ASIC RG 192 — ASIC Regulatory Guide – RG 192 Licensing: Wholesale equity schemes

Page 1 REGULATORY GUIDE 192 Licensing: Wholesale equity schemes November 2024 About this guide This is a guide for trustees and managers of wholesale equity schemes and their advisers. It is particularly relevant to venture capital and private equity schemes. This guide explains the licensing relief we have given in ASIC Corporations (Wholesale Equity Scheme Trustees) Instrument 2017/849. The relief is for trustees of wholesale equity schemes that are operated by a manager holding an Australian financial services (AFS) licence under Ch 7 of the Corporations Act 2001 (Corporations Act). This guide also explains financial requirements that may apply to these managers under ASIC Corporations (Financial Requirements for Responsible Entities, IDPS Operators and Corporate Directors of Retail CCIVs) Instrument 2023/647. Page 2 REGULATORY GUIDE 192: Licensing: Wholesale equity schemes © Australian Securities and Investments Commission November 2024 Page 2 About ASIC regulatory documents In administering legislation ASIC issues the following types of regulatory documents. Consultation papers: seek feedback from stakeholders on matters ASIC is considering, such as proposed relief or proposed regulatory guidance. Regulatory guides: give guidance to regulated entities by:  explaining when and how ASIC will exercise specific powers under legislation (primarily the Corporations Act)  explaining how ASIC interprets the law  describing the principles underlying ASIC’s approach  giving practical guidance (e.g. describing the steps of a process such as applying for a licence or giving practical examples of how regulated entities may decide to meet their obligations). Information sheets: provide concise guidance on a specific process or compliance issue or an overview of detailed guidance. Reports: describe ASIC compliance or relief activity or the results of a research project. Document history This regulatory guide was issued in November 2024 and is based on legislation and regulations as at the date of issue. Previous versions:  Superseded Regulatory Guide 192, issued August 2008, reissued September 2018 Disclaimer This guide does not constitute legal advice. We encourage you to seek your own professional advice to find out how the Corporations Act and other applicable laws apply to you, as it is your responsibility to determine your obligations. Page 3 REGULATORY GUIDE 192: Licensing: Wholesale equity schemes © Australian Securities and Investments Commission November 2024 Page 3 Licensing: Wholesale equity schemes Key points To remove impediments in the venture capital and private equity industry, we have given trustees of wholesale equity schemes relief from the requirement under Ch 7 to hold an AFS licence to provide custodial or depository services and dealing services in connection with the investment products held under the scheme. The relief provided under ASIC Corporations (Wholesale Equity Scheme Trustees) Instrument 2017/849 applies when a fund manager that has an AFS licence and is a related body corporate of the trustee accepts responsibility for the conduct of the trustee. The relief is subject to a number of requirements and conditions. What is a wholesale equity scheme? RG 192.1 A ‘wholesale equity scheme’ for the purposes of our relief is a managed investment scheme to which all of the following apply: (a) the scheme is not registered; (b) all of the trust property (other than incidental property) consists of investment products; (c) at all times, the value of the investment products that are quoted on a financial market does not exceed 20% of the trustee’s reasonable estimate of the market value of the trust property; and (d) no interests in the scheme have been issued to a person as a retail client. RG 192.2 Many venture capital and private equity schemes are wholesale equity schemes. These schemes primarily hold equities in small, unlisted, closely held private companies and are generally operated using a multiple-unit trust structure with separate corporate trustees to ensure that each trust is not treated as a public trading trust for tax purposes. Why is relief required? RG 192.3 ASIC Instrument 2017/849 gives trustees of wholesale equity schemes relief from the requirement under Ch 7 to hold an AFS licence to: (a) deal in investment products that form part of the trust property of the wholesale equity scheme (other than by issuing to a person as a retail client); and Page 4 REGULATORY GUIDE 192: Licensing: Wholesale equity schemes © Australian Securities and Investments Commission November 2024 Page 4 (b) provide a custodial or depository service in relation to the investment products. Note: In this guide we refer to these two financial services as ‘wholesale equity financial services’. RG 192.4 In the absence of relief, the trustee of each wholesale equity scheme may require an AFS licence because it will be carrying on a financial services business by: (a) dealing (under s766C(1)(a) and (e)), when acquiring and disposing of financial products (e.g. shares in unlisted companies) on behalf of members of the wholesale equity scheme; (b) dealing (under s766C(1)(b)), when issuing interests in the wholesale equity scheme. The trustee is likely to be the issuer in relation to the wholesale equity scheme if it is responsible for obligations owed to members under the terms of the facility that is the product (s761E(4)); and (c) providing a custodial or depository service (under s766E), by holding financial products (e.g. shares in unlisted companies) on trust for, or on behalf of, the members of the wholesale equity scheme. RG 192.5 Certain exemptions from the requirement to hold an AFS licence may apply, depending on the circumstances. However, in relation to the financial services provided by trustees in relation to wholesale equity schemes, we consider it unlikely that trustees will be able to rely on the exemptions for: (a) authorised representatives in s911A(2)(a), because the trustee would undertake and be personally responsible for obligations to clients under the terms of the trusts and not as the manager’s representative; and (b) intermediaries in s911A(2)(b), other than where a licensed manager offers to arrange for the issue of interests in the scheme. Note: For more information about these exemptions, see Information Sheet 251 AFS licensing requirement for trustees of unregistered managed investment schemes (INFO 251). RG 192.6 We have provided our relief because we consider that it would impose a disproportionate cost burden on a wholesale equity scheme and create impediments in the venture capital and private equity industry to require the trustee of the scheme to also hold an AFS licence: (a) when the scheme is structured with separate corporate trustees, so that the trustee does not control any of the entities in which it invests; and (b) when a manager who holds an AFS licence with appropriate authorisations takes responsibility for the operation of the scheme. Page 5 REGULATORY GUIDE 192: Licensing: Wholesale equity schemes © Australian Securities and Investments Commission November 2024 Page 5 Requirements and conditions for relief RG 192.7 The relief in ASIC Instrument 2017/849 is subject to: (a) the manager applying for an AFS licence or licence variation to impose the condition set out in Requirement 3 in Table 1; (b) the other requirements in sections 5 and 6 of the instrument, summarised in Table 1; and (c) the conditions in section 7 of the instrument, summarised in Table 2. Table 1: Summary of requirements of relief Requirement Explanation 1 The scheme must be a ‘wholesale equity scheme’ meeting all of the following criteria:  the scheme is not registered;  all of the trust property (other than incidental property) consists of investment products;  at all times, the value of the investment products that are quoted on a financial market does not exceed 20% of the trustee’s reasonable estimate of the market value of the trust property; and  no interests in the scheme have been issued to a person as a retail client. The relief is available only for unregistered managed investment schemes whose members are all wholesale clients. The trust property requirements reflect the fact that the relief is aimed at helping the venture capital and private equity industry. We have imposed the 20% limit because we envisage that it will only be necessary to hold small holdings in listed entities on a transitional basis after floats. 2 The scheme must be operated by a related body corporate of the trustee (the manager). The relief is intended to apply where the manager is effectively controlling the operations of the scheme so that, as far as possible, the same regulatory and liability consequences apply as if the manager were providing the wholesale equity financial service itself. Page 6 REGULATORY GUIDE 192: Licensing: Wholesale equity schemes © Australian Securities and Investments Commission November 2024 Page 6 Requirement Explanation 3 The manager must have an AFS licence that:  authorises it to provide all of the wholesale equity financial services that are provided by the trustee when relying on the relief; and  contains conditions to the effect that the manager must: − as far as possible, comply with the Corporations Act as if the trustee were providing the wholesale equity financial services as the manager’s representative; − have in place a deed poll that contains enforceable, unlimited and irrevocable covenants, for the benefit of each person (beneficiary) to whom the trustee provides a wholesale equity financial service, to the effect that the manager will indemnify the beneficiary in relation to any liability (other than an exempt liability) that arises from the trustee’s provision of the wholesale equity financial services to the beneficiary; and − for the purposes of the ‘relevant financial conditions’ of the manager’s AFS licence— treat the assets, liabilities, cash inflows and cash outflows of the trustee as though they were the assets, liabilities, cash inflows and cash outflows of the manager. These conditions are intended to protect scheme members by ensuring, as far as practicable, that the same regulatory and liability consequences apply as would apply if the manager had provided the wholesale equity financial services itself. For more information about how the financial conditions on the manager’s AFS licence will apply, see RG 192.9. 4 The trustee or manager must report to ASIC if the trustee has failed to comply with the conditions of section 7 of ASIC Instrument 2017/849 (summarised in Table 2). The trustee or manager must make its report:  in writing, setting out full particulars of the failure (to the extent that the trustee or manager knows those particulars or would have known them if it had undertaken reasonable inquiries); and  within 10 business days of becoming aware, or when it should reasonably have become aware, of matters that give it reason to believe that the trustee has failed to comply, other than in an immaterial respect, with the conditions. Our relief is structured so that a failure by the trustee to meet the conditions of relief summarised in Table 2 will not necessarily cause the relief to cease. However, a failure to meet the requirement to report such a failure will cause the relief to cease. ASIC will consider reports of failure to meet conditions and determine whether or not to exclude the relevant trustee from relief. Page 7 REGULATORY GUIDE 192: Licensing: Wholesale equity schemes © Australian Securities and Investments Commission November 2024 Page 7 Table 2: Summary of conditions of relief Condition Explanation 1 The trustee must:  be solvent at all times and have positive net assets (see conditions 13(a) and (b) of Pro Forma 209 Australian financial services licence conditions (PF 209));  comply with the tailored cash needs requirement in ASIC Corporations (Financial Requirements for Custodial or Depository Service Providers) Instrument 2023/648, except for the net tangible assets (NTA) requirements; and  lodge the audit opinion on the trustee’s compliance with the financial requirements in ASIC Instrument 2023/648 (except for the NTA requirements) within the specified timeframe. We consider these are important requirements, as the trustee is a separate legal entity with obligations to scheme members and it is important that it has the financial capacity to meet these obligations. 2 The trustee must comply with the minimum custody requirements for providers of custodial and depository services in ASIC Corporations (Custody Standards for Providers of Custodial and Depository Services) Instrument 2024/17. As the trustee will be providing the financial service under the exemption, it should ensure that the custody requirements are met. 3 The trustee must take all reasonable steps to ensure that no interests in the scheme are acquired by a person as a retail client. This requirement is intended to ensure that our relief will not affect the protections Parliament intended for retail clients, such as the requirement for a Financial Services Guide to be given to them. If interests in the scheme are acquired by retail clients, then the financial services provided will no longer be ‘wholesale equity financial services’ and the scheme will no longer be a ‘wholesale equity scheme’ within the terms of relief, and our relief will no longer apply. Financial requirements for managers RG 192.8 As an AFS licensee, the manager operating the scheme must also meet the financial requirements relevant to the authorisations on its AFS licence. RG 192.9 The financial requirements applying to a manager that holds an AFS licence that authorises it to provide wholesale equity financial services align with the requirements for relevant financial conditions, summarised in Requirement 3 of Table 1. These requirements are set out in ASIC Instrument 2023/647 and apply as if the assets, liabilities, cash inflows and cash outflows of any eligible trustee were included in the assets, liabilities, cash inflows and cash outflows of the manager. Note: See s912AA(2A) of ASIC Instrument 2023/647. RG 192.10 These requirements ensure that the outcome would be the same if the trustee’s operations were undertaken by the manager. Page 8 REGULATORY GUIDE 192: Licensing: Wholesale equity schemes © Australian Securities and Investments Commission November 2024 Page 8 Key terms Term Meaning in this document AFS licence An Australian financial services licence under s913B that authorises a person who carries out a financial services business to provide financial services Note: This is a definition in s9. ASIC Instrument 2017/849 (for example) An ASIC instrument (in this example numbered 2017/849) Corporations Act Corporations Act 2001, including regulations made for the purposes of that Act eligible trustee A trustee of a wholesale equity scheme that is a body corporate and does not control any entity that is an issuer of an investment product held by the body corporate Note: ‘Control’ has the same meaning as in s50AA of the Corporations Act. exempt liability A liability arising from any act or omission relating to a wholesale equity financial service for which the trustee of the scheme may be indemnified from the trust property financial product Generally, a facility through which, or through the acquisition of which, a person does one or more of the following:  makes a financial investment (see s763B);  manages financial risk (see s763C);  makes non-cash payments (see s763D) Note: See Div 3 of Pt 7.1 of the Corporations Act for the exact definition. In addition to the general categories above, this specifies certain things as being included or excluded from the definition. incidental property Cash, deposits or current accounts with an Australian authorised deposit-taking institution or interests in a cash management trust that are held for no more than three months pending the acquisition of investment products, or expenditure or distribution to members Page 9 REGULATORY GUIDE 192: Licensing: Wholesale equity schemes © Australian Securities and Investments Commission November 2024 Page 9 Term Meaning in this document investment product Each of the following:  a security;  a managed investment product;  a financial product covered by s764A(1)(ba) of the Corporations Act; and  an option to acquire, by way of transfer: − a security covered by paragraph (a), (b) or (c) of the definition of ‘security’ in s761A of the Corporations Act; and − a financial product covered by s764A(1)(b)(i) or (ii) or s764A(1)(ba)(i) or (ii) of the Corporations Act manager A related body corporate of the trustee that holds an AFS licence containing the conditions in Requirement 3 of Table 1 Note: See section 6(a) of ASIC Instrument 2017/849 for the full definition. PF 209 (for example) An ASIC pro forma (in this example numbered 209) related body corporate Has the meaning given in s9 of the Corporations Act relevant financial conditions Conditions that have the effect of the following financial conditions in PF 209:  condition 13 (base level financial requirements);  condition 21 (financial requirements for holding client money or property);  condition 22 (financial requirements for licensee transacting with clients); and  condition 28 (audit opinion on financial requirements) retail client A client as defined in s761G and 761GA of the Corporations Act and Div 2 of Pt 7.1 of the Corporations Regulations 2001 s766E (for example) A section of the Corporations Act (in this example numbered 766E), unless otherwise specified trustee A person who is an eligible trustee of a wholesale equity scheme Page 10 REGULATORY GUIDE 192: Licensing: Wholesale equity schemes © Australian Securities and Investments Commission November 2024 Page 10 Term Meaning in this document trust property Means:  contributions of money or money’s worth to the scheme;  money borrowed or raised by the trustee for the purposes of the scheme;  property acquired, directly or indirectly, with, or with the proceeds of, contributions of money or money borrowed or raised; and  income and property derived, directly or indirectly, from contributions of money, money borrowed or raised, or property acquired. wholesale client A client who is not a retail client as defined in s761G of the Corporations Act and Div 2 of Pt 7.1 of the Corporations Regulations 2001 wholesale equity financial services Has the meaning given in RG 192.3 wholesale equity scheme Has the meaning given in RG 192.1 Page 11 REGULATORY GUIDE 192: Licensing: Wholesale equity schemes © Australian Securities and Investments Commission November 2024 Page 11 Related information Headnotes AFS licence, control, custodial or depository service, dealing, managed investment scheme, manager, related body corporate, trustee, wholesale clients, wholesale equity schemes Legislative instruments and pro formas ASIC Corporations (Wholesale Equity Scheme Trustees) Instrument 2017/849 ASIC Corporations (Financial Requirements for Responsible Entities, IDPS Operators and Corporate Directors of Retail CCIVs) Instrument 2023/647 ASIC Corporations (Financial Requirements for Custodial or Depository Service Providers) Instrument 2023/648 ASIC Corporations (Custody Standards for Providers of Custodial and Depository Services) Instrument 2024/17 PF 209 Australian financial services licence conditions Legislation Corporations Act, Ch 7, s761E(4), 766C(1)(a), 766C(1)(b), 766C(1)(e), 766E, 911A(2)(a), 911A(2)(b), 912AA(2A) Consultation papers and reports CP 280 ASIC class order on wholesale equity schemes: Licensing relief for trustees—[CO 07/74] REP 545 Response to submissions on CP 280 ASIC class order on wholesale equity schemes Media releases 17-063MR ASIC consults on ‘sunsetting’ class order about licensing relief for trustees of wholesale equity schemes (15 March 2017) 17-330MR ASIC remakes ‘sunsetting’ class order providing licensing relief for trustees of wholesale equity schemes (29 September 2017)