Starting a wholesale fund

A wholesale managed investment scheme (fund) is established by a unit trust (trust). The fund is a managed investment scheme as investors are passive, with the trust controlled by a trustee (Trustee). Investment is by way of an unregistered Information Memorandum.

If you are engaging in the business of providing financial services (such as the raising or managing of public investor funds), you must hold an Australian Financial Services License (AFSL) issued by the Australian Securities and Investment Commission (ASIC) or be authorised to do so by an AFSL holder. A Trustee must hold an AFSL.

Some considerations for starting a wholesale fund:

  • Viability: Can you raise sufficient funds? What quantum of funds typically needs to be raised for a fund to be commercially viable?
  • Asset: Is the asset attractive to investors? Is the projected investor return realistic given commercial, risk, legal and various other considerations and verifications required?
  • Wholesale: Do you know what constitutes a wholesale investor and the limitations? See below for the definition of wholesale investor.
  • AFSL: What are the licensing requirements? Should you apply for your own AFSL or outsource?
  • Disclosure: There are many disclosure requirements. Pointer Lawyers has developed a robust Due Diligence Process for the preparation and sign off of an Information Memorandum. See below for further information on disclosure.
  • Tax: You need to consider all the tax implications before setting up a fund. Pointer Lawyers do not provide tax advice. We recommend leading independent tax advisers.
  • MIT: If you are establishing a managed investment trust, are you aware of the withholding and capital gains tax concessions and the different conditions concerning Australian investor residency, for example, to other managed fund structures? Pointer Lawyers does not provide tax advice. We recommend leading independent tax advisers.
  • Trustee: do you have the capacity to do this yourself and know the legal and commercial advantages of outsourcing? What are the AFSL issues you need to be aware of? i.e. If you intend to operate a wholesale fund you will be required to hold an AFSL or be appointed by an AFSL holder as an authorised representative. We recommend trustees.
  • Custodian: Do you need a custodian? What is the role, legal and commercial value of a custodian?
  • Responsible Manager: Do you understand the role of a responsible manager of an AFSL holder?
  • Investment Management: What are the legal and commercial requirements?
  • Fund Administration, Audit and Registry: do you know what’s involved and have expert advisers? We can recommend fund administrator, auditor and registry service providers.

Who is a wholesale investor?

What is a wholesale managed investment scheme?

A managed investment scheme (‘Managed Fund’ or ‘Fund’) enables a group of investors to contribute money to acquire rights (interests) to an asset (or assets) who are not active in controlling the Fund’s day to day operations.

Managed Funds are usually structured using a unit trust (Trust), with the Fund typically controlled by an independent corporate trustee (Trustee). Every entity (such as the investment promoter) engaging in the business of providing financial services (such as the raising of investor funds), must hold an Australian Financial Services License (AFSL) issued by ASIC or be authorised to do so by an AFSL holder. The Trustee must hold an AFSL.

Investors invest in the Fund by way of an unregistered Information Memorandum.

With limited exceptions, there can only be a maximum of 20 wholesale investors in a wholesale fund or it is classified by ASIC as a retail fund.

It is recommended tax advice is obtained to help determine the best fund structure based on your needs. Pointer Lawyers do not provide tax advice and can recommend fund tax adviser specialists.

Who is a wholesale investor?

 The following is a summary of ‘tests’ concerning who is considered a ‘wholesale’ client and can invest in a wholesale fund in accordance with Chapter 7 of the Corporations Act 2001 (note there are additional conditions and limitations concerning Australian residency on who can invest and if the fund being established is a managed investment trust):

 Investment Size Test

If you are investing AUD $500,000 or more, you are automatically deemed a Wholesale Client and no additional documentation is required. The person will remain a wholesale investor even if their interest subsequently falls below $500,000.

 Personal Wealth Test

 A qualified accountant’s letter (not more than 6 months old and valid for up to 2 years) certifying that the investor has either of the following:

Net assets of at least AUD $2.5 million (including the net assets of any company or trust controlled by the investor)

 OR

 Gross income for each of the last two financial years of at least AUD $250,000 (including the gross income of any company or trust controlled by the investor).

 Professional Investor Test

 A statutory declaration stating the investor holds an Australian financial services licence or is a ‘professional investor’ as defined in the Corporations Act. Professional investors may include APRA regulated bodies, AFS license holders, listed companies, or a person or entity who controls AUD $10 million or more.

 Wholesale investor regulations change from time to time and you may be required to submit appropriate documentation in order to meet ASIC’s Wholesale Client regulations.

Owner/promoter ‘key’ considerations before establishing a wholesale fund include:

  • Do you have tax advice?
  • Do you have sufficient start-up capital to pay set-up and ongoing fees?
  • Can you raise sufficient investor funds to make a commercial return from the fund?
  • Is the fund asset(s) likely to be attractive to investors?
  • What is the basis of and anticipated investor % annual return?
  • Do you have sufficient experience and track record as investment promoter?

Disclosure considerations

An Information Memorandum (IM) typically includes:

  • An Important Notice concerning legal matters on the fund issuer and structure, and a range of disclaimers, disclosures and conditions for investors to note in relying on the IM to make an investment decision;
  • Key features of the fund including potential investor returns; distributions, liquidity, redemption of units, withdrawal from the fund and complaints;
  • The assets the fund will invest in and how these assets will be valued;
  • Details on the investment manager and experience, and how the fund will be managed;
  • Details on the trustee and custodian;
  • Details on the risks associated with investing in the fund;
  • Fees and expenses and how this will impact any investor return; and
  • Information and an application form on how to invest in the fund.

Registration

Wholesale funds are not required to be registered with ASIC.

Disclaimer

While the information above is believed to be accurate and is produced by Pointer Lawyers in good faith, Pointer Lawyers does not expressly warrant or imply, guarantee or represent that it is complete or free from error or omission. This information has been produced as general information only in a summary form and should not be relied upon as or used as a substitute for legal advice. Pointer Lawyers does not accept any responsibility for errors in or omissions from this information. The use of this information is at your sole risk.