The most commonly used structure is a unit trust, due to its flexibility.

For private equity and venture capital funds, a unit trust or a limited partnership, usually in the form of a venture capital limited partnership (VCLP) or early-stage venture capital limited partnership (ESVCLP) (in certain circumstances), can be used.

A unit trust is simpler to establish and offers greater flexibility with respect to the asset classes in which it can invest; however, certain limited partnerships can attract tax benefits for investors and fund managers, when certain requirements are met. 

For hedge and credit strategies, a unit trust is the suitable local structure.

Following recent legislative changes, it is possible to establish corporate collective investment vehicles (CCIVs) which can be used as investment vehicles for a variety of asset classes.

A regulated Australian unit trust will require registration with the Australian Securities & Investments Commission (ASIC). Such unit trusts are known as registered managed investment schemes. Once ASIC receives an application, it must make a decision on registration within 14 days. Key approval criteria are that:

• the trustee of the fund holds an Australian Financial Services Licence (AFSL) authorising it to be a “responsible entity” of a registered managed investment scheme;
• the responsible entity is an Australian public company; and
• the constitution of the fund meets the requirements of the Corporations Act 2001 (Cth) (the “Corporations Act”) and relevant ASIC guidance.

The key required documentation is a constitution/trust deed. An investment management agreement is also typically required, by which the trustee outsources investment management to a manager entity.

The setting-up process is not lengthy, and costs are reasonable. Establishment of a registered managed investment scheme and registration with ASIC can take place within three to four weeks.

An unregistered unit trust can be established within one to two weeks.

The above timings assume a simple structure and that relevant licensing arrangements are previously in place.

VCLPs and ESVCLPs are incorporated limited partnerships established under state-based legislation. They are bodies corporate and need to be registered with relevant state regulatory bodies. In addition, these entities require registration with Innovation and Science Australia under the Venture Capital Act 2006 (Cth) (the “VC Act”). Due to legislative requirements, the general partner of the VCLPs and ESVCLPs must also be an incorporated limited partnership (VCMP). The general partner of that VCMP is generally a company.

The benefit of registering VCLPs and ESVCLPs is primarily the manner in which investment proceeds are taxed for both the general partner and the limited partners. Managers of each of these vehicles are required to:

• hold an AFSL;
• be an authorised representative of an AFSL holder; or
• have the benefit of a relevant exemption.

Key documents for partnerships are:

• a partnership agreement;
• a subscription agreement;
• a management agreement; and
• any side letters.

A partnership agreement for the VCMP is also required.

Incorporation of a limited partnership can occur in approximately two business days with modest registration fees. Registration of a VCLP or ESVCLP can be conditional or unconditional depending on whether all registration conditions have been met. Following receipt of a complete application, Innovation and Science Australia must typically make a decision in respect of registration under the VC Act within 60 days.

A significant workstream to be undertaken on fund inception is the relevant “carry” vehicles and rules applicable for the carry participants.

As discussed later (see 2.2.2 Legal Structures Used by Fund Managers), if a CCIV is the preferred vehicle, these are formed on registration with ASIC. 

The trust deed for most unit trusts includes what is, in effect, a contractual limitation of liability of investors. The effectiveness of such limitations has broad commercial acceptance. Despite such acceptance, the question of the legal effectiveness of such limitations has not been settled across Australia’s states and territories.

In relation to limited partnership structures, as a general rule, an investor’s liability is limited to their capital committed to the investment vehicle. Typically, if there is a tax impost relating to an investor’s commitment, the investor must fund that impost.

A fundamental disclosure requirement is that communications to investors cannot be misleading or deceptive, including by omission.

Where retail investors are issued with interests in a fund, the product disclosure statement (PDS) must comply with statutory disclosure rules, including detailed costs disclosure. The issuer of the product has continuous disclosure obligations.

Institutional investors from Australia and offshore frequently invest in alternative funds. Most major Australian institutional investors have an allocation for private equity and private debt funds. Venture capital investment in Australia is mostly high net worth and family office led, though some institutions have a venture capital allocation. 

Unit Trusts

In Australia, unit trusts can be structured as open- or closed-end vehicles, where performance fees can take the form of a traditional performance fee on net asset value increase or a private equity-style “carry waterfall”.

There are very few legal requirements that apply to Australian unit trusts, which are simple to establish and, provided they are only offered to wholesale investors, often have no regulatory or other registration or approval requirements (note that there would typically be regulatory requirements for the manager or trustee; see 2.3 Regulatory Environment).

A unit trust is managed by its trustee, who may, in practice, appoint an investment manager to provide investment management services in respect of the trust. The use of corporate trustees is common by fund managers who do not wish to manage the day-to-day administration of their own trust or who may lack the necessary regulatory licence to act as a trustee.

Partnerships

The common partnership structures used by a private equity or venture capital fund to invest primarily in Australian businesses are known as VCLPs for private equity and venture capital funds, or as ESVCLPs for early-stage venture capital funds.

Overview of VCLPs and ESVCLPs

An incorporated limited partnership must meet specific requirements before it can be registered as a VCLP or an ESVCLP with Industry Innovation and Science Australia, an Australian government department. There are specific requirements for a VCLP and an ESVCLP set out in the VC Act, with many consistencies between the two, including that:

• the term of the partnership must be more than five years and less than 15 years;
• the minimum committed capital must be at least AUD10 million; and
• the partnership must only carry on activities that are related to making eligible venture capital investments (EVCIs), as defined by relevant Australian tax legislation.

An EVCI is an equity investment in an unlisted company or unlisted trust that:

• is located in Australia;
• does not exceed more than 30% of the partnership’s committed capital; and
• has a predominant activity that is not an ineligible activity.

An ineligible activity includes:

• property development or land ownership;
• banking;
• providing capital to others;
• leasing;
• factoring;
• securitisation;
• insurance;
• construction or acquisition of infrastructure facilities and/or related facilities; and
• making investments that are directed at deriving income in the nature of interest, rent, dividends, royalties or lease payments.

For an investment to qualify as an EVCI, the investment must not exceed the value restriction imposed at the time of the investment (ie, AUD50 million for an investment by an ESVCLP and AUD250 million for an investment by a VCLP).

In addition to the requirements for registration, the VC Act applies various restrictions to these structures:

• no single investor in an ESVCLP, other than in certain circumstances, can contribute more than 30% of the total committed capital;
• the maximum committed capital for an ESVCLP is AUD200 million;
• VCLPs and ESVCLPs cannot invest in a single investment whose total assets exceed AUD200 million at the time of investment; and
• in general, they cannot make debt investments other than permitted loans as defined in the VC Act.

Given the strict requirements and restrictions imposed on VCLPs and ESVCLPs, many fund managers establish these vehicles together with parallel funds (usually soft stapled-unit trusts). This structure allows fund managers to obtain the tax benefits afforded to VCLPs and ESVCLPs in respect of investments that are EVCIs, while providing the fund manager the flexibility to invest in non-EVCIs via the parallel funds. This has been a common strategy for leading Australian private equity and venture capital funds.

CCIVs

Recent amendments to the Corporations Act have facilitated the emergence of a new fund vehicle – the CCIV. This vehicle is a company limited by shares, which must consist of one or more “sub-funds”. While the CCIV itself is a legal entity, sub-funds are not separate legal entities. Each share in a CCIV must be referrable to a single sub-fund and the assets of the CCIV must be allocated to a particular sub-fund in an allocation register. The Corporations Act provides that the assets of one sub-fund are not available to satisfy the liabilities of another sub-fund.

CCIVs can be structured as open ended or closed ended and are suitable for retail or wholesale clients. A retail CCIV is subject to specific rules broadly similar to registered managed investment schemes. A CCIV must be designated as retail or wholesale, though under certain circumstances a CCIV will be required to register as a retail CCIV.

A CCIV is managed by a “corporate director” which must be a public company with an AFSL authorisation to “operate the business and conduct the affairs of a CCIV” for retail or wholesale CCIVs (as applicable) holding the relevant type of assets. A CCIV and each sub-fund is established on registration with ASIC and is governed by that CCIV’s constitution. 

Australia has a highly developed and continually evolving regulatory regime in relation to investments from offshore into Australia.

In summary, the Treasurer of Australia, acting through the Foreign Investments Review Board (FIRB), can block foreign direct investment that is “contrary to Australia’s national interest” if clearance is required.

The foreign investment review framework is set by the Foreign Acquisitions and Takeovers Act 1975 (the “FATA Act”) and the Foreign Acquisitions and Takeovers Fees Impositions Act 2015, along with their associated regulations.

The legislation generally regulates foreign investment proposals by a “foreign person”. Foreign persons involved in applicable transactions are required to notify FIRB. “Foreign persons” essentially means individuals, offshore companies, or onshore companies in which offshore foreigners hold a substantial interest. It includes private foreign investors and foreign government investors.

Changes to the rules applied by FIRB from 1 January 2021 also give the Treasurer “call-in powers” and “last-resort powers”, by which the Treasurer may “call in” investments not notified to FIRB for review and in exceptional circumstances may exercise “last-resort powers” to impose conditions, vary existing conditions or require divestment of approved investments where national security risks emerge. In addition, a new set of rules applies for screening national security businesses, which include:

• communications (including telecommunications, broadcasting and domain name systems);
• higher education and research;
• data storage and processing;
• the defence industry;
• energy (including electricity, gas, energy market operators and liquid fuels);
• food and grocery;
• financial services and markets (including banking, superannuation, insurance and financial market infrastructure);
• healthcare and medical (including hospitals);
• space technology;
• transport (including ports, freight infrastructure, freight services, public transport and aviation); and
• water and sewerage.

The critical infrastructure rules and FIRB’s guidance also outline some specific entities (eg, Australia’s big supermarkets, banks, insurers and superannuation funds) as critical infrastructure assets.

Entities managing alternative funds should:

• hold an AFSL with appropriate authorisations;
• be appointed as the authorised representative of the holder of an AFSL; or
• fall within a relevant licensing exemption under the Corporations Act.

Where the fund is a unit trust, the trustee and the manager should have the appropriate authorisations in respect of managing, and issuing, interests in a managed investment scheme. Where a foreign manager wishes to offer interests in an Australian fund, it is common to appoint a corporate trustee as the trustee of the fund, who would appoint the manager as the investment manager of the fund (see 2.3.3 Local Regulatory Requirements for Non-local Managers regarding regulation of the manager).

From a regulatory perspective, alternative funds open to only wholesale clients operate with relative freedom.

There are very few limitations applying to alternative funds. Significantly for private equity funds, there are adverse tax implications if a trust were to control a business such that it would be designated a “trading trust”. In such a case, the trust would potentially not be eligible to qualify as a managed investment trust and could potentially be treated like a company (where the trust is widely held). The concept of “control” is widely interpreted for Australian income tax purposes.

In certain circumstances, including where 20% of the interests in an Australian fund are held by a foreign entity or 40% of the interests in aggregate in an Australian fund are held by foreign entities and their associates, approval may be required by FIRB in respect of the investments of such fund.

Please see 2.3.3 Local Regulatory Requirements for Non-local Managers.

Non-local providers of financial services, including investment managers, have two main options for providing financial services to Australian wholesale clients, in addition to the option of holding a full AFSL:

• they may apply for a foreign AFSL, which is a more limited type of AFSL;
• they may apply for individual relief from ASIC to be relieved of the obligation to hold an AFSL; or
• they may rely on some form of transitional relief.

Foreign AFSL

The foreign financial services providers (FFSPs) framework is under review. A new regime was initially proposed to take full effect on 1 April 2022, but has been delayed until 1 April 2025. The Australian federal government (the “Federal Government”) consulted on a new direction for the regime in 2021 and introduced a bill in February 2022. However, when the Federal Government called an election in May 2022, the bill containing proposed new exemptions lapsed. A subsequent bill was introduced to Parliament in August 2023 with a proposed commencement date of 1 April 2024.

As a result, the current licensing arrangements for FFSPs remain in a transitional period. See The Foreign Financial Service Providers (FFSP) Regime in 4.1 Recent Developments and Proposals for Reform for further information.

ASIC has announced that it will pause assessment of “foreign AFS licence” applications already lodged by FFSPs, unless specifically requested to proceed by the applicant. FFSPs that have been or are granted a foreign AFS licence will be able to continue to operate under the licence issued by ASIC, noting that the Federal Government’s consultation is ongoing at the time of writing.

A foreign AFS licence allows FFSPs that are from jurisdictions that are regulated in a “sufficiently equivalent jurisdiction to Australia” to apply for a foreign AFS licence so they can provide a range of financial services to Australian wholesale clients, whether from inside or outside Australia.

This is similar to the former passport relief that was previously available to FFSPs regulated by the FCA (UK), SEC (US) (and certain other US regulators), MAS (Singapore), SFC (Hong Kong), BaFin (Germany) and CSSF (Luxembourg).

To be eligible to apply for a foreign AFS licence, FFSPs must satisfy a number of conditions. Most importantly, they must be regulated under an overseas regulatory regime that has been assessed by ASIC as “sufficiently equivalent” to Australia’s regime. This includes not only those listed above but also those regulated by the Danish FSA, the Swedish FI, the French AMF or ARPR, or the Ontario Securities Commission (subject to holding relevant authorisations).

Foreign AFS licensees do not need to comply with all the obligations of normal AFS licensees, but they do have a broader range of obligations than FFSPs relying on other forms of relief.

A regulated fund (typically an Australian unit trust) is known as a registered managed investment scheme, meaning that it is registered with ASIC. The registration process is relatively straightforward and only requires that:

• the trustee of the fund holds an AFSL authorising it to be a “responsible entity” of a registered managed investment scheme;
• the responsible entity is an Australian public company; and
• the constitution of the fund meets the requirements of the Corporations Act.

Once an application for registration is received by ASIC, a decision on registration must be made within 14 days.

As previously noted, incorporation of a limited partnership can occur within approximately two business days. Registration of VCLPs and ESVCLPs can take as little as one month, assuming all required documents have been prepared. Registration fees are modest.

In Australia, pre-marketing of alternative funds, like marketing of alternative funds, may involve the provision of financial services in Australia, for which an AFSL will be required, subject to applicable exemptions.

Please refer to 2.3.3 Local Regulatory Requirements for Non-local Managers, 2.3.6 Rules Concerning Marketing of Alternative Funds and 2.3.7 Marketing of Alternative Funds.

Marketing an alternative fund may involve the provision of financial services in Australia, for which an AFSL will be required, subject to applicable exemptions.

Non-local providers of financial services should refer to 2.3.3 Local Regulatory Requirements for Non-local Managers.

Alternative funds can be marketed in Australia, as long as the person marketing the fund is authorised under an AFSL (or an exemption – see 2.3.3 Local Regulatory Requirements for Non-local Managers) to provide financial product advice, or to deal in the relevant fund interests to the relevant client group. Typically, these funds would be marketed to wholesale clients only.

If the person is not authorised to provide these services to retail clients, marketing activities must be limited to wholesale clients. In addition, where the fund is marketed to retail clients, it would usually need to be registered with ASIC as a “registered managed investment scheme” (see 2.3.4 Regulatory Approval Process) and comply with regulated disclosure requirements (see 3.3.1 Regulatory Regime) and associated rules applying to regulated products.

In Australia, marketing of alternative funds may involve the provision of financial services in Australia, for which an AFSL will be required, subject to applicable exemptions. In these circumstances, depending on whether an AFSL will be required or whether an exemption is available, some form of prior authorisation or notification may be required to be made to ASIC. 

For example, if it is determined that an AFSL is required, an application for an AFSL will need to be made to ASIC prior to any marketing activities taking place. 

Alternatively, if it is determined that an exemption is available, then depending on the exemption, prior notification to ASIC may be required. 

Please refer to 2.3.3 Local Regulatory Requirements for Non-local Managers.

Once an alternative fund has been marketed to investors in Australia, there may be certain ongoing requirements that need to be considered. 

Certain activities in relation to the alternative fund (for example, issuing interests in the alternative fund to investors in Australia and providing reporting and information to such investors) may involve the provision of a financial service in Australia. In these circumstances, the fund operator may require an AFSL or be able to rely on an exemption.

If an AFSL is obtained, the licensed entity will be subject to ongoing statutory duties and obligations including, for example, to:

• provide their services efficiently, honestly and fairly;
• manage conflicts of interest; and
• report “reportable situations” to ASIC. 

Alternatively, if a relevant exemption was being relied upon, the conditions of that exemption would need to be complied with on an ongoing basis. For example, the sufficient equivalence relief includes certain reporting requirements to ASIC.

Please refer to 2.3.3 Local Regulatory Requirements for Non-local Managers.

Investor protection rules in relation to financial services provided to wholesale clients are primarily focused on compliance with the conditions applicable in relation to the AFSL under which the relevant financial service is being provided. This includes compliance with relevant provisions of the Corporations Act, including restrictions on misleading and deceptive conduct.

Investor protection rules in relation to financial services provided to retail clients include compliance with the matters noted immediately above, and additional rules designed to protect retail clients, including membership of an alternative dispute resolution system, and more detailed and prescriptive product disclosure rules.

Since October 2021, persons issuing and distributing financial products to retail clients have been subject to provisions of the Corporations Act known as the financial product “design and distribution obligations” (DDO). This has been a significant focus of the industry in recent times.

Under the new obligations, to ensure that their products are designed and distributed appropriately, issuers are required to make a target market determination (TMD) for each product that identifies, among other things, the intended class of consumers. They are then required to take “reasonable steps” that will (or are reasonably likely to) result in the financial product being distributed in a manner that is consistent with the TMD. Issuers are obliged to conduct reviews of the TMD periodically and keep certain records; and where there are significant dealings in the financial product that are inconsistent with the TMD, issuers are required to notify ASIC.

Distributors are also subject to certain obligations under the DDO – specifically to:

• not engage in retail product distribution unless they reasonably believe a TMD has been made or is not required to be made;
• take “reasonable steps” that will (or are reasonably likely to) result in distribution being consistent with the TMD;
• notify the issuer of significant dealings that are inconsistent with the TMD; and
• keep certain records.

As the non-prudential regulator of the Australian financial services (AFS) industry, ASIC plays an active role. It conducts surveillance and enforcement of the industry and facilitates regulatory development and implementation.

ASIC’s position on a range of regulatory matters is publicised via the ASIC website and through other communication channels. Documents issued by ASIC include regulatory guides, information sheets and media releases.

Meetings between industry participants and ASIC take place from time to time, in a variety of contexts.

Unit Trust

The most commonly used structure for retail funds in Australia is a unit trust. Each unit entitles the unit holder (ie, the investor) to a beneficial interest in the trust property as a whole, but not in any particular asset comprising the trust property.

The trustee (which in the context of retail funds is referred to as a responsible entity) is responsible for the operation and management of the unit trust. As retail funds are regulated in Australia, the Corporations Act requires that the responsible entity be an Australian public company that holds an AFSL. For this reason, offshore managers looking to establish an Australian retail fund will often use the services of a local responsible entity for hire to act as responsible entity of the fund, as opposed to establishing their own responsible entity in Australia.

The responsible entity may then appoint an investment manager to manage the assets of the fund. The investment manager can be an offshore entity or could be a locally established (usually an Australian proprietary company limited by shares) subsidiary of an offshore manager. The investment manager, regardless of whether it is locally established or offshore, would generally need to obtain an AFSL or a foreign AFSL (if available), or be able to rely on a relevant exemption. Please see 3.3.3 Local Regulatory Requirements for Non-local Managers for further discussion regarding the local regulatory requirements for offshore managers.

Key Advantages and Disadvantages of Unit Trusts

The key advantages of unit trusts include the following.

• Tax “flow through” – unit trusts that have passive investments (and do not have active businesses) are typically managed as a flow-through vehicle for tax purposes, which means that, unlike a company, a unit trust does not itself pay tax. Rather, the unit holders of the unit trust will pay tax on their proportional share of the distributions to them.
• Asset protection – unit trusts offer additional asset protection from internal and external parties as the assets of the unit trust are held by the trustee on trust for the unit holders. The trustee is also subject to fiduciary and (as a responsible entity) statutory duties, including to act in the best interests of unit holders.

The perceived disadvantages of unit trusts include the following.

• Unit trusts are not common offshore – unit trusts tend to be creatures of common law jurisdictions and hence they are often only used or well understood in some offshore jurisdictions.
• No separate legal identity – unlike a company, a unit trust is not itself a separate legal entity and therefore any contracts relating to the fund will be entered into by the responsible entity. This can give rise to some additional complexities when applying the insolvency rules.

CCIVs

Recent amendments to the Corporations Act have facilitated the emergence of an alternative fund vehicle to the unit trust, namely the CCIV. Please refer to 2.2.2 Legal Structures Used by Fund Managers for further information.

Registration Requirement

A retail fund in Australia will generally be required to be registered with ASIC as a managed investment scheme in accordance with Chapter 5C of the Corporations Act, unless all investors are wholesale clients. Wholesale clients include:

• professional investors (for example, AFSL holders, trustees of superannuation funds with net assets of at least AUD10 million, or entities regulated by the Australian Prudential Regulation Authority);
• sophisticated investors (ie, persons regarded as having sufficient experience to assess the relevant investment);
• investors investing at least AUD500,000; and
• investors meeting the requisite wealth test of net assets of AUD2.5 million or gross income of AUD250,000 in each of the previous two years.

Investors that do not satisfy one of the wholesale client tests are considered retail clients.

CCIVs and their sub-funds are also subject to a registration requirement under the Corporations Act, although the registration requirement applies to both retail and wholesale CCIVs.

Process and Documentation Required

To register a fund with ASIC, the responsible entity must lodge the following documentation with ASIC:

• a prescribed form including details of the responsible entity, fund, the auditor and compliance plan auditor;
• the constitution (ie, the trust deed) for the fund, which complies with the prescribed requirements in the Corporations Act and relevant ASIC guidance; and
• the compliance plan for the fund, which complies with the prescribed requirements in the Corporations Act and relevant ASIC guidance.

Once an application for registration has been lodged with ASIC, ASIC has a statutory 14-day period to consider the application and register the fund or reject the application. During the 14-day registration period, ASIC will generally respond with queries and comments in relation to the constitution and compliance plan.

Despite the prescribed requirements for constitutions and compliance plans, the cost of preparing and lodging these documents with ASIC for registration is reasonable.

The registration process and documentation for a CCIV and its sub-funds is similar, and includes lodgement of the CCIV’s constitution and, in the case of a CCIV offered to retail clients, the compliance plan.

The trust deed for most unit trusts includes what is, in effect, a contractual limitation of liability of investors. The effectiveness of such limitations has broad commercial acceptance. Despite such acceptance, the question of the legal effectiveness of such limitations has not been settled across Australia’s states and territories.

CCIVs take the form of a company limited by shares, which means that the liability of each investor is limited to the value of their shares.

Product Disclosure Statement

The offer of interests in an Australian retail fund to retail investors will generally require a PDS (ie, a regulated offer document), except in certain limited circumstances. The PDS will need to comply with the prescribed content requirements in the Corporations Act and relevant ASIC guidance and include disclosure regarding the benefits, risks and fees associated with the fund.

Confirmations

As the issuer of the Australian retail fund, the responsible entity (or corporate director in the case of a CCIV) will have an obligation to provide retail clients with certain confirmation statements. Broadly, these are provided in relation to transactions where a retail client acquires interests in the fund or redeems some or all of their interests in the fund.

Ongoing and Continuous Disclosure Requirements

The issuer of an Australian retail fund will also have continuous disclosure requirements with which they must comply under the Corporations Act. Broadly, these obligations require the issuer to disclose material changes, significant events and information that is not generally available and that a reasonable person would expect to have a material effect on the price or value of the interests in the fund (that is, influence persons who commonly invest in units in deciding whether to acquire or dispose of the interests).

Periodic Reporting

The issuer will have certain periodic disclosure requirements where the Australian retail fund is issued to retail clients. This generally involves providing retail clients with an annual periodic report detailing certain matters concerning their investment (for example, opening and closing balances, details of transactions during the reporting period and the return on investment).

Breach Reporting

In addition to the above disclosure and reporting requirements, the responsible entity or corporate director, as the holder of an AFSL, will also have an obligation to notify ASIC of certain breaches or likely breaches of its obligations under the Corporations Act and relevant financial services laws. 

Certain changes to the breach reporting requirements commenced in October 2021. Please see 4.1 Recent Developments and Proposals for Reform for further discussion in relation to this.

Investor demand in the Australian retail funds market continues to grow, with approximately AUD480.1 billion total funds under management as of the end of September 2023 (Australian Bureau of Statistics, Managed Funds, Australian, September 2023).

The size and steady growth of the market is largely underpinned by the compulsory superannuation contribution system in Australia that was introduced in the early 1990s.

Retail fund managers established in Australia are themselves typically structured as Australian proprietary companies limited by shares. However, fund managers’ internal structures often provide that the Australian management entity may contract with other internal entities for the provision of investment management services to mitigate tax and legal exposure.

There are no restrictions on the types of investors that may, or are eligible to, invest in an Australian retail fund that is a registered managed investment scheme. Therefore, retail clients and wholesale clients could invest in an Australian retail fund. Please see 3.1.2 Common Process for Setting Up Investment Funds for further discussion on the definitions of “retail client” and “wholesale client”.

The regulatory regime governing Australian retail funds includes three key areas, namely: registration, disclosure and licensing requirements.

Registration

A retail fund in Australia will generally be required to be registered with ASIC as a managed investment scheme in accordance with Chapter 5C of the Corporations Act. A CCIV is also subject to registration requirements. Please see 3.1.2 Common Process for Setting Up Investment Funds for further discussion regarding the process and documentation involved in applying for registration with ASIC.

As a registered managed investment scheme, the fund will be governed by the provisions in Chapter 5C of the Corporations Act together with the fund constitution. Under Chapter 5C of the Corporations Act, the responsible entity and its officers will have certain statutory duties, including duties to:

• act honestly;
• exercise care and diligence; and
• act in the best interests of members.

Chapter 5C of the Corporations Act also governs the process by which a responsible entity may retire and be appointed as responsible entity of the fund.

CCIVs are subject to similar requirements under Chapter 8B of the Corporations Act.

Notably, an Australian retail fund is not subject to any investment limitations or restrictions under the Corporations Act (although the introduction of the DDO in October 2021 means that some Australian retail funds will need to restrict the scope of their investments – please see 4.1 Recent Developments and Proposals for Reform). Rather, the scope of investments and permitted assets is governed by, and documented in, the constitution and associated disclosure documentation.

Disclosure

The offer of units in an Australian retail fund to retail investors will generally require a PDS (ie, a regulated offer document), except in certain limited circumstances. The PDS will need to comply with the prescribed content requirements in the Corporations Act and relevant ASIC guidance, and include disclosure regarding the benefits, risks and fees associated with the fund. Please see 3.1.4 Disclosure Requirements for further discussion regarding PDSs.

Licensing

The Corporations Act requires a person, regardless of whether they are local or from offshore, who “carries on a financial services business in Australia” to hold an AFSL covering the provision of such services, unless an exemption applies. A person provides a financial service if, among other things, the person:

• provides financial product advice;
• deals in a financial product; or
• operates a registered managed investment scheme.

For these purposes, a unit in an Australian retail fund that is a registered managed investment scheme will be a financial product.

The responsible entity or corporate director of an Australian retail fund is required to hold an AFSL. The investment manager would also generally hold an AFSL or rely on an available exemption in order to provide these financial services.

As discussed in 3.3.1 Regulatory Regime, the Corporations Act requires a person, regardless of whether they are local or from offshore, who “carries on a financial services business in Australia” to hold an AFSL covering the provision of such services, unless an exemption applies. Depending on the scope and structure of the provision of the relevant services, a non-local service provider may need an AFSL or to be able to rely on an exemption in order to provide their services to an Australian retail fund.

Australian Licensing Options

If a non-local service provider is deemed to be carrying on a financial services business in Australia, it will need to:

• obtain an AFSL;
• apply for a foreign AFSL (if available); or
• consider whether there are any available exemptions.

Please see 2.3.3 Local Regulatory Requirements for Non-local Managers and 4. Legal, Regulatory or Tax Changes for further discussion.

Authorised Representative Exemption

An alternative exemption available is for a person to be appointed as an authorised representative of a holder of an AFSL. This effectively enables the non-local service provider to provide the same financial services as the AFSL holder, and the AFSL holder will be responsible for the provision of the relevant financial services by the non-local service provider.

AFSL

If a non-local service provider is not able to rely upon a suitable exemption or does not qualify for the foreign AFSL regime, the non-local service provider will likely need to apply for an AFSL.

Registration as a Foreign Company

Additionally, to the extent that a foreign company, itself or through its agents, is carrying on business in Australia, Australian law will require that company to be registered with ASIC as a foreign company in Australia.

Similar to as discussed in 3.3.2 Requirements for Non-local Service Providers, any non-local manager that provides financial services in Australia would need to hold an AFSL or a foreign AFSL (if available) or seek to rely on an alternative exemption, depending on the scope of the services and the category of clients to whom those services are provided.

Where a non-local manager manages an Australian retail fund, particular consideration will need to be given as to whom the services are provided.

If the non-local manager provides financial services directly to retail clients in Australia, it would likely be required to obtain an AFSL or be appointed as an authorised representative to cover the provisions of these services to retail clients.

For more information on the key licensing options/exemptions that may be available, please see 3.3.2 Requirements for Non-local Service Providers.

Applying for Registration

As discussed in 3.3.1 Regulatory Regime, the regulatory approval process for an Australian retail fund is relatively straightforward. Once the requisite documentation has been prepared (ie, the fund constitution and compliance plan), these are lodged with ASIC for its consideration. In the case of a registered managed investment scheme, ASIC then has a statutory 14-day period to consider the application and register the fund or reject the application. During the 14-day registration period, ASIC will generally respond with queries and comments in relation to the constitution and compliance plan.

Applying for an AFSL or Foreign AFSL

As discussed in 3.3.2 Requirements for Non-local Service Providers, separate to registering the fund with ASIC, and depending on the structure and scope of services to be provided in relation to the fund, an AFSL or foreign AFSL (if available) may be required for the investment manager and will be required for the responsible entity or corporate director. The process of applying for an AFSL or foreign AFSL can be relatively lengthy and involves preparing a number of documents to be submitted to ASIC. The time to prepare an application, lodge it with ASIC and obtain the AFSL or foreign AFSL can take six to eight months or more.

In Australia, pre-marketing of retail funds, as with marketing of retail funds, will likely involve the provision of financial services in Australia, for which an AFSL will be required, subject to applicable exemptions.

Please refer to 3.3.2 Requirements for Non-local Service Providers, 3.3.3 Local Regulatory Requirements for Non-local Managers, 3.3.6 Rules Concerning Marketing of Retail Funds and 3.3.7 Marketing of Retail Funds.

Similar to as discussed in 3.3.2 Requirements for Non-local Service Providers and 3.3.3 Local Regulatory Requirements for Non-local Managers, an entity (whether local or offshore) that is involved in or engages in the marketing of an Australian retail fund to Australian clients (whether retail clients or wholesale clients) will need to consider its Australian licensing options. This is because the activity of marketing the fund will likely involve the provision of financial services (in particular, financial product advice, as well as potentially dealing or arranging for dealing in financial products).

The Corporations Act does not impose any restrictions on the types of investors that an Australian retail fund may be marketed to. Therefore, an Australian retail fund that is registered as a managed investment scheme may be marketed to any person in Australia, provided the entity marketing the fund holds an appropriate AFSL or a foreign AFSL (if available) or is able to rely on an available exemption that authorises it to provide the relevant financial services in relation to retail clients and wholesale clients.

The recent introduction of the DDO in October 2021 means that some Australian retail funds must ensure their marketing activities comply with the new obligations. Please see 4.1 Recent Developments and Proposals for Reform for further discussion.

In Australia, marketing of retail funds may involve the provision of financial services in Australia, for which an AFSL will be required, subject to applicable exemptions. In these circumstances, depending on whether an AFSL will be required or whether an exemption is available, some form of prior authorisation or notification may be required to be made to ASIC. 

For example, if it is determined that an AFSL is required, an application for an AFSL will need to be made to ASIC prior to any marketing activities taking place. 

Alternatively, if it is determined that an exemption is available, depending on the exemption, prior notification to ASIC may be required. 

Please refer to 3.3.3 Local Regulatory Requirements for Non-local Managers.

Once a retail fund has been marketed to investors in Australia, there may be certain ongoing requirements that need to be considered. 

Certain activities in relation to the retail fund (for example, issuing interests in the retail fund to investors in Australia and providing reporting and information to such investors) may involve the provision of a financial service in Australia. In these circumstances, the fund operator may require an AFSL or be able to rely on an exemption.

If an AFSL is obtained, the licensed entity will be subject to ongoing statutory duties and obligations including, for example, to:

• provide their services efficiently, honestly and fairly;
• manage conflicts of interest; and
• report “reportable situations” to ASIC. 

Alternatively, if a relevant exemption was being relied upon, the conditions of that exemption would need to be complied with on an ongoing basis. For example, the sufficient equivalence relief includes certain reporting requirements to ASIC.

Please refer to 3.3.3 Local Regulatory Requirements for Non-local Managers.

Investor protection rules in relation to financial services provided to a retail client in an Australian retail fund are primarily focused on compliance with the conditions applicable to the AFSL under which the relevant financial service is being provided. This includes compliance with the Corporations Act, which comprises prohibitions on unconscionable conduct and engaging in misleading, deceptive or dishonest conduct.

The investor protection rules also include provisions designed to protect retail clients. In addition to the prescribed product disclosure requirements discussed in 3.1.4 Disclosure Requirements, these include obligations regarding dispute resolution systems, compensation and breaches of PDS obligations.

In addition to the above, the new DDO regime applies to product issuers and distributors. Please see 4.1 Recent Developments and Proposals for Reform.

The provision of financial services in Australia is regulated and licensed by ASIC, which is an independent Australian government body established and administered under the Australian Securities and Investments Commissions Act 2001 (Cth) (the “ASIC Act”).

ASIC’s relationship with entities that are licensed or providing financial services in Australia is generally of an ad hoc nature, as opposed to an ongoing one, and usually arises in the context of specific circumstances or matters (for example, in response to lodgement of a breach report). While entities will generally not be assigned a designated officer for their relationship with the regulator, depending on the circumstances, it is often possible to reach out to ASIC to discuss or obtain feedback on certain matters.