Introduction

In our previous article, we provided guidance on how retail fund providers wishing to make cross border offers in Australia and New Zealand can take advantage of the Trans-Tasman Mutual Recognition of Securities Offerings Scheme (MRSO) (also known as the Trans-Tasman Mutual Recognition Scheme). We set out the entry requirements for accessing the MRSO and the documentary and ongoing compliance obligations which apply to participating retail fund providers. However, as noted in that article, wholesale fund products are excluded from the MRSO and there is no similar recognition scheme which can be relied upon by wholesale fund providers.

In this article, we summarise the licensing options, relief and exemptions available for wholesale fund product issuers (sitting outside of the MRSO) wishing to reach wholesale investors in both the Australian and New Zealand financial markets. We provide insights into, and information on, how wholesale fund providers can navigate the specific licensing and disclosure requirements for offering wholesale fund products across the Tasman.

Our Dentons Trans-Tasman Corporate and Investment Funds team work closely together and can assist to guide you through the Trans-Tasman regulatory landscape for wholesale fund providers.

Wholesale Funds – Australia

Investment in a wholesale fund in Australia is restricted to investors meeting the definition of a wholesale investor under the Corporations Act 2001 (Cth) (AU Corporations Act) (of which an investor has to meet one of five eligibility tests to be characterised as a wholesale investor).¹ As a wholesale investor is considered by law to be more financially literate than a retail investor, they can access a broader range of investment opportunities (often with higher underlying risk profiles). Accordingly, the Australian regulatory framework for wholesale funds is less burdensome for the issuer, which recognises the stronger financial position² or investment competence of the wholesale investor and therefore does not require the prescriptive conduct and disclosure obligations (on the issuer) which apply to retail funds.

While the reduced disclosure requirements relating to an Australian wholesale fund translates to a lighter touch in terms of ongoing regulatory oversight, the absence of a disclosure-heavy regime does not negate the requirement for an issuer to be appropriately licensed or authorised. To operate a wholesale fund in Australia, an issuer must either:

1. obtain an Australian Financial Services Licence (AFSL) from ASIC for the relevant financial services and products which the issuer will be providing in respect of the wholesale fund; or
2. be appointed as an authorised representative of an AFSL holder and have in place an appropriate authorised intermediary arrangement in place with an AFSL holder which, in each case, provides the relevant authorisations for the relevant financial services and products which the issuer will be providing in respect of the wholesale fund.

Existing licensing exemptions

Readers should note that the Australian regulatory environment for foreign wholesale fund providers wishing to operate in Australia has been in a state of flux now for a number of years while the licensing arrangements for foreign wholesale fund providers have been reviewed and revised a number of times by the Treasury and ASIC.

Under transitional arrangements, the ‘limited connection’ relief (Limited Connection Relief) will continue to apply until 31 March 2025 to Foreign Financial Services Providers (FFSPs), including New Zealand wholesale fund providers, which have historically relied on the relief to provide financial services to wholesale investors in Australia. A foreign wholesale fund provider may have relied on the Limited Connection Relief from ASIC where it has been historically (and continuing to):

1. operating from offshore and not in Australia;
2. dealing only with wholesale investors; and
3. carrying on a financial services business in Australia only because it has been engaging in conduct that is intended to induce, or likely to induce, people in Australia to engage its financial services (using the relief while complying with a. and b. above).³

From 31 March 2025, it is proposed this relief will no longer apply and be replaced by the Funds Management Relief (Professional Investors) described below.

Proposed new licensing exemptions

The Treasury has recently concluded their consultation process on the revised exposure draft legislation published on 7 August 2023, proposing to introduce a suite of new licensing exemptions for FFSPs. For readers interested in understanding the proposed reforms, the Bill and Explanatory Memorandum can be found here. In summary, the proposed new exemptions are:

1. a modified ‘professional investor’ exemption (Professional Investor Exemption), which is intended to replace the existing statutory licensing exemption relating to professional investors under subsection 911A(2E) of the AU Corporations Act. This existing exemption is restricted to financial product advice, dealing in and making a market in respect of derivatives, foreign exchange contracts, and certain carbon emissions units (which is largely irrelevant for a foreign wholesale fund provider);
2. a ‘comparable regulator’ exemption (Comparable Regulator Exemption), based on the existing Sufficient Equivalence Relief, which will exempt an FFSP from being required to hold an AFSL where they wish to provide a financial service to wholesale clients in Australia if the FFSP is authorised, registered or licensed (as applicable) by a comparable regulator to legally provide the same, or substantially the same, financial service in a place outside Australia;
3. a ‘market maker’ exemption, which will exempt an FFSP from being required to hold an AFSL where their financial services business comprises making a market for derivatives that are able to be traded on prescribed licensed markets; and
4. a ‘fit and proper person test’ exemption (Fit and Proper Test Exemption), which is not intended to be a licensing exemption per se, but will simplify the AFSL application process for an FFSP seeking to obtain an AFSL so as to establish more permanent operations in Australia, by providing an exemption from the fit and proper person test where the FFSP is regulated by a comparable regulator to ASIC (being a comparable regulator as identified under the Comparable Regulator Exemption).

Based on the above, our key observations and comments are as follows:

1. as indicated from the exposure draft legislation and as noted above, the Australian Government does not propose to continue the Limited Connection Relief. Instead, the Limited Connection Relief will be replaced by a much narrower ‘funds management’ relief (Funds Management Relief (Professional Investors)) in the ASIC Corporations (Foreign Financial Services Providers—Funds Management Financial Services) Instrument 2020/199, currently expected to commence on 1 April 2025. The Funds Management Relief (Professional Investors) will exempt an FFSP from being required to hold an AFSL where they are carrying on a financial services business in Australia only to the extent of providing ‘funds management financial services’ to professional investors under section 911D of the AU Corporations Act. Relevantly, for foreign wholesale fund providers, the definition of funds management financial services covers:
1. dealing in offshore fund financial products;
2. providing financial product advice in relation to offshore fund financial products;
3. making a market for offshore fund financial products as a result of redeeming or buying back those financial products; and
4. providing a custodial or depositary service in relation to offshore fund financial products;
2. notably, it is uncertain whether or not the option for an FFSP to apply for a modified AFSL under Australia’s foreign licensing regime (as set out in ASIC Regulatory Guide 176 Foreign financial services providers) will continue, subject to the outcome of the Treasury’s consultation process on the exposure draft legislation referred to above. During the extended transitional period (expiring on 31 March 2025), the opportunity remains available for an FFSP to apply for a foreign AFSL with ASIC if they hold relevant financial services authorisations in a sufficiently equivalent overseas regulatory regime and are seeking to provide such financial services to wholesale investors in Australia. However, the distinct FFSP licensing option proposed for comparable regulators (in connection with the Fit and Proper Test Exemption) raises questions about the future of the foreign AFSL regime;
3. broadly, the Minister will have the power to determine that a foreign regulatory regime should be taken as a comparable regulator for the purposes of the Comparable Regulator Exemption and the Fit and Proper Test Exemption. However, we do not consider it likely that New Zealand will be deemed to be a comparable regulator. This is because New Zealand does not have a comparable regulatory regime for wholesale funds, and therefore, there does not appear to be a substantive basis upon which New Zealand could be considered to be comparable to the Australian regime; and
4. the Professional Investor Exemption (if enacted) will serve to exempt a foreign wholesale fund provider from the requirement to obtain an AFSL where:
1. it provides financial services from outside of Australia (except during limited marketing visits);
2. it only provides financial services to ‘professional investors’;
3. the financial services do not involve dealing in specified financial products tradeable on certain licensing markets;
4. its head office and principal place of business are located outside of Australia;
5. it reasonably believes that providing the same or substantially the same financial service would not contravene any law applying in its head office, principal place of business or the place from where the financial services are provided; and
6. it complies with certain other conduct and notification requirements, including the core obligation to do all things necessary to ensure that the financial services are provided efficiently, honestly and fairly.

    

As noted above, the Professional Investor Exemption applies only to professional investors, which are a subset of wholesale investors.⁴ Accordingly, a foreign wholesale fund provider should be mindful that the following key categories of wholesale investors (who are not professional investors) are excluded from the Proposed Professional Investor Exemption:

1. wholesale investors with at least AU$2.5 million in net assets or a gross income exceeding AU$250,000 for the past two years which have been certified by a qualified account; and
2. participating investors where the price or value of the financial product is at least AU$500,000.

If a foreign wholesale fund provider does not meet the Professional Investor Exemption or the Funds Management Relief (Professional Investors), then they will be required to either attain a Foreign AFSL or an AFSL or be appointed as a corporate authorised representative of an AFSL holder with relevant authorisations and authorised intermediary arrangements, to be able to offer their fund to Australian wholesale clients. In all cases, we strongly recommend obtaining advice as to what is the most effective licensing approach, including whether reliance can be placed on the Professional Investor Exemption and/ or the Funds Management Relief.

Wholesale Funds – New Zealand

Offers of financial products that are limited to wholesale investors (in New Zealand) are not subject to prescribed disclosure requirements in New Zealand. This means wholesale fund product providers do not need to be licensed or registered in New Zealand to offer their products to wholesale investors in New Zealand.

However, if just one non-wholesale investor accepts an offer to wholesale investors in New Zealand and is issued with the product, the offer is deemed to be retail and will at that point be in breach of the NZ FMC Act unless the requirements of the NZ FMC Act mutual recognition regime have been satisfied.

To minimise the risk of an offer to New Zealand wholesale investors being ‘tainted’ by a retail investor, Australian offerors can rely on a safe harbour certificate. The certificate is effective for two years from the date it is given (unless earlier revoked by the investor), must contain a prescribed warning statement, and the investor must state which wholesale investor ground(s) they are relying on.

A safe harbour certificate is not a prescribed requirement but removes any doubt as to whether an investor meets wholesale criteria in New Zealand, without requiring the offeror to make its own inquiries. This is the case even if the investor ceases to meet the requirements to be a wholesale investor after having provided the certificate within the two year effective period, unless the issuer knows the investor was not in fact a wholesale investor at the time the certificate was given or becomes aware that the investor is no longer a wholesale investor.

The safe harbour certificate must be in a separate written document to the application form – so it should not just be included as additional text within an application form.

Conclusion

It is important for offshore wholesale fund providers seeking to raise capital from wholesale investors in Australia and New Zealand to understand firstly, how ‘wholesale investors’ may be defined and secondly, the different regulatory regimes for wholesale fund products which apply across the Tasman. In a recent article here, we discussed the proposed reforms for the ‘wholesale investor’ test in Australia which is likely to be reformed later in 2024.

Australia’s licensing regulatory regime for foreign wholesale fund providers (including New Zealand wholesale fund providers) has been in a state of flux for the past few years, and in 2024, there appears now to be a clearer path ahead for relevant exemptions and relief to apply, including the Professional Investor Exemption and the Funds Management Relief (Professional Investors).

In New Zealand, foreign wholesale fund providers (including Australian wholesale fund providers) have the benefit of being able to offer their products to New Zealand wholesale investors without the need to obtain a license or be registered to make an offer under New Zealand’s fundraising laws.

Our Dentons Trans-Tasman Corporate and Funds team is experienced in providing tailored and comprehensive advice to assist our clients to understand and navigate these regulatory requirements.

1. A wholesale investor in Australia is defined by being either: (i) a professional investor as defined in section 9 of the Corporations Act; (ii) a sophisticated investor under section 761GA of the Corporations Act; (iii) an investor investing at least AU$500,000 as prescribed under section 761G(7)(a) of the Corporations Act and the Corporations Regulations; (iv) an investor which meets the wealth tests prescribed by section 761G(7)(c) of the Act and the Corporations Regulations (being either that the investor has gross income of AU$250,000 per annum for the past two years or net assets of AU$2.5 million as certified by an accountant; or (v) an investor which is a business which is not a small business under section 761G(7)(b) of the Act, as defined in section 761G(12) of the Corporations Act.
2. Readers should note that the ‘wholesale investor’ test in Australia is currently under review – please see our previous article here.
3. Aside from the Limited Connection Relief, eligible FFSPs wishing to deal with Australian wholesale investors may continue to rely on the ‘sufficient equivalence’ relief (also known as the ‘passport’ relief) (Sufficient Equivalence Relief) under transitional arrangements until 31 March 2025. The Sufficient Equivalence Relief is available where the regulatory regime of the FFSP’s home jurisdiction is deemed by ASIC to be sufficiently equivalent to that of Australia. However, ASIC does not consider New Zealand to be a sufficiently equivalent jurisdiction to Australia (in terms of the regulation of wholesale funds), and therefore, New Zealand wholesale fund providers are precluded from applying for the Sufficient Equivalence Relief with ASIC.
4. The meaning of a professional investor under the AU Corporations Act includes (for example): (i) a body regulated by the Australian Prudential Regulatory Authority (other than trustees of superannuation funds and certain other funds that have net assets of less than AU$10 million); (ii) an AFSL holder; (iii) a listed entity and/ or their related body corporate; (iv) a person that has, or controls, gross assets of at least AU$10 million (including any assets held by an associate or under a trust that the person manages); (v) an investment company that is a body corporate or unincorporated body that carries on a business of investment in financial products, interests in land or other investments or invests funds received following an offer or invitation to the public; and (vi) a foreign entity that (if established or incorporated in Australia) would be covered by one of these categories.