Navigating Legal Rules for Real Estate Funds in Australia

Investing in pooled real estate requires a deep understanding of the legal and regulatory environment, supervised by the Australian Securities and Investments Commission (ASIC).

This article will guide readers through the essentials of navigating these regulations to ensure compliance and optimise your investment strategies.

Raising Capital in Australia

When asset managers get started, most of the capital is raised using small-scale offerings. This allows access for 20 investors over 12 months, with a maximum combined investment of $2 million.

As the size of the project gets bigger, transitioning to more complex investment structures like Managed Investment Schemes (MIS) becomes necessary, as fewer exemptions apply. 

These schemes, regulated and requiring an Australian Financial Services Licence (AFSL), offer structured and diversified investment sources but can be complex and require higher ongoing management.

Small-Scale Offerings (ASIC 20/12 Rule)

ASIC supervises operators of financial markets and maintains a register of financial services licensees.

Rule 20/12 allows for raising up to $2 million from no more than 20 investors over a 12-month period, facilitating small-scale offerings without needing a regulated disclosure statement.

Restrictions include no public promotion and limited solicitation methods. Investors are typically drawn from the issuer's existing network.

Eligibility and Restrictions

To qualify for the small-scale offerings exemption:

• Offers must be personal;
• Must not breach the 20 investors or $2 million ceilings;
• Several exclusions apply, such as:
  • Investors committing at least $500,000.
  • Offers to parties outside Australia.
  • Company officers and sophisticated or wholesale investors.

Joint Ventures

Joint ventures involve pooling resources to invest in property, with active participation from all investors. 

Common structures include partnerships, corporations, and trusts, each with unique characteristics.

Joint ventures offer flexibility and shared risk, but they require clear agreements and exit strategies to ensure smooth operations.

Common JV Structures

Some common JV structures are:

1. Partnerships: Favoured for simplicity and ease of formation. All parties share profits, losses, and management in proportion to their investment.
2. Corporations: Provide a formal structure with limited liability but require rigorous governance.
3. Trusts: Offer unique characteristics based on project needs and preferences.

Managed Investment Schemes (MIS)

MIS are collective investment vehicles managed on behalf of investors by a responsible entity holding an AFSL. 

These schemes provide access to diversified portfolios and potential returns from property income and appreciation, and are classified into either:

• Retail Schemes: Open to the general public with significant protections, including comprehensive product disclosure statements (PDS).
• Wholesale Schemes: Restricted to sophisticated investors with fewer regulatory requirements and higher minimum investments.

 Outlined below is a table comparing the differences of these two scheme types.

Working with International Investors

Foreign Investment Review Board (FIRB) guidelines apply to foreign investments in Australian property. 

FIRB scrutiny typically applies to investments exceeding $1 million in residential real estate.

The application process involves submitting detailed information about the investment and its potential impact on Australia.

Conclusion

Understanding the legal and regulatory framework for raising capital and investing in real estate in Australia is essential. As with all transactions, it’s always advisable to consult with legal and financial professionals.

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