By Warwick Painter, Partner
Today marks the introduction of the Federal Government’s highly anticipated changes to the laws regulating the Significant Investor Visa (SIV) programme and the launch of the Premium Investor Visa (PIV) programme. Initiated as part of its broader agenda to increase Australia’s competitiveness and annual productivity growth rate, the changes introduce dramatic reforms to Australia’s Business Innovation and Investment programme, aimed at boosting the Australian economy by targeting investment in areas which support innovation and providing new sources of capital growth for emerging business ventures.
- The main reform to the SIV programme, effective as of 1 July 2015, is that a significant part of the minimum $5 million to be invested in “complying investments” under the SIV programme must now be directed into venture capital and emerging companies as follows:
- At least $500,000 must now be invested in AusIndustry-registered Australian venture capital or growth private equity fund(s) investing in start-up and small private companies (i.e. either Early Stage Venture Capital Limited Partnerships (ESVCLPs) or Venture Capital Limited Partnerships (VCLPs)). The Government expects to increase this to $1 million for new applications within two years as the market responds. Recognising that an investment in an ESVCLP or VCLP may take some time to arrange, the new rules allow up to 12 months after the Visa is issued for the applicant to arrange the investment and a further period over the life of the Visa for the investment to be substantially deployed into the fund. In the meantime the funds must be held in cash deposits and earmarked for this purpose.
- At least $1.5 million must now be invested through one or more managed investment funds that invest in “emerging companies”, (i.e. which can be either a company or a managed investment scheme) with a market capitalisation of less than A$500,000,000 at the time of the investment. The investment must be made through a managed investment fund, with the underlying investments being in one or more of the following:
- securities quoted on ASX;
- securities quoted on an Australian securities exchange other than ASX (up to a 20% limit of the value of the fund at any time);
- unquoted Australian securities issued by an Australian company or trustee/responsible entity of an Australian managed investment scheme that invests in Australian real property or Australian infrastructure assets (up to a 20% limit of the value of the fund immediately after the time of investment and up to 10% limit for investments in Australian residential real estate);
- securities quoted on a securities exchange operated in a foreign country (up to a 10% limit of the value of the fund at any time);
- cash held by Australian ADIs, including certificates of deposit, bank bills and other cash-like instruments (up to a 10% limit of the value of the fund immediately after the time of investment invested in any one issuer); and
- derivatives (up to a 10% limit of the value of the fund immediately after the time of investment invested in any one issuer).
To the extent that not all funds are invested in the above two categories, a “balancing investment” of any remaining portion of the investment must be made through one or more managed funds that invest in a combination of eligible assets. These include:
- Australian listed entities;
- eligible corporate bonds or notes;
- cash held by Australian ADIs;
- derivatives; and
- Australian real property (subject to the 10% limit on residential real estate and the prohibition on direct residential real estate investment).
One significant change is that no investment under the SIV regime can be made directly in government securities or corporate debentures, thereby removing the passive investment option which was previously chosen by many applicants for an SIV.
In addition to the above, from 1 July 2015:
- The existing rules banning direct investment into residential real estate have been reinforced, and new measures have been introduced to clamp down on indirect investment into residential real estate, with indirect exposure through investment vehicles now restricted to no more than 10% of the value of a vehicle’s net assets. A portion of funds will continue to be permitted to flow into commercial or industrial real estate, via managed funds.
- The residency requirement has changed to require either the primary applicant to reside in Australia for 40 days per year (or 160 days over four years), or the secondary applicant (who can be a spouse or de facto partner) to reside in Australia for 180 days per year (or 720 days over four years). Previously, the residency requirement applied only to the primary applicant. The secondary applicant is also now able to apply to fulfil the primary criteria for the permanent visa on behalf of the primary applicant.
- ‘Loan back’ arrangements, where the investment is used as security or collateral by applications for the duration of the provisional visa, are now specifically excluded from the regime.
In addition, the Premium Investor Visa (PIV) is now available for certain applicants investing a minimum of $15 million. The scope of eligible investments under the PIV regime is broadly as follows, with certain conditions attached to each category:
- Australian securities exchange listed assets;
- Australian government or semi-government bonds or notes;
- Corporate bonds or notes issued by an Australian exchange listed entity (or wholly owned subsidiary of the Australian listed entity) or investment grade rated Australian corporate bonds or notes rated by an Australian Financial Services licenced credit rating agency;
- Australian proprietary limited companies;
- real property in Australia (excluding residential property);
- deferred annuities issued by Australian registered life companies;
- if the investment is made through a managed investment fund – cash held by Australian ADIs;
- derivatives; and
- State and Territory government approved philanthropic donation.
The PIV offers a 12 month pathway to permanent residency (3 years faster than the SIV). It is an exclusive visa and will be offered at the invitation of the Australian Government only, with potential recipients to be nominated by Austrade.
Austrade is now the key government entity responsible for the SIV and PIV programmes. It has been tasked with the following 3 key duties:
- nominating potential SIV applicants (together with the States and Territories);
- progressing the new PIV programme and being the sole nominator for persons invited to participate in that programme; and
- reviewing the framework for complying investments under the SIV and PIV programmes on an ongoing basis to ensure that each programme achieves its long term objectives.
As with any policy change of this nature, there is good news and bad news for operators of managed investment schemes designed to meet the requirements of the substantial investment capital flows associated with the SIV and PIV programmes.
The good news is a substantial affirmation of the role of collective managed investment schemes as a conduit for approved investments in most of the categories of complying investment (other than the venture capital/ growth private equity component which is a specialised subset of investment management). In fact the removal of direct investment into government bonds and corporate debentures should provide an increased pool of investment capital to be directed into these funds. So existing operators of complying managed investment schemes are still open for business.
The bad news is that ensuring that your fund can continue to be a complying investment (and hence able to access the substantial capital inflows which could be anticipated) has just become a whole lot more difficult, both administratively and in ensuring your existing investment objectives meet the relevant criteria.
There has been widespread concern that these changes could reduce the effectiveness of the Visa programme. This is because the requirement to direct money into high risk venture capital investments, along with the much more restrictive criteria for investment in real estate (and especially residential real estate), could see many potential Visa applicants looking towards other jurisdictions or investment opportunities which offer more flexibility.
Another concern is that the amendments could overheat the small-cap and venture capital market. Such businesses could see substantial inflows of new foreign investment under the amended legislation, which could lead to excessive valuations.
Fund managers and trustees administering funds through which SIV investments are currently channelled will need to re-examine their funds to ensure that they remain compliant under the amended regime. In some cases this may require structural reform to existing investment platforms and new governance and administration measures being put in place by the trustees for those funds. Fund managers and trustees should also consider establishing new funds or redesigning existing funds to take advantage of the new PIV programme.
Operators of these managed investment funds should also prepare for more direct engagement with Austrade and the Federal Government in order to ensure that they continue to offer complying investments under the SIV and PIV programmes.
The Corporate Advisory team at Mills Oakley Lawyers act for a number of local and international fund managers, trustees and custodians and have extensive experience in the structuring, implementation and maintenance of managed funds that are compliant with the Significant Investor Visa programme.
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