Property tokenisation glossary: regulator terms and a Queensland lot

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Kooky

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An offer to buy a fraction of a Queensland apartment usually arrives with two vocabularies at once. One comes from property: lot, title, register, rent. The other comes from financial regulation: token, unit, scheme, custody, disclosure statement, wholesale client. A reader who knows the first set well can still be lost in the second, and the second is the one the offer document is written in.

This glossary takes the terms as the regulators use them. The definitions come from four places that were read for this guide: Information Sheet 225 of the Australian Securities and Investments Commission (ASIC), which deals with digital assets; ASIC's investor guide to unlisted property schemes, published in November 2012; ASIC's Moneysmart website; and the Land Title Act 1994 of Queensland. Each term is then set beside the same simple case: one lot in Queensland, recorded in the State's freehold land register, in which several people are offered a share.

It is a guide to words, not to any offer. Whether a particular arrangement falls inside a definition depends on its own facts, and the regulator's wording is deliberately cautious on that point.

ASIC Information Sheet 225 for the three elements; Moneysmart glossary entry "sophisticated investor" for the two thresholds.

The property words: lot, register, indefeasible title

Lot. The Land Title Act 1994 speaks of lots, not houses or apartments. Section 28 requires the registrar to record the particulars needed to identify every lot brought under the Act. A detached house on its own block is a lot; so is an apartment in a building. Everything that follows in this glossary is, in the end, about one or more lots.

Freehold land register. Section 27 of the Act requires the registrar to keep it. Under section 28 the register records, for each lot, every registered interest, the name of the person who holds each registered interest and the names of those who held it before, and the registered instruments with the dates they were lodged and registered. This is the State's own record of who holds what in Queensland land.

Registered interest. An interest in a lot that appears in that register. The Act's list of what the registrar records is built around this idea: an interest, a named holder, and the instrument that put it there.

Indefeasible title. Section 38 defines it in one line: the indefeasible title for a lot is the current particulars in the freehold land register about the lot. It is a statement drawn from the register, not a certificate kept in a drawer.

Title search. Section 35 lets a person, on payment of the titles registry fee, search and obtain a copy of the indefeasible title of a lot, of a registered instrument, or of an instrument that has been lodged but is not yet registered. The right belongs to "a person", so it is not reserved for the owner or for a lawyer. For the rest of this glossary that matters a great deal: whatever an offer says about a Queensland property, the name of the registered holder of the lot can be read from the State's record.

One practical consequence follows from these five terms. None of the financial words below (token, unit, interest in a scheme) appears in the list of things section 28 tells the registrar to record. The register names the holder of the registered interest in the lot. The arrangements between that holder and the people who put up the money live in other documents.

The technology words: digital asset, token, tokenisation

Digital asset. ASIC's Information Sheet 225 uses the phrase as a general term covering crypto-assets, virtual assets, tokenised assets, tokens and coins, and says it does not mean to exclude particular products by choosing that label. It is the widest word in the set.

Token. The same information sheet gives the word a meaning that surprises readers who think of a token as a line of code. For ASIC, a token is the bundle of rights, benefits, expectations and product features associated with it as offered to the public. The definition looks through the technology to the promise. Applied to a Queensland lot, the question is never "what is this token made of" but "what does its holder expect to receive, and from whom".

Rights. ASIC adds that the word should be read broadly. Rights that may arise in the future or on a contingency are included, and so are rights that are not legally enforceable. An expectation of a share of rent from a Gold Coast apartment, or of a share of the price when it is sold, counts as part of the bundle even if the paperwork is loose.

Tokenisation. In the information sheet this is the process of representing an asset on a blockchain. ASIC's illustration is a bond whose holdings are recorded that way. The word describes a method of record keeping. It does not, on its own, say what legal structure sits between the token holder and the asset.

Private key. The information sheet treats control of the private keys for an address on a public blockchain as the practical test of who holds a digital asset. The term returns under "custody".

The sharing words: fractional interest and nominee

Fractional interest. ASIC uses the phrase in the one worked example of Information Sheet 225 that concerns real estate, Example 9. There, a company issues tokens described as representing fractional interests in an apartment building. The phrase is descriptive: a slice of the economic outcome of a property, sold in small pieces.

Nominee. In Example 9 the investors' money buys the property and the issuing company holds it as nominee. Set beside the Queensland register, the word has a concrete meaning. If a company holds a Brisbane apartment as nominee, a title search under section 35 would be expected to show that company as the holder of the registered interest. The investors' position rests on their arrangement with the nominee.

Direct real estate. Moneysmart's page on checking an investment lists direct real estate among investments that are not regulated as financial products, alongside precious metals and those crypto or digital assets that are not financial products. Buying a whole Queensland lot in one's own name is a property transaction. The financial vocabulary starts to apply when what is bought is no longer the lot but a stake in an arrangement around it.

Managed investment scheme and its three elements

Managed investment scheme. This is the central term, because it is where ASIC's property example lands. Information Sheet 225 sets out three elements. First, people contribute money or money's worth to acquire rights to benefits. Second, the contributions are pooled or used in a common enterprise to produce financial benefits. Third, the contributors do not have day-to-day control over the operation.

Laid over a Queensland case, the three elements read as three plain questions. Did several people pay in? Was the money put together to buy, hold and let the lot for a financial return? And do those people leave the running of it, from choosing the tenant to deciding when to sell, to someone else? ASIC's reasoning in Example 9 follows that path: the money raised from selling tokens buys the property and, together with the rent, maintains and services it, with the intended benefit to members being growth in the value of their tokens.

Interest in a scheme. What a member of a managed investment scheme holds. In Example 9 the token is treated as likely to be such an interest. The term matters because an interest in a scheme is a financial product, and the licensing and disclosure words in the later sections attach to financial products.

Day-to-day control. The third element. A group of friends who buy a house together and decide everything themselves are in a different position from investors who hand every decision to an operator. The regulator's definition turns on that difference, and on the facts of each arrangement.

Fund words: units, unit trusts and property schemes

Managed fund. Moneysmart describes a managed fund as money from many investors pooled and invested to match the fund's strategy by a professional manager. It adds that the same thing goes by several names: unit trust, mutual fund, managed investment scheme, or corporate collective investment vehicle. A reader meeting any of those labels in a property offer is in the same family of structures.

Unit. In a managed fund, investors own units, or stakes in the fund, and Moneysmart is explicit that they hold these rather than the underlying assets directly. Queensland readers should watch the word. In everyday property talk a "unit" is an apartment. In a disclosure document a "unit" is a slice of a fund. An offer of "units in a Brisbane unit" uses the word both ways in five words.

Unit trust. One of the names Moneysmart gives for a managed fund. Where an offer for a single Queensland property uses the label, the points made about managed funds apply: the investors hold units, and the fund, not the investors, stands next to the lot.

Property fund or property scheme. Moneysmart uses the two as synonyms: a fund that pools investors' money to buy property assets, which it describes as commercial, retail or industrial. A manager selects the properties, looks after maintenance, collects the rent and manages improvements. Investors receive units and may receive distributions and capital gains.

Listed and unlisted. The distinction Moneysmart draws is set out in the table below. ASIC's 2012 guide is devoted to the unlisted kind, and a scheme built around one Queensland house or apartment and sold directly to investors sits on that side of the line.

Distribution. The income payment a property fund makes to its investors, which Moneysmart says is typically quarterly or half-yearly. It is the fund-world counterpart of rent, after the fund's costs.

Who's who: manager, responsible entity, custodian

A direct purchase of a Queensland lot involves a buyer, a seller and a register. A pooled arrangement adds several roles, and the regulators' documents name them precisely.

Fund manager and responsible entity. Moneysmart separates the two: the manager decides what to invest in, and the responsible entity operates the fund legally. ASIC's 2012 guide uses "investment manager" for the party that must keep the written policies described later in this glossary.

Custody. In Information Sheet 225 a person provides a custodial or depository service when they hold financial products, or a beneficial interest in them, on trust for or on behalf of clients. For digital assets ASIC gives a working rule: a person who controls the private keys for an address on a public blockchain will likely be providing such a service, while offering a self-custody or self-hosted wallet product is unlikely to amount to one.

It is worth being exact about what is being kept safe. In the Queensland case there are two different things. The lot is recorded in the freehold land register under the name of its registered holder. The tokens, if they are financial products, are held at a blockchain address by whoever controls its keys. "Custody" in ASIC's sense is about the second.

Omnibus holding. Information Sheet 225 records that ASIC has extended an existing exemption so that custodians of digital assets that are financial products may hold them in omnibus arrangements, meaning pooled rather than one address per client. The general requirement the sheet restates is that client assets are held separately from the firm's own.

Incidental custody. Custody that only supports dealing, market making or operating a market in a digital asset that is a financial product, with no revenue earned from the custody itself. The label matters because the financial requirement differs, as the numbers section shows.

The paper words: PDS, prospectus, target market

Product disclosure statement (PDS). Moneysmart says the investment manager of a property fund must provide one, and that it explains how the scheme works, its features, its risks, its fees and how it is managed. ASIC's 2012 guide adds that for an unlisted property scheme the PDS should address six benchmarks and eight disclosure principles, and explain any benchmark the scheme does not meet. The same guide notes that ASIC does not endorse the underlying investment.

Prospectus. The equivalent document for securities such as shares. Information Sheet 225 says that where a digital asset is a security, the issuer will generally need a prospectus for an offer to retail investors, and that a prospectus must contain all the information consumers reasonably require to make an informed decision. A Queensland property held through a company that sells shares would meet this word; one held through a scheme meets "PDS".

Benchmark and disclosure principle. ASIC's terms for the two layers of its unlisted property guidance. A benchmark is a standard the scheme either meets or explains: for example, that the manager keeps a written valuation policy. A disclosure principle is a set of facts the document should give: for example, the gearing ratio.

Target market determination (TMD). Moneysmart describes it as the document that lets an investor confirm whether a fund lines up with their objectives, timeframe, risk tolerance and need to get at their money. Information Sheet 225 lists design and distribution obligations among the extra requirements that apply when financial services are provided to retail clients.

The investor words: retail, wholesale, sophisticated

Retail client. Information Sheet 225 says the Corporations Act imposes additional requirements on those who provide financial services to retail clients: disclosure documents, design and distribution obligations, internal and external dispute resolution, and compensation arrangements. A licence must specifically authorise services to retail clients.

Wholesale client. The other side of the line. Moneysmart's page on choosing a managed fund notes that such investors may be offered products without regulated disclosure documents.

Sophisticated investor. Moneysmart's glossary defines this as a person holding a certificate from a qualified accountant that they have a prescribed level of net assets or gross income, which gives an exemption under the Corporations Act 2001 so that they can buy financial products without a regulated disclosure document. The levels it states are gross income of $250,000 or more a year in each of the previous two years, or net assets of at least $2.5 million.

For Queensland property owners that second figure deserves a moment's thought. The glossary entry speaks of net assets without limiting the kind, so a person may reach the level largely through what they own and still be new to pooled or tokenised investments. The label describes a certificate, not experience. ASIC's information sheet puts the duty on the offering side: entities are expected to know who their investors are in order to justify treating them as wholesale or sophisticated.

The register names who holds the lot. The disclosure document, where one is owed, says what everyone else has been promised.

The number words: gearing, interest cover, NTA

Gearing. Moneysmart's glossary: borrowing to invest, as when a house is bought with a mortgage. A property scheme can borrow against the lot just as a household does.

Gearing ratio. ASIC's 2012 guide gives the formula: total interest-bearing liabilities divided by total assets. A scheme with no debt sits at 0 per cent. At 100 per cent or more the debts equal or exceed the assets. The guide's own summary is that higher means riskier.

Interest cover ratio. Earnings divided by interest repayments, in the same guide. A scheme at 1 earns just enough to pay its interest; below that, it does not.

Interest capitalisation. Adding unpaid interest to the loan instead of paying it. ASIC's benchmark is that a scheme should not do this, and that if it does, the manager explains how the debt will be repaid.

Valuation: "as is" and "as if complete". For a property under development, ASIC's valuation benchmark asks for both figures: what the site is worth today and what it would be worth finished. The gap between the two is where development risk sits, which is relevant to any off-the-plan Queensland project sold in fractions.

Related party transaction. A dealing between the scheme and someone connected to its manager. ASIC's fifth benchmark asks for a written policy on them, because such dealings may lack an arm's-length check.

Withdrawal rights. The terms on which an investor can get money back from the scheme itself. ASIC's guide warns that many unlisted schemes offer none, and that some impose waits of 12 months or more.

Net tangible assets (NTA). The term has two uses, and they should not be confused. In ASIC's property guide it is a per-unit figure for the scheme: net assets, less intangible assets and adjustments, divided by the number of units on issue. In Information Sheet 225 it is a financial requirement on a custodian: typically at least $10 million for custodial services, $150,000 where custody is incidental, with at least half of the required amount held in cash or cash equivalents.

The checking words: licence, registers, alert list

Australian financial services (AFS) licence. Moneysmart's glossary: a licence given by ASIC that allows people or companies to legally carry on a financial services business. Information Sheet 225 lists the activities that need one when a digital asset is a financial product: dealing, which includes issuing and arranging; giving financial product advice; making a market; and providing custodial or depository services.

Moneysmart is careful about the limits of the word. A licence controls what financial products can be sold and gives investors better protection if something goes wrong. It does not mean ASIC endorses the company or the product, and it does not make an investment safe.

Authorised representative. A category that Moneysmart names, beside AFS licensees, among those who can be looked up on ASIC's registers. An offer may be promoted by a firm that appears there in this capacity instead of as a licensee in its own name.

Professional registers search. ASIC's public search for AFS licensees, authorised representatives and managed investment schemes. It is the financial-side counterpart of the Queensland title search: one confirms who holds the lot, the other confirms who is licensed and whether the scheme is on ASIC's register.

Investor alert list. Moneysmart's list of companies that are suspicious or unlicensed.

Read together, the terms sort into two groups. The property words describe a public State record with a named holder for every lot. The financial words describe what happens when that holder stands in for many people: a scheme, its operator, its documents, its investor categories and its ratios. The regulators' material read for this guide does not treat the token as a third category. In ASIC's own definition it is the bundle of rights on offer, and the remaining vocabulary exists to say what that bundle contains.

Kooky, from Shaka

Kooky edits Queensland Estate and builds Shaka, the payment router he made for Queensland property professionals. One payment comes in, and every agent, agency and party in the deal receives their signed share on closing date.

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