Financial Conduct Authority (A Company Limited by Guarantee) v (1) Capital Alternatives & 15 Ors  EWHC 144 (Ch)
The defendants promoted and operated four investment schemes. The first scheme, referred to as the African land scheme, concerned a rice farm in Sierra Leone. Investors bought sub-leases of plots of land at the farm, on the basis that they would receive the profit from the sale of the rice cultivated on the plot sub-leased to them. The other three schemes were carbon credit schemes relating to forest areas in Australia, Sierra Leone and the Amazon. They involved the sale to investors of sub-leases or licences, on the basis that the operators would seek accreditation by a relevant body, resulting in tradable carbon credits which could be re-sold at a profit.
FSMA, section 235 provides that an investment scheme will be classed as a CIS if the participants do not exercise day-to-day control over the management of the investment property and the scheme has one or both of the following attributes: (a) the contributions of the participants and the profits or income out of which payments are to be made to them are pooled; (b) the property is managed as a whole by or on behalf of the operator of the scheme.
The Court held that, on the facts, the investors in both types of scheme evidently did not exercise day-to-day control over the investment property. (a) pooling and (b) management as a whole were separate issues. An investment scheme might not involve pooling but might nonetheless be “managed as a whole” and, as such, would be a CIS.
Whereas investors’ contributions were pooled to meet the costs of developing and running the rice farm in its entirety, there was no pooling of profits or income, as the rice from each plot was harvested separately, weighed and sold for sums representing the amount of rice grown. Accordingly, the Court found in favour of the scheme as regards pooling. As regards the Australian carbon credit scheme, the investors received revenues in accordance with the performance of their individual plots, and so there was no pooling of profits, whereas the evidence did point towards a pooling of contributions and profits in the Sierra Leone and Amazon carbon credit schemes. The correct test for deciding whether property was “managed as a whole” was whether the elements of individual management, arising either from attention given by the management to the interests of individual investors or from participation by the investors themselves in the management of the property, was substantial. If so, the management by or on behalf of the operator was not to be regarded as management “as a whole”.
On the facts, the only aspect of the management of the rice farm that was undertaken on an individual (as opposed to collective) basis was the harvesting and weighing of the rice for each investor’s plot. However, this had no real commercial purpose, and it did not benefit investors. Further, the only purpose of the segregation of the land into plots was to generate individual returns simply to avoid categorisation as a CIS. The property was therefore managed “as a whole” and the Africa land scheme was a CIS.
Similarly, in the Australian carbon credit scheme, the allocation of individual plots to investors had no economic purpose and there was management of the entire investment property (here, the forest) as a whole. On this basis, the Australian scheme was a CIS.
In the Sierra Leone and Amazon carbon schemes, the intention seemed to be that the property was managed as a whole. Therefore, on this basis and on the basis of pooling, the Sierra Leone and Amazon carbon schemes were held to be CISs.
This judgment is being appealed. Nevertheless, it provides useful guidance as to the meaning of section 235, and will be of interest to those who promote and operate a wide range of investment schemes, including those that facilitate investment in hotel rooms and buy-to-let apartments.
The full text of the judgment can be found here: