Unregulated collective investment schemes ("UCIS") are generally regarded as high risk and there are significant restrictions on who can manage them and how, and to whom they can be promoted in the UK. The question of whether an investment scheme constitutes a collective investment scheme ("CIS"), within the meaning of section 235 of the Financial Services and Markets Act 2000, is therefore key. There are three limbs to the definition:

  • It is an arrangement with respect to property (of any description, including cash), the purpose or effect of which is to enable the persons taking part in the arrangements (whether by becoming owners of the property or any part of it or otherwise) to participate in, or receive profits or income arising from the acquisition, holding, management or disposal of the property
  • The investors must not have day-to-day control over the management of the property, whether or not they have the right to be consulted or give directions
  • The arrangement has either or both of the following characteristics:
    • The investors' contributions and the profits/income out of which payments are to be made are pooled
    • The property is managed as a whole by or on behalf of the operator of the scheme

In this decision, Capital Alternatives & Ors (the "Defendants") appealed against a decision that four investment schemes constituted a CIS. If the schemes were a CIS, their establishment, operation and winding-up were regulated activities which could not lawfully be carried out by Capital, which was unauthorised. Two types of scheme were in issue:

  • The African land scheme – exploitation of a rice farm in Sierra Leone
  • The carbon credits schemes – exploitation of forest areas in Australia, Sierra Leone and Brazil

In determining that all four schemes met the definition of a CIS, the Court of Appeal looked at the characteristic features of each scheme and the way in which each scheme was intended to work in practice, particularly in respect of the third limb of the test (whether there has been a pooling of investors' monies and/or whether investments have been managed centrally). The Court found that, in relation to all four schemes, either there was central management with no provision for management input by or consultation with investors, and/or there was a pooling of income. The only evidence of individual management was segregation of plots in the African land scheme, and this was not sufficient and had been put in place in an attempt to evade the CIS rules.

Whilst the decision does not create new law, it provides helpful guidance as to how the Court will approach an assessment of whether or not a scheme is a CIS. Given that permission to appeal has been refused by the Supreme Court, it is anticipated that the Court of Appeal's approach will now bring some clarity to this issue. There are a number of other schemes with similar structures which commentators anticipate may now receive attention from the FCA. Meanwhile in the Capital case, the parties will now go back to the High Court to test whether misleading statements were made to investors.

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