What is a fund? This question may be simple, but it is
important to alternative investments because a fund (collective
investment scheme) faces a much higher level of regulation than an
arrangement that it is not a fund.
Historically, the way in which many alternative investments have
operated is by giving investors an identifiable share of the
property of the scheme, which each investor has the ability to
exercise some form of day-to-day control over. This has generally
meant that those types of investments were not believed to be
classed as funds for regulatory purposes.
However, a recent English case has moved the goal posts on what
constitutes a fund, which may have a profound impact on the
alternative investment market, including more novel financial
services, such as peer-to-peer lenders.
Last year the Financial Conduct Authority in the UK (FCA)
brought legal action against the promoters and managers of an
African Land Scheme and three Carbon Credits Schemes because of the
FCA's view that they had been deliberately structured to avoid
the need to be regulated.
The African Land Scheme involved a rice farm in Sierra Leone in
which an investor could purchase a sub-lease of a plot of land on
the farm, so that they would receive the profit from the sale of
the rice grown on their plot. The Carbon Credits Schemes involved
similar arrangements in respect of forest areas in Australia,
Sierra Leone and the Amazon, whereby each investor received the
profits attributed to their plots from the sale of tradable carbon
In short, the English Court identified that the key question of
whether the schemes were funds was whether each scheme was
"managed as a whole", even if investors purchased a lease
over an individual plot and received income based on the value of
the carbon credits or rice produced by that plot.
In answering this question the English Court explained that the
test to be applied is whether "the elements of individual
management, arising either from attention given by management to
the interests of individual investors, or from participation by the
investors themselves in the management of the property, is
If the individual management is substantial, the schemes should
not be regarded to be funds because each of them is not managed
"as a whole".
Ultimately, the FCA won the case. The English Court held that
none of the schemes had individual management that was substantial
enough to avoid being labelled as collective investment schemes.
Therefore, the schemes were operating as unauthorised funds in
breach of the regulatory requirements in the UK.
Many jurisdictions have a similar definition of collective
investment scheme that uses the 'managed as a whole'
terminology and it is possible that the regulators and Courts in
those jurisdictions will look to follow the decision in this
Further, similar investment structures that invest in other
types of alternative investments, such as classic cars, hotel rooms
and wine, as well as alternative financial services providers (e.g.
peer-to-peer lenders) may also be caught by the wider
interpretation of 'managed as a whole'. Therefore, managers
of those types of arrangements need to be aware that their
regulatory authorities may now look to regulate those arrangements
However, it appears that the case has been given permission to
be appealed, so watch this space to see if the goal posts are moved
An original version of this article was published in Funds
EuropeGuide to AIFMD 2014, July
Many people are baffled by trusts, the purpose of which they don't fully comprehend. Some even regard them with suspicion, as tools of of opaque tax evasion strategies of a type favoured by wealthy individuals.
We were recently instructed by a Bank in relation to a regulatory matter. The Bank had made a suspicious activity report to the Financial Investigation Unit ("FIU") due to their concerns about the potential source of funds in an account.
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