Capital Alternatives (first instance)

The court determined a preliminary issue whether four investment schemes (the "African Land" scheme and three "Carbon Credits/CCC" schemes) were "collective investment schemes" within the meaning of section 235 of the Financial Services and Markets Act 2000 (FSMA). The judge held that the decisive inquiry is fact-sensitive and focused on whether the property concerned is "managed as a whole" by or on behalf of the operator (s.235(3)(b)), as well as the separate question of pooling of profits or income (s.235(3)(a)).

Key legal principles and material grounds:

• Pooling: pooling of profits or income requires the creation of a fund for the combined or common benefit of investors; separate allocation of income to individual plots does not of itself constitute pooling.
• Property: the relevant "property" in s.235(3)(b) is to be understood with reference to s.235(1) and may include the larger project (for example Yoni Farm or a forest area) that enables investors to benefit, not merely the individual plot titles.
• Managed as a whole: a scheme may be a CIS under s.235(3)(b) even if investors receive individually-measured returns, if the operator manages the property as a single entity for the collective benefit of investors and investor involvement in management is insubstantial.
• Application to the schemes: the African Land scheme and the Australian CCC scheme were managed as a whole and therefore were CISs despite segregated harvesting/plot accounting; two other CCC schemes (Sierra Leone and Brazil) involved both pooling and collective management and were also CISs.

This was a first-instance trial of a preliminary issue brought by the Financial Conduct Authority in July 2013 against promoters and operators of four alternative investment schemes: an African rice farm scheme ("African Land") and three carbon-credits/forestry schemes (the "CCC" schemes). The FCA sought a determination whether the arrangements were collective investment schemes within s.235 FSMA so as to trigger the authorisation and related consequences under FSMA.

Background and parties: the claimant was the FCA (formerly the FSA). Defendants included Capital Alternatives and associated companies and individuals involved in promotion and receiving investor money, African Land Limited (operator of the Sierra Leone rice project at Yoni Farm), Reforestation Projects Limited (operator of the CCC schemes) and various directors and other associated persons. The hearing addressed the statutory test in s.235 FSMA and related provisions (for example s.19, s.22 and the RAO).

Nature of the application and issues: the preliminary issue directed by Roth J. required the court to decide, as a matter of construction and fact, whether these schemes were CISs. The main contested issues were (i) the meaning and scope of "property" in s.235(3)(b), (ii) the meaning of "pooling" in s.235(3)(a), and (iii) the meaning of "managed as a whole" in s.235(3)(b). The defendants relied in part on FCA Perimeter Guidance (PERG) and on the fact that the promotional materials described individual plots and individual returns; the FCA relied on evidence of centralised management and the practical operation of the projects.

Court's findings and reasoning:

• The court emphasised that statutory construction should be approached conservatively but not unduly narrowly and that the factual operation of arrangements is decisive.
• On "pooling", the judge held that it requires a combined fund or common benefit: merely selling the aggregate production to a single buyer or making standard deductions does not by itself constitute pooling of income under s.235(3)(a).
• On "property", the court held that s.235(3)(b) refers back to s.235(1): the relevant property is what enables participants to benefit from acquisition, holding, management or disposal. On the facts that included infrastructure and areas outside individual plots, the property for the African Land and CCC Australia schemes was the whole project area (Yoni Farm or the forest area), not merely the individual sub-plots.
• On "managed as a whole", the judge rejected a rule that any element of individual management defeats collective management. The correct enquiry is qualitative: if the element of individual management is insubstantial and the operator runs the project as a single enterprise without investor participation in decisions, s.235(3)(b) is satisfied. The court found that African Land (including ACSL and later GMX management) exercised overall management of Yoni Farm, and investors were armchair investors; segregated harvesting and plot accounting (even if genuine) served chiefly to attempt to avoid regulation and had little commercial effect in practice.
• In the CCC Australia scheme the court accepted evidence (notably from Citola) that individual plot allocation of ACCUs was intended to be measured and that the project was nevertheless managed as a whole by the project developer; accordingly it was a CIS on the "managed as a whole" limb. For the Sierra Leone and Brazilian CCC schemes the court found that the operator intended pooled allocation (or rateable sharing) of credits and in those cases both pooling and collective management applied.
• The court considered but did not regard PERG or informal FSA guidance as decisive where the factual operation did not match the guidance assumptions.

The judge therefore declared that all four schemes were collective investment schemes under s.235 FSMA.

The court declared that all schemes before it were collective investment schemes within the meaning of section 235 FSMA. The judge gave detailed reasons: (i) "property" in s.235(3)(b) can extend to the whole project that produces investors' returns; (ii) "pooling" requires a common fund or combined benefit and is not made out merely by aggregate sales or standard deductions; and (iii) a scheme is a CIS under s.235(3)(b) where the operator manages the property as one enterprise for collective benefit and investors have no substantial involvement. Applying those principles, the African Land scheme and the Australian CCC scheme were managed as a whole and thus CISs; the Sierra Leone and Brazilian CCC schemes involved both pooling and collective management and thus were CISs as well.