What section 235 says
Section 235 of the Financial Services and Markets Act 2000 defines a collective investment scheme as arrangements with respect to property of any description, including money, whose purpose or effect is to enable the people taking part to share in the profits or income arising from the acquisition, holding, management or disposal of the property. Two further features have to be present.
- The participants do not have day-to-day control over the management of the property, even if they have the right to be consulted or to give directions.
- Either the participants’ contributions and the profits or income are pooled, or the property is managed as a whole by or on behalf of the operator, or both.
The word arrangements is wide. A scheme does not need a fund, a prospectus or a formal structure. An informal syndicate set up by email, a joint venture agreement or a profit share in a development can all be arrangements for this purpose. Establishing, operating or winding up a collective investment scheme is a regulated activity under the Regulated Activities Order, so the person running an arrangement that meets the definition needs permission unless an exclusion or exemption applies.
Structures that often raise the question
Property is one of the most common areas where people set up a scheme without realising it. The structures below are not schemes by definition, but each has features that can bring section 235 into play.
| Structure | What usually needs looking at |
|---|---|
| Syndicate buying a property together | Whether investors really control letting, refurbishment and sale, or leave it to the organiser |
| Joint venture with a developer | Whether each party takes an active part in management, or one side only provides money |
| Development funding for a profit share | Whether the return depends on the performance of a project managed by someone else |
| Units, rooms or pods in a managed building | Whether income is pooled or the building is let and managed as a whole |
| Loan notes or shares in a property company | Usually a different question: the company may be excluded, but the notes or shares are investments |
Day-to-day control is a practical test
Many organisers try to give investors control on paper: a right to vote on major decisions, a seat on a committee or the ability to approve a business plan. Section 235 makes clear that a right to be consulted or to give directions is not the same as day-to-day control. What matters is who actually makes the ongoing decisions about the property, such as choosing tenants, setting rents, instructing contractors and deciding when to sell. Where investors rely on the organiser or a manager for those decisions, they are unlikely to have day-to-day control however the documents describe their role.
Exclusions in the CIS order
The Financial Services and Markets Act 2000 (Collective Investment Schemes) Order 2001 lists arrangements that are not collective investment schemes even if they would otherwise meet the definition. In outline, they include arrangements that are not operated by way of business, most bodies corporate, timeshare schemes, some funds relating to leasehold property, and some arrangements whose main purpose is to let participants share in the use or enjoyment of property rather than make an investment return. Each exclusion has detailed conditions, and an arrangement that looks similar to an excluded one can still fall outside the exclusion on its facts.
Alternatives that change the analysis
Where a scheme is not intended, the usual approaches involve changing who controls the property or how investors hold their interest. Structures where each investor owns a separate asset and genuinely makes the decisions about it, or a true joint venture where every party takes part in management, can sit outside section 235. Using a company to hold the property can bring the body corporate exclusion into play, although that exclusion does not apply to a limited liability partnership. That does not make the arrangement unregulated, though: the shares or loan notes issued to investors are specified investments, so arranging investment in them and promoting them raise their own questions. Some businesses instead use an authorised operator to run the scheme. Schemes can also be alternative investment funds, which brings a separate set of rules for the manager. Investment introductions
Investor documents are promotions
The marketing test applies whatever the structure. Brochures, information memoranda, pitch decks, websites and emails inviting people to invest are financial promotions under section 21 of FSMA. Promotions of unregulated collective investment schemes are among the most restricted. Section 238 of FSMA limits what even an authorised firm can promote to the public, and the exemptions that allow promotion to particular investors come with conditions. If the structure is a company issuing shares or loan notes, the ordinary promotion rules for those investments apply instead. Fundraising and investor materials
Common misunderstandings
Investors vote on decisions, so they have control
A right to be consulted or to give directions is expressly not day-to-day control. The test looks at who runs the property in practice.
We use a company, so there is nothing to consider
A company may take the arrangement out of the scheme definition, but issuing and promoting its shares or loan notes are regulated questions of their own.
Only friends and family are investing
The exclusion for arrangements not operated by way of business is narrow. Who the investors are matters more to the promotion rules than to the scheme definition.
It is bricks and mortar, not a financial product
Section 235 applies to property of any description. The question is how the investment is arranged, not what the underlying asset is.
When a written opinion helps
A written legal opinion is worth considering before you take money from investors into a property deal, when a bank or lender asks how the equity has been raised, when you are choosing between a syndicate, a joint venture and a company structure, or when an investor’s own advisers ask whether the arrangement is a scheme. The opinion applies section 235 and the CIS order to your draft documents and to how the deal will actually be run. How written opinions work
Primary sources
- Financial Services and Markets Act 2000, section 235: collective investment schemes
- Financial Services and Markets Act 2000, section 238: restrictions on promotion
- Financial Services and Markets Act 2000 (Collective Investment Schemes) Order 2001
- Financial Services and Markets Act 2000 (Regulated Activities) Order 2001
- FCA Handbook, COBS 4: communicating with clients, including financial promotions