16
across a number of underlying assets.
Funds can also be much quicker, easier
and cheaper to invest in than buying land
or forestry plantations directly. However,
closed-ended funds are illiquid and
often unregulated. Risks include a higher
concentration of assets, complex terms
and conditions, lack of regulatory scrutiny
and transparency and higher leverage.
ENTERPRISE INVESTMENT
SCHEME (EIS)
The EIS is a Government backed initiative
to promote investment into small start-
up companies, with investors receiving
tax reliefs for taking on the extra risk
associated with these companies. In order
for investors to receive these reliefs,
companies have to meet certain criteria set
by HM Revenue & Customs (HMRC).
VENTURE CAPITAL TRUST
(VCT)
Venture Capital Trusts (VCTs) are listed
companies that are run by a fund manager
and which, in turn, invest mainly in smaller
companies that are not quoted on stock
exchanges. Investors into VCTs receive
generous tax reliefs in return for the added
risk of investing into small, higher risk
start-up companies.
There are very strict rules on how VCTs can
invest pooled money in order to qualify
for Government tax reliefs. In order to
receive tax reliefs and be classed as an
eligible company, the company must
undertake a "qualifying trade". Forestry is
one of a number of trades that is excluded
from receiving investment from VCTs,
and therefore there are no opportunities
available in this sector.
REGULATION
The Financial Services Authority (FSA),
now the Financial Conduct Authority
(FCA) and the Serious Fraud Office (SFO)
have previously raised concerns about
unregulated investments into forestry. These
investments are often based overseas.
had been running collective investment
schemes without authorisation. The
defendants argued that they were not
collective investments as they were direct
asset purchases.
Registered subscribers can read an in-depth
summary of the outcome of this case via
Intelligent Partnership’s research hub:
This is one of the first cases in which the
English court has considered the meaning
of various elements of the definition of
a CIS under section 235 of the Financial
Services and Markets Act 2000.
The investment structure and operating
model of these products is similar to a
number of other forestry investments that
are still being promoted to retail investors;
meaning we are likely to see more product
intervention from the FCA in 2014.
MAIN
INVESTMENT
STRUCTURES:
DIRECTLY
HELD
CORPORATE
ELEMENT
7
COLLECTIVE
INVESTMENT
SCHEME
The FCA does not regulate the sale of land,
timber or forestry but they do regulate
Collective Investment Schemes (CIS) and
restrict financial promotions, a firm must be
authorised by the FCA to operate or promote
a CIS from the UK.
The FCA works by some broad characteristics
to determine whether a scheme is a CIS, but
it is often a complex, legal matter open to
interpretation:
▲
▲
Investors do not have day-to-day control
over managing their plot;
▲
▲
The scheme involves pooling investor
funds;
▲
▲
The operator is responsible for managing
the scheme as a whole.
The promotion and sale of Unregulated
Collective Investment Schemes (UCIS) and
Close Substitutes was restricted from 1st
January 2014 as a result of the FCA policy
paper PS13/3. The FCA now categorises any
investment that is not a direct purchase of an
asset, but instead has a structure around it
that modifies the investors’ exposure to the
asset with an element of pooling of income,
profits or contributions as a Non-Mainstream
Pooled Investment (NMPI).
These investments are considered to be only
suitable for high net worth individuals (those
with over £250,000 in investable assets or
an annual income in excess of £100,000) and
sophisticated investors due to their high risk,
illiquid nature.
PS13/3 has dramatically narrowed the
audience UCIS can be promoted to. However,
some forestry investments will still claim
that they are not collectives as they are
direct purchases of land or forestry, and
therefore will argue that they escape the new
restrictions.
Advisers and intermediaries must be
certain that the investment is not an NMPI
if they are promoting it to ordinary retail
investors. The FCA recently won a court
case against Capital Alternatives (along
with several other firms including African
Land Limited and Reforestation Projects
Limited) in which the FCA believed they
