How to raise finance from private investors without getting on the wrong side of the Financial Conduct Authority

The ‘African Land’ case – why did the FCA prosecute?

In the case of Financial Conduct Authority v Capital Alternatives Ltd and others (called the “African Land” case), the Court of Appeal rejected findings of the trial judge in relating to a prosecution brought by the FCA. The case related to the marketing of certain investments, including subleases of individual plots of a rice farm. The Court of Appeal found that the plots were managed as a whole, and the arrangements constituted a Collective Investment Scheme (“CIS”). The establishment and operation of a CIS are regulated functions, and there are restrictions on how they can be promoted. It is a criminal offence to establish or operate a CIS without having the relevant FCA permissions.

What does this mean for UK property professionals?

The case underlines the risk for developers and other property professionals of being exposed to FCA enforcement action, whether by inadvertently creating a CIS or by breaching the rules on the promotion of financial investments such as shares or loan notes.

Tried and tested solutions

Despite these complications, tried and tested solutions are available for property developers who want to attract acquisition or development finance from private investors. Those solutions may include one or more of the following:

• Offering joint venturing opportunities, rather than purely financial investments
• Ensuring that the status of any prospective investors is properly verified, before any financial promotions are made to them
• Adopting marketing approaches which do not involve making financial promotions (for example, information or education marketing)
• Allowing investors to create self-managed syndicates which do not constitute a CIS
• Involving FCA authorised firms where necessary