Land-banking and gold buy-back schemes to be regulated

Certain investment schemes such as land-banking and gold buy-backs will come under the ambit of the Monetary Authority of Singapore (MAS).

The necessary regulatory changes were passed in Parliament in January and they are likely to be implemented later this year.

In a nutshell, the new regulation has broadened the definitions of debentures (a debt instrument) and collective investment schemes (CIS), which must be authorised or recognised by MAS for public offers made to retail investors.

Prior to the change, for a scheme to be regarded as a CIS, both profits and contributions from investors needed to be pooled.

But investment schemes can be structured to sell investors sub-divided interests in physical assets such as undeveloped land, plantation plots or even units in an apartment block to be run as a hotel. Such schemes have typically been called land-banking, plantation schemes and condo-tels respectively.

By structuring the schemes this way, the pooling element was able to be avoided, and regulation as a CIS thereby circumvented.

The amended CIS definition will no longer require investors' contributions and profits to be pooled for a scheme to be regarded as a CIS.

One of the conditions for a scheme to be classified as a CIS is that the scheme property is managed as a whole.

The other conditions are: The participants do not have day-to-day control over the management of the property, and purpose or effect of the scheme is for investors to participate in profits arising from the scheme property.

These are existing criteria of CIS, and will continue to be so under the revised definition.

This recognises the "collective" nature of such schemes, since property is still managed as a whole by the scheme manager, to generate profits for the collective interests of scheme investors. Such arrangements in substance pose the same risks to investors as traditional CIS, and should be regulated as such.

Under the new regulation, some schemes such as land-banking may no longer solicit funds from retail investors without first being authorised or recognised by MAS and fulfilling the prospectus requirements.

This follows from MAS' response to the feedback received on the proposed changes in September 2015, when it stated that schemes that primarily invest in undeveloped real estate are subject to "high risks given its illiquid and speculative nature".

Operators of such schemes can still rely on existing exemptions to offer small, niche schemes.

Exemptions include offers to institutional and/or accredited investors, small offers to not more than 50 investors within 12 months, or offers not exceeding $5 million within 12 months. Arrangements that exist before the legislative changes are effected will not be affected, unless additional funds are raised from retail investors after the new laws are implemented.

A full assessment of how a scheme is operated will need to be undertaken to determine if it would likely fall within the proposed MAS regulation. Check MAS' website for more information.

•Retail schemes authorised by MAS:

•Financial institutions licensed or regulated by MAS, and the regulated activities they are authorised to provide: https://masnetsvc.mas.

Lorna Tan

A version of this article appeared in the print edition of The Sunday Times on April 30, 2017, with the headline 'Land-banking and gold buy-back schemes to be regulated'. Print Edition | Subscribe