Robson Lee, a partner in the legal firm of Shook Lin & Bok LLP, contributed this article to NextInsight. (2016 update: Robson Lee is presently a partner in Gibson Dunn & Crutcher LLP)
A. A. MAS Consultation Paper
Introduction
In Singapore, the securities and futures market is supervised by the Monetary Authority of Singapore (“MAS”). The Securities and Futures Act (Cap 289 of Singapore) (“SFA”) safeguards investors’ interests by ensuring adequate disclosure of material information relating to investments.
On 21 July 2014, the MAS released a consultation paper proposing enhanced safeguards for investors (“Consultation Paper”). The proposals focus on three broad areas, namely:
(a) extending regulatory safeguards for capital markets investors to investors in certain “non-conventional” investment products;
(b) introducing a complexity-risk rating for investment products, and disclosing such ratings to investors; and
(c) treating accredited investors (“AIs”) as retail investors, unless they “opt-in” to AI status.
The MAS has introduced the proposals in response to evolving developments in the investment landscape. The public consultation exercise for the Consultation Paper will be held from 21 July 2014 to 1 September 2014.
“Non-Conventional” Investment Products
Robson Lee, with Miss Christina Teo, MD (Singapore) of L Capital Asia, at the Singapore Corporate Awards 2014. Photo: John Heng“Non-conventional” investment products, such as gold or land, have been increasingly offered to retail investors in recent years. These products are presently not regulated under the SFA. Hence, investors are often left without recourse when such schemes fail.
The Consultation Paper recommends extending the scope of the SFA to regulate investment products that are, in substance, capital markets products. This will allow investors to be protected under the SFA. The Consultation Paper deals with the following two categories of “non-conventional” investment products:
(a) Buy-back arrangements involving precious metals
Buy-back arrangements involve investors buying precious metals such as gold, silver or platinum, at a purported discount to the market price. Such arrangements either guarantee regular pay-outs, or involve a “buy-back” of the goods at a premium. This essentially allows the buyer to obtain an apparent financial benefit. Such arrangements are popular due to the perception that precious metals retain their value and market liquidity, even in times of economic uncertainty.
However, such arrangements present certain risks to investors. Scheme operators do not have to comply with any disclosure requirements that are subjected to statutory enforcement with penal consequences for any breach. Such schemes often lack pricing transparency, and investors typically do not have physical possession of the products. Investors thus risk losing their investments if such schemes fold. Genneva Pte. Ltd, The Gold Guarantee Pte. Ltd. and Asia Pacific Bullion Pte. Ltd. are examples of now-defunct gold trading companies which are being investigated by the Commercial Affairs Department.
The Consultation Paper proposes that such buy-back arrangements should be regulated as debentures under the SFA. Debentures may be secured or unsecured, and involve the (i) provision of funds that will be repaid with interest; and (ii) transfer of ownership of assets for collateral. Offers of debentures are subject to prospectus disclosure requirements, appointment of MAS-approved trustees for offers of unlisted debentures, and licensing of intermediaries under the SFA. The Consultation Paper proposes applying these regulatory requirements to buy-back arrangements.
(b) Collectively-Managed Investments Schemes (“CMIS”)
CMIS offer investors direct interests in physical assets such as land, and typically possess the following characteristics:
(i) participants lack day-to-day control over management of the property;
(ii) collective management by the scheme operator;
(iii) participants’ contributions are not pooled;
(iv) share in the scheme profits or income (usually on a proportional basis); and
(v) the purpose or effect of the arrangement is to provide participants with a right to participate in (iv).
These characteristics are identical to SFA-regulated collective investment schemes (“CIS”), save for the element of pooled contributions. Pooled contributions are a feature of CIS, where investors’ contributions are pooled for the purpose of generating profits through the acquisition, holding, management or disposal of property. Nonetheless, the Consultation Paper acknowledges that the similarities between CIS and CMIS expose participants to similar risks. As scheme operators typically have a broad discretion to manage the property, they should be subject to certain standards of accountability.
The Consultation Paper proposes that the CIS regulatory regime should be extended to CMIS. All offerings of units in a CIS must be accompanied by a MAS-registered prospectus. In addition, a CIS must meet standards imposed by the Code on Collective Investment Schemes (“CIS Code”), which requires, inter alia, that:
(i) the offerors shall seek the MAS’ authorisation or recognition of the CIS;
(ii) the assets bought by investors must be liquid;
(iii) the intermediaries dealing in or advising any person concerning such products, or marketing a CIS, shall be licensed by the MAS; and
(iv) the CIS shall be managed by a scheme operator who is fit and proper.
The proposal to apply the CIS regulatory regime to CMIS will be in line with the regulatory regimes of Hong Kong and the United Kingdom (“UK”).
Schemes such as land investment schemes and buy-to-let schemes are examples of CMIS that will be subject to SFA regulations.
Land investment schemes – Involve the offer of fractional interests in undeveloped land. Future profits are contingent on the ability of the scheme operator to (i) obtain planning permission for or (ii) dispose of the land. Investors do not retain day-to-day control over management of the property, and risk losing their investments if the scheme is a scam, or if development plans are shelved. Land investment schemes for agriculture, forestry or harvesting also follow a similar model.
There has been growing public disquiet about investors experiencing difficulty in recovering their investments and promised returns that did not materialise. Recent cases include:
(i) EcoHouse Group Developments Ltd - In July 2014, Brazilian property developer EcoHouse Group was placed on the MAS’ Investor Alert List after investors complained about the company’s inability to pay them their investments or returns.
(ii) Profitable Plots Pte Ltd - In June 2014, two of the three directors of land-banking company Profitable Plots Pte Ltd were sentenced to jail for conspiracy to cheat investors.
(iii) Land International (Far East) Pte Ltd - In 2010, nearly 200 investors who had purchased plots of UK land through Land International (Far East) Pte Ltd, lost an estimated S$6 million when the company stopped payouts following a financial dispute with its UK parent company.
Buy-to-let schemes – Involve the offer of fractional interests in real estate, and the right to participate in pooled rental income. The scheme operator manages the property and rental profits are shared amongst all scheme participants.
Regulating CMIS may spell bad news for investors of such existing schemes. CMIS companies would have to fulfil minimum base capital requirements, and ensure that their staff are licensed financial advisers. Further, the CIS Code’s assets liquidity requirement would preclude the offer of land to retail investors. This could put existing CMIS companies out of business and cause investors to lose their investments. It is not clear if the new proposed regulations will apply the CIS Code retrospectively to existing CMIS. Operators of such schemes are now put on notice to comply with the CIS Code or to unwind any existing scheme that does not comply with it.
The MAS has reiterated that the proposals do not seek to comment on the merits of such schemes. Instead, they aim to provide a regulatory framework to ensure adequate disclosure and enable investors to make informed decisions.
Complexity-Risk Rating
The Consultation Paper recommends that investment products should be rated according to complexity and risk. Complexity refers to the difficulty involved in understanding a product’s risk/reward profile. Risk refers to the likelihood of investors losing their investments.
There are four proposed levels of complexity rating, based on the following factors:
(a) number of structural layers;
(b) expansiveness of derivative used;
(c) availability and usage of known valuation model; and
(d) number of scenarios determining return outcomes.
Similarly, there are four proposed levels of risk rating. These are based on pre-determined “buckets” that assess the likelihood of an investor losing some, all or more than his principal investment amount.
Such ratings should be disclosed by product issuers in all marketing and offer documentation. Information on a product’s price volatility or credit rating should also be included. This will assist retail investors in differentiating between investment products and assessing the accompanying risks.
The proposed complexity-risk rating framework will only be applicable to retail investors. It will include investment products such as capital market products, bank-issued structured deposits, participating whole-life and endowment policies and investment-linked insurance policies. Term life policies, non-participating whole life and endowment policies and annuities are excluded.
Accredited Investors
The Consultation Paper recommends that AIs should benefit from the regulatory safeguards applicable to retail investors. AIs are generally identified by income or wealth thresholds. They are considered to be sufficiently knowledgeable in managing their financial affairs (either directly or through professional advice). However, after the global financial crisis, regulators have begun to realise that this may not be true.
The MAS has proposed an “opt-in” regime where all investors other than institutional investors are treated as retail investors. An investor meeting any of the AI criteria can elect for retail or AI status. The proposed regime is in line with regulatory regimes in the European Union and Hong Kong. It is also aligned with international best practices recommended by the International Organisation of Securities Commissions. The MAS has proposed a two-year transitional period for existing AIs to “opt-in” under the new regime.
C.
C. Conclusion
The Consultation Paper is a timely response to investors’ concerns relating to “non-conventional” investment products. The proposals will provide regulatory safeguards for investors who are interested in such investment products. It remains to be seen whether Singapore will legislate specific regulations for crowdfunding. Investors should at all time exercise due care and diligence before investing, and seek professional advice when in doubt about potential investment proposals.
The Chinese version of this article can be found here.
Recent story: ROBSON LEE: Balancing Legal Responsibilities of Directors, CEOs, CFOs and External Auditors
