Fractional ownership schemes: Distinguishing between investment schemes and shared ownership of real assets
Vinod Kothari | vinod@vinodkothari.com
Schemes to crowdfund real assets (that is, assets other than financial assets) continue to proliferate. Known by various names as fractionalisation, tokenisation, fractional property shares, etc., these schemes invite multiple retail investors to become fractional owners of assets. The assets in question may consist of properties, solar assets, leased equipment, etc. The assets, in turn, are deployed by some asset manager, who produces returns from these assets. These returns are earned by the investors.
Money for money, or interest in assets for money:
A money-for-money transaction is essentially an investment contract. The meaning of money-for-money transaction is one where a person puts in money, and is promised money in return. That is to say, the essence of the activity is producing monetary returns by investing a certain sum of money. This is opposed to a shared property ownership or business where money is invested for acquiring stake in an asset. The asset, in turn, may be deployed for a common good, but the key question to ask is: have the investors been promised returns by the manager of the scheme? That is, do investors acquire equity in the asset, exposing themselves to the risks/returns of the asset, or do investors have been promised, explicitly or implicitly, a fixed rate of return? In the latter case, it is clearly an investment transaction, and being a pooled investment vehicle, it may be termed as “collective investment scheme”.
There are stringent regulations in India for Collective Investment Schemes i.e. the SEBI (Collective Investment Scheme) Regulations, 1999, and India is not unique in this respect. We have earlier discussed the law regarding fractional ownership of properties, and the ingredients that distinguish between a participated ownership, versus a collective investment scheme.
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