Background and Issue
The decision pertained to publication by 36One - an approved manager of collective investment schemes in terms of CISCA - of information concerning certain unapproved offshore funds on its website, periodic newsletters, and in presentations to its clients. The issue in dispute was whether such publication constituted soliciting of investment in an unapproved foreign collective investment scheme. The decision of the Tribunal turned on the proper meaning of the term “solicit” as used in section 65(3) and defined in section 1 of CISCA namely as “any act to promote investment by members of the public in a collective investment scheme”.
In terms of section 65(1) of CISCA, soliciting of investment in offshore funds may only be done upon approval of such offshore funds by the FSCA. Section 65(3) criminalises soliciting of investments in unapproved offshore investment funds with potential liability on conviction to a fine not exceeding R10 million or to imprisonment for a period not exceeding 10 years, or to both such fine and imprisonment.
36One submitted that the information it had provided was in line with international best practice in the asset management industry to provide full and transparent data regarding a firm’s product offering when presenting such information to investors. For this reason, all the portfolios that were offered by 36One, both approved and unapproved, were published on its website.
In respect of each of the approved and unapproved funds there was an icon labelled “Invest” on the website. If the “Invest” icon was clicked in respect of an unapproved fund the website user would be required to complete their details to enable 36One to contact them. No details were provided on the website as to how to invest and subscription forms were not made available online.
The 36One website also contained a pop-up disclaimer which included the following wording:
“The information and documentation presented on this site do not constitute a solicitation, invitation or Investment recommendation, and prior to selecting a financial product or fund it is recommended that investors seek specialised financial, legal and tax advice. The laws of the Republic of South Africa shall govern any claim relating to or arising from the contents of this site.”
The Tribunal accepted the submission that, for purposes of section 65(3), the act of promoting an investment in an offshore fund requires the intent to promote, and that an innocent promotion may not be struck by the prohibition. This leads to two discrete enquiries – first, whether the website and other information promoted the products it mentioned and, second, what was the subjective intention of the asset manager in providing the information on the website.
36One argued that it did not intend to promote, but that it merely intended to provide information to the market. The Tribunal found that this argument failed to distinguish between motive and intent – the motive may have been to give the market information but one of the purposes of giving that information was to promote its business.
The purpose of publication of investment funds in its portfolio by a company, whose business entails administration of those investment funds, can hardly exclude the marketing of those funds. It may not be the sole purpose for publication, but marketing or soliciting investment in those funds would definitely be amongst the purposes.
The Tribunal also found that the fact that the promotion was ineffective (i.e. no South African investor invested in the offshore funds by virtue of having seen them in any of the publications) does not mean that the act was not one of promotion. It is the act which is prohibited, irrespective of success.
The only difference between the publication on the website of the approved funds in which investment was undeniably being solicited and the unapproved funds was that (1) there was a disclaimer in respect of unapproved funds that the publication did not constitute solicitation of investment and (2) that, unlike the approved funds in respect of which the website provided investment procedure and subscription forms to apply for investment, the website merely provided a prospective investor with a form to complete their details for 36One to contact them.
The Tribunal found that the disclaimer was in this regard disingenuous. It recognises that solicitation was not allowed but then proceeded to provide a button which invited the user to contact 36One in connection with the product. In addition, the fact that the disclaimer states that information published in respect of the unapproved offshore funds reveals that 36One was conscious of the soliciting effect of that publication but sought to undo it by a disclaimer.
The Tribunal confirmed that as long as the publication of the information has the effect of promoting the product or arousing an interest in investing in the product it amounts to soliciting, and in light of the above it found that the 36One publications in question constituted “soliciting” investment in those unapproved offshore funds in contravention of section 65 of CISCA.
The Tribunal emphasised the significance of the risk imposed by soliciting investment in unapproved or unregulated funds in a society like ours, and in determining an appropriate penalty sought to strike a balance between effective deterrence from contravention of financial sector laws and unreasonably harsh penalties.
In light of the Tribunal’s broad interpretation of “solicitation” in this decision, it is advisable that managers exercise caution when including references to unapproved offshore funds in any promotional material. Given the interpretation to include a subjective test, there may be some scope to argue that the intention of the inclusion of such information is not to solicit investment, however, the Tribunal’s distinction between motive and intention should be carefully noted. The most prudent way to avoid contravention of section 65 would be to ensure that as far as practicable no specific reference is made to any unapproved offshore funds in any promotional material. Finally, and importantly, it should also be noted that “solicitation” for the purposes of section 65 may be found to occur even where a disclaimer is included which seeks to state otherwise.