Capital Markets

Pay defaults in Sh13.5bn Cytonn fund invites fresh CMA action

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Cytonn Investments chief executive Edwin Dande. FILE PHOTO | NMG

Cytonn Investments’ troubled private funds have triggered fresh regulatory action in the wake of mounting complaints from investor reports of delayed payment of returns from real estate investments.

The Capital Markets Authority (CMA) on Thursday said it has opened investigations into Cytonn High Yield Solutions (CHYS) and Cytonn Project Notes (CPN)—which have investments worth Sh13.5 billion.

The regulator does not regulate the two funds, which have failed to pay investors upon maturity of their investments in properties developed by Cytonn.

The company has been marketing the funds as private placements, a closed shop of a few sophisticated investors, which do not fall under the ambit of the CMA.

The regulator, however, has the power to look into the funds if the public complain.

Cytonn has since last year faced many legal suits from investors over contract breaches after the company asked them to postpone payment of their investments, citing liquidity problems following effects of Covid-19.

“Investors who are affected by investing in unregulated products should report to the Capital Markets Fraud Investigation Unit (CMFIU), which is the Police Unit 

attached to the Capital Markets Authority,” CMA chief executive Wyckliffe Shamiah said.

“CMFIU is currently investigating the issue for criminal violations for investors in the Cytonn High Yield Solutions (CHYS). The Authority confirms that Cytonn Investments is not a licensed and approved entity,” he added.

The CMA only regulates five funds under the company, including Cytonn Money Market Fund, Cytonn Balanced Fund, Cytonn Equity Fund, Cytonn Africa Financial Services Fund, Cytonn Money Market Fund (USD), and Cytonn High Yield Fund.

The five have put money in a mixed portfolio that includes stocks, foreign exchange, fixed income and real estate.

Cytonn’s two troubled funds, CHYS and CPN, invested in real estate properties that were not under the watch of the CMA.

Some investors have sued the company for contract breach and raised issues about the operations of the two funds.

Kenneth Kasinga said he was lured to invest Sh3 million believing he was being made a partner in the private cash call involving less than 100 people only to discover Cytonn had raised money from 3,000 investors.

He said that the company disguised the Cytonn High Yield Solution as a private placement to avoid scrutiny yet it did not satisfy the conditions set out by the CMA to qualify as such.

In a letter annexed in the proceedings, Cytonn defended itself, saying they complied with the law which only required a company to invoke one of the nine conditions set out in section 21 of the Capital Markets Listings and Disclosure Regulations to qualify as a private placement.

The conditions include a private offer being restricted to less than 100 people, members of a club with common interests, restricted circle of people with sufficient knowledge and under - standing of the risk or offered in connection with a bona fide invitation.

It also applies to where securities are offered to employees of the company, the amount raised is more than Sh100,000 and where the securities are offered in connection with a take-over scheme approved by the Authority.

The investment firm invoked force majeure on the contracts guiding the funds, which technically means that Cytonn is not be bound by the existing pacts on payment of investor returns.

A declaration of Force Majeure excuses a company from contractual agreements when an extraordinary event that is beyond its control occurs like pandemics.

The firm said the coronavirus pandemic had slowed down collections on its real estate projects, which meant they could not service their loans and repay investors.

Cytonn has extended the one year moratorium and asked investors keen to get back their money to take up their real estate units in the Alma, Applewood and Cysuites apartments