Cytonn Investments’ troubled private funds have triggered new regulatory action in the wake of growing complaints from investor reports about late payment of returns on real estate investments.
The Capital Markets Authority (CMA) said on Thursday that 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 not paid investors at maturity for 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 within the purview of the CMA.
The regulator, however, has the power to investigate the funds if the public complains.
Cytonn has faced many legal lawsuits from investors for breaches of contract since last year after the company asked them to postpone paying their investments, citing liquidity problems following the effects of Covid-19.
“Investors who are affected by investment in unregulated products must report to the Capital Markets Fraud Investigation Unit (CMFIU), which is the Police Unit
attached to the Capital Markets Authority, ”said CMA CEO Wyckliffe Shamiah.
“CMFIU is currently investigating the issue of criminal offenses for investors in 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 company funds, 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.
All five have put money into a mixed portfolio that includes stocks, currencies, fixed income and real estate.
Cytonn’s two troubled funds, CHYS and CPN, invested in real estate that was not under the supervision of the CMA.
Some investors sued the company for breach of contract and raised issues about the operations of the two funds.
Kenneth Kasinga said he was lured into investing Sh3 million believing he was becoming a partner in the private cash call involving fewer than 100 people, only to find that Cytonn had raised money from 3,000 investors.
He said the company disguised the Cytonn High Yield Solution as a private placement to avoid scrutiny, but failed to meet the conditions set by the CMA to qualify as such.
In a letter attached to the proceeding, Cytonn defended itself, saying that it complied with the law that only required a company to invoke one of the nine conditions set forth in section 21 of the Capital Markets Disclosure and Listing Regulations to qualify as a private placement.
The conditions include a private offer restricted to less than 100 people, members of a club with common interests, restricted circle of people with sufficient knowledge and understanding of the risk or offered in connection with a good faith invitation.
It also applies when securities are offered to company employees, the amount collected is greater than Sh100,000 and when the securities are offered in connection with an acquisition plan approved by the Authority.
The investment firm invoked force majeure in the contracts governing the funds, which technically means that Cytonn is not bound by existing covenants on paying investors’ returns.
A declaration of force majeure exempts a company from contractual agreements when an extraordinary event occurs that is beyond its control, such as a pandemic.
The firm said the coronavirus pandemic had slowed the collection of its real estate projects, which meant they were unable to pay off their loans and repay investors.
Cytonn has extended the one-year moratorium and asked investors who wish to recoup their money to take their real estate units in the Alma, Applewood and Cysuites apartments.