Nature of Interest Schemes: The Four Categories

As mentioned in our previous article, under section 4(1) of the Interest Schemes Act 2016 (“ISA 2016”), there are 4 categories of schemes, namely:

• an investment scheme;
• a recreational membership scheme;
• a time-sharing scheme; or
• a combination of such schemes (also known as the hybrid scheme).

In this article, we aim to provide a brief overview of each of the above categories of schemes.

Investment Scheme

Pursuant to section 4(2) of the ISA 2016, a scheme is an investment scheme if the interest holder does not have day-to-day control over the operation of the scheme, whether or not the interest holder has the right to be consulted or to give direction and that:

1. the interest holder contributes money or money’s worth as a consideration to acquire a right or interest to profits, assets or realisation of any financial or business undertaking of the scheme, whether the right or interest are actual, prospective or contingent and are enforceable or not; or
2. the contribution by the interest holder is pooled or used in common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property for which the interest holder is led to expect profits, rent or interest from the efforts of the promoter of the enterprise or a third party.

In plain terms, an investment scheme is an arrangement where a person contributes money or other value to a business or investment without having day-to-day control over its operations. In return, the person expects to receive profits, income or other financial benefits generated through the efforts of the person operating the scheme, known as the “management company”.

For businesses, an investment scheme can provide an alternative structure for raising funds without giving interest holders ownership in the company. A variety of business and investment models may be structured under this category, including fundraising for business expansion, share farming, equipment sharing and land banking. An example of an investment scheme is explored here.

A less obvious example can be found in the memorial park industry. Many may not realise that arrangements offered by a significant number of memorial parks today may, depending on their nature and structure, fall within the regulatory purview of the SSM under the ISA 2016.

Recreational Membership Scheme

Under section 4(3) of the ISA 2016, a scheme is a recreational membership scheme if:

1. in substance and irrespective of the form, the scheme involves the investment of money in or under such circumstances that an interest holder acquires or may acquire an interest or right in respect of property which under or in accordance with the terms of investment will or may, at the option of the investor, be used or employed in common with any other interest or right in respect of property acquired in or under like circumstances and includes an entitlement to a right to use or enjoy any sport, recreational, holiday or other related facilities for a consideration; and
2. the scheme is to operate for a duration of not less than 12 months whether or not on a recurring basis.

To put it simply, a recreational membership scheme is an arrangement where persons pay for the right to use or enjoy shared recreational, sporting, holiday or similar facilities. It qualifies as such a scheme if such arrangement lasts for more than 12 months, whether as a single term or on a recurring basis.

Traditionally, recreational membership schemes have been associated with businesses such as golf clubs, recreational clubs and marina clubs, where members pay for the right to access and enjoy certain facilities. However, the potential application of this structure extends beyond the traditional club model. Depending on how they are structured, membership programmes and plans offering privileges, rewards, points or other benefits may also fall within this category.

The structure may also present opportunities for businesses with underutilised property or land. Rather than leaving these assets idle, businesses may potentially structure recreational, vacation or other right-to-use offerings around them, including concepts involving agritourism, wellness tourism or sports tourism. This allows existing assets to be put to productive use while creating new offerings and potential revenue streams for the business.

Time-sharing Scheme

A scheme is a time-sharing scheme if:

1. an interest holder is or may become entitled to use, occupy or possess for two or more periods during the period for which the scheme, whether in Malaysia or elsewhere is to operate, property to which the scheme relates; and
2. the scheme is to operate for a period of not less than 3 years.

In other words, a time-sharing scheme is an arrangement where people pay for the right to use or occupy a property, wherever it is located, at different times over the life of the scheme. It qualifies as such a scheme if this arrangement runs for more than three years. This may apply to businesses operating hotels, holiday resorts and apartments, and private retirement homes.

Hybrid Scheme

A hybrid scheme, now expressly recognised under the ISA 2016, is essentially a scheme that combines two or more of the natures of schemes discussed above. One combination we commonly see brings together features of an investment scheme and a recreational membership scheme.

What makes a hybrid scheme particularly interesting is its flexibility. Unlike more conventional fundraising structures, a hybrid scheme can offer interest holders not only financial returns, but also non-financial benefits, such as the right to use or enjoy certain properties or facilities. Depending on how the scheme is structured, the investment may also be repaid partly in cash and partly through the provision of such benefits, rather than entirely in monetary form. For innovative businesses, this can provide an alternative way to raise funds for expansion while also creating opportunities to generate revenue and preserve cash flow.

Despite this flexibility, hybrid schemes remain relatively uncommon in Malaysia. Historically, only a small number have been registered and, as at the date of this article, there are only 4 registered hybrid interest schemes. That said, hybrid schemes appear to be gaining traction among industry players, with 6 applications currently being processed at the time of writing.

Conclusion

The four categories of schemes under the ISA 2016 encompass a broader range of business arrangements than their labels may suggest. Businesses that raise funds from the public, offer membership-based benefits or grant rights to use or enjoy property should therefore consider at an early stage whether their proposed business model may fall within the scope of the ISA 2016. At the same time, these categories provide businesses with structured and regulated avenues to raise capital and develop new revenue streams. This is particularly relevant for hybrid schemes, which remain relatively uncommon in Malaysia but are attracting increasing commercial interest. Early legal assessment of the proposed arrangement can help businesses identify potential regulatory requirements, structure the scheme appropriately and ensure that the chosen model aligns with their commercial objectives.