4. Marcus and Shona are fourth year LLB students with a entrepreneurship mindset at the University of Glico, in Bloemfontein, Free State Province. They have attended a lecture for the Law of Business Entities and gained some crude knowledge on the idea of Stokvels. Marcus and Shona are excited and fascinated with the idea of starting a stokvel. They are contemplatin ,g on establishing an online scheme whereby they invite members of the public including their friends to invest 2000 rands each into their new scheme which they call XMXM with 100% guaranteed return on investment within a week. The members who are enrolled into the scheme also received 30% of the money they have invested if they enrol new members in the scheme. As the membership pool expands exponentially, XMXM would even uses the profits from downstream membership to pay bonuses to those who are excelling in recruiting new members into the scheme.
Based on statutory provisions, case law and other authorities, explain to Marcus and Shona whether their proposed scheme qualifies to be a stokvel.
Firstly, it is important to note that stokvels are regulated by the Stokvel Act No. 95 of 2012 in South Africa. According to Section 1 of the Act, a stokvel is defined as “an open or closed group or organization, whether formal or informal, with a membership of persons who have voluntarily agreed to contribute money or other resources to a common fund or for a common purpose or object”.
In considering whether Marcus and Shona's proposed scheme qualifies as a stokvel, it is important to examine the key elements of a stokvel as outlined in the Act. Firstly, a stokvel requires membership of persons who have voluntarily agreed to contribute money or other resources to a common fund or for a common purpose or object. Marcus and Shona's scheme requires members to invest R2000 each into the scheme with the promise of a 100% return on investment within a week. This may be seen as a contribution to a common fund but the purpose is not clear and may be seen as profit-driven rather than for a common purpose or object.
Secondly, the Stokvel Act requires that a stokvel must be formal or informal, which means that it should have some sort of structure or organization. There is no clear indication of this in Marcus and Shona's scheme, as it appears to be a loose online affiliation without any clear organizational structure.
Lastly, a stokvel is usually established for the benefit of the members, which is not clearly the case in Marcus and Shona's scheme. The scheme offers a 30% commission to members who enroll new members, which may be seen as benefiting the members but it also appears to be primarily focused on generating profits from downstream recruitment.
Considering these key elements of a stokvel, it may be difficult to argue that Marcus and Shona's proposed scheme qualifies as a stokvel. Rather, it may be seen as an investment scheme which may be subject to other regulatory requirements such as those governing securities and investment schemes. Marcus and Shona should seek legal advice before proceeding with their proposed scheme to ensure that they comply with all relevant laws and regulations.
Based on the information provided, Marcus and Shona's proposed scheme does not qualify to be a stokvel. A stokvel is a savings or investment scheme where a group of individuals contribute money regularly, usually on a monthly basis, and take turns receiving a lump sum payout. Stokvels are typically informal and voluntary arrangements among friends, family, or colleagues.
Here are a few reasons why Marcus and Shona's scheme does not meet the criteria of a stokvel:
1. Contribution Structure: In a stokvel, members usually make regular contributions of a fixed amount. However, in Marcus and Shona's scheme, they are inviting members of the public to invest a one-time sum of 2000 rands each. This one-time investment structure differs from the regular and periodic contributions of a stokvel.
2. Expected Return: Marcus and Shona's scheme promises a guaranteed return on investment of 100% within a week. Stokvels do not typically guarantee returns or promise fixed amounts. The returns in a stokvel are determined by the contributions of its members and are distributed in a rotating fashion.
3. Recruitment Incentives: In their scheme, Marcus and Shona offer a bonus to members who enroll new members into the scheme. This recruitment aspect, along with the promise of monetary rewards, introduces MLM (Multi-Level Marketing) or pyramid scheme elements, which are generally prohibited by law in many jurisdictions due to their unsustainable and exploitative nature.
4. Profit Generation: Marcus and Shona's scheme also states that it will use profits from downstream membership to pay bonuses to those who recruit new members. Stokvels are primarily focused on savings and investment purposes, rather than generating profits through recruitment and downstream membership.
It is important for Marcus and Shona to understand the legal and regulatory framework around investment schemes and avoid engaging in activities that could potentially be illegal or harmful to participants. It would be advisable for them to consult legal professionals or regulators to ensure compliance with applicable laws and regulations.