Saving and increasing capital is one of the reasons that drive people from all over the world to look for legal solutions and safe locations to register their business. It so happens that most of the well-developed economies have high requirements applied for the businesses that want to enter the market, and in this article, our experts have summarised the most important information about one of the ways to start an investment activity in this state. You will find some tips from our experts to help you get started and how an investment fund in the jurisdiction of the UAE can literally open the door to new opportunities if you know the legal framework and up-to-date information on the effective requirements you need to meet to set up a fund in the perspective economy of Emirates.
What you need to know about the UAE supervisory system
If you intend to incorporate a direct investment fund in the jurisdiction of the UAE which have a top rating according to the best rating agencies as S&P, Moody's, you will need to pay close attention to the instructions of the various regulatory institutions. Another detail is about the structure of the investment fund as an important factor for decision-making. It should be within the standards accepted by Securities and Commodities Authority (abbreviated name is SCA) which has a serious regulatory power in the UAE as a regulatory body. They accept the corporate entity of the fund as an LLC structure. This type of structure clearly shows the level of involvement and responsibility, and divides the contributors into general partners (which means it is a company which provides professional management services) and limited types of the fund partners. Responsibility level is different but under the existing model all types participate in the operation.
Legislative framework of the UAE consists of many laws, but you don't need to know all of them. SCA regulations are highly important for the activity of the investment facilities plus keep an eye on applicable clauses of the Commercial Companies Law. Mutual funds have to comply with strict standards, but this is compensated by the opportunities they gain, and of course the funds have their own legal capacity and competence. For example, liability of all shareholders is limited with their shares, and the only figure with unlimited liability and maximal risk from this point of view is the general partner.
Investment companies created in a form of funds are welcome in the Emirates in the so-called free zones. There are two of them. The first is called Dubai International Financial Centre (DIFC). Here investors need to take a close look at the fund law, note this abbreviation: DIFC Law No3 dd. 2018.
This jurisdiction has its own financial regulator called DFSA.
The second free zone intended for funds is called the Abu Dhabi General Market, or ADGM, where investors must operate under the Funds Regulation adopted in 2017. In this free zone, investors must conform with the standards of the Financial Services Regulatory Authority (FSRA).
One thing is common to both free zones. They allow investment funds to be registered in one of three forms. The first form is a company. The second option is a partnership and another is a trust. This gives investors a pretty good choice to decide which form suits them better.
Generally, investors opt for a partnership and the organisational structure of their fund in the UAE. However, regardless of which form investors choose, they have to go through a serious licencing process, which is mandatory for the general partner. This shows how seriously the UAE takes the implementation of high business standards to protect investors and investments, and not to put obstacles in the way of companies wishing to enter the UAE.
It is common for the registration procedures in each country to have some specificities based on the requirements of local legislation and standard practice for establishing a new business within the jurisdiction of the country. The UAE, as a well-developed country, is no exception and has created its own procedures for investors.
First and foremost, one needs to determine what form of organisation it should be, either after doing one's own research into the legislation or after consulting with the lawyers. Secondly, depending on the legal form chosen for the investment facility, one must study the list of documents that must be submitted to the registration and licensing office. This embraces gathering the necessary documents, legalisation and, if necessary, translation. This requires time and considerable effort to verify that all the needed documents are correct, otherwise they will have to be corrected and only upon this submitted in due course. An investment fund in UAE cannot exist without the manager. The next step, therefore, is to select an administrator who meets the requirements of local legislation and to agree on remuneration. Once these steps are completed, it is time to file the documents to obtain the approvals.
According to the SCA, the general partner is the key incorporator. This person is in charge of filing the papers to the regulator. When we talk about the documents at this stage, we mean that the application form of the standard type must be completed and submitted. Obtaining the licence is a mandatory thing for taking advantage of being part of an investment market of the UAE.
The application template alone is not sufficient, it is accompanied by a package of documents needed for admission in the chosen location.
The compilation of the papers takes the detailed work of a qualified lawyer. The future fund must submit an Affiliate Agreement and complete it, as it is not possible to make internal changes once it has been filed with the regulator and this document is kept on file. All partners of the investment fund must provide details of their current contact details. The capital must satisfy the following criteria for authorisation: It must be paid up, and this fact must be certified by a document, the amount of equity must not be less than the minimum prescribed for the UAE and specific number of share capital of each contributor have to be confirmed. These are the standard documents for the licensing process, but one must be prepared that they can be extended at the discretion of the SCA. Any additional information may be requested and the provision of full, timely, comprehensive and reliable data would contribute to a positive decision by the regulatory body.
There are some imminent links in the chain of investment facilities in the Emirates. For example, the founding members of the company have to act through custodians.
Once all the documents are prepared and submitted, it is time for the SCA as the regulator to review the submitted documents and take the decision about the licence.
It can be said that attracting investors into mutual funds in Dubai is not so straightforward, as in practice the shares are not meant for public issue. Mutual funds can exist either as tax-exempt entities or as the funds intended for qualified investors, but in either case, the fund can attract investments from limited groups of people. They may only deal with professional clients. What varies based on the type of fund are the figures for minimum subscription standards and the number of investors allowed.
The application review process in a free zone has some similarities, even if the local regulators are called differently. The process begins with filing the documentation and ends with waiting for the regulator' decision in respect of issuing the licence.
There is another feature, pre-licencing. SCA works closely with investors, and it is not enough to get the licence once. As long as the fund is functioning, the licence has to be renewed every year. The Fund's staffing policy is not a completely internal process, depending only on the decision of the manager or the contributor. Internally, candidates for manager and founder positions are selected through business negotiations, but their actual appointment requires the approval of the SCA. This is an uncommon practice in some countries, but as concerns the United Arab Emirates the manager may be a firm which has obtained the licence required for this type of activity. You will understand that the number of potentially suitable managers is limited. Licensed banks with the capital equal 5 millions in the local currency are allowed to be the managers of the funds.
Financial aspects and business ethics for mutual funds in the UAE
The leadership of the mutual fund is deemed as a very important element, because this task is so much more than just compiling documents. Once the management of the investment entity has been authorised and approved by the SCA, comes the immediate responsibility for the proper control functions as a part of professional service. The administrative activity means that these officials must be constantly informed of current legislation, the standards of the DIFC and the DFSA, the standards applicable in the free zone, as well as changes in the law, and carry out the activity within this framework. The business activities of the fund must be conducted through specially opened accounts in duly authorised financial institutions.
In addition to the strict laws, the manager is to be guided by the company's articles of association. The fund manager is in charge of carrying out its activities based on the principles of honesty, integrity, high professional standards, due diligence, cooperating with governmental and regulatory authorities to ensure that activity is legal and it is not causing conflicts of interest. A manager must therefore have a comprehensive knowledge of the law, local norms and business ethics, as well as good analytical skills that help to anticipate and eliminate potential problems, and must have high moral standards so as not to be tempted to approve dubious transactions. All these functions demonstrate that the manager represents government standards and the best legal interests of the company's contributors.
Another point concerning the manager is that he must pay attention to details, as he is also responsible for documentation work. This means that this role involves keeping an up-to-date and accurate register of shareholders and their shares in the company, details of contributors, including address and ID, and that the manager must keep track of information on contributors' valid passport details.
The UAE sets high standards for those who wish to take advantage of the economic opportunities available to funds registered in the country.
The AML policy helps prevent violations, and the severe consequences for companies are a strong lever to reduce the number of those who actually want to violate the law, because in such cases it is a reputational risk for the Emirates.
The system to prevent money laundering consists of several layers: internal procedures, licencing by the government agencies, federal laws (e.g. to combat crime, to combat the legalisation of income obtained through criminal means), legislation of the free zones such as the regulatory laws of DIFC and DIFSA, and another layer is the list of sanctions that are publicly available. Businesses need to constantly keep track of up-to-date information on sanctions to avoid the risk of doing business with sanctioned partners.
The FSRA publishes a separate register for equity funds launched in the ADGM. The publicly available information includes: Name, registration details, address of the fund and information on the manager.
The prospect of the mutual fund being based in the Emirates, a country with a stable, high rating and good forecasts for future development, may be attractive to many investors. Official registration of an investment fund in the Emirates is not so easy, as it requires an understanding of the legal framework, but it is possible to line up with requirements and obtain authorisation if you meet the criteria and seek competent advice. If you have any questions about this article, please fill out the relevant contact form to enable us to communicate quickly and arrange a consultation to provide you with information regarding the regulation of an investment activity in the UAE. We would be happy to offer legal assistance to those planning to set up a PIF in the UAE, Abu Dhabi or any other emirate, as our experts know the ins and outs of the jurisdiction and how to facilitate the documentary part of the procedures.
- Trust company;
For an investment company, one must submit the following documents:
- Private Allotment Memorandum;
- Subscription agreement;
- Investment Management Agreement;
- Articles of association of the fund.
If the fund is intended to take the form of a partnership, the following documents must be provided:
- Private Allotment Memorandum;
- Partnership Agreement;
- Subscription agreement for the investors;
- Investment Management Agreement.