This article aims to outline key aspects that warrant attention when registering an investment fund in a foreign jurisdiction.
What is an overseas investment activities?
The term collective investment institution (CII) broadly covers registered investment funds and companies that channel investments into financial assets, primarily marketable securities and bank deposits. It's noteworthy that CIIs can fall into two categories: open-ended and closed-ended.
Open-ended CIIs have the flexibility of an unlimited validity period and unrestricted issuance of shares/units, with the option for shareholders to redeem them directly or indirectly from the fund's assets. Conversely, closed-end funds have a fixed number of shares/units, necessitating the buying or selling of existing shares when investors enter or exit. The fund's prospectus plays a pivotal role in defining its investment policy, encompassing the types of assets to be acquired (e.g., bonds, stocks, real estate), their geographical focus (e.g., Asian, American, European, emerging markets), currency components, and the delineation of any additional investment strategies.
Diverse objectives of CIIs
It's imperative to acknowledge that collective investment schemes can possess varying objectives. Some CIIs may be designed to pursue capital growth, categorizing them as “growth” funds. Others may be structured to generate a steady income stream through interest and/or dividends, thereby earning the classification of “income” funds.
What is a CII?
It is an institution that offers shares (in the case of a corporate structure) or units (when structured as a trust) to the public. These funds pool the capital they raise from investors and then invest it in various financial and/or non-financial assets. These structures are designed to provide investors with enhanced investment opportunities and often offer lower investment fees compared to individual investment strategies. So, you can:
- establish a mutual fund abroad;
- create an exchange-traded fund in a foreign jurisdiction;
- register a money market fund abroad;
- create a hedge fund in a foreign jurisdiction.
When establishing an investment fund in a foreign jurisdiction, there are several key factors and considerations to be aware of:
- Investment restrictions
- Different funds may have varying levels of investment restrictions. Some funds, like Jersey funds, may have borrowing limits but no specific investment restrictions.
- Retail funds often face more stringent investment standards, while professional funds in the European Economic Area tend to have more lenient restrictions.
- Reporting standards and compliance
- Each jurisdiction has its own reporting standards for investment funds, which may include periodic reviews, audits, and Net Asset Value (NAV) reports.
- To ensure compliance with regulations, businesses are typically required to appoint an anti-money laundering compliance officer.
Registration of investment companies abroad
- Establishing a company limited by shares is a common structure for supervising open-end funds in foreign jurisdictions. Examples include SICAV registration in Malta, OEICs in the UK, and tax-exempt enterprises in the Cayman Islands.
- Segregated Portfolio Companies (SPCs) in the BVI and Cayman Islands offer protection to investors from losses in other share classes.
- Guernsey and Jersey provide options for creating separate portfolio companies (PCCs).
- Variable Capital Companies (VCCs) are designed to spread investment risk and have the flexibility to buy back their shares.
Regulatory requirements of key service providers
- Depending on the jurisdiction, it may be necessary to appoint licensed managers, administrators, and custodians when setting up a fund. For example, the BVI typically requires these service providers.
- Guernsey and Ireland also mandate local administrators and custodians for regulated funds.
- Hong Kong doesn't directly regulate fund administration services, but some managers may outsource certain services while retaining ultimate responsibility.
- Singapore requires regulated funds to engage an independent service provider to assess their assets under management.
Legal Form of investment fund registered abroad:
- Investment Limited Partnerships are a popular structure for establishing funds abroad. ILPs have no independent legal existence, and all assets and liabilities are jointly owned by the partners.
- Mutual funds are used for establishing retail open-ended investment funds in various countries. These trusts operate based on a Trust Deed, with unit holders as beneficiaries. They have voting rights and participate in fund meetings.
- Offshore unit trusts can be set up in places like Cyprus as standalone structures or umbrella trusts with multiple sub-trusts.
- Treaty funds, available in Ireland, Luxembourg, Liechtenstein, and Malta, are primarily aimed at institutional investors. They are tax-transparent structures created through a public act signed by the manager and custodian.
Exploring investment options: a quick overview
When considering investment opportunities, investors have a range of choices, including AIFs (Alternative Investment Funds) and UCITS (Undertakings for Collective Investment in Transferable Securities). Here's a brief overview of these options.
Setting up an AIF abroad
Setting up AIFs in Europe or Asia are typically designed for professional investors. If available to non-professional investors, they must be authorized by the country's regulator.
Initiating an UCITS abroad
- UCITS are European funds regulated under a single scheme across the European Union.
- They are an ideal choice for entrepreneurs interested in establishing a Dutch investment fund due to the harmonized regulatory framework.
Setting up a private equity fund abroad
- PEFs invest in non-publicly traded assets, often in startups.
- These investments can lead to mergers or acquisitions beyond the debtor company.
- Benefits include increased cash flow, management control, high profitability, and tax advantages.
Launching a real estate fund abroad
- Real estate funds allow investors to own property or shares in real estate companies with minimal investment.
- Benefits include rental income, shared ownership of real estate, tax advantages, and effective portfolio management.
Establishing a venture capital fund abroad
- Venture capital funds focus on innovative projects, startups, and technological breakthroughs.
- Investors acquire stakes in companies, providing private capital for business activities.
- Advantages include tax benefits and an investment tool for growth.
Launching an investment fund abroad: investment directions
Establishing a foreign investment fund is a complex process that demands thorough preparation. It involves legal and tax consultations, the creation of a subscription for shares, drafting Articles of Association, and more. It's also crucial to understand the local regulations governing investment activities in the chosen foreign jurisdiction, including the relevant regulatory bodies. For instance, the UK has the FCA, and the Czech Republic has the CNB.
Investors typically prefer to launch their investment funds in reputable jurisdictions. The choice of country is influenced by various factors.
- Proximity to investors. Investors often prefer countries close to their target investment destinations.
- Investment conditions. The fundamental investment conditions in the chosen country play a significant role in the decision-making process.
- Tax benefits. The potential tax advantages available to investors can greatly influence the decision.
- Bureaucracy level. The ease of navigating administrative processes is an important consideration.
- Sociopolitical situation. The sociopolitical stability and climate in the country can impact investment decisions.
Entrepreneurs looking to establish investment funds in Europe typically consider Ireland and Luxembourg as prime destinations for their activities.
Ireland offers a highly developed business environment within the European Union, with investment-friendly legislation and a flexible tax system.
Luxembourg is one of the world's leading financial centers, with a strong economy based on financial services. It was the first European country to establish an investment framework.
Investors and markets
Funds managed by non-EU managers intending to sell units within the Eurozone must comply with national private placement regimes (NPPR).
In Belgium, open investment funds with a minimum subscription of EUR 250,000 may be exempt from prospectus approval during registration.
Germany generally does not provide exceptions to rules regarding private placements. However, cooperation agreements between the German regulator and the competent authority of the fund manager's country may be required.
In theNetherlands, obtaining an investment fund manager license may not be necessary for funds from non-EU countries that are distributed to qualified investors, provided there is a cooperation agreement between the Dutch Authority for Financial Markets (AFM) and the regulator of the fund's location.