Alternative Investment Fund_Alternative Investment Fund_Fintech Licenses

Alternative investment funds are not subject to regulation by the UCITS directive at the European Union level. AIFs can invest in any type of investment asset, such as real estate, crypto assets, hedge funds, managed futures, commodities, private equity funds, and other institutional funds, covering a wide range of investment strategies.

The creation of investment funds in Europe represents a promising way to expand business internationally. Regulation of AIFs may differ depending on the jurisdiction in which they are registered. In the European Union, they are regulated by AIF Directive 2011/61/EU (Directive on the Management of Alternative Investment Funds), which sets risk management and monitoring standards and requires them to be registered and properly documented.

Choosing the most appropriate jurisdiction is one of the most difficult decisions when setting up an AIF. There are several prospective centers in Europe where it is possible to register such a fund: Malta, Luxembourg, the Netherlands, Estonia, and Ireland.

EU Alternative Investment Fund Managers Directive (AIFMD)

The EU Alternative Investment Fund Managers Directive (AIFMD) has provided investors and fund managers with a highly effective mechanism for creating and promoting investment products. In contrast to collective investment funds, alternative investment funds may invest in only one asset or a small number of assets and are therefore considered alternative investment funds within the meaning of the Alternative Investment Fund Managers Directive.

This directive covers the regulation of the management of alternative investment funds. For example, the regulation of private equity funds, hedge funds, real estate funds, and other types of institutional funds as well as management companies that manage AIFs. The directive introduces several mandatory reporting, risk, and liquidity requirements for AIF management companies, as well as requirements for labeling AIF products, namely assigning them an appropriate label or designation that indicates the type, strategy, and risk of the fund.

The directive also establishes the regulation of public authorities about AIF managers and sets rules for European AIF management companies to provide services in other EU countries without having to go through an additional registration procedure.

Since its inception in 2011, the AIFMD has been working to create an effective single market for AIFs and establish a robust regulatory and supervisory framework for AIFMs in the EU. As part of the Capital Markets Union (CMU) package, legislation was proposed on November 25, 2021, to improve AIFMD functionality and create a more efficient AIF market. The passage of the legislative proposal helped achieve the three key objectives of the CMU outlined in the Commission’s Communication: to improve investor protection, to ensure better monitoring and risk management for financial stability, and to make the AIF market even more efficient.

Requirements for AIFS (Alternative Investment Funds)

To register an alternative investment fund (AIF) in the European Union certain requirements set out in the EU AIFMD Directive (Directive 2011/61/EU) must be met:

The existence of a fund management company (AIFM), must be registered in one of the EU Member States and be licensed accordingly.
The management company must provide the regulator with complete information about the fund, including investment strategy, risk assessment, established rules, procedures, and valuation of assets and other important aspects of the fund.
Notification of its planned activities in each member state where it plans to invest and how the fund will be supervised is required.
Having proper risk management and a reliable control system in place, as well as sufficient capital to ensure the fund’s stability.
Reporting on the activities of the fund and complying with the other obligations laid down in the AIFMD Directive.
An AIF must be closed or open and meet certain asset and investor criteria to meet the definition of an AIF.
An AIFM which is an internal AIF – must have an initial capital of at least 300,000 euros. If the AIFM manager is appointed by an external AIF manager, the initial capital must be at least 125,000 euros
If the value of the AIFM-managed portfolios exceeds €250 million, the AIFM provides an additional amount of own funds. This additional amount of own funds must be equal to 0.02% of the amount by which the value of the AIFM portfolios exceeds €250 million. However, the total amount of the initial capital and the additional amount of own funds must not exceed €10 million.
Persons who run an AIFM business must have a sufficiently good reputation and experience in the investment strategies conducted by AIFMs managed by AIFMs. There must be at least 2 persons who meet these requirements.
Availability of a registered AIFM office located in one Member State.

info

In addition, each of the 27 members of the European Union has its own national rules and requirements for the registration of alternative investment funds which may differ from jurisdiction to jurisdiction.

Procedure for setting up an AIF (Alternative Investment Fund)

COMPANY REGISTRATION

Stage 1

The key step is the registration of a legal entity that will manage the cash flow of the fund and control its activities. Obligatory requirement for registration: at least 2 committee members.

PREPARATION OF DOCUMENTS

Stage 2

To obtain permission to manage an AIF, it is necessary to prepare several documents, such as the fund’s charter, investment strategy description, management rules, risk information, etc.

OBTAINING APPROVAL

Stage 3

It is necessary to apply for registration with the competent authority of the state where the management company is located. On average, it takes two months to review the application to the regulatory authority.

LICENSING

Stage 4

In addition, the AIF manager must apply for an anti-money laundering permit for the financial institution together with the application for statutory registration.

ENTRY IN THE REGISTER

Stage 5

After the regulatory authority approves the application, the foundation must be entered into the Registry of Companies of the country of operation. Only after the completion of all the steps, the foundation can start its activity in compliance with the European Union legislation.

SUPERVISION AND REPORTING

Stage 6

Once an AIF is registered, the requirements of Directive 2011/61/EC must be complied with, including the reporting and accounting of the fund’s operations. In addition, the competent authorities of the states where the management company and the fund are registered oversee the activities of the AIF and its management company.

Where it is profitable to establish an Alternative Investment Funds (AIFs) in the EU

The European Union (EU) is one of the largest regulators of investment funds in the world. The EU has strict regulatory requirements, but thanks to them, the EU provides investors and management companies with a wide range of options for setting up and managing AIFs, as well as for gaining access to global investors and capital markets. Different EU countries have their advantages and disadvantages as a place to register an AIF. The choice of country depends on many factors, such as tax policy, legal regulations, access to markets, etc.

Luxembourg

Luxembourg is one of the most popular jurisdictions for setting up alternative investment funds (AIFs) in Europe and worldwide. It is known for its long history in this field, as well as for its favorable legal environment for such funds.

By the end of 2017, 14,400 funds, including sub-funds, were registered in Luxembourg, with a total of €4 trillion in assets under management. The state provides a wide range of legal instruments to support private capital and venture capital investments, including SICAR, S.C.S., and S.C.Sp.

Before the new regime was introduced in 2013, Luxembourg Alternative Investment Funds were treated as unregulated funds, but since then they can be treated as limited partnerships, which allows them to avoid direct supervision by the CSSF (Commission de Surveillance du Secteur Financier). This is the financial regulator which supervises financial activities in Luxembourg, including financial institutions, investment funds, insurance companies, and other financial institutions.

The structure created in 2013 in the form of a special limited partnership (S.C.Sp.) makes it possible to use the best elements of the classical Anglo-Saxon limited liability partnership and apply them to both regulated and unregulated partnerships.

S.C.S. (Société en commandite simple) is also worth considering. It is a limited liability partnership in Luxembourg, based on the Companies Law of 1915. It allows the formation of partnerships where there are one or more limited partners who are liable only up to the amount of their contributions and one or more unlimited partners who are personally liable for the debts of the partnership.

Luxembourg generally provides a favorable legal and tax environment: AIFs are exempt from corporate tax and income tax as well as securities and other taxes on capital gains but have to pay an annual fixed contribution of 0.01% of the net assets of the fund. For the creation of alternative investment funds, and is one of the most attractive places to establish them in Europe.

Ireland

Ireland is an attractive jurisdiction for the creation of funds because of its innovative approach to taxation, its wide range of qualified financial and investment professionals, and its favorable political and economic climate.

One of the main advantages of Ireland is its tax system, in which investment income and capital gains are tax-free. This allows funds to retain a large portion of their income.

Irish funds can also be regulated or unregulated which gives flexibility in the choice of management strategy. What is more, Ireland has a wealth of specialist investment and financial expertise that enables funds to be created and managed to the highest standards of governance.

Ireland has a high level of legal and financial protection, which makes it attractive to investors. The country also has different types of funds, including open-end and closed-end investment funds, as well as real estate and venture capital funds.

In 2017, there were about 7,000 funds registered in the country, managing more than 2 trillion euros worth of capital. There are two main legal forms for investment businesses in Ireland: the public limited company (Plc) and the Irish asset management institution (ICAV).

The ICAV was introduced in March 2015 and has become a popular form of investment fund registration in recent years. The ICAV is private law, which means that Ireland’s general company law does not apply to them. In addition, the ICAV is a “check-the-box” corporate entity, which makes it easy for investors taxed in the US to invest in funds registered in Ireland.

An ICAV has several basic features such as authorization and supervision by the Central Bank of Ireland, the ability to be established as a UCITS fund or an AIF fund, the ability to establish an umbrella type fund with split liability between sub-funds, multiple classes of shares, the need to deposit assets, the place of management must be from within Ireland, and the executive body must be a board of directors consisting of at least 2 directors.

The difference between an ICAV and a Plc is that if an ICAV fund manager wants to change the memorandum of association or articles of association, they do not need to hold a shareholder vote. They can also opt out of their annual meeting with 60 days’ notice, and unlike Plc, there is no statutory risk-sharing requirement in an ICAV. Overall, the ICAV is an improvement on the Irish Plc model, especially in terms of marketing and taxes.

Malta

The jurisdiction of Malta is known as an attractive location for the incorporation of Alternative Investment Funds. Maltese legislation provides flexibility and adaptability for the management of different types of assets and investment strategies. This, combined with the tax advantages available, makes Malta a competitive jurisdiction for international investors and fund managers.

Malta’s financial regulator, the MFSA, is renowned for its loyalty to start-up funds and for offering its assistance in servicing them. Various options are available for fund registration in Malta, including SICAV, limited partnerships, unit trusts, and funds on a contractual basis, as well as investment companies with permanent capital. However, the SICAV remains the most popular option for setting up an umbrella fund in Malta.

Another advantage of Malta is its tax system. Malta has one of the lowest corporate tax rates in Europe (if companies are owned by non-residents or residents without residence in Malta, the effective corporate tax rate is 5%) and provides several tax benefits to fund managers and investors. This includes no income tax for certain types of funds and tax treaties with more than 70 countries around the world.

The resilience of Malta’s local economy and financial system, and its appeal to international investors, have also been a key benefit. Moreover, Maltese legislation offers a high degree of flexibility and adaptability, enabling the most efficient use of opportunities in the market.

Netherlands

One of the main advantages is the favorable investment climate, which contributes to the development of the financial sector and attracts foreign investors. In the Netherlands, there is a special regime AIFM, which facilitates the registration of funds and is especially attractive to startup projects located outside the country. For foreign management companies, the investment company must be registered in the Netherlands as a Dutch AIFM. It can be either a legal entity or a fund on a contractual basis without creating a legal entity.

The particularities of Dutch law for AIF include the availability of several types of funds for registration, such as Limited Liability Companies (BV), Open Preparatory Funds (OPF), and Mutual Investment Societies (VBI) or Public Limited Companies (NV). In the case of a contractual basis of operation, 2 options have long been available: a limited liability partnership (CV) and a co-investment fund (FGR). However, as of 2018, the Netherlands decided to abandon the CV form, making it undesirable to register new CVs. FGR, on the other hand, is a popular instrument and is used mainly for funds with active daily operations. The FGR can receive an exemption from taxation if the structure has no connection to Dutch investors.

The requirements for AIFs in the Netherlands are also by European regulations, such as the AIFMD. One of the main requirements is that proper risk management and appropriate fund management procedures are in place.

In addition, the Netherlands offers favorable tax conditions for AIF, including income tax, which is 25%.

Estonia

Alternative Investment Funds (AIFs) in Estonia are regulated by the Investment Funds Act and Managers (IFMA). This act was passed in 2014 and regulates AIFs and their managers in Estonia.

In Estonia, AIFs can be registered in various forms, including closed-end and open-end investment funds, including real estate investment trusts (REITs). They can be for both local and foreign investors.

To be registered in Estonia a management company must be registered as a legal entity in Estonia or have a representative office in Estonia. In addition, the management company must meet certain requirements, such as having a minimum share capital and a certain level of professional competence.

The advantage of registering an AIF in Estonia is the speed and availability of registration and the relatively low tax rates on investment income and dividends (corporate income tax rate from 14% to 20%; 0% corporate income tax on undistributed and reinvested profits). In addition, AIF management companies have access to a wide range of investment instruments, including financial instruments, securities, real estate, and other assets.

However, like any other jurisdiction, Estonia has certain restrictions and requirements. For example, AIFs must comply with certain rules regarding information disclosure, portfolio diversification, and risk management. In addition, the management company must have an AIF management license, which is issued by the regulatory authority – the Estonian Financial Supervision Authority.

Conclusion

In general, investment funds are an attractive tool for investors who want to earn income from investing without directly participating in asset management. AIFs in different jurisdictions have their characteristics, advantages, and requirements that may be attractive to certain categories of investors. The term AIF can encompass many different investment structures, including venture capital funds, hedge funds, real estate funds, private equity funds, etc. Each of these types of AIFs has its characteristics, limitations, and risks that must be taken into account when making an investment decision.

Each European state jurisdiction has its peculiarities and advantages, even though the local rules are based on the generally accepted EU directive. To select the appropriate jurisdiction, AIF founders need to conduct a preliminary analysis or obtain a full legal opinion that takes into account individual peculiarities. Golazin & Sherle assists in the analysis and selection of the optimal EU jurisdiction depending on your wishes, concept, and strategy of establishing an Alternative Fund, registration of the management company and the fund itself, as well as preparing the necessary documents for filing a license and interacting with the regulator until the tasks are completed. Please fill out the feedback form below for a free consultation.

FAQ about Fintech Law Firm

What is the purpose of establishing an AIF?

The main purpose of alternative investment funds is to raise capital from investors for subsequent investment in various assets and projects to make a profit. AIFs provide opportunities for diversifying the investment portfolio and may also have more flexible investment strategies than traditional funds.
What are the requirements for AIFs?

AIFs are subject to various requirements under the EU AIFMD Directive (Directive 2011/61/EU), including registration, asset management, risk assessment, disclosure, and reporting. Requirements may also vary depending on the jurisdiction in which they are registered and operate.
What is an alternative investment fund under the AIFMD?

An alternative investment fund is a financial instrument designed to raise investments from a limited range of investors and invest in assets other than ordinary shares and bonds. The AIFMD sets uniform standards for the regulation and supervision of AIFs in the European Union.
What are the risks of an AIF?

Risks for AIF holders include possible capital losses, liquidity and credit risks, as well as market price and exchange rate risks.
What is the AIFM directive?

The AIFM Directive is a European Union regulation establishing uniform standards for the regulation and supervision of alternative investment funds (AIFs) to ensure investor protection and financial market stability.