On 28 July, 2016 the new law of 23 July, 2016 on reserved alternative investment funds ("RAIF Law") was published in Luxembourg's Official Journal (Mémorial A) following its adoption by Parliament earlier this month and it will enter into force 3 days following this publication date.
The RAIF Law adds an important new tool to Luxembourg's investment funds range and is deemed by many industry professionals as crucial in facilitating Luxembourg's ability to better compete with other major alternative investment fund centres.
In the wake of the changing regulatory landscape for managers of alternative investment funds (some of whom are still adjusting to the additional layer of manager supervision stemming from the AIFMD on top of traditional product supervision), the RAIF represents a move away from the "double layer" supervision, by allowing the creation of an alternative investment fund ("AIF"), having all the features of a regulated investment fund, but without requiring any prior authorisation or continued supervision by the Luxembourg Commission for the Supervision of the Financial Sector (the "CSSF"). The RAIF would instead be indirectly supervised in view of the fact that it will be required under law to be managed by an authorized external alternative investment fund manager ("AIFM").
Having this new choice of investment vehicle will certainly be a welcome development for those fund promoters seeking to offer investors a product having the advantageous features of a specialized investment fund ("SIF") or an investment company in risk capital ("SICAR") while also benefitting from a reduced time to market, light touch regulatory intervention (through an AIFM) and flexibility to amend constitutive documents without CSSF approval.
The rationale for the legislative development leading to the RAIF Law is rooted in the recent shift in European regulatory focus from the regulation of funds themselves to the managers thereof. Following the adoption of Directive 2011/61/EU on Alternative Investment Fund Managers ("AIFMD") into the national laws of EU member states, questions arose from stakeholders around the need for a "double license" (product and manager) in order to access non-retail investors via the pan-European passporting scheme, given that the AIFMD is not a product regulation and as such it does not directly regulate AIFs, but rather the managers of those AIFs. Furthermore, the AIFMD does not require AIFs to be subject to any product laws or direct regulatory supervision. This has led to the development of a new generation of fully compliant unregulated AIFs which can be passported across the EU, thanks to the license granted to the AIFM.
In Luxembourg, the introduction of the RAIF Law underpins this trend by providing a specific regulatory framework whereby this new type of AIF will not require any direct supervision by the CSSF while nonetheless benefitting from the AIFMD regulatory regime which affords managers of the RAIF direct access to investors across the EU via the AIFM passport.
Key Features of the RAIF
Pursuant to the RAIF Law (which replicates the SIF Law to a large extent) the RAIF will have the following essential characteristics:
- Scope and eligible investors:
The RAIF regime is available to Luxembourg AIFs that are adequately diversified (the CSSF's risk spreading rules applicable to a SIF may serve as inspiration, unless the RAIF is investing solely in risk capital), reserved to well-informed investors and whose constitutive documents provide that they are subject to the RAIF Law.
In the same manner as for a SIF, well-informed investors are defined as (i) institutional, (ii) professional and (iii) other investors who (a) confirm their status as well-informed investors in writing and (b) either invest a minimum of EUR 125,000 or have their expertise, experience and knowledge to adequately appraise the contemplated investment certified by a credit institution, investment firm, UCITS management company or AIFM (an AIFM may not issue such certificate under the SIF Law or SICAR Law).
In contrast to SIFs (and SICARs), the RAIF is not subject to CSSF prior approval or direct ongoing supervision. The fact that the RAIF may be marketed to investors as soon as the RAIF documentation has been put in place and the external authorized AIFM has been appointed will facilitate a speed to market that is unrivalled by existing regulated AIFs in Luxembourg.
RAIFs must be managed by an external authorized AIFM which is not required to be a Luxembourg authorized AIFM and as such neither an internal AIFM nor a registered (as opposed to fully autorized) AIFM is sufficient for this purpose. This requirement will enable an indirect supervision of the RAIF by the competent supervisory authority of the AIFM.
The AIFM will be responsible for managing the RAIF in accordance with the provisions of the AIFMD. This obligation should not present significant obstacles for existing managers of AIFs, most of whom have already adapted well to the AIFMD environment either through the set up of a fully compliant AIFM structure themselves or the use of a third party service provider.
- Legal form:
Like a SIF, the RAIF may adopt the form of a common fund ("FCP") or an investment company with variable capital ("SICAV") or any other form, including an investment company with fixed capital ("SICAF"). In case of a SICAV, the RAIF must (and in case of a SICAF, the RAIF may) take any of the following corporate forms:
- public limited liability company (société anonyme - S.A.)
- private limited liability company (société à responsabilité limitée - S.à r.l.)
- corporate partnership limited by shares (société en commandite par actions - S.C.A.)
- common limited partnership (société en commandite simple - S.C.S.)
- special limited partnership (société en commandite spéciale - S.C.Sp.)
- cooperative company set up as a public limited liability company (société cooperative organisée comme une société anonyme - S.Co.S.A.).
Whatever the legal form, the minimum capital requirement of EUR 1,250,000 must be reached by the RAIF within 12 months of its creation, in line with the minimum capital requirement for a SIF (even if the RAIF adopts a SICAR-like structure).
- Flexible structuring options:
A key differentiator between the RAIF and other unregulated AIFs is that the RAIF may be set up as a multi-compartment "umbrella-fund" whereby each sub-fund may have its own category of investors, investment policy, fee and distribution structure and rules governing the issue and redemption of interests/securities (ring-fencing principle). It is also possible to issue a separate prospectus or offering document for each sub-fund and "cross-investment" between the compartments of the same RAIF umbrella is permitted subject to certain conditions.
- Formalities of constitution:
The RAIF's constitution must be recorded by a (notarized affidavit) "acte de constat"within 5 working days from its incorporation date. It has yet to be clarified in practice what will be required for obtaining the notarized affidavit however during the legislative process, the Luxembourg Chamber of Notaries expressed the view that the notary should be in a position to assess the legality of the constitution, the capacity and identity of the founders and the compliance with the applicable rules against money laundering and the financing of terrorism.
In practice, this requirement will only be relevant for those limited partnerships (société en commandite simple - S.C.S. and société en commandite spéciale - S.C.Sp.), which may ordinarily be set up by means of a contract under private seal without any notary involvement. The requirement for such S.C.S. or S.C.Sp. adopting the RAIF status to have a notarized affidavit will thus represent an additional administrative step in their constitution.
Within 15 working days from the date of the notarized affidavit, a note on the constitution of the RAIF must be submitted to the Luxembourg Trade and Companies Register ("RCS") for publication on RESA, the new electronic platform that recently replaced Mémorial C of the Luxembourg Official Journal. Within 20 working days from the date of the notarized affidavit, the RAIF must also be entered on a separate list kept by the RCS.
RAIFs will need to appoint a depositary which has either its registered office or a branch in Luxembourg.
The RAIF Law enables existing investment structures (whether regulated or not) to convert into RAIFs under certain conditions. Firstly, the investors must approve the conversion and the entity must (at the time of the conversion) be AIFMD compliant (i.e. managed by an external AIFM). Investment vehicles such as a "Part II" UCI, SIF or SICAR must obtain CSSF approval and amend the fund's constitutive documents as well as the fund's offering document (except where the SIF or SICAR is not open to new investors). With regard to unregulated structures, amendments must be made to the limited partnership agreement.
A non-Luxembourg entity may also convert into a RAIF if it can be re-domiciled under the laws of its home jurisdiction. Otherwise, this conversion may only be realized by way of a merger, a contribution in kind or other mechanism.
It is also noteworthy that the RAIF regime expressly provides for the possibility to convert a RAIF into a regulated entity. This could allow the possibility for the adoption by fund initiators of a "phased approach" by setting up a RAIF to accommodate initial investors who do not require a regulated product. To meet the needs of additional investors joining the fund at a later stage, the RAIF could then be converted (following CSSF authorization) into a regulated AIF, such as a SIF or SICAR depending on the investment strategy.
- Information to investors:
The RAIF will need to produce an offering document which must contain a clearly visible statement on its cover page that the RAIF is not subject to supervision by the CSSF. The investor disclosure requirements under the AIFMD will also be applicable in the context of information that will be required to be made available to investors before they invest in the RAIF.
An audited annual report for each financial year must also be published and made available to the investors.
RAIFs will benefit from the pan-European passport currently available to AIFMs which permits the marketing of the RAIF to professional investors within the EU. With regard to other well-informed investors (outside or within the EU), the marketing of the RAIF should comply with the national placement rules of each jurisdiction.
Closed-ended RAIFs may be required (if they do not benefit from an exemption) to comply with the Law of 10 July 2005 on prospectuses for securities ("Prospectus Law") where it is intended to carry out a public offering or admission to trading.
As a general rule, RAIFs are not subject to any Luxembourg taxes (wealth taxes, income taxes and taxes on the income received or the capital gains realized by the RAIF). Nonetheless, RAIFs (with some exceptions) are subject to an annual subscription tax of 0.01% calculated on the total net assets of the RAIF valued at the end of each calendar quarter.
There is also an alternative tax regime for a RAIF which is identical to the one currently applied to SICARs. To avail of this optional regime, the constitutive documents of the RAIF will need to disclose that (i) its object is to exclusively invest in risk capital and (ii) it is subject to the provisions of the specific article of the RAIF Law which provides for this alternative tax regime. RAIFs investing in "risk capital" (which, with respect to the SICAR, the CSSF has interpreted to mean the direct or indirect contribution of assets to entities in view of their launch, development or listing on a stock exchange) would therefore (where their legal forms permit) be subject to general corporation taxes in Luxembourg, including corporate income tax, municipal business tax and a solidarity surcharge. However, any income derived from securities held by the RAIF or funds drawn for investment (within 12 months) as well as any income from the sale, contribution or liquidation thereof will be fully exempt. Such RAIFs should also generally benefit from the network of double tax treaties entered into by Luxembourg.
Importantly, where a RAIF is created as an umbrella fund, the applicable tax treatment will apply to all sub-funds (compartments) combined, meaning that it will not be possible for certain sub-funds of a RAIF to be subject to the subscription tax regime and for others to be subject to the alternative tax regime.
In having the RAIF as part of their Luxembourg product offering, initiators of AIF products will be in the advantageous position of being able to offer well-informed investors an investment vehicle that has the attractive structuring features enjoyed by regulated AIFs while also benefitting from the absence of any requirement for prior regulatory authorisation and the resulting speedier access to market.
The trade-off will be the requirement to have the RAIF managed by an authorized external AIFM, however, this should not present significant obstacles for existing AIF managers, most of whom have already adapted well to the AIFMD environment either through the set up of a fully compliant AIFM structure themselves or through the use of a third party service provider.
The table immediately below compares the main features of a S.C.Sp.-SIF, an unregulated S.C.Sp. and a S.C.Sp.-RAIF. Further below, for the non-legal expert, we have attached a short survival kit for inquiries from foreign investors.
Click here to view table
Note: The RAIF Law does not provide guidance on the practical interpretation of the diversification requirement, however the preparatory works indicate that CSSF Circular 07/309 (which concerns the risk diversification requirement for SIFs) may be used as a benchmark. The diversification rules will not apply where the RAIF's constitutive document provides that its exclusive object is to invest in risk capital.
9 Things You Should Know About The RAIF
- Scope: for qualified investors only
- No direct supervision: quick to market
- Need for an external authorized AIFM
- Subscription tax (where applicable)
- Umbrella fund possible
- No prior formalities with notaries
- Need for a depositary
- Large range of legal forms available: FCP or SICAV (including the S.C.Sp.)
- Akin to an unregulated SIF
Please also refer to our previous legal alert, titled "The Reserved Alternative Investment Fund ("RAIF") - a new Luxembourg investment vehicle" and available here.