On December 7, 2015, a draft law number 6929 on the reserved alternative investment fund was introduced to the Luxembourg Parliament. Should this draft bill come into force, it would create a new investment vehicle in Luxembourg – the Reserved Alternative Investment Fund ("RAIF"), which – in contrast to existing Luxembourg investment vehicles such as specialized investment funds (“SIFs”), investment companies in risk capital (“SICARs”), or the so-called Part II Fund – would not require a prior approval from the Luxembourg Commission for the Supervision of the Financial Sector (the "CSSF").
The Alternative Investment Fund Managers Directive1 ("AIFMD") was transposed into Luxembourg law by the Law of 12 July 2013 on alternative investment fund managers (the "AIFM Law"). The AIFM Law does not directly regulate investment funds, but rather the manager of those alternative investment funds.2 Neither the AIFM Law nor any other binding source of law requires an AIF to be subjected to a national product regulation with prior authorization and supervision. This led to the development of a new generation of fully compliant unregulated AIFs passported across the European Union thanks to the AIFM license granted to its manager.
This development has come about due to some market participants in the Luxembourg investment fund industry questioning the need of a "double license" (product and manager) to be permitted to access their non-retail investor clientele via the EU passporting scheme. Hence, some fund sponsors launched unregulated Luxembourg AIFs passported via their AIFM platform to complete their product range alongside the more traditional mainstream SIFs and SICARs (where both the fund manager and the AIF are authorized and regulated).
The new RAIF would underpin this trend and provide a specific regulatory framework where the fund vehicle would not require authorization from and subsequent monitoring by the CSSF while being stamped as an "AIF" by virtue of law. In addition, the new RAIF would benefit from some additional features not yet possible for standard Luxembourg law-governed unregulated AIFs, notably the possibility to structure the unregulated AIF as an umbrella fund or become a contractual fund ("FCP").
The Basic Features of the RAIF according to the Draft Law
To become an RAIF, an investment vehicle would have to fulfill the following four requirements:
(i) the vehicle must qualify as an AIF as set forth in the AIFM Law and must appoint an external AIFM that is authorized under the AIFM Directive, whether in Luxembourg or abroad;
(ii) the exclusive business of the RAIF must be the collective investment of its funds in assets in order to spread the associated investment risks3 and ensure, for investors, the benefit of the results of the management of their assets;
(iii) the securities or partnership interests of the RAIF are exclusively reserved for well-informed investors. The definition of "well-informed investor" in the RAIF project law corresponds at large to that set out in the SIF Law and the SICAR Law; and
(iv) the constitutive or offering documents or partnership agreement of the AIF provide that the undertaking is subject to the provisions of the RAIF Law.
An RAIF can be organized in any form available under Luxembourg law, and the RAIF project law provides detailed regulations for RAIFs organized in the form of an FCP or in the form of an investment company with variable capital ("SICAV"). In this latter case, the RAIF may take any of the following corporate forms:
(i) public limited liability company (société anonyme);
(ii) partnership limited by shares (société en commandite par actions);
(iii) simple limited partnership (société en commandite simple);
(iv) special limited partnership (société en commandite spéciale);
(v) private limited liability company (société à responsabilité limitée); or
(vi) cooperative in the form of a public limited liability company (société cooperative
organisée sous forme de société anonyme).
RAIFs are subject to the tax regime applying to regulated fund vehicles, which is an annual subscription tax of 0.01%, or, in the case of RAIFs implementing a venture capital strategy, to the exemption regime applicable to SICARs.
The main novelties that would be introduced by the new RAIF to the Luxembourg fund industry would be:
- shorter time to market (compared to regulated products such as SIFs and SICARs);
- extensive choice in terms of corporate legal forms to be used, as compared to the SCS/SCSp being currently the only unregulated forms offering the required flexibility, and the possibility to structure unregulated FCPs; and
- the possibility to set up different compartments in an unregulated AIF.
In return, the granting of an RAIF status is made subject to the observance of minimal conditions (appointment of a fully compliant AIFM4 and minimum portfolio diversification rules), and also triggers the application of the annual subscription tax.
On the original article is a table comparing the main features of a regulated SCSp SIF/AIF, an SCSp RAIF, and an unregulated SCSp AIF.
It would be good news if the Luxembourg legislator were to pass the law introducing the new RAIF vehicle (which remains optional for existing non-regulated AIFs), as it would create a more quickly recognizable de minimis harmonized non-regulated undertaking for collective investment, hence filling the current gap between the fully regulated undertakings for collective investment among the "jungle of variety" of unregulated AIFs, which require a deep investor due diligence and which cause difficulty when wishing to complete a first close quickly.