The UAE Securities and Commodities Authority (SCA) published the long awaited Investment Funds Regulations at the end of July. These regulations contain a number of new provisions, including in relation to the establishment of domestic funds in the UAE. However, of most interest to fund managers outside of the Emirates (including managers based in the DIFC) is likely to be the requirement for the SCA to approve all marketing of foreign funds in the UAE. This is a marked change from the previous tolerance of low-level, targeted marketing to institutions, including those in connection with existing client relationships.
The Regulations contain provisions regarding both public offerings and private placements, both of which require the prior approval of the SCA.
In order to conduct a public offer of a foreign fund in the UAE, that foreign fund must:
- be subject to the supervision of an authority which is equivalent to the SCA in its home country; and
- be authorised to make a public offering of units in its home jurisdiction.
The SCA may also impose additional conditions on public offerings (and has in relation to the use of local placement agents, below).
Of most interest (and possibly concern) to managers of hedge funds, private equity funds and real estate funds will be that:
- all private placements of foreign funds (including to sovereign wealth funds) will now require the prior approval of the SCA; and
- minimum subscription amounts of AED 500,000 (for foreign funds), and AED 1 million (for foreign funds incorporated in free zones outside of the UAE) apply in respect of private placements.
Local Placement Agents/Representative Offices
Under the new Regulations, all offerings of a foreign fund in the UAE (by way of a public offering or a private placement) must be made through a locally licensed placement agent. Placement agents can be banks and investment companies regulated by the UAE Central Bank or companies licensed by the SCA to undertake such business. Private placements may also be made through a local unregulated representative office of the fund, provided that the offer is limited to institutional investors and the relevant minimum subscription amount is not less than AED 10 million. Local private placement agents will be under certain obligations, including to take all necessary care in selecting foreign funds to be promoted and following up the performance of funds after the promotion.
These regulations appear to mark the end of the tolerated practice in the UAE of selected marketing to institutional investors, and is likely to require foreign fund managers and those operating in the DIFC to vary their practice. In addition, the attractiveness of having a DIFC presence may not be as strong as it was previously for fund managers, given that DIFC funds will be classified as foreign funds for the purposes of the new Regulations, and marketing of offshore funds even via the DIFC will require the prior approval of the SCA. It remains to be seen how these regulations affect the growth of the DIFC as a funds centre, but we would expect fund managers to now be considering establishing offices within the UAE (either in addition to or at the detriment of their current DIFC offices) in order to avoid the need to engage local placement agents.