Qualifying Investor Funds Non-UCITS investment funds targeted at high net worth investors may be established in Ireland as qualifying investor funds (QIFs) and these structures benefit from the automatic disapplication by the Irish Financial Services Regulatory Authority (the “Financial Regulator”) of the general non-UCITS fund investment and borrowing restrictions. Accordingly, the Financial Regulator does not generally impose any investment concentration or leverage restrictions of any nature on QIFs.
A broad range of funds can be structured as QIFs, and the flexibility associated with QIF structures is very attractive to hedge fund and other alternative investment fund promoters. Last year, the speed to market of QIFs was enhanced with the introduction of a 24-hour turnaround time for regulatory approval of QIFs. This means that applications for the authorisation of a QIF can be fasttracked, with authorisation possible in a single day on a filing-only basis once all relevant parties to the QIF (for example the promoter, directors and service providers) are approved in advance of the application and the fund has certified compliance with the requirements of the Financial Regulator’s QIF application form.
Most recently however, the Financial Regulator has published new measures designed to further enhance the attractiveness and competitiveness of the Irish QIF product. These developments followed a committed consultation process with industry, in which Matheson Ormsby Prentice was involved, and a summary of the changes agreed to date are as follows:
- An investment by a QIF in another fund will now not be regarded as a feeder-type investment unless the investment is in excess of 50 per cent of net assets (formerly the limit had been 40 per cent);
- The Financial Regulator has clarified that responsibility for compliance with the Irish company law requirement that investment companies must spread investment risk rests with the directors. This opens up the possibility of a more flexible and purposive interpretation of the risk spreading requirements than the prior focus on percentage limitations afforded;
- QIFs which have established as investment companies and partnerships are no longer required by the Financial Regulator to publish semi-annual accounts. The Irish Stock Exchange has also amended its requirements in this regard;
- QIFs are now permitted to issue a separate prospectus for share classes within a QIF, or within a sub-fund of an umbrella QIF, provided that the existence of the other share classes are disclosed to investors;
- QIFs are no longer required to refer to limited liquidity status on the prospectus cover, instead the fund promoter has discretion to refer to “open ended with limited liquidity” on the cover if desired;
- It is now possible to convert a professional investor fund to QIF status on the basis of a 75 per cent shareholder vote in favour of conversion, as opposed to the 100 per cent level of shareholder approval which had previously been set as the threshold. The vote in favour of such conversion must represent at least half of the total number of shares, and a QIF status certificate in respect of each shareholder participating in the conversion must be furnished prior to the conversion taking place. Shareholders who do not provide a QIF shareholder status certificate will be redeemed prior to the amalgamation (this will include shareholders who vote against the conversion and non-responding shareholders);
- Although a QIF may not raise capital from the public through the issue of debt securities, the Financial Regulator has now clarified that QIFs are permitted to issue notes on a private basis to a lending institution to facilitate financing arrangements; and
- A fast-track derogation procedure for a QIF feeder scheme investing in an unregulated scheme (where the parties involved have previously been granted a derogation on the same basis as the current request) has been confirmed.
INTRODUCTION OF “SUPER SOPHISTICATED” FUNDS LISTING REGIME
The Irish Stock Exchange has recently introduced a new regime for a new category of fund, the super sophisticated investor fund (“SSF”) with minimal listing conditions but with higher standards applied to the investor. This development permits exemptions from certain investment fund listing conditions and related disclosures for funds which are marketed to highly sophisticated investors.
The minimum initial subscription level is US$500,000 and to qualify as a super sophisticated investor, an applicant must warrant that:
- its ordinary business or professional activity includes the buying and selling of investments, whether as principal or agent; or
- in the case of a natural person, their individual net worth, or joint net worth with that person’s spouse, exceeds US$2.5 million; or
- it is an institution with a minimum amount of assets under discretionary management of US$5 million.
Investors must also provide warranties in relation to their understanding of the risks in investing in the fund, and bearing the loss of their investment. The minimum investment requirement does not apply to the investment manager or any of its directors, employees or connected persons (or, in the case of an investment manager which is a limited partnership, its members with an executive function).
The quantitative restrictions which usually apply to listing entities replaced with a requirement instead for the SSF to demonstrate how investment and counterparty risk is diversified and the requirement for a fund to be a passive investor is also removed for SSFs, as are the usual conditions regarding dividend policy. It is envisaged that removing the passive investor requirement will facilitate the listing of SSFs established as private equity funds. The investment manager of a SSF must be regulated or registered with an appropriate regulatory authority.
REVISIONS TO LISTING RULES FOR CLOSED END INVESTMENT FUNDS
Taking into account the provisions of the Prospectus Directive, Admissions Directive, Market Abuse Directive and the Transparency Directive, the Irish Stock Exchange has recently issued revised guidelines for listing a closed end investment fund (“CEIF”), removing a number of conditions which had previously applied, on the basis that the aforementioned directives and the revised rules of themselves provide a robust and appropriate regime for listing CEIFs. The most important changes resulting from the Irish Stock Exchange’s review are that CEIFs will not have to comply with a number of previously applying quantitative investment restrictions, rather (in common with SSFs), they will have to demonstrate a spread of investment and counterparty risk. The previous conditions regarding dividend policy requirements and qualified accounts for initial listings are also no longer applicable to CEIFs. It is envisaged that the revised regime for listing CEIFS will be very attractive to issuers.
The additional flexibility for QIFs, SSFs and CEIFs which has been introduced is welcome. There is no doubt that the QIF enhancements reflect the market appetite for a sophisticated regulated Irish product facilitating hedge fund and other alternative investment strategies, and these changes will be of interest to promoters of proposed and existing Irish QIF structures.
Combined with the recent steps taken by the Irish Stock Exchange described above which allow issuers the flexibility required to list the innovative and sophisticated products that are developing in current market conditions, these recent developments serve to illustrate that Irish regulatory commitment to facilitate a flexible approach appropriate for sophisticated fund investors, and to streamline its processes wherever possible, remains a consistent and ongoing priority.