Introduction The Spanish Official Journal of 13 November published the Private Investment Entities1, Collective Investment Entities of a ClosedEnded Type2 and Managers of Collective Investment Entities of a Closed-Ended Type3 (Regulation) and the Collective Investment Schemes Act 35/2003 o f 4 November (Amendment) Act 22/2014 of 12 November (the “Act”). The Act repeals the Private Investment Entities and their Managers (Regulation) Act 25/2005 of 24 November. The explanatory notes to the Act sets out the following as its main objectives: a) To transpose into Spanish law Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers; b) To introduce the legal construct of ECRs-Pyme and so-called other collective investment entities of a closed-ended type; c) To increase the flexibility of the financial regime for ECRs; d) To reduce intervention by the CNMV (Spanish Securities Market Authority); and e) in general, to revise the legal regime for private investment (venture capital/private equity) in order to promote fundraising to allow the financing of a larger number of enterprises. This paper covers some of the Act’s main developments in respect of ECRs, other collective investment entities of a closed-ended type and their managers. 2. Private investment entities (ECRs) 2.1.Types of ECR ECRs shall continue to have the legal form of private investment firms or funds, although the heretofore separation between common and simplified regime entities disappears. Instead, the Act recognises the following types of ECRs: a) “Ordinary” ECRs; b) ECR-Pymes4; The main developments of Act 22/2014 of 12 november in respect of private investment entities, other collective investment entities of a closed-ended type and their managers Íñigo Erláiz and Carlos Fernández-Loeches Gómez-Acebo & Pombo, Corporate & Commercial Practice 1 Abbrev.: ECRs 2 Abbrev.: EICCs 3 Abbrev.: SGEICs 4 SMEs (pequeñas y medianas empresas)Analysis GA&P | December 2014 2 c) European venture capital funds; and d) European social entrepreneurship funds. 2.1.1. Ordinary ECRs The Act maintains the general concept of ECRs as defined in the repealed Private Investment Entities and their Managers (Regulation) Act 25/2005 of 24 November, i.e., financial entities whose main object consists of acquiring temporary shareholdings in companies (not of a real estate or financial nature) which, at the time of acquisition, are not listed on the primary stock exchange market or other equivalent regulated market in the EU or other member countries of the OECD. 2.1.2. ECR-Pymes ECR-Pymes are a special type of private investment entity that must meet the following requirements: a) Invest in companies that: — at the time of the investment do not trade on a regulated secondary market or a multilateral trading facility; — have less than 250 employees at the time of the investment; — at the time of the investment either have annual assets with a value no greater than 43 million euros or an annual turnover no greater than 50 million euros; — are not collective investment schemes; — are not of a real estate or financial nature; and — are established in a European Union member State or a third country, provided such third country is not on the FATF’s list of non-cooperative countries and territories against money laundering and has a tax treaty in place with Spain that includes an information exchange clause or a tax information exchange agreement; b) have an advisory relationship with their investees; c) SCR5-PYMEs must have an authorised minimum share capital of €900,000, with 50% paid up at the time of incorporation and the rest paid up (in one or various instalments) within the three years following incorporation; d) FCR6-PYMEs must have minimum committed funds of €1,650,000; and e) in addition, ECRs-PYME must satisfy investment ratios different to those of ordinary ECRs, as set out in section 2.3.2. 2.1.3. European venture capital funds (EuVECA) EuVECAs are venture capital funds that must use the designation “EuVECA” when marketed in the EU. The Act does not regulate this new legal construct and refers to the provisions of EU Regulation 345/2013 on European venture capital funds. 2.1.4. European social entrepreneurship funds (EuSEF) EuSEFs, in turn, are venture capital funds that must use the designation “EuSEF” when marketed in the EU. As occurs with EuVECAs, the Act does not regulate this legal construct and refers to the provisions of EU Regulation 346/2013 on European social entrepreneurship funds. 5 Abbreviation for a private investment firm (sociedad de capital-riesgo) 6 Abbreviation for a private investment fund (fondo de capital-riesgo)Analysis GA&P | December 2014 3 2.2.Incorporation of ECRs The main development in terms of the incorporation o f ECRs is that CNMV-authorised managers that wish to incorporate an ECR and commence activities shall not require prior authorisation from the CNMV. In order to incorporate an ECR under these circumstances, the manager must simply: a) Send the CNMV certain information on the ECR at the time of its incorporation; b) Incorporate the ECR by deed and register it with the Register of Companies (only when the ECR adopts the form of a firm). In the case of private investment funds, this requirement is optional; and c) Register the ECR with the CNMV Administrative Register. However, it should be pointed out that in order to incorporate self-managed SCRs, the vehicle itself must obtain the authorization of the CNMC in order to act as manager. 2.3.Investment regime of ECRs 2.3.1. Regime of ordinary ECRs The main developments in terms of ordinary ECRs are as follows: a) Mandatory investment ratio Ordinary ECRs are now obliged to keep 60% of their eligible assets7 in: i) shares or other securities or financial instruments that may give a direct or indirect right to subscribe or acquire the foregoing and shares in the capital of companies that are the subject of their activity; ii) profit sharing loans to companies within the scope of their main activity, with a rate of return fully linked to the company’s profit or loss, such that it is non-existent if the company does not make a profit; iii) other profit sharing loans to companies within the scope of their main activity, other than those mentioned in point (ii) above, up to a maximum limit of 30% of its eligible assets; and/or iv) shares of ECRs. In short, the Act makes the mandatory investment ratios more flexible, permitting an unlimited use of profit sharing loans to companies within the ECRs’ scope of activity, provided the return on such loans is fully linked to the companies’ profit or loss. Another development is the inclusion in the mandatory investment ratio not only of investments in shares of non-financial companies traded on the secondary market of a Spanish stock exchange, a multilateral trading facility or an equivalent market in another country, but also the granting of profit sharing loans to such companies and the granting of financing that meets the requirements of sections (ii) and (iii) above. b) Investments in ECRs Within the mandatory investment ratio, ordinary ECRs may invest up to 100% of their eligible assets in other ECRs authorised in Spain and similar foreign undertakings that meet certain requirements, rather than the 20% provided in Act 25/2005 of 24 November. c) Unres tric ted inves tmen t ra tio, limi ts on groups and investment diversification In general terms, the Act maintains the same rules found in Act 25/2005 of 24 November. 7 According to the Act, eligible assets are the result of adding equity, profit sharing loans received and latent capital gains after tax, without prejudice to adjustments the CNMV may approve in the future.Analysis GA&P | December 2014 4 d) Temporary breaches o f the limits on investments The Act largely reflects the rules set out in Act 25/2005 of 24 November, although it does introduce certain modifications in terms of greater flexibility in calculating the time limits for compliance with the mandatory investment ratio and the group and investment diversification ratio. 2.3.2. The regime for ECR-Pymes a) Mandatory investment ratio ECR-Pymes must keep at least 75% of their eligible assets in the following financial instruments that provide financing to companies that are the subject of their activity: — shares or other securities or financial instruments that may give a direct or indirect right to subscribe or acquire the foregoing and shares in the capital. — profit sharing loans; — hybrid financial instruments, provided the return on such instruments is linked to the company’s profit or loss and the recovery of the principal in the event of an insolvency is not fully insured; and/or — secured or unsecured debt instruments issued by companies of which the ECR-Pyme already holds shares through any of the instruments mentioned in the points above. b) Unrestricted ratio ECR-Pymes’ remaining assets that are not subject to the mandatory ratio may be kept in: — fixed income securities traded on a regulated market or an organized secondary market; — shares in the capital of companies other than those that are the subject of its activity, including shares in collective investment schemes, ECRs that are not ECRPymes and collective investment entities of a closed-ended type; — cash; — financing of any kind of company included in their object; and/or; — in the case of self-managed private investment firms, up to 20% of their share capital may be invested in fixed assets needed to carry out their activities. In short, ECR-Pymes have a more flexible financial regime and may make greater use of both profit sharing loans and debt. c) Limi ts on groups and investment diversification ECR-Pymes may not invest more than 40% of their eligible assets at the time of the investment in a single company, or more than 40% in companies belonging to the same group. d) Temporary breach o f investments ECR-Pymes are subject to the same legal regime as ordinary ECRs. 3. Other collective investment entities of a closed-ended type (EICCs) Together with ordinary ECRs, ECR-Pymes, EuVECAs and EuSEFs, mentioned above, the Act deals with another new legal construct: EICCs. 8 Collective investment of a closed-ended type shall be that where (a) the redemptions are simultaneous by all investors or unitholders; and (b) that received by each one is calculated on the basis of their entitlement under the entity’s articles of association or rules.Analysis GA&P | December 2014 5 EICCs are collective investment entities of a closed-ended type8 like ECRs which, in the absence of a commercial or industrial objective, raise funds from a number of investors by way of marketing, investing the funds in all kinds of financial or non-financial assets pursuant to a defined investment policy. EICCs can take the form of a firm (abbrev.: SICC) or a fund (abbrev.: FICC), and are subject to the rules established for SCRs and FCRs, respectively, with the following exceptions: — they are not subject to the authorised minimum share capital requirements set out for ECRs. Nevertheless, self-managed SICCs must have fully paid up share capital of no less than €300,000. — they may not carry out the ancillary activities of ECRs; and — the initial and subsequent capital contributions of FICCs must be made in cash. 4. Entities excluded from the scope of application of the act The following entities, among others, are excluded from the scope of application of the Act: — ECRs or EICCs whose articles of incorporation or incorporation documents restrict capital raising to a single investor; and — managers, insofar as they manage one or more ECR or EICC whose only investor is the manager, the parent company or a subsidiary of the manager or other subsidiary of such parent company, provided none of the investors is also an ECR or an EICC. 5. Managers of collective investment entities of a closed-ended type Current managers of private investment entities (abbrev.: SGECRs) are replaced by so-called managers of investment entities of a closed-ended type (abbrev.: SGEICs). ECRs and EICCs can have only one manager, which may be: — an SGEIC or a manager of collective investment schemes; or — in the case of SCRs or SICCs, the firm itself, provided it is authorised to act as a manager. 5.1.Time limit for compliance with the Act SGECRs will be automatically transformed into SGEICs when the Act comes into force, with no need to apply for a new authorisation. The CNMV and the Register of Companies will adapt their registers of their own initiative to reflect the change in the articles of association of SGECRS in line with the new Act. Without prejudice to the above, SGECRs and ECRs that were authorised before 14 November 2014 must send to the CNMV: — a statement that the entity has been adapted to the requirements of the Act and, where appropriate, that its programme of activities has been modified, no later than 14 February 2015; and — the information they must provide pursuant to the Act, no later than 14 November 2015. However, the following SGECRs and ECRs need not adapt to the Act: — those that manage ECRs that are not going to make new investments after 14 November 2015; — those that manage ECRs whose time limit for investors to sign up expired before 14 November 2014 and were incorporated for a term that will expire by 22 June 2016 at the latest, except for the duty to publish an annual report Analysis GA&P | December 2014 6 and the duty to inform arising from the acquisition of significant shareholdings and the control of companies. 5.2.Conditions for access to SGEIC activity 5.2.1. Functions of managers The functions of managers with respect to entities they manage are now regulated by the Act as follows: a) Minimum functions: — portfolio management; and — risk control and management. b) Additional functions: — Management of the entity, which includes: i) legal and accounting services; ii) client inquiries; iii) valuation and determination of the net asset value, including the application of the appropriate tax regime; iv) control of compliance with applicable legislation; v) keeping a register of shares; vi) distribution of returns, as the case may be; vii) subscription and repayment, acquisition and sale of shares; viii) settlement of contracts, including the issuance of certificates, and ix) record-keeping; — marketing of the entity; and — activities related to the entity’s assets, particularly, the services necessary for mee ting the managers’ fiduciary duties, t h e m a n a g em e n t o f r e a l estate and services used for its activity, the administration o f r e al e s t a t e , a d vi c e t o companie s rega rding thei r capital structure, industrial strategy and related matters, and other services in connection with the management of the entity and the companies and assets in which it has invested. c) Ancillary services: — discretional management of investment portfolios; — advice on investment matters; — safekeeping and administration of shares of ECRs or EICCs and, as the case may be, of FCREs and FESEs; and — receipt and transmission of client orders in respect of one or various financial instruments. Notwithstanding the above, the Act provides that managers shall not be authorised to: — provide the ancillary services mentioned above on an exclusive basis; — provide advisory services in terms of investments, safekeeping and a dmi ni s t ra ti o n o f s h a r e s and receipt and transmission of client orders in respect of one or various financial instruments, if they do not also provide discretionary portfolio management services; Analysis GA&P | December 2014 7 — provide only the additional functions mentioned above; or — provide discretionary portfolio management services if they do not provide risk management services, and vice versa. 5.2.2. Requirements for manager authorisation The most significant new requirements for manager authorisation pursuant to the Act are as follows: a) The CNMV, rather than the Ministry of Economy and Treasury at the CNMV’s proposal, shall now be responsible for authorising the activities of managers. b) The minimum paid up share capital of SGEICs is now €125,000. However, the minimum paid up share capital of self-managed SICCs may not be less than €300,000. c) When the total value of a managed port folio exceeds 250 million euros, the manager must keep an additional amount of equity and reserves equivalent to 0.02% of the amount by which the portfolio value exceeds 250 million euros, although the required amount of initial capital plus the additional amount must not be greater than 10 million euros. However, up to 50% of the additional equity and reserves amount may be covered with a bond in that amount issued by a credit institution or an insurer. d) SGEICs must also: — have additional equity and reserves in an amount sufficient to cover any possible risk of professional liability in the event of professional negligence; such amount may not be less than 0.01% of the managed assets; or — take out professional liability insurance in line with the covered risks. e) A particularly significant development is that SGEICs must designate a depository for each ECR or EICC they manage, provided they meet any of the following conditions: i) that they market ECRs to nonprofessional investors; ii) that their managed assets exceed the following thresholds: — 100 million euros, including a s s e t s a c q ui r e d wi t h leveraged financing, or — 500 million euros, when the investment entities they manage a re no t leveraged and do not have reimbursement rights that can be exercised during the five years following the initial investment date; or iii) that they have been voluntarily included the general SGEIC regime provided in title II, part II of the Act. 5.3.Conditions for carrying out activities The main development is that the Act provides a general regime and a special regime for managers to carry out their activities. These regimes are applicable not only to outside managers but also to self-managed SCRs and SICCs. 5.3.1. General regime Among the conditions for managers subject to the general regime to carry out their activities, the Act has introduced new requirements regarding their structure and organisation, in order to guarantee the control of risks, liquidity Analysis GA&P | December 2014 8 and conflicts of interest and, specifically, to comply with remuneration guidelines that avoid excessive risk-taking. In addition, the Act includes new requirements on reporting to investors and the CNMV. 5.3.2. Special regime Managers with managed assets below the following thresholds shall not be subject to any of the conditions provided in the general regime for carrying out management activities: a) 100 million euros, including assets acquired with leveraged financing; or b) 500 million euros , when the investment entities they manage are not leveraged and do not have reimbursement rights that can be exercised during the five years following the initial investment date. Nor is the general regime applicable to managers that manage one or more ECRs or EICCs. Nor is the general regime applicable to managers that manage one or more ECRs or EICCs investing only in the SGEIC, the parent company, subsidiaries of the manager or other subsidiaries of such parent company, provided none of the investors is also an ECR or EICC and that they have voluntarily submitted to the Act. Mangers subject to the special regime must: a) inform the CNMV of the ECRs or EICCs they manage and provide it with information on their investment strategies; b) inform the CNMV if they no longer meet the conditions to be subject to the special regime; c) provide information periodically to the CNMV regarding the main instruments in which they invest as well as their main risks and concentrations; d) make certain information on the entities they manage available to investors or unitholders; e) have their accounting records audited; and f) make the audit report available to the CNMV within the first six months of each year. Notwithstanding the above, the special regime shall not be applicable to those managers that market ECRs or EICCs to non-professional investors, even if their managed assets are below the abovementioned thresholds. 6. Marketing of ecrs and EICCs in Spain 6.1.Marketing of Spanish ECRs and EICCs Shares or units of Spanish ECRs and EICCs may only be marketed to: a) professional investors as defined in the Securities Market Act; b) non-professional investors who meet the following requirements: — they undertake to invest at least €100,000; and — they expressly state in writing, in a document other than the investment agreement, that they are aware of the risks inherent to the undertaking; c) non-professional investors who invest in ECRs listed on a stock exchange; d) non-professional investors who evidence experience investing in, managing or advising ECRs similar to the one in which they intend to invest; and e) the directors, managers or employees of the manager or of self-managed entities, in respect of the entity itself or those managed or advised by the manager.Analysis GA&P | December 2014 9 Marketing to non-professional investors shall require prior submission of the prospectus, the annual report and the management delegation agreement, as the case may be. In addition, the annual report must be provided to the unitholders within the first six months of each year. 6.2.Marketing of non-Spanish ECRs and EICCs 6.2.1. Marketing to professional investors a) ECRs or EICCs incorpora ted in ano ther EU Member S ta te wi th managers au thorised in a Member S ta te pursuan t to Directive 2011/61/EU These entities may be freely marketed to professional investors as soon as the competent authority in the Member State - which has au thorised the ECR or EICC manager - informs the manager that it has sent the CNMV a letter containing the following information and documentation: — the particulars of the entities it intends to market, as well as the place where they are based; — the provisions and methods for marketing the shares or units in Spain; — the FCR’s or FICC’s rules or the firm’s incorporation documents; — the investment entity’s prospectus, if required, and the latest annual report; — the particulars of the investment entity’s depositary; — a description of the investment entity or any information regarding the entity that is available to the investors; — information on the place where the master investment entity is located, if the investment entity to be marketed is a feeder. — where appropriate, information on any measures taken to avoid the marketing of shares/units in the investment entity to retail investors; and — a certificate issued by the c om p e t e n t a u t h o ri ti e s i n the manager’s home Member State evidencing that it is a u t h o ri s e d u n d e r Di r e c tive 2011/61/EU. Similarly, these investment entities must observe all Spanish rules and regulations in terms of marketing and advertising. b) ECRs or EICCs incorpora ted in a non-EU coun try bu t managed by an EU Member S ta te-au thorised manager pursuan t to Direc tive 2011/61/EU These investment entities may be freely marketed in Spain to professional investors, provided they obtain prior authorisation from the CNMV and they - as well as their managers - are registered with the CNMV register, providing evidence of the following: — that there is a cooperation agreement in place between the competent authorities of the manager’s home Member State and the supervisory authorities of the non-EU country where the investment entity is based, in order to guarantee an efficient exchange of information that allows the competent authorities to perform their functions pursuant to Directive 2011/61/EU. — that the ECR’s or EICC’s non-EU home state does not appear on the FATF’s list of non-cooperative countries and territories against money laundering.Analysis GA&P | December 2014 10 — that the non-EU country where the ECR or EICC is based has an agreement in place with Spain that fully reflects the precepts set out in art. 26 of the OECD’s Model Tax Convention on Income and on Capital and guarantees an effective exchange of tax information, including, if appropriate, multilateral tax treaties; and — that the manager is authorised to manage investment entities under Directive 2011/61/EU. In addition, in these situations it will be necessary to submit to the CNMV certain information and documentation regarding the ECR or EICC (identification of the entity, the fund’s rules or the firm’s incorporation documents, prospectus, etc.). c) ECRs or EICCs managed by a non-EU manager These investment entities may be marketed to professional investors in Spain, provided they have prior authorisation from the CNMV and they - as well as their managers - are registered with CNMV register, submitting evidence of the following: — that there is a cooperation agreement in place between the CNMV, the competent authorities of the manager’s home country and the supervisory authorities of the third country where the investment entity is based, and, as the case may be, the supervisory authorities of the EU-Member State where the investment entity is based, in order to guarantee an efficient exchange of information that allows the competent authorities to perform their functions pursuant to Directive 2011/61/EU; and — th a t th e n on -E U c oun t r y where the manager is based and, as the case may be, the non-EU country where the investment entity is based, do not appear on the FATF’s list of non-cooperative countries and territories against money laundering. In addition, the manager must submit to the CNMV certain information and documentation regarding the ECR or EICC (identification of the entity, the fund’s rules or the firm’s incorporation documents, prospectus, etc.). 6.2.2. Marketing to certain non-professional investors The Act permits the marketing of the ECRs mentioned in points a), b) and c) of 6.2.1 above to the following nonprofessional investors: a) investors who: — undertake to invest at least €100,000, and — expressly state in writing, in a document other than the investment agreement, that they are aware of the risks inherent to the undertaking; b) the directors, managers or employees of the manager or of self-managed entities, in respect of the entity itself or those managed or advised by the manager; c) non-professional investors who invest in ECRs listed on a stock exchange; and/or d) investors who evidence experience investing in, managing or advising ECRs similar to the one in which they intend to invest. In any case, these marketing activities require prior authorisation from the CNMV and registration of the ECR, as well as its manager, with the CNMV register, providing evidence of a number of particulars.Analysis GA&P | December 2014 11 For further information please visit our website at www.gomezacebo-pombo.com or send us an e-mail to: firstname.lastname@example.org. Barcelona | Bilbao | Madrid | Valencia | Vigo | Brussels | Lisbon | London | New York 7. Marketing in the eu of ECRs and EICCs with Spanish managers authorised under Directive 2011/61/EU In these cases, the manager must send the CNMV a notice giving the particulars of the investment entities it intends to market, where they are based, and certain documentation regarding the ECR or EICC in question (management rules, prospectus, etc.). The CNMV has 20 working days to verify the documentation and send it electronically to the authorities of the Member State where the SGEIC intends to market the investment entity, attaching a certificate evidencing that the manager is authorised under Directive 2011/61/EU. The CNMV will notify the manager that this documentation has been sent, at which point it may begin its marketing activities.