Capital markets and structured investments

Investment funds may be set up exclusively for institutional investors. In that case the Fund rules shall be explicit about the exclusive participation of institutional investors. A Fund intended exclusively for institutional investors may establish different rules compared to other funds, in particular establishing different time limits for ascertaining the value of the unit and payment of redemption, charge a management fee on the basis of the results of the Fund or dispense with the preparation of a half-yearly report.

Distinction between retail and wholesale investors

An investor is deemed to be a ‘wholesale’ investor for Australian law purposes where it has invested AUD500,000 or more in a particular fund. There are numerous other criteria for an investor to qualify as a ‘wholesale’ investor for Australian law purposes. For example, where an investor can produce a copy of a certificate given within the preceding two years by a qualified accountant that confirms that it has net assets of at least AUD2.5 million or has a gross income for each of the last two financial years of at least AUD250,000. Further, a person who has or controls gross assets of AUD10 million (including any assets held by an associate or under a trust that that person manages) is deemed to be a wholesale investor no matter what the size of its investment.

All investors that are not wholesale investors are considered to be retail investors.

Retail funds

Funds offered to retail investors must be registered with ASIC. The offer of interests in retail funds must be accompanied by a PDS, which must contain specific information as prescribed by the Corporations Act 2001 (Cth) (for example, information about the Responsible Entity, the fees and costs payable, the risks and benefits and significant characteristics of the fund). A PDS must also contain all other information that might reasonably be expected to influence the decision of a retail investor considering whether to invest in the fund.

Institutional/professional funds

Funds which are offered exclusively to wholesale investors do not need to be offered using a PDS. However, it is usual to provide another disclosure document, such as a private placement memorandum or information memorandum, when offering interests in such funds. Any such disclosure document must not be misleading or deceptive.

EU based alternative investment fund managers (AIFMs) authorized under the AIFM Law will be granted a passport to either manage alterative investment funds (AIFs) in other EU member states or to market the units or shares of AIFs in other EU member states to professional investors. In order to exercise such activities in other EU member states, the EU based AIFM is required to notify the supervisory authority of the relevant member state.

The passport regime will not apply to the marketing of AIF units or shares to retail investors, as the Alternative Investment Fund Managers Directive (AIFMD) permits the member states to impose stricter requirements for marketing to such investors. As is the case in most EU member states, Belgium has elected to make use of this option, and the AIFM Law imposes more stringent conditions for AIFMs marketing units or shares in AIFs to retail investors.

For the purposes of the AIFMD, the term ‘professional investors’ is defined as any investor that is considered as, or may be treated as, a professional client under the Markets in Financial Instruments Directive (MiFiD). Professional clients include, among other things, credit institutions, investment firms and collective investment schemes, as well as ‘opted up’ retail clients.

The UCITS Law contains rules applicable to Belgian Undertakings for Collective Investment in Transferable Securities (UCITS) and foreign UCITS complying with the conditions of the Undertakings for Collective Investment in Transferable Securities Directive, whose shares are offered to the public in Belgium.

The UCITS Law is not applicable to foreign UCITS whose shares are offered within the context of a private placement. In derogation from the UCITS Directive, the UCITS Law further distinguishes between Belgian UCITS whose shares are offered within the framework of a public offering and Belgian UCITS whose shares are offered within the framework of a private placement. There is no public offer if the shares are exclusively offered to professional investors.

Publicly offered UCITS are subject to a list of additional requirements, such as a registration with the FSMA. Moreover, all communications, advertisements and other documents that are related to a public offering of the shares in a UCITS must be pre-approved by the FSMA and must be complete, accurate and consistent with the prospectus.

Retail funds

The distribution of securities representing an interest in the capital of open-ended funds (referred to under Brazilian law as quotas) does not require advance registration with the Brazilian Securities Commission (CVM). However, the public distribution of quotas of closed-ended funds do require advance registration with CVM and must comply with all of the formalities applicable to the public offer of securities in Brazil.

Institutional/professional funds

The offer of quotas of closed-ended funds directed only to professional investors are automatically granted by CVM, provided certain documents are delivered to CVM through its internal internet system. The distribution of quotas of closed-ended funds to professional investors with limited marketing efforts also benefit from the registration exemption set out in CVM Instruction No. 476, provided the following additional requirements are complied with:

• quotas are marketed to a maximum of 75 qualified investors and subscribed or acquired by no more than 50 qualified investors; and
• no marketing efforts through stores, offices, establishments open to the public or public communication services are used.

Retail funds

Both closed-ended and open-ended funds that wish to sell securities to the public must file a prospectus and comply with continuous disclosure and other applicable regulatory requirements, as well as exchange rules and policies where the securities of the fund are publicly listed. The funds must also comply with applicable registration requirements under NI 31-103.

Foreign funds in many cases will be able to sell its foreign securities to Canadian investors without being registered in Canada, provided the fund:

• sells only to ‘permitted clients’;
• meets all requisite conditions; and
• complies with certain filing requirements (as set out under NI 31-103).

Institutional/professional funds

Institutional or professional funds are not recognized as a separate category and the offering of securities by an institutional fund would depend entirely on the form of the fund. Where the fund is marketing to the public, it must file a prospectus and comply with continuous disclosure and other applicable regulatory requirements, as well as exchange rules and policies where the securities of the fund are publicly listed. Alternately, as is more often the case, funds targeted at institutional investors do not offer securities to the public and generally offer securities by way of a private placement under a prospectus-filing exemption.

As previously explained, the difference lies not in the type of investor, but in the type of fund. Private investment funds are non-regulated funds that may not make public offering of their quotas. As a consequence, they are far more flexible than regulated investment funds, which conversely are entitled to make public offering of their quotas.

Colombian law does not make any distinction between offering fund securities to institutional/professional and other investors.

Retail funds

Raising of funds on the basis of a public offer of securities or equity participation in domestic investment funds with variable capital (which are companies established in the Czech Republic) is prohibited.

Distribution of securities of or equity participations in domestic investment funds with variable capital (which are companies or cooperatives established in the Czech Republic) can be carried out only by private offers and/or to professional investors.

Qualified Investors Fund

According to Section 272 onwards of the Act on Investment Companies and Investment Funds, a Qualified Investors Fund is a special fund of qualified investors and domestic investment funds, and is a company or a cooperative established in the Czech Republic. The creation of a Qualified Investors Fund is not subject to licensing in accordance with the Act on Investment Companies and Investment Funds but the Act regulates other aspects, such as the statute (or constitution) of the fund or requirements of audit and annual reports.

Retail funds

Undertakings for Collective Investments in Transferable Securities (UCITS) funds must be open for all investors and are therefore subject to substantial regulatory oversight and restrictions, including obligations with regard to independent custodian/depositary arrangements for assets, investment and borrowing powers specifications, concentration requirements and other matters. The information to be provided to investors in an UCITS fund is regulated by Mutual Funds Ac. The Act does not make a distinction between non-professional and professional/institutional investors in an UCITS fund.

Non-UCITS funds can restrict the scope of eligible investors in their fund rules. However, if the units of a special mutual fund shall be offered to non-professional investors, the risk must be diversified (but to a lesser amount than in an UCITS fund) and the rules of the fund must indicate the deviations from the principles of Chapter 13 of the MFA. As a main rule, a special mutual fund shall have a minimum of ten investors.

Subject to certain exceptions as to e.g. family offices and business angel investors, the units in an alternative investment fund may be marketed to non-professional investors only if the fund manager has been authorized, the rules and a key investor information document (KIID) have been prepared for the fund and all the required documents and information has been provided to the FIN-FSA. The legal forms and domiciles of alternative investment funds (AIFs) allowed to be offered to non-professional investors is restricted. Further, the AIF units may not be offered to non-professional investors if the subscription obligates to additional investments and any such obligations are non-binding on a non-professional investor.

Professional investors may waive their legal right to receive information from the alternative investment fund manager in writing. As mentioned, if the AIF units are only offered to professional investors the key investor information document (KIID) does not need to be prepared.

When offering and marketing the funds to consumers, also the provisions of the Finnish Consumer Protection Act shall also be adhered to.

Retail funds

Retail funds, including Undertakings for Collective Investment in Transferrable Securities (UCITS), are subject to substantial regulatory oversight and restrictions, including obligations with regard to independent custodian/depositary arrangements for assets, investment and borrowing powers specifications, concentration requirements and other matters.

Institutional/professional funds

Professional funds can only be marketed to professional clients as defined in the MiFID.

Professional funds that are offered in France are subject to the Alternative Investment Fund Managers Directive regime in relation to authorization of the manager/fund, marketing arrangements, reporting, depositary arrangements for assets and governance etc.

A different set of rules apply under the German Capital Investment Code (Kapitalanlagegesetzbuch – KAGB) depending on whether you are marketing funds to retail investors or to professional/semi-professional investors. For all types of investors the marketing of a fund must be notified to and approved by the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin)). When marketing to retail investors the fund managers generally need to provide the retail investor with more comprehensive information regarding the fund. There are specific rules as to the protection of retail investors, such as the right of revocation in certain scenarios.

The identified sources of funds for management include individuals, institutions, provident funds and welfare funds, collective investment schemes, endowments and foundations and pension funds.

Collective investment schemes designed to be offered to the general public including the retail investor are subject to elaborate and detailed regulation.

Pension funds are subject to an elaborate regulatory regime under the pension legislation.

Funds marketed to private high-net-worth clients or to professional or institutional investors are not subject to the elaborate regime for collective investment schemes under LI 1695.

Retail funds

The investment units of securities funds and real estate funds may be offered to professional and retail investors alike.

Institutional/professional funds

Venture capital funds and private equity funds may be established for fixed periods by the private offering of non-redeemable investment units to professional investors exclusively.

There are various differences which arise depending on whether securities are being offered to professional/institutional or other investors. These differences, and the various fund structures that are typically used, are explored further below.

Retail

UCITS

Open-end retail funds must be either authorized or recognized (if domiciled in another jurisdiction) by the Central Bank of Ireland. Funds that are recognized in this context are usually UCITS, which are collective investment schemes established and authorized under a harmonized EU legal framework. Under this framework, a UCITS established and authorized in one EU Member State holds what is termed the "European passport," allowing it to be sold cross-border into other EU Member States without further authorization. This enables fund promoters to create a single product for the entire EU rather than having to establish an investment fund product on a jurisdiction by jurisdiction basis. Ireland is one of the world’s leading domiciles for cross-border UCITS.

UCITS are aimed at the retail market. They are a regulated retail investment product, subject to various liquidity constraints, investment/asset class restrictions (both in terms of permitted investments and required diversification) and borrowing and leverage limits. UCITS are structured as open-ended, diversified and liquid products. Although designed principally for the inexperienced investor, they are often sold across the full spectrum of investor types, including institutional investors.

UCITS are subject to a simple registration process and the EU framework mentioned above means they do not need to comply with local securities laws in each Member State. They can also be sold globally and can be restricted to institutional investors if the promoter wishes.

RIAIF

A RIAIF is an AIF authorized by the Central Bank of Ireland aimed at non-professional/institutional investors. It does not have a regulatory minimum subscription. The Central Bank of Ireland has set out the general investment and borrowing restrictions applicable to RIAIFs in its AIF Rulebook. As a retail fund, a RIAIFs does not have the automatic right to any marketing passport and access to individual markets is granted on a case-by-case basis only. RIAIFs must appoint a fully authorized AIFM and non-EU managers or registered AIFMs are prevented from managing RIAIFs.

A RIAIF is subject to fewer investment and eligible asset restrictions than UCITS, but a more restrictive regime than the QIAIF (discussed below). There is a restriction on a RIAIF borrowing more than 25% of its net assets.

Institutional/professional funds

QIAIFs

Non-retail funds that are offered in Ireland are usually authorized as QIAIFs and subject to the AIF regime in relation to authorization of the manager/fund, marketing arrangements, reporting and governance.

QIAIFs are authorized by the Central Bank of Ireland to be marketed only to what are termed qualifying investors (i.e. sophisticated and institutional investors). A QIAIF is subject to a minimum initial subscription requirement of EUR100,000 (or equivalent in other currencies) per investor and investors must meet certain appropriate expertise/understanding tests in order to invest. A QIAIF is the most frequently used non-UCITS vehicle due to its greater flexibility in terms of investment, leverage and borrowing limits (though it is obliged to spread risk if established as an Investment Company). Ireland’s tax regime provides that Irish QIAIFs are not subject to Irish tax on their income, gains or dividend payments to non-Irish investors.

A QIAIF must appoint a depositary and also an alternative investment fund manager (AIFM). In addition, the status of its AIFM determines how the QIAIF can be managed and where and how it can be marketed. A QIAIF can avail of the right to market across the EU, using an AIFMD passport, and can either be managed by an EU or non-EU AIFM and/or internally managed (discussed further below). A QIAIF can also be marketed freely to professional investors throughout the EU Member States (and the three additional European Economic Area Members States) by an authorized AIFM using an AIFMD marketing passport.

A QIAIF is suitable for hedge funds, less liquid and illiquid alternatives, private equity, venture capital, development capital and real estate funds (as well as most other types of investment fund exposure).

Real Estate Investment Trusts (REITs) were introduced in Ireland in 2013, with a view to stabilizing the local property market at a time when it was stagnating due to the fiscal crisis. Although REITs are not collective investment undertakings, the Central Bank of Ireland has indicated that they will generally be regarded as AIFs for the purposes of AIFMD (and therefore require an AIFM) unless the REIT can demonstrate that this should not be the case.

In broad terms, a REIT must reside in Ireland for tax purposes, be incorporated under the Companies Act 2014 and list its shares on the main market of a recognized stock exchange in a Member State of the EU. As REITs are intended to provide risk diversification and after tax returns to investors, they must hold at least three properties and no one property may account for more than 40% of the total value of the property in the relevant REIT. Once incorporated, the trust can gain classification as a REIT from the Irish Revenue Commissioners when certain conditions are satisfied. In order to classify as a REIT, the trust must (among other things) derive at least 75% of its profits from property rental and distribute at least 85% of its rental profits to shareholders. Once classification is obtained, the REIT is exempt from corporation tax on qualifying income and gains from rental property.

UCITS structures are not appropriate for REITs, as UCITS may not invest directly in real estate, must focus on liquid assets and are required to provide at least twice monthly redemption facilities. Accordingly, the appropriate structures for real estate funds are non-UCITS structures.

Retail funds

Italian retail funds are subject to stringent regulatory requirements, comprising, inter alia, minimum contents of the fund rules, authorization procedure vis-à-vis the Bank of Italy, approval of the management rules and of its subsequent amendments, investments' limits and risk mitigation, fractioning and diversification criteria.

Institutional/professional funds

Italian reserved funds, as expected, are subject to fewer and less stringent investment limits, as well as less disclosure and reporting requirements towards the relevant supervisory authorities. No authorization is required for the establishment of reserved funds and generally the fund rules are not subject to approval by the Bank of Italy.

Retail funds

Considered as laypersons, retail investors need more detailed information and advice to be able to understand the investment documents and make sound financial decisions. They also need more protection.

Based on those considerations, UCITS for instance, being one type of entity through which retail investments are made, are to be authorized by the CREPMF and are subject to considerable regulation.

Institutional/Professional funds

They are usually subject to less protective regulations.

Institutional and professional funds are considered more experienced and sophisticated and able to understand and make sound financial and investment decisions.

However, there is a legal and regulatory framework in place to secure subscribers based on the control mechanisms set up by the Central Depository/ Settlement Bank (DCBR) and the CREPMF.

The main difference between offering fund interests to professional/institutional or other investors is whether certain exemptions to the broker license requirement are applicable.

Under the Financial Instruments and Exchange Act of Japan, a license is required to solicit the sale of fund interests to Japanese investors.

However, a commonly used exemption, known as the Article 63 Exemption, exempts an issuer from the broker license requirement provided that a standard notification to make use of the exemption is made. Due to the availability of the exemption, foreign companies often offer fund units to Japanese investors without the requisite broker license.

The basic requirements for the application of this exemption are as follows:

• The foreign issuer must offer the fund units by themselves.
• At least one Japanese qualified institutional investor (QII) must be involved in the issue.
• If the pool of Japanese investors includes non-QIIs, then such non-QIIs must be eligible to be solicited (so-called “Eligible non-QIIs“) and there must be no more than 49 eligible non-Qlls.

In addition, professional investors may also be exempt from other restrictions (as detailed below).

If the Article 63 Exemption applies, the general partner (GP) must fulfil certain obligations including the following:

• the creation and annual filing of a business report with the regulatory authority;
• maintaining proper accounting books and business records; and
• making filed information available for public inspection at each business location or by making the information available on a website.

Retail funds

Retail funds, which are mainly Undertakings for Collective Investments in Transferable Securities, are subject to substantial regulatory oversight and restrictions.

Institutional/professional funds

Non-retail funds are Specialized Investment Funds or Reserved Alternative Investment Funds which generally fall into the category of Alternative Investment Funds and will therefore have to appoint an Alternative Investment Fund Manager. As such, certain obligations with respect to marketing arrangements, reporting, governance etc are applicable.

Professional Collective Investment Schemes which offer their shares solely to sophisticated investors or as private placements or expert funds which offer their shares solely to expert investors are exempted from most ongoing obligations/regulations generally imposed on collective investment schemes.

Generally, Mexican law does not distinguish between the regulation of open-ended and closed-ended funds or retail and institutional/professional funds. Mutual funds can be marketed to both persons and corporations and to the public in general.

The differences are more or less similar to the rules applicable to the offer of the securities.

Licensed fund vehicles/managers in the Netherlands may offer units to both retail investors and professional investors.

Depending of the type of investor being dealt with (ie professional/institutional versus retail), different information provision requirements will be applicable. Higher levels of protection apply when offering units in fund vehicles to retail investors.

Retail funds

Retail funds must comply with a range of registration requirements, have a licensed manager and a licensed supervisor, and have compliant offering documents. The fund's assets must be held by the supervisor or an independent custodian, and investments must be undertaken in accordance with a registered statement of investment policy and objectives. Retail funds are subject to a high level of regulatory oversight by the Financial Markets Authority (FMA).

Institutional/professional funds

Funds offered to wholesale investors (as defined in the Financial Markets Conduct Act 2013 (FMCA)) do not have to comply with the same requirements as retail schemes. The FMA's oversight of wholesale funds is limited to conduct obligations under the Fair Dealing provisions in Part 2 of the FMCA. Indications are that FMA will look to increase its scrutiny of wholesale funds in the future.

Retail funds

Retail funds, including Undertakings for Collective Investments in Transferrable Securities (UCITS), are subject to a strict regulatory regime, including obligations with regard to the fund management and the investments of the securities fund's assets (ie allocation and investment limits and requirements as to liquidity of the investments). Special investor protection rules apply and it is required to provide key investor information and meet language requirements.

The retail funds are offered to non-professional investors and are subject to strict investor protection rules. Note that certain categories of funds cannot be offered to non-professional investors. A non-professional investor means any investor not considered as a professional investor, or one who may upon request be treated as such.

Institutional/professional funds

Professional funds are offered to professional investors and a professional client who meets two of the following three criteria: a total balance sheet of €20 million, turnover of €40 million or own capital of €2 million. In practice, in Norway, this often refers to non-UCITS funds, being hedge funds, private equity funds, investment companies and real estate funds, which fall into the category of Alternative Investment Funds (AIFs) and are therefore subject to the Alternative Investment Funds Managers Act of 2014. The regulatory framework is better suited for professional investors and does not set the same restrictions on the investments made by the fund.

For investment funds, the main difference is that if the fund’s securities will be exclusively offered to institutional investors, the registration procedure of the funds will be conducted through the simplified regime. In that sense, the management company will not be obliged to present an advance copy of the agreement to be executed with its clients (which is needed for funds incorporated under the general regime) or require to register in advance the information regarding the invstment fund and its issue.

Retail funds

Open-ended retail funds must be either authorized by the Polish Financial Supervisory Authority (PFSA) (if domiciled in Poland), or recognized by the PFSA (if domiciled in another jurisdiction). Funds that are ‘recognized’ by the PFSA in this context mostly comprise Undertakings for Collective Investments in Transferrable Securities (UCITS) funds established in other jurisdictions.

Retail funds, including UCITS, are subject to substantial regulatory oversight and restrictions, including obligations with regard to independent custodian/depositary arrangements for assets, investment and borrowing power specifications (for open-ended retail funds), concentration requirements, and other matters.

Institutional/professional funds

Closed-ended funds are generally established as Polish closed-ended investment funds or Polish/offshore limited partnerships.

Non-retail funds that are offered in Poland generally fall into the category of Alternative Investment Funds and are therefore subject to the Alternative Investment Fund Managers Directive regime in relation to authorization of the manager/fund, marketing arrangements, reporting, governance etc.

An offer of fund securities to qualified investors such as credit institutions, investment firms, insurance firms, pension funds and fund managers is considered a private offer. Conversely, an offer of fund securities to undetermined investors is considered a public offer, provided the offer is not addressed to qualified investors. Disclosure of an approved prospectus is only required for public offers.

Retail funds

Retail funds require the registration of a prospectus and are subject to investment requirements, prohibitions regarding leverage, limitation on transactions with affiliates and other requirements applicable to investment managers of the fund, which may not be applicable in the case of institutional funds.

Institutional/professional funds

If the institutional/professional investor qualifies for an exemption of registration (for example, a private placement exemption) registration of a prospectus is not required. However, a disclosure document, such as a private placement memorandum, should be used to comply with the anti-fraud provisions of the Uniform Securities Act and US securities laws.

Participative titles issued by Alternative Investment Funds (AIFs) which are authorized in other member states can be offered to retail investors in Romania only if those AIFs observe the conditions of the investment limits and reporting, transparency and publicity requirements currently applicable to Other Collective Investment Undertakings (OCIUs) which attract financial resources publicly.

In addition to such conditions, participative titles which are issued by AIFs authorized in other member states and which may be offered to Romanian professional investors, may be distributed to Romanian retail investors only if the entities which perform the distribution are authorized to provide investment advisory services.

Russian law establishes that certain types of securities may be offered to qualified investors only. There is also a general prohibition on offering foreign securities and foreign financial instruments that are not admitted for public placement/circulation in Russia by the exchange, or, in certain cases – the CBR to an unlimited group of persons, or to persons who are not qualified investors.

The term 'offering/offer' is understood very broadly. According to informal opinions of the predecessor of the current regulator (the Federal Service for Financial Markets which is the predecessor of the Central Bank of the Russian Federation in the sphere of financial market regulation), an 'offer' is in essence 'advertising or proposing' and 'it is not allowed to disseminate within the Russian Federation in any way, in any form and by any means, information that (i) is addressed to an unlimited number of persons or to persons that are not qualified investors and (ii) is aimed at (a) drawing attention to foreign financial instruments that are not admitted for public placement and/or public circulation in Russia, (b) creating and supporting interest in such securities and (c) promoting them in the market'.

Considering the above, active marketing/distribution of foreign financial products is possible only if such financial instruments have obtained appropriate authorization for public placement/circulation in Russia by the exchange, or, in certain cases – the CBR. If a financial instrument has not been authorized for public placement/circulation in Russia, it may only be offered to qualified investors.

Retail funds

Retail investors need more detailed information and advice to allow them to understand the investment documents and make sound financial decisions. Considered as laypersons, they benefit from enhanced protection.

Consequently, and based on those considerations, UCITS for instance, being one type of entity through which retail investments are made, are to be authorized by the CREPMF and are subject to considerable regulation.

Institutional/Professional funds

They are usually subject to less protective regulations.

Institutional and professional/Professional funds do have more expertise, are considered more experienced, sophisticated and able to understand and make sound financial and investment decisions.

There is, however, a legal and regulatory framework, in place, to secure subscribers based on the control mechanisms set up by the Central Depository/ Settlement Bank (DCBR) and the CREPMF.

Retail funds

Retail funds are usually structured as a unit trust and are subject to the Collective Investment Schemes (CIS) regulatory regime, including the CIS code.

For retail schemes constituted in Singapore to be authorized by the Monetary Authority of Singapore, the following would need to be, inter alia, complied with:

• lodging a prospectus with the Monetary Authority of Singapore in compliance with the CIS Code; and
• the requirements of the CIS Code.

Raising funds on the basis of a public offer of securities or equity participation in the domestic investment funds with variable capital, provided these domestic investment funds are companies or cooperatives established in the Slovak Republic, is prohibited. Distribution of securities or equity participations in domestic investment funds with variable capital, provided these domestic investment funds are companies or cooperatives established in the Slovak Republic, can be carried out only by private offers and only addressed to professional investors.

Qualified Investors Fund

A Qualified Investors Fund is a special fund for qualified investors and domestic investment funds, which is a company or a cooperative established in the Slovak Republic. The establishment of a Qualified Investors Fund is not subject to licensing according to the Act on Collective Investment.

In terms of board notice 52 of 2015 (Financial Sector Conduct Authority (previously known as the Financial Services Board): Determination on the Requirements for Hedge Funds) (Board Notice 52) there are two categories of hedge funds, namely Qualified Investor Hedge Funds (QIHFs) and Retail Investor Hedge Funds (RIHFs).

RIHFs are aimed at the general public whilst QIHFs are aimed at more advanced investors.

There are no requirements in order to invest in an RIHF and RIHFs are able to set their own minimum investment levels.

Only 'Qualified Investors' may invest in QIHFS. A Qualified Investor is an investor which invests a minimum investment of ZAR1 million per hedge fund and has:

• demonstrable knowledge and experience in financial and business matter which would enable the investor to assess the merits and risks of a hedge fund investment; or
• appointed a Financial Services Provider (authorized in terms of Financial Advisory and Intermediaries Services Act (FAIS)) who has demonstrable knowledge and experience to advise the investor regarding the merits of a hedge fund investment.

The regulations relating to QIHFs are not as stringent as those attached to RIHFs, with QIHFs having more autonomy over their risk profiles and not being subject to the same liquidity and exposure requirements as RIHFs. For more information, see Managing and marketing debt and hedge funds – investment management restrictions.

Definition of marketing and reverse solicitation

Under the Collective Investment Schemes (CIS) Law and the Close-ended Collective Investment Law, offering/marketing of funds means attracting clients through an advertising campaign, by the CIS/close-ended collective investment entity or any other entity acting on its behalf or on the marketing entity's behalf, in order to raise funds, assets or rights to the CIS/close-ended collective investment entity.

For these purposes, marketing of funds shall be understood as any form of communication addressed to potential investors in order to promote, either directly or through third parties acting on behalf of the CIS/close-ended collective investment entity or on behalf of the management company of the CIS/close-ended collective investment entity, the subscription or acquisition of units or shares of the CIS/close-ended collective investment entities. In any case, there is marketing of funds when the CIS/close-ended collective investment entities or their management company approaches the investors through phone calls, home visits, personalised letters, emails or any other electronic means, which are part of a marketing and promotional campaign.

A marketing of promotional campaign in Spain means any campaign addressed to investors resident in Spain. In case of email or any other electronic means, the offer is deemed to be addressed to investors resident in Spain when the CIS/close-ended collective investment entity or their management company, or any person acting on their behalf through the electronic means:

• proposes the purchase or subscription of the shares or units; or
• furnishes to residents in Spain all the necessary information regarding the characteristics of the offer and how they can subscribe to the offer.

In light of the above, in the event that Spanish resident investors are contacted for the purposes of offering units or shares in a fund, this will be considered as marketing. If, on the contrary, a Spanish resident investor has requested the investment upon his/her own initiative, this would not be deemed as an offer (ie this would be a reverse solicitation).

Offering of funds to retail and professional investors

Open-ended CIS qualifying as UCITS can be offered/marketed to retail investors without limitation. However, non-UCITS open-ended CIS and close-ended collective investment entities can only be offered/marketed to professional investors with the following exceptions:

• funds of hedge funds can be offered to retail investors;
• hedge funds and close-ended collective investment entities can be offered/marketed to retail investors if:
  • such investors undertake to invest at least €100,000; and
  • such investors make an statement in writing declaring they are aware of the risks inherent with such investment (this exception is not applicable to hedge funds which invest in invoices, loans, or hedge funds which grant loans (these can only be offered/marketed to professional investors);
• venture capital entities can also be offered/marketed to retail investors if:
  • the investors are managers, directors or employees of the manager of the venture capital entity;
  • the investors ordinarily invest in listed venture capital entities; and
  • the investors have experience in these types of investments, i.e., management or advisory experience regarding a similar venture capital entity to that in which they want to invest in. 

Retail funds must be authorized by the Swedish Financial Supervisory Authority (Finansinspektionen).

Retail funds, including UCITS, are subject to substantial regulatory oversight and restrictions, including obligations with regard to independent custodian/depositary arrangements for assets, investment and borrowing powers specifications (for open-end retail funds), concentration requirements and other matters.

Non-retail funds that are offered in Sweden generally fall into the category of Alternative Investment Funds (AIFs) and therefore are subject to the Alternative Investment Fund Managers Directive (implemented in Swedish law through the Alternative Investment Fund Managers Act 2013 (Lag om förvaltare av alternativa investeringsfonder (2013:561)) regime in relation to authorization of the manager/fund, marketing arrangements, reporting and governance etc.

Retail funds

Retail funds are known as mutual funds under Thai law. Open-ended retail funds or close-ended retail funds must be authorized and supervised by the SEC and the SET.

Retail funds are subject to substantial regulatory oversight and restrictions, including obligations with regard to independent custodian/depositary arrangements for assets, investment and borrowing powers specifications (for open-ended retail funds), concentration requirements and other matters.

Institutional / professional funds

Non-retail funds are known as private funds under Thai law and are subject to authorization and supervision by the SEC. Private funds are described in detail in Entity establishment. 

Ukrainian law makes a distinction between retail and institutional investors, but despite this statutory distinction, there is no sophisticated legislation which sets out different legal regimes for the marketing and selling of debt securities to professional or retail investors.

The Ukrainian draft law 'On Amending Certain Legislative Acts of Ukraine in relation to Investment Attraction and Introducing of New Financial Instrument’ which has been pre-approved by Parliament, contains the Markets in Financial Instruments Directive II 2014/65/EU (MiFID II) approach to client categorization. In particular, investors will be distinguished between qualified and non-qualified investors depending on the nature of the investor, their experience in the financial market and awareness about market products, among other factors. In general, qualified investors require less regulatory protection, while non-qualified investors are protected with the highest degree of regulatory protection.

Retail funds

Open-end retail funds must be either authorized by the UK Financial Conduct Authority (if UK domiciled) or recognized by the Financial Conduct Authority (if domiciled in another jurisdiction). Funds that are 'recognized' by the Financial Conduct Authority in this context mostly comprise Undertakings for Collective Investment in Transferable Securities (UCITS) funds established in other jurisdictions. Closed-end retail funds that are listed in the London Stock Exchange Main Market or specialist funds market are not 'authorized' by the Financial Conduct Authority, but the listing itself requires approval by the Financial Conduct Authority in its capacity as the UK listing authority.

Retail funds, including UCITS, are subject to substantial regulatory oversight and restrictions, including obligations with regard to independent custodian/depositary arrangements for assets, investment and borrowing powers specifications (for open-end retail funds), concentration requirements and other matters.

Institutional/professional funds

In practice, non-retail funds (other than limited partnerships) are usually established outside the UK because there are no UK non-retail tax-exempt fund vehicles (other than unauthorized unit trusts that are only offered to UK tax-exempt investors).

Closed-end funds are generally established as UK or offshore limited partnerships and open-end funds such as hedge funds are typically established as companies and unit trusts.

Non-retail funds that are offered in the UK generally fall into the category of Alternative Investment Funds (AIFs) and therefore subject to the Alternative Investment Fund Managers Directive regime in relation to authorization of the manager/fund, marketing arrangements, reporting, governance etc.

Retail funds

Open-end retail funds must be either authorized by the UK Financial Conduct Authority (if UK domiciled) or recognized by the Financial Conduct Authority (if domiciled in another jurisdiction). Funds that are ‘recognized’ by the Financial Conduct Authority in this context mostly comprise Undertakings for Collective Investment in Transferable Securities (UCITS) funds established in other jurisdictions. Closed-end retail funds that are listed in the London Stock Exchange Main Market or specialist funds market are not ‘authorized’ by the Financial Conduct Authority, but the listing itself requires approval by the Financial Conduct Authority in its capacity as the UK listing authority.

Retail funds, including UCITS, are subject to substantial regulatory oversight and restrictions, including obligations with regard to independent custodian/depositary arrangements for assets, investment and borrowing powers specifications (for open-end retail funds), concentration requirements and other matters.

Institutional/professional funds

In practice, non-retail funds (other than limited partnerships) are usually established outside the UK because there are no UK non-retail tax-exempt fund vehicles (other than unauthorized unit trusts that are only offered to UK tax-exempt investors).

Closed-end funds are generally established as UK or offshore limited partnerships and open-end funds such as hedge funds are typically established as companies and unit trusts.

Non-retail funds that are offered in the UK generally fall into the category of Alternative Investment Funds (AIFs) and therefore subject to the Alternative Investment Fund Managers Directive regime in relation to authorization of the manager/fund, marketing arrangements, reporting, governance etc.

Onshore UAE

When it comes to offering or marketing securities in onshore registered funds, the main rule is that fund securities may not be offered if such funds securities have not been approved and registered with the SCA. Very limited exeptions however may applyin the context of a private offering made to Qualfied Investors (noting that the Qualified Investors exception does not apply to natural persons whether or not such natural persons are high-net worth individuals).  

DIFC

In relation to offering or marketing securities in DIFC registered funds, the governing regulations (i.e. the Collective Investment Law DIFC Law No. 2 of 2010 (Collective Investment Law)) provides that, for offering securities to both professional/institutional investors (known as "Professional Clients") and for offering securities to other investors (such as retail investors), a prospectus must be prepared and the offer must be made by a qualified fund manager. However where the regulations differ between professional/institutional investors and retail investors is when it comes to publication of the prospectus, given that the Collective Investment Law provides that where an offer of securities is in relation to a "Public Fund" (i.e. any fund which includes retail investors) then the prospectus must be filed with the with the relevant DIFC authority.

General comments

Care should be had when marketing an onshore registered fund in an offshore jurisdiction and vice versa, given that the relevant regulatory authorities may have memorandums of understanding in place which set out separate regulations with respect to these situations.
We also note that the fund regatulations, both onshore and offshore, are subject to any guidance notes issued by the respective authorities that may be published from time to time.

Retail funds

Offerings made to the public must be registered with the Securities and Exchange Commission (SEC) under the Securities Act of 1933 (Securities Act) unless an exemption from registration is available. Importantly, if a fund publicly offers its securities, it loses the ability to rely on the Section 3(c)(1) or 3(c)(7) exemptions from registration under the Investment Company Act of 1940 (ICA). If a fund elects to make a public offering of its securities it must create disclosure materials that comply with the requirements of the Securities Act and obtain SEC review thereof, and observe the rules set forth in the Securities Act and the Securities Exchange Act of 1934 (SEA) relating to the conduct of such offerings. Such a fund generally would also be subject to the provisions of the ICA, including the prohibition on performance-based compensation.

Institutional/professional funds

Offerings made to professional or institutional investors are typically made via an exemption from registration under the Securities Act, Regulation D, that permits private offerings to 'accredited investors' with limited oversight by the SEC. 'Accredited investors' include:

• a person whose individual net worth (or joint net worth with that person’s spouse) exceeds USD1 million or who had an individual income in excess of USD200,000 in each of the two most recent years or joint income with that person’s spouse in excess of USD300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year; and
• an entity, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of USD5 million.

Most funds offered to institutional investors are limited to 'qualified purchasers,' and, as discussed above, are offered in private placements. Qualified purchasers include:

• a person who owns at least USD5 million in investments; and
• a person or entity, acting for its own account or the accounts of other qualified purchasers, who in the aggregate owns and invests on a discretionary basis at least USD25 million in investments.

So long as the conditions for the exemption from registration under the Securities Act are met the issuer is not required to obtain SEC review of the disclosure materials prior to the offering or to observe the rules relating to public offerings of securities. However, the fund remains subject to the Securities Act’s anti-fraud rules, and the fund must notify the SEC no later than 15 days after the first sale of a security in the private placement.

Fund issuers must also comply with state securities laws to the extent not superseded by applicable federal securities laws. In particular, there may be post-sale filing obligations in states where subscribers for private fund interests reside which should be considered.