AIFs have become popular especially in the venture capital industry because of the minimum regulatory, financial and administrative requirements for establishment and subsequent operation. The point is that alternative investment funds are not subject to robust regulation and supervision by the Czech National Bank (CNB) and its registration, including the preparation of supporting documentation, can be completed within a few weeks. As a result, It is quite easy to pool qualified investors into an alternative fund with the aim of joint investments in companies identified based on an investment strategy.
Today’s article focuses on the basic parameters of asset administration comparable to asset management under Section 15 of the Investment Companies and Investment Funds Act. In practice, these entities are usually referred to as “15’s”, alternative investment funds, sub-fund or alternative fund or mini-fund administrators. For the purposes of this article, we use the term “alternative investment fund” (AIF).
What is an alternative investment fund?
Any legal entity registered in the Czech Republic that wishes to administer (manage) assets collected from a small group of investors for the purpose of joint investments based on a strategy designed for the benefit of the investors.
The most common forms include a limited liability company or a joint-stock company.
In what else can investments be made through it?
Investments virtually in anything can be made through an alternative fund. In addition to venture capital, these most often include investments in various forms of crypto-assets (stablecoins, utility tokens or crypto-currencies) or private projects.
Commodities (gold, silver, oil), common stocks or bonds, derivatives (CFDs, options, futures) or development projects or specific real estate are no exception.
Collectibles are also becoming more popular (collections of paintings, stamps, coins, vintage cars).
The wide range of these assets is then supported by the fact that the alternative investment fund is not bound by investment limits, such as asset diversification and sufficient liquidity in the fund.
What is the minimum and maximum volume of assets that can be managed by an AIF?
No minimum volume of assets managed by the fund at a certain point in time after its establishment is set, unlike other forms of funds (such as qualified investor funds).
The maximum volume of assets managed by the fund (the relevant limit) is set, albeit relatively high. The alternative investment fund must not manage assets exceeding EUR 100 million (the basic relevant limit) or EUR 500 million (higher relevant limit), based on the exchange rate as announced by the CNB.
The higher relevant limit may be applied especially where there is no disbursement or distribution of investments for 5 years after they are made, or there is even no use of the leverage effect (the use of instruments such as financial derivatives, currency hedges or loans).
If the relevant limit is exceeded, the alternative investment fund has thirty (30) days to apply for the relevant authorisation (typically a qualified investor fund) or may return below this limit.
Who can become an investor in an AIF?
As in the qualified investor fund (which is subject to robust regulation), assets can be raised from an unlimited group of qualified investors.
The minimum investment for each investor is EUR 125 thousand.
Assets may only be collected simultaneously from investors to whom the trustee has provided information in writing sufficiently in advance of the conclusion of the contract about:
- the riskiness of the investment
- the fact that the investment is not guaranteed and that the investor may lose any funds invested,
- the total amount and structure of the remuneration,
- the investment horizon
- the investment strategy; and
- the fact that the person referred to in paragraph 1 is not subject to the supervision of the Czech National Bank.
The administrator need not disclose the above information to the investor if it provides the investor with a key information document in accordance with Regulation of the European Parliament and of the Council.
The investor must also be an investor who, on the basis of information obtained from the administrator in a manner similar to the provision of the main investment service under the CIFMD, the administrator may reasonably believe that the investment is consistent with the investor's financial background, investment objectives and investment expertise and experience, and the investor confirms these facts in writing.
An alternative investor fund may also be used by a limited number of non-qualified investors who who do not have to meet the minimum investment of EUR 125 000.. Their number is currently limited to twenty (not including qualified investors). Exceeding this number may be a breach of the prohibition to offer and collect funds from the public (“slush fund”). Those considering going beyond this limit must choose a form of a fund that is generally subject to robust regulation.If the number of non-qualified investors exceeds 20, the person must electronically submit an auditor's report to the Czech National Bank by the end of the sixth month following the end of the previous calendar year
What is the form of the relationship with investors? How do investors participate in the AIF?
Most often, investors participate on a contractual “non-institutionalised” basis under an investment agreement. The agreement also includes the fund’s investment strategy.
However, participation through a trust or “institutional” participation are not uncommon, where investors acquire a direct interest / shares in the company. A special form of limited partnership on investment certificates can also be used.
How is an AIF registered / established?
An assessment of investment plan and the most appropriate solution is always an individual matter. Nevertheless, the vast majority of cases are dealt with as follows:
- Establishment of a legal entity registered in the Czech Republic; most often in the form of a ready-made company (typically a limited liability company or a joint-stock company).
- Development of an investment strategy and preparation of the investment agreement including other enclosures that are part of the application and which are submitted to the CNB.
- Submission of an application for entry in the register maintained by the CNB.
- Subsequent registration within one week (provided that the application contains all required information).
The entire process can be completed within three to four weeks (depending on mutual cooperation / provision of the necessary information). The registration obligation arises before the actual commencement of the administration.
Furthermore, the trustee must use the phrase "venture capital entity" in its name and must not use the term "fund", its translations or words derived from it in its name.
However, registration does not mean that the CNB exercises supervision over the AIF, except for the fulfilment of the registration obligation, the notification obligation and the obligations under PRIIPs and SFDR (see below).
The fee for registration of an alternative fund is CZK 10,000.
What happens after AIF registration?
Registration is not the end. If an alternative investment fund is successfully registered, it is obliged to comply with the following:
- AML Rules: The AIF is obliged to develop and send to the Financial Analytical Office a system of internal policies including risk assessment within 60 days (or 30 days after a subsequent change); this does not apply if it has no employees or persons working for it otherwise, but still has to comply with the obligations under the Czech Anti-Money Laundering Act as an obliged person. The AIF is also required identify or check customers.
- Annual or ad hoc reporting to the CNB: The AIF fulfils its reporting duties by means of statements provided through the CNB’s SDAT collection system or ad hoc data box.
- The obligation to state that the AIF is not subject to CNB supervision: the fund must state this fact, for example, in all business documentation, including its website; on the other hand, the fund must not use terms used by entities that agreed to be subject to full regulation such as “investment fund”, “investment company” or “mutual fund”.
- Sustainability: the AIF must state on its website information on the integration of sustainability risks into its risk management policies related to investment decisions and information on how it takes into account the main adverse impacts of investment decisions on sustainability factors.
- Key Information Disclosure (KID): Under certain conditions, the alternative fund must also prepare KID (a brief 3-page document containing basic information about the investment).
- LEI assignment: If an alternative investment fund wishes to trade in investment instruments, including derivatives (such as futures, option and CFDs), it must obtain an LEI. Getting it is easy (filling out a form and paying a fee). Alternative investment funds investing in e.g. real estate, movable assets or crypto-currencies do not need an LEI.
The main changes are as follows:
- The name of the alternative investment fund has to imply that it is a venture capital entity.
- Only qualified investors with a minimum investment of EUR 125 thousand may become investors; exceptions apply to unqualified investors in number of up to 20 persons
- A simple notification obligation towards investors is in place, specifying the risk level of the investment, what the fund will invest in, the investment term and the fees.
- The registration of an alternative investment fund is subject to a fee of CZK 10 thousand.
***
If you have any questions regarding the establishment of an alternative investment fund or any other investment structure, please contact us.
