European Union: The SICAR Regime - Update February 2024

INTRODUCTION

The Law of 15 June 2004 ("SICAR Law")¹ introduced into Luxembourg law the investment company in risk capital (société d'investissement en capital à risque or "SICAR(s)") which was conceived as a customised vehicle for investment in private equity and venture capital. The intention was to introduce a vehicle which could cope with the specific structural needs of private equity and venture capital projects, benefiting from a light regulatory regime while still being subject to the permanent supervision of the Commission de Surveillance du Secteur Financier ("CSSF"). Briefly, the SICAR regime offers a great deal of corporate flexibility along with recognised supervision and favourable tax treatment.

The SICAR regime was amended among others by the Law of 12 July 2013 on alternative investment fund managers ("AIFM Law") which implements the AIFMD² into Luxembourg law. Whilst the AIFM Law mainly purports to regulate alternative investment fund managers ("AIFM(s)"), it also contains various provisions applicable to alternative investment funds ("AIF(s)"), for which SICARs may qualify. The SICAR regime was also amended by the Law of 21 July 2023, which modernises the Luxembourg toolbox relating to investment funds (including SICARs), namely to take into account certain legal changes and market requirements.

The SICAR Law is divided into two parts. The first part contains general provisions applicable to all SICARs, while the second part contains specific provisions applicable only to those SICARs which qualify as AIFs ("SICAR AIF(s)") and which are managed by an AIFM that is authorised in accordance with the AIFM Law or AIFMD provisions. SICAR AIFs that are managed by an AIFM authorised in the European Union ("EU")³ may benefit from the AIFMD passport in order to be marketed to professional investors in the EU through a regulator-to-regulator notification regime.

In addition, the European long term investment fund Regulation ("ELTIF Regulation")⁴ and the European venture capital Regulation ("EuVECA Regulation")⁵ may also offer new opportunities as they enable AIFMs to market SICAR AIFs with an ELTIF label to retail investors in the EU and SICAR AIFs with EuVECA label to certain eligible investors other than professional investors in the EU, provided that the relevant investors qualify as well-informed investors under the SICAR Law.

CHAPTER I: GENERAL PROVISIONS APPLICABLE TO ALL SICARS

The SICAR regime is applicable to investment companies:

• whose securities or partnership interests are reserved to one or several well-informed investors;
• whose exclusive object is the investment of their assets in securities representing risk capital in order to ensure for their investors the benefit of the result of the management of their assets in consideration for the risk which they incur; and
• whose constitutive documents⁶ provide that they are subject to the SICAR regime.

1. SCOPE

1.1. Well-informed investors

Investment in SICARs is restricted to well-informed investors who are deemed to be able to adequately assess the risks associated with an investment in such a vehicle.

The SICAR Law defines well-informed investors not only as (a) institutional investors and (b) professional investors within the meaning of Annex II of MiFID⁷ , but also as (c) other investors who:

• confirm in writing that they adhere to the status of well-informed investors, and
• either
  1. invest a minimum of EUR 100,000; or
  2. benefit from an assessment made by an EU credit institution, MiFID investment firm, UCITS management company or authorised AIFM certifying that they have the adequate expertise, experience and knowledge to appraise the contemplated investment in risk capital and the risks thereof.

Within this category (c), sophisticated retail or private investors are authorised to invest in a SICAR.

The above conditions do not apply to the directors and those other persons involved in the management of the relevant SICAR.

1.2. Optional Regime

The SICAR regime is optional to the extent that the constitutive documents must expressly provide that the investment vehicle is subject to the provisions of the SICAR Law. Accordingly, any investment vehicle which is reserved to one or more well-informed investors will not necessarily be governed by the SICAR regime. Instead it could opt to be established as an unregulated company subject to the general rules of Luxembourg Company Law⁸.

2. OBJECT AND INVESTMENT RULES

2.1. Concept of risk capital

The SICAR regime may be opted for by vehicles whose purpose is to invest their assets in securities representing "risk capital". The concept of risk capital is defined by the SICAR Law as "the direct or indirect contribution of assets to entities in view of their launch, development or listing on a stock exchange"

The parliamentary documents of the SICAR Law clearly state that this definition is only indicative. A comprehensive definition was not adopted in order to avoid the SICAR Law lagging behind the market.

The SICAR Law does not impose any restrictions regarding the type of assets that may be held by a SICAR. Parliamentary documents confirm that the definition includes any kind of contribution of assets, whether in the form of capital, debt, or financing of the "mezzanine" or "bridges" type. Loan contracts structured either as senior or subordinated debt can also constitute eligible assets.

On a case-by-case basis, the CSSF assesses compliance of the proposed investment policies with the SICAR Law. In particular, in its Circular 06/241, the CSSF describes its interpretation of the concept of risk capital under the SICAR Law and the criteria to be applied when assessing the eligibility of contemplated investment policies.

Pursuant to the CSSF Circular 06/241, the concept of "risk capital" generally hinges on two cumulative elements, namely (i) a high risk associated with the relevant assets, and (ii) an intention to develop the target entities (portfolio companies). The main objective of a SICAR must be to contribute to the development of the target entities. This concept is to be understood, in the broad sense, as value creation at the level of the target entities. Basically, the investment of the SICAR should, directly or indirectly, enable the target entities to finance their own development. Besides, as opposed to a holding company, a SICAR is in essence an investment vehicle. Accordingly, its primary objective must be to acquire financial assets in order to sell them at a profit.

The CSSF Circular 06/241 lists a series of elements that should be considered in order to assess whether an investment policy is acceptable, for example

• the number and the nature of the target entities;
• their maturity level;
• their maturity level;
• the envisaged duration of holding.

The CSSF Circular 06/241 confirms that an indirect investment through another investment vehicle is acceptable, provided that the exclusive investment policy of such a vehicle is to invest in eligible assets within the meaning of the SICAR Law.

The Circular further confirms that a SICAR may invest in real estate if this investment can be considered as "risk capital". Such an investment must be made through special purpose vehicles ("SPV(s)") as a SICAR cannot directly acquire real estate. The Circular specifies under what conditions private equity real estate is eligible under the SICAR Law. Again, eligibility criteria are based on the concept of development. The SICAR may not be used to make a long-term, passive investment in stabilised real estate assets. Rather, the SICAR can be used to implement value-enhancing real estate strategies where it proposes to achieve high yields through redevelopment or repositioning of properties.

Finally, investments in listed securities are also permitted under certain limited circumstances, for example, in the case of investments in a distressed company in view of a de-listing, in companies listed on immature markets which do not offer real liquidity to the securities listed, or when the issuer has recently been listed or is in a new phase of development.

As an alternative to the SICAR, reserved alternative investment funds ("RAIF(s)") incorporated as investment companies, which state in their constitutive documents that their sole objective is to invest their funds in securities representing risk capital (and that they are subject to the provisions of Article 48 of the RAIF Law⁹), will benefit from certain features of the SICAR regime, such as the non-applicability of the diversification requirement and the specific SICAR tax regime, the so-called "RAIF-SICAR"¹⁰. Contrary to the SICAR, RAIFs are not subject to the supervision of the CSSF but they must, in principle, always be managed by an authorised AIFM.

2.2. Investment rules

The SICAR Law does not impose any risk-spreading requirements (i.e. the SICAR is not prevented from holding only securities of the same or of different types issued by the same issuer), nor does it impose any investment rules or restrictions other than those set out above. Further, there are no restrictions on investments in any jurisdictions, industries or currencies.

In addition, there is no prohibition against holding a majority stake in an entity nor is there any prohibition on being the sole owner thereof.

However, where the constitutive documents or the prospectus of the SICAR detail specific investment rules or restrictions, these will have to be complied with.

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Footnotes

1. The SICAR Law is available on our website www.elvingerhoss.lu in both English and French.

2. "AIFMD" refers to Directive 2011/61/EU on alternative investment fund managers, as amended.

3. For the purposes of this Memorandum, the terms "European Union", "EU" and "EU Member States" also refer to and include the European Economic Area ("EEA") and the States that are contracting parties to EEA agreement other than the Member States of the European Union, within the limits set forth by this agreement and related acts.

4. "ELTIF Regulation" refers to Regulation (EU) 2015/760 on European long-term investment fund, as amended. For more information, please see also our Memorandum "European Long-Term Investment Funds (ELTIFs) in a nutshell" on our website www.elvingerhoss.lu.

5. "EuVECA Regulation" refers to Regulation (EU) 345/2013 on European venture capital funds, as amended

6. i.e. mainly the articles of incorporation (statuts), the management regulations (règlement de gestion) or the partnership agreement (contrat social), depending on the legal form of the SICAR.

7. "MiFID" refers to Directive 2014/65/EU on markets in financial instruments, as amended.

8. "Luxembourg Company Law" refers to the Law of 10 August 1915 on commercial companies, as amended.

9. "RAIF Law" refers to the Law of 23 July 2016 on RAIFs, as amended.

10. For more information on RAIFs, see our Memorandum "RAIFs, Luxembourg regime for investment funds not supervised by the Luxembourg regulator and dedicated to sophisticated investors" on our website www.elvingerhoss.lu.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.