Luxembourg has recently recognised that the double layer of regulation imposed at (i) the level of the alternative investment fund manager ("AIFM") and (ii) at the level of the Luxembourg alternative investment fund ("AIF") (for SIFs and SICARs) is not necessarily required when dealing with well-informed investors and that the timeto-market can accordingly be dramatically reduced by not subjecting the AIF to the prior approval and ongoing supervision of the CSSF, yet still giving the fund access to the AIFM Directive's marketing passport.
This approach is encapsulated in a bill of law deposited with the Luxembourg Parliament on 14 December 2015 which introduces a new type of Luxembourg investment vehicle, the "Reserved Alternative Investment Fund" (the "RAIF" / the "RAIF Bill").
The RAIF Bill is a blend of the SICAR and SIF regimes with which many are already familiar. Fund managers will thus be able to combine flexibility, quick time-to-market and the protection afforded by the AIFMD regime in one vehicle aimed at professional investors, which benefits from an EU marketing passport.
It is anticipated that the RAIF will be available in 2016.
2. Investors: reserved to well-informed investors
RAIF investors need to be well-informed investors, who are able to adequately assess the risks associated with an investment in such a vehicle. The RAIF Bill defines well-informed investors as (a) institutional investors, (b) professional investors, and (c) other investors who confirm in writing that they adhere to the status of wellinformed investors; and either (i) invest a minimum of 125,000 euros or (ii) benefit from an assessment made by a credit institution, an investment firm or a UCITS management company or an authorised AIFM certifying their expertise, experience and knowledge to adequately appraise the contemplated investment in the RAIF.
Persons involved in the management of the RAIF are deemed to be well-informed investors.
3. Service providers
3.1 The RAIF may only be managed by an external authorised AIFM established in Luxembourg, in another EU Member State or in a third country that benefits from the AIFMD passport regime (when this becomes available). The RAIF regime is therefore not available to self-managed funds nor to registered AIFMs that benefit from the de minimis exemption under the AIFMD.
3.2 An experienced Luxembourg depositary must be appointed by the RAIF. The type of Luxembourg depositary appointed depends on the redemption rights afforded to investors and the type of underlying assets.
3.3 A Luxembourg statutory auditor with appropriate professional experience must also be appointed by the RAIF. The auditor must have been approved by the CSSFs to act as the auditor of a Luxembourg-regulated fund.
3.4 The RAIF's central administration must be performed in Luxembourg.
3.5 Subject to the AIFM delegation rules, one or several investment managers or investment advisers may be appointed by the external AIFM for the management of the RAIF's assets (or one or more sub-funds thereof).
3.6 There is no legal requirement to appoint Luxembourg directors, although there are other tax and commercial considerations that influence the appointment of directors to the fund.
4. Corporate and contractual forms of the RAIF
The decision as to the legal form of the RAIF will often be driven by tax and commercial reasons. It is possible to have a tax transparent entity, with no legal personality, which is separate from the management company or the general partner.
In addition to this, the capital may be variable (SICAV) or fixed (SICAF). The options therefore include a limited company, a partnership limited by shares, a limited partnership, a special limited partnership, a limited liability company or a cooperative in the form of a public limited company and a common fund (FCP). The FCP must be managed by a Luxembourg management company which meets the conditions set out in the 2010 law (i.e. a Luxembourg regulated entity must be appointed). The FCP will be required to appoint an external authorised AIFM (see above) in addition to the Luxembourg manager.
5. Formation formalities of the RAIF
5.1 The manner in which a RAIF is established is driven by the envisaged corporate or contractual form. The RAIF Bill requires that the formation of the RAIF be recorded by a notarial deed. This means that non corporate forms (FCP or SCS/SCSp) will require the Luxembourg notary to record their establishment by way of a notarial deed.
5.2 Within ten business days of the date of the notarial deed:
5.2.1 the RAIF will have to be registered on an official list held with the Luxembourg trade and companies; and
5.2.2 a publication, specifying amongst other matters, the name of the appointed AIFM, must be made in the Mémorial, (the Luxembourg official gazette).
5.3 A Grand-Ducal regulation will provide additional details on this list and the information to be published in the Mémorial.
5.4 The RAIF is required to indicate in its formation documents that it will fall under the RAIF regime.
5.5 Many of the common features of fund structures, such as ringfenced sub-funds, different classes and cross investing (subject to conditions) will be available under the RAIF regime.
6. Investing in risk capital
6.1 The RAIF Bill is a blend of the SIF and SICAR regimes without the CSSF approval and ongoing supervision. At the level of the RAIF (not at the sub-fund level), a distinction needs to be made between following a SIF-like or a SICAR regime.
6.2 A limited definition of risk capital is provided in the RAIF Bill. RAIFs wishing to follow this option will need to state in their formation documents that their sole object is to invest their assets directly or indirectly in securities that represent risk capital, that the provisions of this article shall apply and that the special tax regime (see below) provided for in article 48 of the RAIF Bill is applicable.
6.3 The auditors of a RAIF which has opted for this regime will have to certify in the RAIF's annual report that it has invested in risk capital over the relevant period. This report will be communicated to the Luxembourg tax administration (Administration des contributions directes).
6.4 Guidance on the concept of risk capital can be found in CSSF Circular 06/241.
7. Establishment of an offering document and an annual report and information to be circulated to investors
7.1 RAIFs will be required to issue a placement memorandum or a prospectus. Sufficient information, including the associated risks, must be disclosed therein to enable an investor to make an informed decision. The RAIF Bill also requires the (article 21) AIFM law disclosures to be included in the placement memorandum and the disclosure obligation rests with the RAIF rather than the AIFM. Information needs to be up to date when new shares/units are to be issued. RAIFs are also required to include a clear provision on the front page stating that the RAIF is not subject to the supervision of the Luxembourg supervisory authority.
7.2 It is also possible for the RAIF to issue a placement memorandum or prospectus per sub-fund, provided that it indicates that the RAIF operates as an umbrella fund and that other sub-funds may be launched.
7.3 Audited reports need to be made available to investors within six months of the financial year end. The annual audited reports need to meet the minimum content requirements set out in annex 1 to the RAIF Bill and article 22 of the AIFMD.
7.4 Umbrella RAIFs may produce separate annual accounts per sub-fund which shall provide additional financial information relating to the relevant sub-fund as well as aggregated financial information concerning the other sub-funds of the umbrella.
8. Eligible assets and the principle of risk-spreading
Except for RAIFs which invest in risk capital, no restriction is placed on the asset classes in which the RAIF may invest. However, RAIFs (other than those investing in risk capital), are subject to the principle of risk-spreading which is not defined in the RAIF Bill. For guidance on this principle, the RAIF should adopt the interpretation provided in CSSF circular 07/309 relating to SIFs.
The taxation rules applicable to the RAIF replicate to a large extent the rules applicable to the SIF and the SICAR. Thus, where the RAIF: 9.1 Invests in Risk Capital and opts for this regime (see above)
9.1.1 Incorporated under the form of an S.A., an S.C.A or a S.à r. l. which opt for the special tax regime will be fully taxable (which may allow them to access double taxation treaties), but will be in a position to exempt from their tax base all income and capital gains derived from securities. Income generated by cash pending investments in risk capital will also be exempted, provided that this cash is effectively invested in risk capital within a period of 12 months. A small minimum net wealth tax may be levied.
9.1.2 Established under the form of an SCS or an SCSp will be fully tax transparent and therefore not subject to any Luxembourg direct taxes.
9.2 Does not invest in Risk Capital and is required to be diversified
The RAIF will be exempt from corporate income or other taxes in Luxembourg except for a subscription tax (taxe d'abonnement) levied on its net assets at a rate of 0.01% p.a. (subject to certain exemptions). The subscription tax will also apply to RAIFs established as an SCS or an SCSp.
10. Further advantages
The flexibility of the regime allows the RAIF to switch to the SIF or SICAR regime if additional investor protection is required at the investor level. Existing SIFs and SICARs are also able to relinquish this status and choose to fall under the RAIF regime, subject to certain conditions.
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.