With the recent entry into force of the law of 21 July 2023 (the Modernization Law) on 28 July 2023, Luxembourg significantly modernizes its investment fund toolbox by introducing several amendments to existing laws governing alternative investment funds (AIFs) and alternative investment fund managers (AIFMs), including the UCI Law1, the SICAR Law2, the SIF Law3, the RAIF Law4 (the Fund Product Laws), and the AIFM Law5.
The general objective of this modernization is to enhance the competitiveness of the Luxembourg fund hub and the appeal of Luxembourg AIFs by increasing structuring opportunities for marketing private strategies to investors that do not qualify as professional investors. These amendments will benefit all types of Luxembourg AIFs and should contribute further to the recent uptick in popularity of Luxembourg-based European long term investment funds (ELTIF), following the recent improvements to Regulation (EU) 2015/760 on ELTIFs by Regulation (EU) 2023/606 of 15 March 20236.
This article summarizes the key changes to the Fund Product Laws introduced by the Modernization Law and their implications for fund managers and investors.
KEY CHANGES TO LUXEMBOURG FUND PRODUCT LAWS
Harmonization of Investor Eligibility Conditions
To achieve its goal of increasing access to alternative asset classes for retail investors, the Modernization Law harmonizes the definition of "Well-Informed Investors" for SICARs, SIFs, and RAIFs, by aligning it with the definition used in the Markets in Financial Instruments Directive (MiFID) and decreasing the minimum investment threshold for "Well-Informed Investors" who are not professional investors, from €125,000 to €100,000 (in line with EuVECA and EuSEF Regulations).
In addition, the Modernization Law expands the range of entities authorized to certify the status of "Well-Informed Investors," to now also include authorized AIFMs.
With respect to RAIFs, the new provisions settle an old debate as to the marketability of RAIFs by confirming explicitly that RAIFs may be marketed to investors that do not qualify as professional investors in Luxembourg, provided they qualify as "Well-Informed Investors."
Overall, this harmonization aims to streamline investor eligibility conditions and promote consistency within the Luxembourg investment fund landscape by allowing for a consistent evaluation of investors' expertise and eligibility.
Enhancement of Structuring Options for Part II Funds
As part of Luxembourg's efforts to democratize access to private asset vehicles, the Modernization Law introduces new structuring options and flexibilities for Part II SICAVs, which are open for investment by any type of investors, including retail investors.
Previously limited to public limited liability companies (SA), the range of legal forms available to Part II SICAVs is expanded to include corporate partnerships limited by shares (SCA), common and special limited partnerships (SCS/SCSp), private limited liability companies (SARL), and cooperatives organized as public companies limited by shares (SCoSA). This increased flexibility provides fund initiators and managers with greater choice in structuring their funds' governance, ensuring a better consistency and alignment with the regime applicable to SIF-SICAVs and RAIF-SICAVs.
In addition, Part II SICAVs may now have their assets valued at fair value (and not necessarily on the last known stock exchange quotation or probable realization value) unless otherwise provided for in their constitutive documents.
Finally, the Modernization Law introduces the possibility for closed-ended Part II funds (FCPs/SICAVs) to determine the issue price of their shares, units, or participation interests based on rules specified in their constitutive documents, whereas previously these funds were required to determine the issue price by reference to their net asset value and the number of securities in issue. This change provides closed-ended Part II funds with the flexibility to set their own pricing mechanisms, which is particularly relevant for listed closed-ended funds and private equity funds.
Alignment of the Sicar Law With the SIF Law
The Modernization Law amends the SICAR regime with a view to better align it with the SIF regime by introducing, among others, (i) specific conditions for the delegation of functions, (ii) a new requirement for the persons in charge of the investment portfolio management to be approved by the Commission de Surveillance du Secteur Financier (CSSF), (iii) a new obligation for the issuance of a statutory auditor's report in the case of contributions in-kind, and (iv) a possibility for the CSSF to withdraw the authorization of a SICAR's sub-fund without this giving rise to the withdrawal of the SICAR from the official list.
Extension of the Timeframe for Meeting Minimum Regulatory Requirements
SIFs, RAIFs, and SICARs now have 24 months to meet the capital threshold, instead of 12 months previously. Similarly, the timeframe for Part II funds has been extended from 6 months to 12 months, altogether providing fund managers with additional time to raise the necessary capital and comply with regulatory requirements.
Increase Flexibility in Depositary Agreements
Previously, the replacement of the depositary of a SICAR, SIF, Part II fund, or UCITS had to take place within 2 months following the dismissal/resignation of the incumbent depositary, failing which the depositary would cease to be contractually appointed, eventually leaving the fund without an officially appointed depositary. To avoid risks resulting from this legal uncertainty, the Modernization Law removes this strict timeframe requirement, mandating instead the inclusion of a notice period in the depositary agreement, at the end of which, failing the formal appointment of a new depositary, the CSSF has the authority to withdraw the fund from the official list, leading to its liquidation.
Furthermore, under the Modernization Law, subscriptions and redemptions are automatically suspended in the absence of a formally appointed depositary, or in case of liquidation, declaration of bankruptcy, suspension of payments, arrangement with the creditors, or management supervision of the incumbent depositary. This mandatory suspension will however not apply in case subscriptions and redemptions are necessary for the purpose of the liquidation proceedings.
Simplification of Establishment Requirements for RAIFs
The Modernization Law abrogates the previous requirement that the establishment of a RAIF under private deed be acknowledged in a notarial deed within five days of its inception, hence reducing the administrative burden and facilitating the efficient setup of RAIFs.
Tax Exemptions for ELTIFs and PEPPS
Finally, the Modernization Law introduces new exemptions from the subscription tax for specific fund types. Part II UCIs, SIFs, and RAIFs (or sub-funds thereof) authorized as ELTIFs and UCITS or Part II funds (or sub-funds thereof) reserved to investors participating in a Pan-European Personal Pension Product (PEPP) will be exempt from the subscription tax, promoting investments in ELTIFs and PEPPs.
Furthermore, UCITS and Part II UCIs (or sub-funds thereof) that qualify as money market funds (MMF) under the MMF Regulation7 will benefit from the reduced subscription tax rate of 0.01%. Those of the above funds that additionally qualify as short-term MMFs are reserved to institutional investors, enjoy the highest possible rating from a reputable rating agency, and are now entirely exempt from the subscription tax.
KEY CHANGES IMPACTING FUND MANAGERS
The Modernization Law introduces several amendments to the AIFM and UCI management company regimes including: (i) the harmonization of rules governing the judicial liquidation of AIFMs and UCI management companies, (ii) a more efficient regulation of the voluntary liquidation of AIFMs, (iii) the extension to AIFMs of the already existing rights of UCI management companies to appoint tied agents, without however being stripped of their liability as a result of such appointment, and (iv) new restrictions on the speculative investment of own funds by UCI management companies.
In conclusion, the modernization of Luxembourg's investment fund toolbox brings about significant enhancements and improvements to the fund industry. With harmonized investor eligibility criteria and increased structuring flexibility, Luxembourg further boosts its attractiveness and competitiveness as a leading destination for fund managers and investors alike.
For more information on the modernization of Luxembourg's investment fund toolbox and how it may impact your business, do not hesitate to contact our Luxembourg office or visit the official website of the Luxembourg Supervisory Authority for the Financial Sector.
Footnotes
1. Law of 17 December 2010 relating to undertakings for collective investment (UCI).
2. Law of 15 June 2004 relating to the Investment company in risk capital (SICAR).
3. Law of 15 June 2004 relating to specialized investment funds (SIF).
4. Law of 23 July 2016 on reserved alternative investment funds (RAIF).
5. Law of 12 July 2013 on alternative investment fund managers.
6. Regulation (EU) 2023/606 of the European Parliament and of the Council of 15 March 2023 amending Regulation (EU) 2015/760 as regards the requirements pertaining to the investment policies and operating conditions of European long-term investment funds and the scope of eligible investment assets, the portfolio composition and diversification requirements and the borrowing of cash and other fund rules.
7. Regulation (EU) 2017/1131 of the European Parliament and of the Council of 14 June 2017 on MMFs.
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.
