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
- invest a minimum of EUR 100,000; or
- 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;
- the SICAR's development projects; and
- 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.
3.Structural aspects and functioning rules
3.1. Legal forms available
A SICAR must adopt one of the corporate forms listed by the SICAR Law, i.e. a public limited company (société anonyme or "SA"), a partnership limited by shares (société en commandite par actions or "SCA"), a cooperative in the form of a public limited company (société coopérative organisée sous forme de société anonyme or "SCSA"), a private limited company (société à responsabilité limitée or "Sàrl"), a common limited partnership (société en commandite simple or "SCS") or a special limited partnership (société en commandite spéciale or "SLP").
Among the corporate forms available for establishing a SICAR, the SLP is a flexible investment vehicle the main feature of which is that it has no legal personality. It is very similar to the Anglo-Saxon LP, which has traditionally been favoured for private equity investments.
The SLP is a partnership entered into for a limited or unlimited duration between one or more unlimited or general partners (associés commandités) with unlimited joint and several liability for all the obligations of the partnership and one or more limited partners (associés commanditaires) contributing only a specific amount pursuant to the provisions of the limited partnership agreement (contrat social). The law which governs SLPs allows flexibility and freedom in the organisation of an SLP due to the limited number of mandatory rules11.
There are a number of aspects to consider when making a choice between the different corporate forms available.
One consideration is the control, which the initiator of the project would like to exercise over the SICAR. Whatever its form, different mechanisms may be put into place when structuring a SICAR, so as to reduce the risk of an unfriendly takeover. However, should the taking of control over the SICAR be a real concern, it is generally advisable to use the corporate form of an SCA, an SCS or an SLP which all provide for dissociation between the categories of partners allowing the initiator to retain control over the vehicle.
Another aspect to consider is the restrictions on the transferability of the units, shares or partnership interests and the number of unitholders/shareholders/partners. The applicable tax regime may also influence the adoption of a particular corporate form.
For the avoidance of doubt, a SICAR must always be a company (société) and can never be organised under the form of a mutual fund (fonds commun de placement).
SICARs are subject to the provisions of Luxembourg Company Law except in those cases where the SICAR Law expressly derogates therefrom. In fact, the provisions of the SICAR Law deviate from the requirements of the Luxembourg Company Law on many aspects in order to offer the SICARs a more flexible corporate framework.
3.2. Umbrella and multiple class structures
The SICAR Law specifically refers to the possibility of creating a SICAR with multiple compartments ("Umbrella SICAR(s)").These compartments may differ in, inter alia, their investment policy, redemption policy, dividend policy, fee structure, reference currency, appointed investment manager/adviser and/or type of target investors.
The SICAR Law further provides that each compartment of such a vehicle will be linked to a specific portfolio of assets and liabilities which is segregated from the portfolio of assets and liabilities of the other compartments, unless a clause included in the constitutive documents provides otherwise. Pursuant to this so-called "ring-fencing" principle, although the Umbrella SICAR constitutes one single legal entity, the assets of a compartment are exclusively available to satisfy the rights of investors in relation to that compartment and the rights of creditors whose claims have arisen in connection with the operation of that compartment, unless a clause included in the constitutive documents of the Umbrella SICAR specifically provides otherwise.
The above structuring possibility and its terms must be expressly provided for by the constitutive documents of the Umbrella SICAR and reflected in its prospectus (which must also describe each compartment's specific investment policy).
The CSSF may withdraw the authorisation it granted to one compartment without automatically undermining the authorisation it granted to the other compartments of the Umbrella SICAR. Moreover, each compartment of an Umbrella SICAR may be liquidated separately and the liquidation of a compartment shall not involve the liquidation of another compartment. Only the liquidation of the last remaining compartment of the Umbrella SICAR involves the liquidation of the SICAR as a whole.
In addition or as an alternative to the umbrella structure, different classes of securities or partnership interests can be created within the same SICAR or even within a compartment of an Umbrella SICAR. Such classes may have different characteristics, notably as regards the fee structure, the type of targeted investors or the distribution policy.
The issue of tracking shares by a SICAR, i.e. shares tracking the performance of a specific underlying asset, is also possible under certain conditions.
3.3. Capital structure and debt financing
The minimum subscribed capital of a SICAR, increased by the share premium, if any or, where applicable, the value of the amount constituting the partnership interests, is EUR 1,000,000. This minimum must be reached within 24 months following the authorisation of the SICAR by the CSSF.
It is possible to set up a SICAR with variable share capital12. In this case, the capital of the SICAR would at all times be equal to its net asset value. Variations in capital take place automatically, without the need to comply with Luxembourg Company Law requirements and procedures for increases and decreases of capital, which apply to ordinary companies (shareholder meetings, notarial deeds, etc.).
A SICAR can issue partly paid shares, which must in principle be paid up to a minimum of 5% per share on issue, except for certain legal forms.
A SICAR may also finance its activities and the acquisition of its portfolio of investments, as the case may be, substantially via borrowings, and the issue of bonds, or other types of debt instruments.
3.4. Issue of securities or partnership interests
The SICAR Law provides that a SICAR can issue securities or partnership interests in accordance with the conditions and procedures set forth in its constitutive documents, without imposing more precise rules. This allows great flexibility in the operation of fund raising and notably facilitates the adequate structuring of drawdown mechanisms.
SICARs can function as either open-ended or closedended funds, for both subscriptions and redemptions.
Moreover, SICARs are not required to issue units, shares or partnership interests at a price based on the net asset value. For instance, the SICAR may issue units, shares or partnership interests at a predetermined fixed price and adopt a structure that is composed of a portion of par value and a portion of issue premium.
Subscription in different tranches can be achieved by means of successive subscriptions of new securities ascertained at the initial subscription through subscription commitments or by means of partly paid securities, the remaining amount of the issue price of these securities being payable in further instalments.
A SICAR set up under the form of an SCS or an SLP may also offer partnership interests that do not take the form of securities, but which set up capital accounts for each partner (and/or if relevant loan accounts) onto which contributions, withdrawals, loans, allocation of profits and other financial movements of the partners will be recorded, and which show the financial standing of each partner vis-à-vis the SICAR and his co-partners. The use of capital accounts may provide for more flexibility in response to any specific requirements and/or constraints that investors in the SICAR may have.
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.
11 For more information, please see our Memorandum "Luxembourg Partnerships in the asset management industry" on our website www.elvingerhoss.lu.
12 Applicable to SICAR under the legal forms of SA, SCA, SCSA and Sàrl.
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