Law of 21 July 2023: Modernizing Luxembourg's Investment Fund toolbox and its impact on RAIF, SIF, SICAR, AIFM & UCI
Luxembourg has taken a significant stride towards modernizing its investment fund laws with the entry into force of the law of 21 July 2023 on 28 July 2023. It adopted Bill 8183 by the Luxembourg Parliament. This law introduces amendments to several pivotal fund laws, including the Law of 2010 on Undertakings for Collective Investment (UCI Law), the Law of 2007 on Specialized Investment Funds (SIF Law), the Law of 2004 on Investment Companies in Risk Capital (SICAR Law), the Law of 2013 on Alternative Investment Fund Managers (AIFM Law), and the Law of 2016 on Reserved Alternative Investment Funds (RAIF Law). These amendments are designed to update and strengthen the country’s fund-related regulations, bolstering the competitiveness and attractiveness of Luxembourg’s financial centre.
The adopted amendments encompass several significant changes, including inter alia:
1. Undertakings for Collective Investment (UCITS and UCI Part II)
| New regime introduced by the law of 21 July 2023 | Previous regime under UCI Law | |
|---|---|---|
| Timeframe for reaching the minimum capital | The period for achieving subscribed capital has been extended to 12 months for UCIs Part II. | The period for achieving subscribed capital was 6 months for UCIs Part II. |
| Replacement of depositary | The depositary agreement must include prior notice provisions, and a replacement depositary must be appointed before the expiry of this notice period. During this transition period, outgoing depositaries are still required to safeguard the interests of investors. This change mitigates the risk of automatic de-listing, considering the necessary time for conducting due diligence and onboarding a new depositary. | A 2-month maximum period was previously foreseen to replace a depositary. |
| Suspension of subscription and/or redemption | Subscriptions and/or redemptions of a SICAV are prohibited: - for the period during which there is no depositary; or - when the depositary is in liquidation, declared bankrupt or undergoing a suspension of payments, an arrangement with its creditors or some other type of management supervision. | The prohibition of subscription and/or redemption of a SICAV for the period during which there was no depositary or when the depositary was in liquidation, declared bankrupt or undergoing a suspension of payments, an arrangement with its creditors or some other type of management supervision was not foreseen under the previous regime. |
| Formation | UCIs Part II opting for a corporate form as SICAV may take the form of a public limited liability company (SA), corporate partnerships limited by shares (SCA), common and special limited partnerships (SCS/SCSp), private limited liability companies (SARL), as well as cooperatives organized as public companies limited by shares (SCoSA). | UCIs Part II opting for a corporate form as SICAV may take the form of a public limited liability company (SA). |
| Issuance share/interests | Closed-ended UCIs Part II may issue shares/interests at a price other than the NAV, provided it is stated in the constitutive documents. | Closed-ended UCIs Part II may issue shares/interests at a NAV price. |
| Tax | i. UCIs Part II authorized as ELTIF are exempted from subscription tax ii. UCIs Part II reserved to PEPPs are exempted from subscription tax iii. UCIs Part II may benefit from the reduced subscription tax of 0.01% provided that certain conditions are met. |
2. Specialized Investment Funds (SIFs)
| New regime introduced by the law of 21 July 2023 | Previous regime under SIF Law | |
|---|---|---|
| Eligibility of well-informed investor | The investment threshold has been lowered to EUR 100,000, and the list of entities authorized to certify the experience of other well-informed investors has been aligned. | The investment threshold was set at EUR 125,000. |
| Timeframe for reaching the minimum capital | The period for achieving subscribed capital has been extended to 24 months for SIFs. | The period for achieving subscribed capital was 12 months for SIFs. |
| Replacement of depositary | The depositary agreement must include prior notice provisions, and a replacement depositary must be appointed before the expiry of this notice period. During this transition period, outgoing depositaries are still required to safeguard the interests of investors. This change mitigates the risk of automatic de-listing, considering the necessary time for conducting due diligence and onboarding a new depositary. | A 2-month maximum period was previously foreseen to replace a depositary. |
| Suspension of subscription and/or redemption | Subscriptions and/or redemptions of a SICAV are prohibited: - for the period there is no depositary; - the depositary is in liquidation, declared bankrupt or undergoing a suspension of payments, an arrangement with its creditors or some other type of management supervision | The prohibition of subscription and/or redemption of a SICAV for the period during which there was no depositary or when the depositary was in liquidation, declared bankrupt or undergoing a suspension of payments, an arrangement with its creditors or some other type of management supervision was not foreseen under the previous regime. |
| Marketing | Marketing of AIFs in the form of a SIF to well-informed investors in Luxembourg is permissible (see further point E below). | Marketing of AIFs in the form of a SIF was permissible only to professional investors. |
| Tax | SIFs authorized as ELTIF are exempted from subscription tax as well when they are authorized as MMFs considering some certain conditions apply. |
3. Investment Companies in Risk Capital (SICARs)
| New regime introduced by the law of 21 July 2023 | Previous regime under SICAR Law | |
|---|---|---|
| Eligibility of well-informed investor | The investment threshold has been lowered to EUR 100,000, and the list of entities authorized to certify the experience of other well-informed investors has been aligned. | The investment threshold was set at EUR 125,000. |
| Timeframe for reaching the minimum capital | The period for achieving subscribed capital has been extended to 24 months for SICARs. | The period for achieving subscribed capital was 12 months for SICARs. |
| Replacement of depositary | The depositary agreement must include prior notice provisions, and a replacement depositary must be appointed before the expiry of this notice period. During this transition period, outgoing depositaries are still required to safeguard the interests of investors. This change mitigates the risk of automatic de-listing, considering the necessary time for conducting due diligence and onboarding a new depositary. | A 2-month maximum period was previously foreseen to replace a depositary. |
| Suspension of subscription and/or redemption | Subscriptions and/or redemptions of a SICAV are prohibited: - for the period there is no depositary; - the depositary is in liquidation, declared bankrupt or undergoing a suspension of payments, an arrangement with its creditors or some other type of management supervision. | The prohibition of subscription and/or redemption of a SICAV for the period during which there was no depositary or when the depositary was in liquidation, declared bankrupt or undergoing a suspension of payments, an arrangement with its creditors or some other type of management supervision was not foreseen under the previous regime. |
| Marketing | Marketing of AIFs in the form of a SICAR to well-informed investors in Luxembourg is permissible (see further point E below). | Marketing of AIFs in the form of a SICAR was permissible only to professional investors. |
| Tax | All in-kind contributions in a SICAR should be backed up by a valuation report drawn by an auditor. | Under the previous regime, there was no explicit obligation for the contributions in kind to be backed up by a valuation report drawn by an auditor. |
4. Reserved Alternative Investment Funds (RAIFs)
| New regime introduced by the law of 21 July 2023 | Previous regime under RAIF Law | |
|---|---|---|
| Eligibility of well-informed investor | The investment threshold has been lowered to EUR 100,000, and the list of entities authorized to certify the experience of other well-informed investors has been aligned. | The investment threshold was set at EUR 125,000. |
| Timeframe for reaching the minimum capital | The period for achieving subscribed capital has been extended to 24 months for RAIFs. | The period for achieving subscribed capital was 12 months for RAIFs. |
| Formation formalities | The formation formalities for RAIFs have been streamlined. The requirement for a Luxembourg notary to acknowledge the establishment and appointment of an external Alternative Investment Fund Manager (AIFM) within five business days has been eliminated for RAIFs established through a notarial deed, though it still applies to RAIFs established through a private deed. | Luxembourg notary shall acknowledge the establishment and appointment of an external Alternative Investment Fund Manager (AIFM) within five business days for RAIFs established through a notarial deed or a private deed. |
| Marketing | Marketing RAIFs to well-informed investors in Luxembourg is permissible (see further point E below). | Marketing of RAIFs was permissible only to professional investors. |
| Replacement of depositary | The depositary agreement must include prior notice provisions, and a replacement depositary must be appointed before the expiry of this notice period. During this transition period, outgoing depositaries are still required to safeguard the interests of investors. This change mitigates the risk of automatic de-listing, considering the necessary time for conducting due diligence and onboarding a new depositary. | A 2-month maximum period to replace a depositary was previously foreseen. |
| Suspension of subscription and/or redemption | Subscriptions and/or redemptions of a SICAV are prohibited: - for the period there is no depositary; - the depositary is in liquidation, declared bankrupt or undergoing a suspension of payments, an arrangement with its creditors or some other type of management supervision | The prohibition of subscription and/or redemption of a SICAV for the period during which there was no depositary or when the depositary was in liquidation, declared bankrupt or undergoing a suspension of payments, an arrangement with its creditors or some other type of management supervision was not foreseen under the previous regime. |
| Tax | RAIFs authorized as ELTIF are exempted from subscription tax. |
5. Alternative Investment Fund Managers (AIFMs)
| New regime introduced by the law of 21 July 2023 | Previous regime under AIFM Law | |
|---|---|---|
| Tied Agents | Authorized alternative investment fund managers are permitted to utilize tied agents as defined by article 1, point 1 of the law of 5 April 1993 on the financial sector. Where an AIFM decides to use tied agents, the AIFM shall, within the limits of the activities permitted under this law, comply with the same rules as those applicable to investment firms under Article 37-8 of the amended law of 5 April 1993 on the financial sector. | The appointment of tied agents was foreseen under the previous regime for pre-marketing purposes. |
| Marketing | AIFMs may market shares/units of AIF SIFs, RAIFs and AIF SICARs to well-informed investors established or residing in Luxembourg even if they do not fall in the scope of the definition of a professional investor. | AIFMs may market shares/units of AIF SIFs, RAIFs and AIF SICARs only to professional investors. |
Should you have any inquiries or require expert guidance pertaining to the information provided, our investment management team is available to assist you.
CSSF issues updated FAQ on SICAR
The CSSF has published on 10 June 2022 an updated version of its Frequently Asked-Questions (“FAQ”) regarding the société d’investissement en capital à risque, i.e. SICAR, an investment company whose purpose is to invest in risk capital.
The list of questions indicated in such FAQ are set out below:
1. What steps are to be taken to submit an authorisation request for a new SICAR?
2. What criteria shall the directors of a SICAR fulfil?
3. What are the CSSF’s requirements regarding the prospectus of SICARs?
4. What does the CSSF require for the central administration of SICARs?
5. What does the CSSF require for the depositary bank of SICARs?
6. What is the procedure in case of replacement of a director or service provider?
7. Which requirements regarding prudential reporting does the SICAR have to comply with?
8. What are the obligations for SICARs as regards information to be submitted to the investors and the dissemination method?
9. Which requirements are the SICARs subject to as regards the drawing-up, approval, statutory audit and publication of annual accounts?
10. To which particular requirements as regards the drawing-up, approval, audit and publication of the annual accounts are SICARs with multiple compartments subject?
11. Which general characteristics shall investment policies of SICARs present?
12. Under which conditions may SICARs carry out real estate investments?
13. Can SICARs invest in infrastructure projects?
14. Can a SICAR have an accessory investment policy which does not comply with the criteria of risk capital?
15. Can SICARs make indirect investments through intermediary investment vehicles or special purpose vehicles?
16. Can SICARs act as feeder fund in a master-feeder structure?
17. Under what conditions may a SICAR invest in securities listed on a stock exchange?
18. Under which conditions can a SICAR invest in derivative financial instruments?
19. In which manner can a SICAR invest its liquidity awaiting investment and reinvestment in risk capital as well as funds awaiting distribution?
20. Can SICARs make investments in commodities?
21. Can a SICAR invest in ABS and CDOs?
22. Under which conditions can a SICAR invest in Distressed Debt securities?
23. What are the SICARs’ obligations with respect to risk management?
24. What requirements are SICARs subject to regarding due diligence in relation to their investments?
25. What requirements are the SICARs subject to regarding management of conflicts of interest?
26. What are the conditions to comply with in case of data transfer by a central administration or a depositary to another service provider?
27. Who to contact for further information?
The updated FAQ is available in English and can be found here.
New requirements on the identification of the beneficial owners of Luxembourg SICARs
The Luxembourg regulatory authority (Commission de Surveillance du Secteur Financier or CSSF), as competent authority to exercise the supervision within the meaning of article 11(1) of the Law of 15 June 2004 relating to the investment companies in risk capital, as amended or supplemented from time to time (the “SICAR Law”), requires all Luxembourg SICARs to transmit to the CSSF the identity of their beneficial owners in compliance with article 32 of the SICAR Law and for the first time in the half-yearly reporting as at 31 December 2009.
Such information on the identity of the beneficial owners is required for (i) the authorisation of the SICAR and (ii) in the context of half-yearly reporting.
In its Newsletter of October 2009 (available on the website of the CSSF, www.cssf.lu), the CSSF has confirmed that an updated table K 3.1 will be published on its website and has also specified the concept of “beneficial owner” as follows:
- Application of the definition of beneficial owner as provided in Article 1(7) of the law of 12 November 2004 on the fight against money laundering and terrorist financing, as amended (the “2004 Law”).
- Application of the concept of beneficial owner to any natural person who owns or controls directly or indirectly a percentage of more than 25% of the SICAR’s shares as well as any natural person who otherwise exercises control over the management of the SICAR.
- Identification of beneficial owners required where the investors of the SICAR are legal persons other than the entities referred to under Article 3-1 of the 2004 Law allowing the application of simplified customer due diligence procedures. The information on beneficial owners must be provided independently from the setting-up of a nominee structure.
Requirements regarding half-yearly financial information for SICARs
In its circular 08/376 regarding financial information to be submitted by investment companies in risk capital (SICARs), the Luxembourg regulatory authority (Commission de Surveillance du Secteur Financier or CSSF), as competent authority to exercise the supervision within the meaning of article 11(1) of the Law of 15 June 2004 relating to the investment companies in risk capital, as amended or supplemented from time to time (the “SICAR Law”), requires all Luxembourg SICARs to transmit to the CSSF half-yearly financial information (the “Half-Yearly Report”) in compliance with article 32 of the SICAR Law and for the first time for the financial reporting as at 31 December 2008.
Such requirements on the disclosure of the Half-Yearly Report is a confirmation of the will of the CSSF to strengthen its supervision of SICARs.
SICARS shall draw up their Half-Yearly Report, if appropriate on a compartment basis, in accordance with table K 3.1 (available on the CSSF website (http://www.cssf.lu) under the section Legal reporting/Periodic reporting/SICAR).
The reference dates for the drawing up of the Half-Yearly Report are 30 June and 31 December of each year. SICARs must transmit the Half-Yearly Report to the CSSF within 45 calendar days from the reference date.
Finally it should be reminded that any SICAR shall also submit to the CSSF a copy of its audited annual report as soon as it is available and in any event within six months from the end of the period to which the report relates (article 28 of the SICAR Law).
Amendments to the SICAR law
On 15 October 2008, the Luxembourg Parliament amended the existing SICAR law of 15 June 2004 with the aim to make the SICAR regime more attractive to private equity and venture capital investors.
The main amendments that have been voted are briefly set out hereunder:
-
Umbrella structure
The new SICAR law has introduced the possibility to create multiple compartments. The principle of compartment segregation already well known for SIFs, securitization vehicles and UCITS funds is now also applicable to the SICAR. Compartment segregration means that the liabilities of the SICAR can be split into different compartments each of which are treated as separate entities making distinct transactions. The rights of investors and creditors are limited to the risks of a given compartments's assets. Each of the compartments can be liquidated separately without triggering the liquidation of other compartments of the SICAR. The main advantage of the umbrella SICAR is that it can issue several tranches of securities corresponding to different collateral and providing different values, yields and redemption terms. It is important that the constitutional documents of the SICAR expressly provide for the possibility to have multiple compartments and expressly outline the rules that are applicable to them. The issue document must outline the investment policy of each compartment. The shares of the umbrella SICAR may be of different value.
-
Minimum capital
The share premium (if any) will be taken into account for the computation of the minimum capital. The share capital increased by the share premium must be at least 1,000,000 Euro to be reached within a period of 12 months from its authorisation by the CSSF.
-
No requirement to publish the NAV
Under the initial SICAR law it was required to provide the net asset value to the investors every 6 months. This provision has been abolished.
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Valuation of assets
The valuation of the assets of the SICAR must be based on the fair market value (rather than the foreseeable sales price estimated in good faith).
-
Reduction of the duties of the custodian
The SICAR law has reduced substantially the duties of the custodian. More in particular, the following duties do not need to be fulfilled by the custodian under the new SICAR law:
- control that the subscription price for the securities of the SICAR has been received within the time limits set forth in the constitutive documents;
- control that in transactions involving the assets of the SICAR, a consideration is paid or delivered to it within the customary time limits;
- control that the income of the SICAR is applied in accordance with its constitutive documents.
The abolition of the above control duties previously imposed on the SICAR will certainly reduce the annual costs charged by the custodian of a SICAR.
-
Annual report
The annual report must be provided to investors within a period of 6 months after the end of the financial year rather than be "published" as was required under the initial SICAR law.
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Limited partnership (société en commandite simple)
The SICAR can now be set up as a société en commandite simple (limited partnership) with a variable share capital.
Amendment to the SICAR regime – possibility to have multiple compartments
On 21 February 2008, the Luxembourg government has introduced a draft law aimed to make more attractive the SICAR vehicle to private equity and venture capital investors.
Brief overview of the main changes proposed in the draft law:
- introduction of possibility to create multiple compartments (as is already the case for the Luxembourg specialized investment fund (SIF) vehicle;
- share premiums will be taken into account for the computation of the minimum capital (share capital + share premium must be at least 1,000,000 Euro)
- no requirement to publish NAV of its assets;
- obligation to publish annual report within 6 months following the end of the accounting year;
- lighter requirements imposed upon custodian (the SICAR regime will be aligned on the SIF regime as to that). Consequently, the annual running costs of the SICAR will be reduced;
- the assets of the SICAR will have to be valued at fair market value;
Please contact Olivier Sciales or Rémi Chevalier should you have any further questions.
