Further developments to come in the rules on alternative investment funds?

Introduction

We’re likely to see three major advances in the rules on Belgian-law alternative investment funds.

First, the Act of 19 April 2014 on alternative investment funds and their managers (the “AIF Act”) is to be amended, first, to allow the creation of sub-funds in closed-end investment funds and, second, to set down the basic rules on public start-up funds.

Then, there is a royal decree on public start-up funds and private PRIVAKs/PRICAFs, which is to be enacted in parallel to institute more-detailed rules on public start-up funds and also permit sub-funds under the aegis of private PIVAK/PRICAF funds.

Finally, section 145 Income Tax Code 1992 is to be amended to incorporate tax relief on acquisitions of new shares in start-up enterprises and rules on how it applies to the various types of AIF.

Bill to amend the AIF Act of 19 April 2014

The AIF Act, which came into force on 27 June 2014 and was enacted in furtherance of the goals of the AIFM Directive,⁽ⁱ⁾ places alternative investment funds and their managers under a prudential regime and heightened transparency rules, with the prime aim of increasing investor protection.

As you may be aware, AIF falling under the 2014 Act comprise three main categories, being public, private and institutional alternative investment funds.

Each of these main categories is subdivided into two sub-categories, being open-end and closed-end funds.

Finally, whether open- or close-ended, each CIU is free to opt for the contractual form of a “mutual fund” or the statutory form of an “investment company”.

It has long since been possible under Belgian law to create sub-funds within mutual funds and investment companies formed as open-end alternative investment funds (sections 187(1), 192 and 294(1) AIF Act).

Provided the planned amendments to the Act go through, it will in future also be possible to create these sub-funds in closed-end funds, generally called “SICAFs/BEVAKs”. In that case, provided their articles are amended to allow it, Belgian-law SICAF/BEVAKs will also be able to create different categories of units corresponding to a distinct portion, or sub-fund, of their assets.

Clearly, the introduction of this new ability for SICAF/BEVAKs to create sub-funds will entail other changes in how they are managed.

First, many rules will henceforth apply to each of the sub-funds created by SICAFs/BEVAKs that have opted to do so. Thus, the rules governing profit distribution (in sections 616 to 619 Companies Code, i.e. on distributable profit and dividends) plus the rules on losses of share capital (sections 633 and 634 Companies Code) will, for instance, apply to each sub-fund separately. Likewise, the accounting par and intrinsic value of units under the rules on contributions in kind (section 444 Companies Code), capital increases (section 582 Companies Code), and suspension or withdrawal of pre-emption rights (section 598 Companies Code) or authorised capital (section 606 Companies Code) will also be determined sub-fund by sub-fund.

In the same way, any restructuring of the sub-funds of a SICAF/BEVAK (dissolution, liquidation, merger, etc.) will also trigger individual application of the various provisions of the Companies Code for each sub-fund. For example, the liquidation of a SICAF/BEVAK with sub-funds can only be closed once the last sub-fund is liquidated and liquidation of an individual sub-fund will not trigger that of the others. Along the same line of thinking, judicial reorganisation or bankruptcy of a SICAF/BEVAK with sub-funds can be effected per sub-fund without the procedure automatically involving the other sub-funds or the SICAF/BEVAK. The rights of unit holders and creditors relative to a given sub-fund will also be limited to that sub-fund’s assets alone.⁽ⁱⁱ⁾

Lastly, the articles will have to make provision for means by which each sub-fund can exercise voting rights, approve annual accounts and charge expenses for the whole company.

If the reform passes, the general principles governing the status of public start-up funds (of the SICAF/BEVAK type) should also directly come into the AIF Act, with the detailed rules governing them being set down in a (draft) royal decree on public start-up funds and start-up private PRICAFs/PRIVAKs.

Draft royal decree on public start-up funds⁽ⁱⁱⁱ⁾ and start-up private PRICAFs/PRIVAKs^(iv)

The draft royal decree on public start-up funds and start-up private PRICAFs/PRIVAKs, which is divided into two parts, should, first embody the rules applying to public start-up funds.

On this score, it will mainly deal with applications for FSMA licences, the ban on receiving contributions in kind and varying unit holders’ preference rights and the prohibition against distributions in kind of fund assets to the holders. It should also provide that 80% of the public start-up fund’s profit (or net proceeds) must be distributed as capital or asset remuneration.

The draft royal decree should also provide for the possibility of creating different categories of units, each corresponding to a separate part or sub-fund of the net assets. It should only be possible to register a non-start-up sub-fund once the fund already has at least one start-up sub-fund, since the draft is directed towards establishing a clear difference in investment policy between public start-up funds with and without start-up sub-funds and those with non-start-up sub-funds.

In the case of public start-up funds without sub-funds or with start-up sub-funds, the fund or start-up sub-fund should have to invest in shares falling under section 145/26(3) Income Tax Code (a tax relief provision that we will come back to below) issued further to the company’s incorporation or a capital increase within four years after incorporation and that are fully paid up, and in cash on an account held in euros or the currency of another member state of the European Economic Area.^(v)

Non-start-up sub-funds, on the other hand, will have to invest at least 70% of their assets in transferable securities issued by unlisted companies (that are not a CIU), in options and in any other securities conferring a right to acquire or dispose of such transferable securities, and in credit granted to such companies; no more than 30% of their assets can be invested in the general classes of assets available to CIUs. It is worth pointing out that the tax relief provided for in section 145/26 should not be claimable by sub-funds that are not start-up sub-funds.

The draft royal decree would finally add the possibility for a private PRICAF/PRIVAK to assume the status of start-up private PRICAF/PRIVAK and align part of the rules governing it to those for public start-up funds, particularly by allowing the creation within itself of different categories of units and sub-funds.

The amendment to section 145 Income Tax Code 1992

Section 145 Income Tax Code should be amended to rectify the tax relief procedures^(vi) relative to the acquisition of new shares and units in licensed start-up funds to expressly target public start-up funds and start-up private PRICAF/PRIVAKs and to stipulate how the section will apply in the case of sub-funds.

In this regard, the tax relief conditions have to be construed in the hands of each individual sub-fund.

Conclusion

The future prospect of creating sub-funds in SICAFs/BEVAKS will be a major new step for close-ended alternative investment funds, the aim being to establish a true division within a SICAF/BEVAK by applying certain rules individually to each sub-fund. Each of the sub-funds can nearly be equated to a separate fund, thus giving it the advantages that result from having separate companies but without the need to set up large numbers of funds.

The division into sub-funds means that certain parts of a SICAF/BEVAK can be managed differently, such as having different investments, and also differentiating risk within the fund.

However, the new rules do run the risk of complicating the application of some rules, especially in terms of the Companies Code, which it is not envisaged amending as things currently stand.

Notes:

i Directive 2011/61/EU of 8 June 2011 on Alternative Investment Fund Managers.

ii These principles will apply similarly to institutional or private close-ended investment companies.

iii A public start-up fund is a closed-end public investment company that invests in certain categories of asset (financial instruments and liquidities and financial financiers issued by unlisted companies.

iv A start-up private PRICAF/PRIVAK is a private PRICAF/PRIVAK (a closed-end private AIF in statutory form) that invests in certain categories of asset (financial instruments and liquidities and financial financiers issued by unlisted companies. They are registered with the FPS Finance.

v With a licensed credit institution under the supervision of a regulator of a member state of the European Economic Area.

vi To claim tax relief, a public start-up fund and a start-up private PRICAF/PRIVAK must invest their contributed assets exclusively as follows:

at least 80% directly invested in fully paid-up new shares in companies that are issued on the company’s incorporation or further to a capital increase within four years of incorporation;
no more than 20% held in cash on an account in euros or the currency of another member state of the European Economic Area with a licensed credit institution under the supervision of a regulator of a member state of the European Economic Area.

In the case of disposal of such an investment within 48 months of the end of the subscription period of the public start-up or start-up private PRICAF/BEVAK or one of their sub-funds:

if the disposal proceeds are less than 70% of the original investment amount, the sums in question need not be reinvested;
if the disposal proceeds are between 70 and 100% of the original investment amount, all of the sums in question must be reinvested within six months of the time of disposal;
if the disposal proceeds are greater than the original investment amount, a sum equal to the original investment amount must be reinvested within six months of the time of disposal.