Alternative Investment Funds: Navigating Legal Challenges for Seamless Incorporation

In recent years, the Republic of Serbia has adopted a set of laws on Alternative Investment Funds (“AIFs”) to harmonize its legal landscape with the European Union (“EU”) and attract more investors into the country, thus enabling an additional way of capital inflow into the country.

The reason for AIFs surge in popularity can be found in the fact that savvy investors seek diversified portfolios beyond traditional markets, and that AIFs offer tax benefits as well, such as the right of investors to a tax credit against the annual personal income tax, in the amount of 50% of the value of the investment made, in the calendar year for which the annual personal income tax is determined.

Additionally, the companies operating AIFs are subject only to Corporate Income Tax since they charge a service fee in a percentage of the profit that the investor realizes.

However, despite the growing interest, incorporating AIFs remains a complex endeavor fraught with legal and administrative hurdles. Regulatory requirements, compliance burdens, constant monitoring and intricate structuring processes often create roadblocks that discourage many from pursuing this avenue.

Therefore, we shall outline certain specifics on how AIF is incorporated, in order to provide information that can make this process easier.

DEFINITION OF AN AIF

An investment fund, in the broadest sense of the word, implies a collective investment of funds in various assets with the aim of generating income while distributing risk. A more complicated definition would be that Investment funds are institutions of collective investment within which funds are collected and invested in various types of assets, in accordance with the investment goals and investment policy stated in the prospectus, to achieve profit and reduce investment risk.

In Serbia, two laws regulate the AIFs:

• Law on Alternative Investment Funds, governing the organization, functioning and registration/incorporation of AIFs (the “Law”);
• Law on Open-Ended Investment Funds Subject to Public Offering, governing all legal matters related to UCITS (Undertakings for the Collective Investment in Transferable Securities) funds.

We already covered the specifics of each above mentioned investment fund, as well as how are they operated in a separate text.

In this text, we shall focus on the aspect of incorporating an AIF.

INCORPORATING AN AIF MANAGEMENT COMPANY

The AIFs in Serbia are operated by AIF Management Companies (“AIFMC”), therefore, the first steppingstone is to incorporate an AIFMC, and most administrative hurdles are related to this step.

AIFMC can be incorporated both in the form of a Limited Liability Company (“LLC”) or a non-public Joint-Stock Company (“JSC”). However, since AIFMC can be both large and small, the Law on Alternative Investment Funds prescribes that large AIFMC can be incorporated solely as two-tier JSC.

The procedure of incorporating an AIFMC starts by filing a request for issuance of license to perform the investment fund management activities to the Serbian Securities Commission (“SEC”).

This can be done by the founders of the AIFMC that is yet to be incorporated (or through their proxy) or by an already existing JSC or LLC. In the latter case, do bear in mind that such an existing company must have a different registered activity because to perform investment fund management activities, a prior issue of the license by the SEC to perform them must occur.

The Law is explicit in this regard and prescribes that before registering the incorporation or activity of the AIFMC in the register of business entities, the AIFMC must obtain an operating license.

Along with the request for issuance of the operating license, the SEC must be provided with the following documents:

1. The founding act of the AIFMC and its statute, if the AIFMC is established in the form of a joint-stock company (note: if the already-existing company is submitting the request, then the amendments of the mentioned documents must be submitted to the SEC);
2. Proof of payment of initial capital into a temporary bank account (or existing account if the company already exists);
3. Proof of origin of the founding capital;
4. A list of and information on the proposed members of the company management;
5. A list of stockholders (for the JSC) or shareholders (for LLC) of the AIFMC, or an excerpt from the register of business entities for legal entities, or a certified translation of an excerpt from the register for foreign legal entities, including information on the identity of direct or indirect holders of qualifying holdings, the amount of such holdings, and close links;
6. A program of the planned activities of the AIFMC, which includes the organizational structure of the AIFM, as well as a statement by the AIFM on how it intends to continuously meet the requirements of this law;
7. Proof of organizational, personnel, and technical capability;
8. Information on the remuneration/reward policies, if there is an obligation to establish such policies (for large AIFMCs this condition must be fulfilled);
9. Information on the activities that the AIFMC will delegate to third parties.

Seems relatively easy? Not quite.

The above mentioned documents are used only as general reference since, in accordance with the Law, the SEC prescribes the content of the license issue request, as well as the content of the documentation submitted along with it. By analzying the SEC’s bylaws, the result is that dozens of documents must be submitted, and that number goes to almost a hundred documents in total.

The first problem is that the SEC requires actually number of forms to be filled, instead of unifying them all into one, coherent form.

In each of those forms, a number of documents are required, and they can be submitted either as original, or certified copy, and if they come from abroad, they must be officially translated to Serbian as well or even legalized with Apostille. Their validity period is also limited – 60 days, after which new document must be submitted (unless it is an amended founding act for example which, by nature, lasts until the next amendment and that can, potentially, be forever if no subsequent amendments occur).

We shall only name a few documents needed in practice:

• the Power of Attorney if the request is submitted via proxy,
• the first founding act (and statute if the company would be/is a JSC) and the latest amendments of that document with its consolidated version,
• the list of IT equipment,
• proof of paid up capital / deposited capital on the temporary account if the company is yet to be incorporated,
• the organizational chart of the company,
• business plan,
• agreements with each member of the management, their CVs, clear criminal record certificates, diplomas, recommendations from previous employers and other documents,
• the lease agreement if the office space where the activities shall be conducted is leased,
• AML procedures,
• if the AIFMC has a legal entity as its shareholder in its corporate structure, all proof regarding the data on the said entity and the ultimate beneficial owners,
• statements on non-existence of close relations between the founders of the AIFMC and the management of the AIFMC,
• risk management policies and many more documents.

Bearing the above mentioned in mind, it would be advisable that the founders already have a certain amount of capital registered and paid up or increased and paid in the existing company for the same purposes (conditional upon decision whether they will incorporate a small or large AIFMC), that the talks with relevant service providers are under way, that they have adequate personnel with experience in the matter, that relevant softwares are in the making and being ready for immediate use, that the premises are spaceous and adapted enough to fulfill all the conditions required by the Law and the SEC, etc.

If all documents are in order, the SEC passess a decision on granting the license to the applicant within 90 days from the day that the application was submitted.

The SEC is also entitled, if it deems necessary, to ask for additional documents and prolongue the period for additional 90 days due to specific circumstances, on which the applicant shall be informed.

After obtaining the license, the incorporation of the specific AIF can be approached.

INCORPORATION OF AIFs

The AIFMC can incorporate as much as only one AIF or multiple.

The AIFMC must submit to the SEC a request for the establishment, or organization and management, of an AIF.

The SEC shall issue a decision granting the license for the establishment, or organization and management, of the AIF when all conditions prescribed by Law for each type of AIF are met, within two months from the date of receipt of complete documentation.

The documents to be submitted depend on the type of AIF.

For the close-ended AIF that has a status of a legal entity, the request for its incorporation is submitted by the AIFMC.

The documents to be provided to the SEC are:

Zahtev za osnivanje i upravljanje zatvorenim AIF-om koji ima svojstvo pravnog lica, pored dokumentacije i podataka iz člana 111. stav 3. ovog zakona, sadrži i:

1. the statute or founding act;
2. The management agreement concluded between the closed-ended AIF with legal entity status and the AIFMC, if the closed-ended AIF with legal entity status is managed by the AIFMC;
3. The decision on the appointment of the initial members of the supervisory board and their written statements of acceptance of the appointment, if the closed-ended AIF with legal entity status is organized as a two-tier company;
4. The name of the AIF, its investment strategy, and the type of AIF in accordance with the Law and the by-laws of the SEC;
5. The operating rules of the AIF, as well as the AIF prospectus, where applicable;
6. The risk profile and information on the risks associated with the AIF intended to be managed;
7. Information on the master AIF, if the AIF is a feeder AIF;
8. The agreement on the performance of depositary functions for the AIF;
9. Proof that the AIFMC meets the organizational requirements set out in the Law (see Section INCORPORATING AN AIF MANAGEMENT COMPANY), from which it can be concluded that it has an adequate organizational structure for managing that type of AIF.

If the AIFMC wishes to open a close-ended AIF wihtout the status of a legal entity, then documents from points 3-9. are submitted.

In these cases as well, the SEC prescribes the form of the request and the content of documents to be provided.

For open-ended, UCITS AIFs, in accordance with the separate law and bylaws of the SEC, the request is sent to the SEC along which the following documents are provided:

1. Draft rules of the UCITS fund, prospectus, and key investor information;
2. Agreement with the depositary;
3. Full name and license number of the portfolio manager

However, the SEC is entitled to ask for additional documents and notifications that she deems necessary for the functioning of the UCITS fund.

If all documents and the request itself are in order, the SEC shall issue the license within 30 days.

If the SEC notes some irregularities, it notifies the applicant and gives an additional deadline to rectify them either through necessary corrections or submission of missing documents.

CONCLUDING REMARKS

As one can clearly see, operating an AIF has many administrative implications and conditions that must be fulfilled continuously throughout the lifespan of an AIF and its management company.

The SEC, since this business falls under the capital markets area, performs regular check-ups and supervises whether the AIFMCs and their AIFs are contionously in line with applicable laws and regulations.

The primary solution in order to navigate through this complex, highly regulated matter is – patience. By creating a step-by-step plan and overview with legal professionals and economy experts and sticking to it without trying to rush things too fast, this whole process can be carried out smoothly and without too much implications.

Of course, the interested businessmen and women must take all points into account, have a developed overview before making the specific plan and are willing to cooperate to secure their goals as soon as possible.

Authors:

Miloš Vučković, Partner

Aleksandar Čermelj, Senior Associate