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 the risk.
In the Republic of Serbia, all matters of importance for investment funds are regulated by two relatively new laws governing investment funds:
• Law on Open-Ended Investment Funds Subject to Public Offering - entered into force on 19 Oct 2019, has been applied as of 20 Apr 2020);
• Law on Alternative Investment Funds - entered into force on 19 Oct 2019. The largest number of provisions started to be applied on 20 Apr 2020, others have been applied as of 1 Jan 2021, while a significant number of provisions will be applied only from the day of the acceptance of the Republic Serbia into the EU).
In this article, we will focus on Alternative Investment Funds (AIF) that are regulated by the Law on Alternative Investment Funds ("Official Gazette of the RS" No. 73/2019). This law prescribes detailed procedure for establishing an AIF. Full application of this law, except for the provisions to be applied once Serbia is part of the EU, started on 1 Jan 2021 with the adoption and entry into force of seven by-laws:
• Regulation on alternative investment funds,
• Regulation on the capital of alternative investment fund management companies,
• Regulation on supervision carried out by the Securities Commission,
• Regulation on the conditions for performing the duties of the depository of an alternative investment fund,
• Regulation on the types of alternative investment funds,
• Regulation on the accounting framework and financial statements of alternative investment fund management companies,
• Regulation on the accounting framework and financial statements of investment funds,
• Regulation on the conditions for performing the activities of the alternative investment fund management company.
The reason for the analysis of the Law on Alternative Investment Funds lies in the newly opened possibility of establishment of such funds with adoption of this law in the Republic of Serbia. The Law on Alternative Investment Funds regulates all types of investment funds, with the exception of open-ended investment funds subject to public offering (UCITS funds) that are regulated by the Law on Open Investment Funds with Public Offering.
The most interesting ones are certainly the types of investment funds that represent a novelty in the national legislation, such as venture capital funds and private equity funds. Investors who intend to invest their capital in the development of micro, small and medium-sized enterprises, with a special focus on start-up companies, might also be most attracted to them.
Regardless of its type, an alternative investment fund is always managed by an alternative investment fund management company (AIFMC). The only exception is the AIF with internal management and the status of a legal entity that manages its own assets independently. This type of AIF is also an AIFMC, since its establishment is subject to legal and by-law norms governing the issuance of approval for the establishment and management of an AIF with the status of a legal entity and the issuance of a permit for the operation of an AIFMC. Nevertheless, although the law effectively equates this type of AIF with an AIFMC, it also places restrictions on it, since it prohibits the establishment of additional funds and the provision of additional services, which is otherwise possible for a regular AIFMC.
The law itself defines an AIFMC as a legal entity with regular activity of managing one or more AIFs as verified by a work permit issued by the Securities Commission. An AIFMC is established as a limited liability company or a joint stock company that is not a public company, as prescribed by the Law on the Capital Market.
ACTIVITIES OF AIFMCs
Activities that AIFMCs perform:
(1) Basic activity, which is management of AIFs. It primarily implies the establishment, organization, management of AIF portfolio and risk management;
(2) Additional activities, e.g. investment advising or receiving and transferring orders related to financial instruments.
TYPES OF AIFMCs
The Law on Alternative Investment Funds recognizes two basic types of AIFMC - Large and Small AIFMCs that differ depending on the total asset value of the AIFs and the categories of investors to whom the AIFs are offered.
In this sense, a large AIFMC directly or indirectly manages
(1) AIFs whose total assets exceed EUR 25.000.000,
(2) AIFs whose total assets exceed EUR 75.000.000, if the managed AIFs do not use financial leverage, or where investors do not have the right to redeem shares for five years from the date of initial investment in each AIF,
(3) AIFs offered to retail investors, regardless of the size of the AIFs’ assets under management.
On the other hand, while considering small AIFMCs, it is important to emphasize that they can offer shares in AIFs exclusively to professional and/or semi-professional investors, and that the total assets of the AIFs they manage must not exceed the thresholds applied to large AIFMCs. Certain legal provisions do not apply to them, such as those on the minimum number of board members, additional capital, etc.
In addition to the above, it is also important to mention the difference between large and small AIFMC in terms of the amount of the monetary part of the core capital.
A large AIFMC participates with a minimum amount of the monetary part of the core capital:
(1) EUR 125.000 in RSD equivalent at the middle rate of the NBS on the day of payment,
(2) EUR 300.000 in RSD equivalent at the middle exchange rate of the NBS on the day of payment for a closed AIF that has the status of a legal entity with internal management.
A small AIFMC cannot have lower monetary part of the core capital than:
(1) EUR 70.000 in RSD equivalent at the middle exchange rate of the NBS on the day of payment,
(2) EUR 15.000 in RSD equivalent at the middle exchange rate of the NBS on the day of payment for a closed AIF that has the status of a legal entity with internal management.
The Law on Alternative Investment Funds prescribes the possibility of establishing alternative investment funds through public or private offering. Both types of funds can be established as open or closed-ended AIFs.
An open-ended AIF represents an asset of its own and is not a legal entity. An AIFMC manages it on its own behalf and for the joint account of the AIF members. At the special request of the AIF members, it is possible to buy investment units of an open-ended AIF.
The law defines several types of close-ended AIFs:
• A close-ended AIF that does not have the status of a legal entity;
• A close-ended AIF that has the status of a legal entity;
• A close-ended AIF that has the status of a legal entity with internal management.
A close-ended AIF that does not have the status of a legal entity also represents an asset that does not have the status of a legal entity and is managed by an AIFMC on its own behalf and for the joint account of the AIF members. Unlike an open AIF, the investment units of a closed AIF cannot be sold at the request of the AIF members.
A close-ended AIF with the status of a legal entity is a legal entity established in the form of a joint-stock company or a limited liability company, established and managed by AIFMC on its own behalf and for its account in accordance with the law, business rules and the investment prospectus of the AIF, when there is an obligation to publish it. Shares in the AIF cannot be sold from the assets of the AIF at the request of the members.
A close-ended AIF that has the status of a legal entity with internal management is the one that has the status of a legal entity, manages its assets by itself, and not through AIFMC. This type of AIF is at the same time an AIFMC.
An AIFMC submits the application for establishment of an AIF to the Securities Commission. If all legal requirements are met, the Commission issues a permit for establishment within 2 months from the date of receipt of complete documentation.
The Securities Commission supervises the operations of the AIF and the AIFMC in accordance with the provisions of the Law on Alternative Investment Funds and the Law on the Capital Market. Such supervision is carried out by inspecting the documentation and other available data of importance owned by the subject of supervision. If the existence of illegalities and irregularities is found in the supervision procedure, the Commission will order their elimination by decision. At the same time, it can impose one or more supervisory measures, e.g. issuing a public warning or issuing an order to prohibit the issuance of shares in AIF for up to three months.
When considering AIFs, it is important to mention that apart from more complex legal considerations, when compared with traditional investments, many alternative investments typically live with following risks: lower liquidity, less regulation, lower transparency, higher fees, and limited and potentially problematic historical risk and return data. Nevertheless, they are attractive to investors because of the potential for portfolio diversification resulting in a higher risk-adjusted return for the portfolio.
Zoran Marić, Partner
Janko Jovančić, Junior Associate
*The information in this document does not represent legal advice and is provided for general informational purposes only.
**Partner, Senior Associate, Associate and/or Junior Associate refers to Independent Attorney at Law in cooperation with IVVK Lawyers.