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How to register an investment fund in 2020?

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Registering an investment fund in 2020

Benefits of opening a fund:

  • A popular business solution for those who want to conduct investment activities;
  • It is possible to create various categories of funds;
  • Ensuring reliable protection of assets;
  • The ability to make profit and attract investors;
  • A relatively fast registration process.
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An investment fund is used to designate a pool of funds, that can be presented in the form of money, stocks, loans, tangible or intangible assets.

As a rule, one person, as well as a set of people, who sign, acquire or sell shares, can register an investment fund.

One of the defining characteristics of a registered investment fund is the fact, that it is most often managed by a fund manager, who, as a rule, is supervised by a national regulator, whose main function is to manage or advise on fund issues.

You can register an investment fund in Luxembourg, as well as in other countries, for:
  • income generation;
  • non-profit goals, such as a charity fund;
  • risk sharing;
  • asset and liability management of the company with the aim of profit;
  • attracting investors (for example, a bank can establish an investment fund in the Czech Republic to place certain assets and then attract investors to obtain funds for managing the bank).

To date, there are many types of investment funds. You can order legal advice on the organization of an investment fund, as well as receive legal support in the implementation of your business project. Below are the most popular fund categories.

Categories of funds depending on the objects of investment:
  • direct investments;
  • fixed income securities;
  • a hedging;
  • real estate market.

Categories of funds depending on the investor’s profit model:

Drawdown and distribution

This model is mainly characteristic in order to establish a private fund (private equity funds). For example, registering a private equity investment fund attracts investor money, when it is needed for an investment. Borrowing funds only if necessary, and not in advance in full, affects an increase in the internal rate of return of the fund (IRR), if it is measured in relation to the date of release or sale of a particular investment. The initial cost, as well as the profit or income from capital gains relating to each asset, is distributed among investors and is rarely reinvested. A registered private investment fund, as a rule, has a fixed period of existence, and the essence is to invest and then return all capital and profit before the created fund is liquidated. As a result, the establishment of an investment fund also involves a distribution of a share of profit between its managers.

The income from investments is usually distributed as they arise, for example, net income from real estate, an income from the rental of property, or the income from capital gains with fixed income. A fund of such a model, as a rule, is considered “closed”, and not “open”. This means, that a number of investors and the invested amount are fixed and have a fixed validity period.

Market Model (Tradable model)

A market model is mainly characteristic for the registration of a securities’ investment fund, in which stocks or shares of the fund are traded, as a rule, on a public market. A capital is not distributed among investors, although regular and larger one-time dividends may be paid. A profit, earned within the mutual fund, should lead to an increase in the prices of its shares. However, funds, that adhere to such a model, are subject to market costs, such as:

  • the illiquidity;
  • a sale of assets below face value;
  • market, economic or investment indicators;
  • Net Asset Model (NAV or redemption model).

An organized asset management fund repurchases shares, owned by investors in the fund, and upon repurchase (or within a specified time) also pays investors any profits “tied” to these shares.

A share of profit is paid as a reward for the performance of a fund manager. Units are often redeemed at the net asset value (NAV) of this unit or are related to it. A unit NAV is a total amount of the fund’s gross assets less leverage and liabilities, divided by a number of shares in the fund. Usually NAV is calculated by fund managers. As a rule, for such a model, a registration of an open investment fund means, that a number of investors and the amount of investments fluctuate as the obligations of the investor are fulfilled and repaid, and can exist for an indefinite period, if the fund is not liquidated.

Categories of funds, depending on the investment strategy:
  • a venture capital;
  • the repurchase of a controlling stake;
  • short-term/long-term assets;
  • capital gains;
  • a development capital;
  • a large-scale/target;
  • a debt and equity financing (Mezzanine strategy).
Categories of funds, depending on the implementation tool:
  • registering a limited partnership in the EU;
  • the establishment of a partnership;
  • opening a company with optimal taxation;
  • the incorporation of a public company, or a company, whose shares are listed on a stock exchange.
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When choosing an implementation tool in the process of registering an investment fund, it is necessary to pay attention to a number of factors:

  • it should be optimal in terms of taxation for investors and for the group of fund managers, taking into account also the assets of a fund and their location;
  • a regulatory regime, that is a least burdensome and at the same time provides an appropriate level of confidence in the registered investment fund, taking into account the opinions of potential investors;
  • any restrictions on target investors (internal or external) or their ability to invest in certain instruments;
  • a previous experience of potential investors and fund managers.

When planning to set up an investment fund, note that alternative assets can also be divided into two other types: illiquid, such as a private capital, a venture capital, real estate, and more liquid, such as listed securities, commodities and derivative financial instruments. This led to the development of two types of fund structure: open and closed.

A type of fund

A liquidity/investments

Assets

An open fund

A vast majority of fund assets are sold within a relatively short period. An organized open fund has an indefinite duration.

Investors can redeem (in whole or in part) or increase their interest during the life of the established open fund.

Usually this is a large number of small assets (for example, quoted stocks) or assets, whose size can be easily adjusted (for example, derivatives).

Registering an open fund makes it possible to acquire new assets with additional investments. It finances the withdrawal of funds by investors through a partial sale of the assets of the fund.

A closed fund

An illiquid structure. A number of investors is usually fixed. As a rule, an investor, who wants to open a closed investment fund in Cyprus cannot leave it during its lifetime, since a fund is not able to liquidate assets to finance the exit.

Only investments are possible during the first half of the operation of a fund to give time for the release of assets. A larger asset means that up to a dozen funds can be invested in each fund.

A fund operates for a limited period, ceasing to operate after all assets have been sold.

Assets are kept for a minimum period (for example, to restructure a portfolio company).

Typically, fewer larger assets are held, such as portfolio companies or real estate.

A process of registering an investment fund in Europe by registering a partnership in the EU includes the following steps:
  • a development of a fund concept, including an investment goal/strategy/profitability (for example, the establishment of a private equity fund);
  • a premarket with key investors to determine interest in the fund, clarifying a concept of the fund (for example, registering a hedge fund or establishing a venture investment fund);
  • the identifying and appointing key consultants and key service providers (for example, legal and tax consultants, administrators, auditors);
  • a development of the fund structure, taking into account a relevant tax and regulatory aspects (for example, the establishment of a closed investment fund);
  • a preparation of more detailed operating conditions for a fund. The key factors in determining the conditions will be the fund’s investment strategy, for example, the organization of an investment fund for development target capital, as well as the relative negotiation positions of the manager and investors.
  • a project of marketing material for a fund;
  • a distribution and conduct of initial negotiations with potential investors;
  • a consideration of the conditions of the fund and a comprehensive examination by investors;
  • a formation of legal documentation for a fund;
  • investors review legal documentation and comment on it;
  • negotiations between the manager and investors;
  • signing agreements by investors;
  • first closing of the transaction.

A registration of an investment fund (as a partnership) usually requires the following documents:

Securities Offering Document (a Memorandum of Private Placement)

This document contains the information about an organized fund, such as its investment objective and strategy, a summary of its conditions, the information about the management and its track record, as well as more detailed technical information such as risk factors, a summary of the tax consequences of investing and a detailed description of the restrictions in relation to the fund.

Agreement between Partners

It is between a general partner and each limited partner. An agreement between partners is the main document, regulating partnerships, and it sets out in detail all the conditions of the fund. If you need the services of drawing up an investment partnership agreement, then IQD Consulting experts with significant experience will help to take into account all the necessary essential conditions, that should be included in it.

Read also:
Investment Management Agreement

This agreement is between a fund and its manager. It provides for the appointment of a manager and the circumstances, in which an appointment of a manager may be terminated. A manager either receives remuneration, for example, from an organized hedge fund, or receives remuneration from the general partner from the priority share of the profit of his general partner. In the latter case, an actual amount payable, as a rule, is not indicated in such an agreement.

Agreement with Investment Advisor

As a rule, it is between the manager and investment advisor. Its content is similar to the Investment Management Agreement. It relates to the appointment, dismissal and remuneration of a consultant.

Stock Subscription Agreement

Each investor signs a stock subscription agreement, in accordance with which he agrees to be a related partnership agreement. If you would like to register an investment fund, then you should know that each investor provides the information about himself, as well as representations and guarantees in relation to himself, including a right to invest in a registered investment fund.

Additional agreements

During negotiations, a manager can coordinate with investors certain issues, that are subsequently fixed in the partnership agreement (for example, specific reporting information, that is required by the investor). Such agreements with individual participants are set out in cover letters with relevant investors.

Professional aid

Our specialists provide qualified drafting services for registration of an investment fund in various jurisdictions.

Thus, opening an investment fund is a fairly comprehensive project, which includes many stages, that require a professional approach. IQD Consulting has considerable experience in supporting the establishment of an investment fund in Luxembourg, a registration of an investment fund in Liechtenstein, the opening a fund in Cyprus, as well as in several other prestigious jurisdictions.

If you need expert advice on registering an investment fund in the EU, you can agree on the date and time of its holding at the contacts, listed below.

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