Styperson POPE

Strategy & Compliance for Investment Firms


Things to Consider When Launching a Fund

The following headings cover some of the key considerations in setting up a fund which will be structured or promoted as an unregulated collective investment scheme:
Location (Tax)
Tax structuring is likely to be the driver behind the decision on where the scheme should be based.  This will be determined in part by who the investors are and where they and the assets of the scheme are located.  If the investors are based in the UK, especially if they are CGT exempt (eg through a SIPP or SSAS), a UK partnership is likely to be tax efficient without needing to look offshore.

Location (Regulation)
Some funds may consider offshore management to save on regulation however if the aim is to save on the ‘cost of regulation’, then the ‘cost of offshoring’ must be set against this.  Offshore lawyers, accountants, managers and administrators are often more expensive than their fully regulated UK equivalents.  It is also worth considering how investors will see the decision to operate off shore if it is perceived as an attempt to avoid regulation (and therefore avoid some of their protection).  Do also bear in mind that UK regulations still apply to the promotion of funds based offshore if that promotion is undertaken in, or from, the UK.

Structure
Tax will again be important in determining the structure of the fund but assuming that the investors are principally based in the UK and include some CGT exempt investors and some tax payers, a typical structure would involve a Limited or Limited Liability Partnership (which is tax transparent) with a UK Unit Trust feeder (for the SIPP and SSAS investors).  Various other vehicles might be used to achieve specific tax planning objectives such as allowing overseas investors to avoid withholding tax or allowing income to be rolled up into capital gains.

Operator
Establishing, operating and winding up an unregulated collective investment scheme is a regulated activity.  This means, where the fund is operated (run) from within the UK, the person doing so must be authorised by the FSA.  Some would-be fund managers become authorised directly, others employ a professional operator to run the fund on their behalf.
The decision on which route to take will depend on the experience available in-house, the size of the fund envisaged and whether it is likely to be one of many future funds.  If the fund is small, a one-off, or the fund manager lacks experience, the costs of becoming authorised and therefore having to buy in expertise, pay fees to the FSA, and maintain regulatory capital are likely to outweigh the costs of buying in a professional operator.

Administration
This activity covers a broad range of services from receiving and processing subscriptions (which can be regulated) to producing call notices, effecting transfers, paying distributions, maintaining statutory books and registers, and issuing updates to investors (which are generally not regulated).  Professional administrators have the expertise necessary to deal with administratively complex funds like hedge funds but others which trade only occasionally or which do not permit transfers or redemptions of their units may be easier to administer in-house.  Once the fund is up and running, certain communications are laid down by regulations and advice may be required on how these should be put together.

Accounting
Again, the need for an external accountant will depend on the complexity of the funds’ activities and the commitments made to investors about when financial information will be circulated.  Simple funds can be accounted for in house, while complex funds may need experienced personnel, specialist systems and a good understanding of models of returns and carried interests.

Promotion (Documents)
Within (and from) the UK, the promotion of unregulated collective investment schemes is very tightly restricted.  This is an area which many funds overlook in their planning but it is, of course, vital to achieving a successful launch.  Every fund needs a clear route to market and a strong offering to both investors and intermediaries.
Most funds will prepare an IM; great care (and good advice) should be taken in ensuring that the IM appropriately addresses the workings of the fund, the financial model, the parties involved, and (perhaps most importantly) the risks it carries.  Even if the IM is not going to be issued or approved by an authorised firm, having it verified by an experienced advisor might be very useful and save considerable cost in the long run.
In some cases, the IM may need to take the form of a prospectus which is a much more tightly prescribed document and, if this is the case, the cost of preparing it may be considerably higher.  Whether this is necessary will depend on the strategy for promoting the fund, its overall size, its minimum investment, and the legal status of the fund vehicles involved.
Unauthorised promoters of funds may be able to use documents approved by an authorised firm but whoever carries out the promotion, the categories of permitted recipient are few and tightly defined.  Great care must be taken to remain within these.

Promotion (Activity)
As well as the documents being used, attention must also be paid to whether the activity of promoting the fund is a regulated activity and therefore requires FSA authorisation in its own right.  It is likely that promotions which do not involve authorised intermediaries will be extremely difficult to undertake.

Next Steps
Knowing the following information will be helpful in addressing the considerations above:
  • What are the fund’s investments in? Asset class, location, &c.;
  • Who are the investors? Individuals, institutions, pension schemes, location, &c.;
  • How may investments will you receive?  Minimum, maximum, total number, &c.;
  • How may investments will you make?  Frequency, size, &c.;
  • Will you distribute income?  Size and frequency of distributions, &c.; and
  • What is your route to market?  Are intermediaries authorised, where are they based, &c..
To discuss any issues related to launching a fund as an unregulated collective investment scheme, please contact Simon Webber, StypersonPOPE’s MD, on 07710 260 717 or sw@strategic-compliance.co.uk.


Marketing Funds: Promoting Unregulated Collective Investment Schemes

This is a long one but it’s a very complicated and misunderstood area… print it off, have a coffee, and take a deep breath…

The Financial Services and Markets Act (FSMA) imposes a restriction on unregulated collective investment schemes being marketed to the public but it also creates three sets of exemptions, each of which has its advantages and disadvantages.  (These all define to whom the fund can be promoted and by who, there are separate rules about the documents which must be used – click here for more information on when a prospectus is required.)

1. The Financial Promotions Order defines how an unauthorised firm can promote a scheme using unapproved documents.  Essentially, it allows promotion to some institutional investors and to Certified Sophisticated Investors (and, depending on the scheme’s investments, occasionally to self-certified high net worth or sophisticated investors).

Advantages to this approach are that:

  • Fees tend to be lower because,
    • the document used does not need to meet the FSA’s requirements for financial promotions, and
    • no FSA authorised firm has to take responsibility for the document.

Disadvantages are that:

  • an unauthorised (and therefore probably less expert firm) takes all of the responsibility,
  • the documents do still need to meet certain FSMA and common law requirements,
  • schemes can only be promoted to institutional and certified sophisticated investors,
  • the person making the communication has to establish that the investor is certified before making any promotion, and
  • authorised firms (eg IFAs) may not be able to pass on the promotion.

2. The Promotion of Collective Investment Scheme (Exemptions) Order contains one of the sets of exemptions to Section 238 of FSMA which restricts how an authorised firm can promote a Collective Investment Scheme. The exemptions here are very similar (but not identical) to those under the Financial Promotions Order (above).

Advantages are that:

  • an authorised firm is involved, giving comfort to partners in the fund by taking on some of the responsibility;
  • investors will feel more comforted knowing that a UK-based, FSA-authorised body is involved in the communication; and
  • the document does not have to meet the full requirements of the FSA’s financial promotion rules;
  • an authorised firm can approve the promotion to be made by unauthorised persons (but there’s little point because the promotion would be limited to the same people the unauthorised person cold promote it to anyway under the Financial Promotions Order).

Disadvantages are that:

  • fees will be higher because the firm will have to ‘verify’ the contents of the promotional material – they have a responsibility to investors to ensure that it is fair clear and not misleading;
  • schemes can still only be promoted to institutions and certified sophisticated investors;
  • the person making the communication still has to establish that the investor is certified before making any promotion; and
  • even some authorised firms (eg IFAs) can not pass on the promotion – eg if it would constitute MiFID business for them.

3. The FSA’s rules provide the final route for promotion. These define eight categories of investor to whom a scheme can be promoted without breaching the restriction in FSMA. Some of these are very specific exemptions for unusual types of schemes (like Church Funds and Lloyds underwriters) but two in particular are of more use.

Advantages of utilising these rules are that:

  • the scheme can be promoted to other groups of investors, including
    • persons assessed as suitable by an authorised firm (probably their IFA),
    • persons who have undergone an adequate assessment of their knowledge, experience and expertise by an authorised firm;
  • the scheme can be promoted in such a way as to reduce as far as possible the risk of someone making an investment who does not fit an exemption (this will mean controlling the promotion, dissuading ineligible persons from applying, and checking that applicants are eligible but unlike the other routes above, this does not need to be done ahead of making initial contact with an investor);
  • an authorised firm will take responsibility for the document; and
  • an authorised firm can approve the document for distribution by unauthorised persons.

Disadvantages of this approach are that:

  • the document will need to be more thorough, meeting all of the FSA’s requirements for financial promotions;
  • fees will be higher because the document will need to be verified by the authorised firm; and
  • an authorised firm will need to have processes and procedures in place to ensure that ineligible applicants are not permitted to participate in the scheme.

As you can see, each approach has its ‘pros and cons’ and each route is therefore suitable for certain types of schemes.

Routes 1 and 2 are most suitable for institutional schemes (ie funds where all of the investors are investment professionals, authorised firms, or high net worth companies and unincorporated associations).

If you are thinking of pursuing either of these routes and the fund is looking for investment from individuals then make sure that you or your distribution network already know a good number of Certified Sophisticated Investors (be careful to ask the right question and get the right answer because Self-Certified Sophisticated Investors, probably won’t count and certificates that do not cover unregulated collective investment schemes are useless to you).

If in any doubt, we recommend that you pick a sample of your target audience, say 20 investors, and (without telling them anything about the fund), ask them if they have a certificate and if they do, to fax it over to you.We can take a quick look at these and make sure that they are the right kind.Once you know what percentage of your target audience has these certificates then you’ll know how restricted you’ll be in promoting your fund.

Route 3 is likely to be more expensive because the authorised firm (probably the operator of the scheme) is going to be more involved – they will verify the document (as indeed they will for route 2 and you will for route 1), they will ensure it meets the FSA’s higher standards, they will approve it for distribution by you, and they will have in place process and procedures designed to stop ineligible investors from participating.

On the other hand, this route will allow more effective promotion of the scheme on the basis that investors will be protected by the assessments carried out by authorised firms (be they the operator or an IFA). If you want to promote the scheme to individuals who don’t already hold a Certificate of Sophistication covering unregulated collective investment schemes, these protections will need to be in place.

Above, I said the fact that “the document will need to be more thorough, meeting all of the FSA’s requirements for financial promotions” was a disadvantage. It might equally be seen as an advantage, both for the investor, who is better informed and therefore better protected, and for the promoter who can draw the attention of their distribution network to the involvement of an authorised firm.

StypersonPOPE can help you to determine the most effective route to employ in promoting a scheme. If you would like to discuss scheme promotion, please do contact Simon Webber,StypersonPOPE’s Managing Director, either by telephone or e-mail.


Structuring Funds: Unregulated Collective Investment Schemes

This isn’t intended to be comprehensive but it hopefully introduces some of the terminology for those who are unfamiliar.  Most fund vehicle types link to Wikipedia articles which open in a new window.

Partnerships
Limited Partnerships (LPs) and Limited Liability Partnerships (LLPs) are popular UK structures for funds because they are ‘tax transparent’, meaning that they will pay no tax themselves and each of the investors (partners) will be responsible for their own tax. This is particularly attractive to investors who don’t pay UK tax – this applies to SIPP and SSAS pension trusts and investors based outside the UK.

Limited Partners / General Partners / Designated Members
There is likely to be a mix of passive and active members. Investors will be passive (Limited Partners) but the people running the fund will be active (a General Partner in an LP, or at least two Designated Members in an LLP). These active partners may also be called the ‘Sponsor’ and will be responsible for the running of the fund which may include calling investor meetings, paying the partnerships’ bills, making investment decisions, or agreeing contracts to outsource these and other duties. Typically, this role is played by an existing company or a special purpose vehicle (SPV) run by whoever initiates the fund – the people with the bright idea!  They may also have a carried interest vehicle which provides them with a tax-effective way to benefit from the success of the fund.

If all of the investors are in day-to-day control of their property (their investment) then the fund may be a ‘syndicate’ (and not really a fund at all) but these are extremely difficult to design and manage for more than a small handful of investors. If any investor is not in day-to-day control of their property it is likely that the fund will constitute a Collective Investment Scheme under UK law. As this is the case for the vast majority of funds, lets assume it’s the case here…

Operator
Any person setting up or operating a fund run from the UK (even where the partnership is established off shore but actually managed by people based in the UK), must be authorised by the FSA to establish, operate and wind up a collective investment scheme. If the people behind the fund are not already an authorised person with the appropriate permissions, then it’s likely that they will require the services of an ‘operator’. The operator will ensure compliance with regulatory requirements, will ensure appropriate information is provided to investors, and can play an important role in aiding the promotion the fund (there’s more detail on this last point, in our article “Three Routes To Promote a Collective Investment Scheme”).

Companies
Some people thinking about establishing a fund, consider structuring it as a limited company in order to avoid the need for an operator (incorporated bodies are excluded from the definition of a collective investment scheme unless they qualify as Open Ended Investment Companies – OEICs) but this is unlikely to be attractive if the fund is larger than about £1m because the cost of an operator will work out less than the amount of corporation tax that the fund would pay. The FSA also places restrictions on the way in which a company’s shares can be sold to investors which, although different, are no less onerous than those on collective investment scheme units and would usually require the assistance of professionals adding further costs.

Feeder Funds & EPUTS
There are a variety of reasons why feeder funds may be used but the most common are to provide:

  • a UK entity through which UK investors can put money into offshore funds;
  • an offshore entity through which non-UK investors can invest in UK funds; or
  • an EPUT through which UK capital gains tax exempt investors can invest.

The reasons for establishing such a fund are usually driven by tax advantages such as ensuring that the upside of investments is taxed as a capital gain rather than income or ensuring that capital gains tax exempt investors, such as SIPP and SSAS pension schemes, do not pay tax at all. ‘EPUT’ stands for Exempt Property Unit Trust and, like other feeder funds, will usually be one of the Limited Partners in the underlying fund. If run from the UK, it is likely that the feeder fund will also be a Collective Investment Scheme and will therefore require an authorised operator.

Unregulated vs. Authorised
This is where the terminology begins to get confusing. All Collective Investment Schemes run from the UK, require the involvement of an authorised operator or manager however, within this, there are two types of scheme; unregulated and authorised. These terms refer to the scheme itself (not the operator). ‘Unregulated’ can also be misleading because they are heavily regulated and very restricted in how they can be promoted.

Authorised funds must apply to the FSA for their authorisation and this can be very costly (for most funds, it is prohibitively so) and can take up to six months from application to authorisation. In addition, authorised funds need to follow rules allowing investors to leave the fund which can make it difficult for such schemes to invest in illiquid ‘alternative assets’ like property, art, wine, films, and shares in unquoted companies. For these reasons, most funds are structured as unregulated collective investment schemes.

StypersonPOPE specialises in assisting anyone involved in establishing or running unregulated collective investment schemes whether as General Partner, Sponsor, or Operator. If you would like to know more about our services, please contact Simon Webber, StypersonPOPE’s MD, on 07710 260 717 or sw@strategic-compliance.co.uk.


Prospectus Exemptions… myths & misunderstandings

We see a lot of clients who really want to avoid having to prepare a prospectus.  Sometimes, I’m not sure all the effort is worthwhile and it may be better to take another look at the costs and time involved in putting a prospectus together if it makes the marketing easier – generally, it’s not as bad as you’d think.  Nonetheless, this article is about the exemptions, or rather about some of the imaginary exemptions we’ve heard of recently.  Our basic guide to the real exemptions can be found by clicking here.

“If working within the limit of 99 people, can’t Sophisticated Investors be excluded from the total?”

No.  It’s true that certain investors can be excluded but the only kind of private individuals who can be excluded are ‘Qualified Investors’.  These must be registered with the FSA and meeting the criteria  for sophistication is not helpful in meeting the requirements to be qualified investors (which are much closer to the criteria for an elective professional investor under MiFID).

“If relying on the minimum investment of €50k, is it OK to quote this in the literature but actually accept less than this?”

Again, no.  Generally speaking, saying one thing and doing another is a recipe for upsetting investors and getting sued.  Apart from this, the relevant rule states that “a person does not contravene section 85(1) if… the minimum consideration which may be paid by any person for transferable securities acquired by him pursuant to the offer is at least 50,000 euros”.  I suppose if you have a really good lawyer, you could get into a debate about the meanings of “may” and “pursuant” but I think we all know what the rule intends and I wouldn’t want one of my clients to be in the dock while the case law is being made. 

“Is it true that the prospectus rules don’t apply to funds which are unregulated collective investment schemes?”

Sorry, yet again, no.  The rules apply to most ‘transferable securities’ including shares in companies and units in partnerships (how most funds are structured).  It is true that there is a list of exempt investment types and that this list includes open ended funds but most smaller, unlisted or unregulated funds won’t qualify as open ended (even if they think they do).  They can, however, use one of the other exemptions.  It is worth noting that any fund listed on the LSE’s Specialist Fund Market must prepare a prospectus even if it otherwise falls into one of the exemptions.

With experience of the prospectus directive within both corporate finance and fund establishment, StypersonPOPE can help you plan which exemptions to use. For an initial discussion, please call or e-mail Simon Webber, StypersonPOPE‘s Managing Director.


Three Routes to Promote a UCIS

The Financial Services and Markets Act (FSMA) imposes a restriction on unregulated collective investment schemes (UCIS) being marketed to the public but it also creates three sets of exemptions, each of which has its advantages and disadvantages…

1. The Financial Promotions Order defines how an unauthorised firm can promote a UCIS using unapproved documents.  Essentially, it allows promotion to some institutional investors and to Certified Sophisticated Investors (and, depending on the scheme’s investments, also to self-certified high net worth or sophisticated investors).

Advantages to this approach are that:

  • Fees tend to be lower because,
    • the document used does not need to meet the FSA’s requirements for financial promotions, and
    • no FSA authorised firm has to take responsibility for the document.

Disadvantages are that:

  • an unauthorised (and therefore probably less expert firm) takes all of the responsibility,
  • the documents do still need to meet certain FSMA and common law requirements,
  • schemes can only be promoted to institutional and certified sophisticated investors,
  • the person making the communication has to establish that the investor is certified before making any promotion, and
  • authorised firms (eg IFAs) may not be able to pass on the promotion.

2. The Promotion of Collective Investment Scheme (Exemptions) Order contains one of the sets of exemptions to Section 238 of FSMA which restricts how an authorised firm can promote a UCIS. The exemptions here are very similar (but not identical) to those under the Financial Promotions Order (above).
 

Advantages are that:

  • an authorised firm is involved, giving comfort to partners in the fund by taking on some of the responsibility;
  • investors will feel more comforted knowing that a UK-based, FSA-authorised body is involved in the communication; and

  • the document does not have to meet the full requirements of the FSA’s financial promotion rules;

  • an authorised firm can approve the promotion to be made by unauthorised persons (but there’s little point because the promotion would be limited to the same people that the unauthorised person could promote it to anyway under the Financial Promotions Order).

 Disadvantages are that:

  •  fees will be higher because the firm will have to ‘verify’ the contents of the promotional material – they have a responsibility to investors to ensure that it is fair clear and not misleading;
  • schemes can still only be promoted to institutions and certified sophisticated investors;

  • the person making the communication still has to establish that the investor is certified before making any promotion; and

  • even some authorised firms (eg IFAs) can not pass on the promotion – eg if it would constitute MiFID business for them.

3. The FSA’s rules provide the final route for promotion. These define eight categories of investor to whom a scheme can be promoted without breaching the restriction in FSMA. Some of these are very specific exemptions for unusual types of schemes (like Church Funds and Lloyds underwriters) but two in particular are of more use.
 

Advantages of utilising these rules are that:

  • the UCIS can be promoted to other groups of investors, including

    • persons assessed as suitable by an authorised firm (probably their IFA),

    • persons who have undergone an adequate assessment of their knowledge, experience and expertise by an authorised firm;

  • the scheme can be promoted in such a way as to reduce as far as possible the risk of someone making an investment who does not fit an exemption (this will mean controlling the promotion, dissuading ineligible persons from applying, and checking that applicants are eligible but unlike the other routes above, this does not need to be done ahead of making initial contact with an investor);

  • an authorised firm will take responsibility for the document; and

  • an authorised firm can approve the document for distribution by unauthorised persons.

Disadvantages of this approach are that:

  • the document will need to be more thorough, meeting all of the FSA’s requirements for financial promotions;

  • fees will be higher because the document will need to be verified by the authorised firm; and

  • an authorised firm will need to have processes and procedures in place to ensure that ineligible applicants are not permitted to participate in the scheme.

As you can see, each approach has its ‘pros and cons’ and each route is therefore suitable for certain types of schemes.

Routes 1 and 2 are most suitable for an institutional UCIS (ie funds where all of the investors are investment professionals, authorised firms, or high net worth companies and unincorporated associations).

If you are thinking of pursuing either of these routes and the fund is looking for investment from individuals then make sure that you or your distribution network already know a good number of Certified Sophisticated Investors (be careful to ask the right question and get the right answer because Self-Certified Sophisticated Investors, probably won’t count and certificates that do not cover units in a UCIS are useless to you).

If in any doubt, we recommend that you pick a sample of your target audience, say 20 investors, and (without telling them anything about the fund), ask them if they have a certificate and if they do, to fax it over to you. We can take a quick look at these and make sure that they are the right kind. Once you know what percentage of your target audience has these certificates then you’ll know how restricted you’ll be in promoting your fund.

Route 3 is likely to be more expensive because the authorised firm (probably the operator of the scheme) is going to be more involved – they will verify the document (as indeed they will for route 2 and you will for route 1), they will ensure it meets the FSA’s higher standards, they will approve it for distribution by you, and they will have in place process and procedures designed to stop ineligible investors from participating.

On the other hand, this route will allow more effective promotion of the scheme on the basis that investors will be protected by the assessments carried out by authorised firms (be they the operator or an IFA). If you want to promote the scheme to individuals who don’t already hold a Certificate of Sophistication covering unregulated collective investment schemes, these protections will need to be in place.

Above, I said the fact that “the document will need to be more thorough, meeting all of the FSA’s requirements for financial promotions” was a disadvantage. It might equally be seen as an advantage, both for the investor, who is better informed and therefore better protected, and for the promoter who can draw the attention of their distribution network to the involvement of an authorised firm.

StypersonPOPE can help you to determine the most effective route to employ in promoting a scheme. If you would like to discuss scheme promotion, please do contact Simon Webber, StypersonPOPE’s Managing Director, either by telephone or e-mail.
 

 

 

 


What is an EIS fund and how is it regulated?

What is an EIS fund?
The short answer is that it’s an arrangement through which less experienced and time-poor investors can put money into Enterprise Investment Scheme qualifying unquoted companies. This offers investors diversification in their portfolios and the higher level of risk is mitigated (to an extent) by the income and capital gains tax reliefs. (See the HMRC site for more detail on Enterprise Investment Scheme tax advantages and qualifying investments.)

When looking at the tax reliefs, there are two types of EIS fund; approved and unapproved.  These are not regulatory terms but refer to whether the fund has been approved by HMRC.  If it has, the investors qualify for relief when they invest in the fund, if it is not, they only qualify for relief when the fund makes an eligible investment.  The predictability of the former makes it attractive to some investors but they are less flexible than unapproved funds and have a limited time in which to make their investments.

When it comes to the structure of the fund it gets more complicated. Firstly it isn’t really a ‘fund’ at all. Unlike companies and other kinds of funds (which are usually partnerships) it doesn’t have a legal personality. It can be a number of parallel investment management agreements between individual investors and the manager of the ‘fund’ or a series of separate portfolios which together are referred to as the ‘fund’.

Typically, the initial investment is kept in cash as ‘client money’ either with the scheme manager, in a client account, or on trust with a bank. The investment manager will then commit a portion of each investor’s cash into each investment in a qualifying company (in line with the investment management agreement). Often the resulting shares will be registered in the name of a nominee and shareholder duties (like voting) will be delegated to the investment manager during the life of the fund.

If that sounds rather like a collective investment scheme, we can understand why.  However, the Treasury have the power under FSMA to create exemptions to the definition of a collective investment scheme and they have created one specific to EIS funds.

A Compliance Perspective
From this point of view as well, EIS funds are strange animals. The fact that an EIS fund is not a collective investment scheme (CIS) has its advantages and disadvantages. On the one hand, they do not require an operator in the same way as a CIS, the scheme documents are not as prescribed, and the promotion is not as restricted (at least for an authorised firm). On the other hand, unlike a CIS, it is ‘MiFID business’ which means that firms managing an EIS fund will need to follow rules from which CIS operators are exempt. It also means that unlike a CIS, it is virtually impossible to run an EIS fund without the permission to deal with retail clients.

Retail client permissions are necessary because it is the underlying investor, not the fund which is the client of the firm. Within the MiFID rules under which EIS funds are regulated, it is much harder to categorise an investor as professional. You may find that if retail investors are excluded, it seriously limits the market for the fund.

The regulated activities involved in managing an EIS fund include holding client money, investment management, and safeguarding and administering investments. Firms should also consider whether any particular investment management agrement is likely to involve them in arranging, advising, or dealing in investments.  It is possible for firms to outsource some of these activities if they do not have the required permissions to carry them out themselves.

Simon Webber, StypersonPOPE‘s Managing Director has experience of both investment management and unquoted corporate finance compliance. If you would like to discuss any aspect of establishing or managing an Enterprise Investment Scheme fund, please contact him directly on 07710 260 717 or sw@strategic-compliance.co.uk.

 

 


Quick Guide to The Structure of a Fund

This isn’t intended to be comprehensive (if it was, it would be better written by a lawyer and a tax accountant) but it hopefully introduces some of the terminology for those who are unfamiliar. Most links lead to Wikipedia articles which open in a new window.

Partnerships
Limited Partnerships (LPs) and Limited Liability Partnerships (LLPs) are popular UK structures for funds because they are ‘tax transparent’, meaning that they will pay no tax themselves and each of the investors (partners) will be responsible for their own tax. This is particularly attractive to investors who don’t pay UK tax – this applies to SIPP and SSAS pension trusts and investors based outside the UK.

Limited Partners / General Partners / Designated Members
There is likely to be a mix of passive and active members. Investors will be passive (Limited Partners) but the people running the fund will be active (a General Partner in an LP, or at least two Designated Members in an LLP). These active partners may also be called the ‘Sponsor’ and will be responsible for the running of the fund which may include calling investor meetings, paying the partnerships’ bills, making investment decisions, or agreeing contracts to outsource these and other duties. Typically, this role is played by an existing company or a special purpose vehicle (SPV) run by whoever initiates the fund – the people with the bright idea!

If all of the investors are in day-to-day control of their property (their investment) then the fund may be a ‘syndicate’ (and not really a fund at all) but these are extremely difficult to design and manage for more than a small handful of investors. If any investor is not in day-to-day control of their property it is likely that the fund will constitute a Collective Investment Scheme under UK law. As this is the case for the vast majority of funds, lets assume it’s the case here…

Operator
Any person setting up or operating a fund run from the UK (even where the partnership is established off shore but actually managed by people based in the UK), must be authorised by the FSA to establish, operate and wind up a collective investment scheme. If the people behind the fund are not already an authorised person with the appropriate permissions, then it’s likely that they will require the services of an ‘operator’. The operator will ensure compliance with regulatory requirements, will ensure appropriate information is provided to investors, and can play an important role in aiding the promotion the fund (there’s more detail on this last point, in our article “Three Routes To Promote a Collective Investment Scheme”).

Companies
Some people thinking about establishing a fund, consider structuring it as a limited company in order to avoid the need for an operator (incorporated bodies are excluded from the definition of a collective investment scheme) but this is unlikely to be attractive if the fund is larger than about £1m because the cost of an operator will probably be less than the amount of corporation tax that the fund would pay. The FSA also places restrictions on the way in which a company’s shares can be sold to investors which, although different, are no less onerous than those on collective investment scheme units.

Feeder Funds & EPUTS
There are a variety of reasons why feeder funds may used but the most common are to provide:

  • a UK entity through which UK investors can put money into offshore funds;
  • an offshore entity through which non-UK investors can invest in UK funds; or
  • an EPUT through which UK capital gains tax exempt investors can invest. 

The reasons for establishing such a fund are usually driven by tax advantages such as ensuring that the upside of investments is taxed as a capital gain rather than income or ensuring that capital gains tax exempt investors, such as SIPP and SSAS pension schemes, do not pay tax at all. ‘EPUT’ stands for Exempt Property Unit Trust and, like other feeder funds, will usually be one of the Limited Partners in the underlying fund. If run from the UK, it is likely that the feeder fund will also be a Collective Investment Scheme and will therefore require an authorised operator.

Unregulated vs. Authorised
This is where the terminology begins to get confusing. All Collective Investment Schemes run from the UK, require the involvement of an authorised operator or manager however, within this, there are two types of scheme; unregulated and authorised. These terms refer to the scheme itself (not the operator). ‘Unregulated’ can also be misleading because they are heavily regulated and very restricted in how they can be promoted.

Authorised funds must apply to the FSA for their authorisation and this can be very costly (for most funds, it is prohibitively so) and can take up to six months from application to authorisation. In addition, authorised funds need to follow rules allowing investors to leave the fund which can make it difficult for such schemes to invest in illiquid ‘alternative assets’ like property, art, wine, films, and shares in unquoted companies. For these reasons, most funds are structured as unregulated collective investment schemes.

StypersonPOPE specialises in assisting anyone involved in establishing or running unregulated collective investment schemes whether as General Partner, Sponsor, or Operator. If you would like to know more about our services, please contact Simon Webber, StypersonPOPE‘s MD, on 07710 260 717 or sw@strategic-compliance.co.uk.