Cyprus introduces a new fund vehicle: the Registered Alternative Investment Fund
On 31 July 2018, the highly anticipated Alternative Investment Funds Law 2018 (New AIF Law) came into force, repealing the pre-existing regime. Among its key innovations, the New AIF Law introduces the Registered Alternative Investment Fund (RAIF). The RAIF vehicle now sits alongside the existing range of AIF products available in Cyprus. RAIFs are specifically relevant to professional and ‘well-informed’ investors and will significantly streamline the establishment process. This update outlines key aspects of RAIFs in Cyprus.
RAIF set-up and marketing
The introduction of Registered Alternative Investment Funds in Cyprus is regarded as a significant development portraying and confirming the jurisdiction’s desire to remain at the forefront of regulatory advancements governing the fund industry in Europe. Importantly, the fund set up process in Cyprus is now significantly expedited, due mainly since RAIFs are not subject to licensing or authorisation processes by the regulator, the Cyprus Securities and Exchange Commission (CySEC). In contrast existing AIFs, whether for professional or retail markets, would be subject to often time-intensive application processes with CySEC.
All RAIFs must appoint a duly authorised Alternative Investment Fund Manager (AIFM). AIFMs in Cyprus are regulated by CySEC under the Alternative Investment Fund Managers Law 2013 which implements the Alternative Investment Fund Managers Directive 2011/61/EU.
This means that Cypriot RAIFs will benefit from the pan-EU passporting regime contained in the AIFMD. In consequence marketing RAIFs across Europe can be significantly streamlined when compared to non-EU jurisdictions as the manager may rely on cross-border passporting arrangements to access all 31 EEA jurisdictions. There is no need to rely on private placement regimes.
Advantages of the Cypriot RAIF
Under the New AIF Law:
- RAIFs are not subject to authorisation and licensing procedures, but to a mere registration with CySEC.
- CySEC needs to be notified only about the setup of a RAIF will minimal ongoing reporting requirements. To this effect, CySEC maintains a special register for RAIFs, and includes approved RAIFs in this register.
- There are no minimum capital requirements in respect of setting up a RAIF in Cyprus.
- A RAIF may be open-ended or closed-ended; it may be organised in any legal form available under Cypriot law, which currently includes companies (variable and fixed capital), limited partnerships and common funds (similar to unit trusts).
- The composition of a RAIF may consist of an unlimited number of investors. This is in contrast to the pre-existing ‘AIF for Limited Number of Persons’ (AIF LNP) which has been limited to 75 investors historically.
- RAIFs may be structured in the form of an umbrella fund, maintaining a number of legally segregated sub-funds or multiple investment compartments (similar to segregated portfolio companies or protected cell vehicles).
- There are no significantly rigid investment restrictions in respect of RAIFs. The only caveat to this is that fund of funds, money market funds or loan origination funds are subject to special requirements.
- The assets under management of a RAIF are subject to no limitation.
Key requirements for a RAIF
As mentioned, RAIFs are not subject to ongoing monitoring by CySEC. They must be externally managed by an AIFM established and licensed in Cyprus or in any other EU / EEA member. It is for the AIFM to ensure the general supervision and compliance in accordance with its own regulatory regime.
RAIFs established as limited partnerships may appoint as managers UCITS management companies or a Cyprus investment firms (CIFs) authorised under MIFID II, instead of AIFMs. In these situations the RAIF would need to be close-ended and invest a minimum of 70 per cent of its funds in illiquid assets.
All RAIFs must appoint a depository, which may be a credit institution (ie a bank) a CIF or other EU MiFID firm. The depositary must have its registered office in the European Economic Area or in a third country provided that CySEC has signed a Memorandum of Understanding for Cooperation and Exchange of Information with the competent authorities of that third country.
Registering a RAIF with CySEC
Whilst the details for the process of registering a RAIF with CySEC are yet to be finalised it is broadly expected that the registration process will enable fund sponsors to set up RAIFs subject to a form of negative consent procedure (or similar), whereby all key characteristics of the RAIF and its service providers are specified and vetted by CySEC acting to strict and streamlined timetables.
Since RAIFs will need to appoint AIFMs it is expected that AIFMs themselves will be required to engage in detailed vetting processes which are managed independently from the direct oversight of CySEC.
Food for thought
Cyprus operates on the cusp of numerous exciting alternative investment markets, from Moscow to Tel Aviv and back again. Undoubtedly regional managers are looking for a cost effective location with time sensitive regulators. We believe that Cyprus will in due time offer the perfect mix in this regard. The recent amendments of the AIF Law and the creation of RAIFs consist of an undeniably significant development in the Cypriot fund industry enhancing considerably investors’ assurance, reliability and trust in Cyprus as an optimal servicing centre for AIFs.