Investment Funds in ADGM: Their structure, benefits, and applicable regulations
Introduction
Investment Funds in Abu Dhabi Global Market (“ADGM”) technically referred to as collective investment funds, are governed by the ADGM’s commercial regulations and rules, and, more particularly the ADGM’s Financial Services Regulatory Authority (“FSRA”)’s regulations and rules, mainly the Financial Services and Markets Regulation (“FSMR”), broadly modelled on the UK’s Financial Services and Markets Act 2000.
Investment Funds are defined as follows:
“(…) any arrangements with respect to property of any description, including money, the purpose or effect of which is to enable persons taking part in the arrangements (whether by becoming owners of the property or any part of it or otherwise) to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income”.
Categories:
The ADGM typically divides Investment Funds into three main types: (i) Public Funds, (ii) Exempt Funds and (iii) Qualified Investor Funds with differences between each type and the next being the decreasing level of scrutiny and reporting requirements, such differences deriving either from the identity of their targeted investors and/or the manner in which they offer their units to such investors.
Presenting the levels of scrutiny and reporting would require extensive in-depth demonstration and deserves to be an independent topic for discussion. However, providing the main differences in the structural requirements that the FSRA poses on these types of Investment Funds is straightforward and they are the following:
According to FSRA regulations, an Investment Fund is treated and categorized as:
- a Public Fund if:
- some or all of its units are or will be offered to investors by way of a public offer; or
- its unitholders include Retail Clients[1].
- an Exempt Fund if:
- its units are offered to persons only by way of a private placement;
- all its Unitholders are persons who meet the criteria to be classified as Professional Clients[2]; and
- the initial subscription to be paid by a person to become a unitholder is at least US$50,000.
- a Qualified Investor Fund if:
- its units are offered to persons only by way of a private placement;
- all its unitholders are persons who meet the criteria to be classified as Professional Clients[3]; and
- the initial subscription to be paid by a person to become a unitholder is at least US$500,000.
Moreover, Public Funds are subject to higher scrutiny and demand more transparency, while Exempt Funds and Qualified Investor Funds, which are restricted to a certain number of accredited investors, are not subject to the same level of disclosure and reporting requirements as Public Funds.
Additionally, the FSMR provides for a second classification of specialist Investment Funds. This categorization includes the concepts of:
- feeder fund, dedicated to investing all, or substantially all, of its assets in the units or debentures of a single other fund that has the same investment strategy;
- master fund, issuing units or debentures to one or more other fund(s) dedicated to investing in that master fund;
- umbrella fund, aiming to establish sub-funds considered each a separate part of its Fund property and where none of its sub-funds invests in another of its sub-funds, and it shall own at least one sub-fund;
- real estate investment trust (REIT), primarily investing in income-generating real-property and mandatorily distributing a significant portion (80%) of its audited annual net income to unitholders; and
- venture capital fund, investing (directly, or, indirectly as a feeder fund holding units of a master fund) only in the securities of companies which are at an early stage of development and that are not listed or admitted to trading on an exchange.
It should be noted that an exponential growth in the last category of specialist funds (venture capital funds) has been noticed in the ADGM, and this can be explained by its relatively simplified structure and regulatory requirements (E.g. venture capital funds can be incorporated either as Exempt Funds or as Qualified Investor Funds, are closed ended, their total subscriptions are limited to a certain amount unless otherwise approved by the FSRA, and their fund managers are not subject to any minimum capital requirements);
Corporate Structure
Investment Funds in the ADGM can be incorporated as (i) investment companies, (ii) limited investment partnerships, (iii) investment trusts, or, (iv) subject to the consent of the FSRA, protected cell companies (PCC) and incorporated cell companies (ICC) (useful in the case of umbrella funds).
Fund managers are required to (i) be bodies corporate, (ii) if they are ADGM-situs fund managers, hold at a minimum, the “Financial Services Permission” to carry on the “Regulated Activity” of “Managing a Collective Investment Fund” and (iii) satisfy the minimum capital requirements set for the type of Investment Fund under their management (except for venture capital funds).
Core elements of ADGM Funds
Stakeholders should note the following key aspects/benefits proper to Investment Funds in the ADGM:
- The ADGM provides a transparent legal system founded on English common law which provides clarity and a well-understood legal environment;
- The FSRA provides firm regulatory framework that (a) align with international best practices, (b) include regulations that clearly define how funds are managed, advertised, and how they interact with investors, (c) provide how to manage conflicts of interest ensuring investor protection, and (d) requires Investment Funds to have in place strategies for risk assessment and mitigation;
- FSRA’s requirements ensure that only competent and capable managers operate within ADGM;
- Fund Managers are required to ensure regular audit by recognized international audit firms.
Foreign Funds and Foreign Fund Managers
The ADGM also acknowledges both (i) the ability for foreign fund managers to establish and manage ADGM Investment Funds and (ii) the ability for ADGM firms to manage, promote and distribute non-ADGM funds, subject to its regulations and rules.
The ADGM additionally provides access to the UAE Fund Passporting Program[4].
Caution
The regulations and rules governing the Investment Funds frame-work in the ADGM are relatively democratized.
However, like any financial endeavour, prospective participants should be fully aware of the regulations, rules, and challenges surrounding that environment.
Engaging with legal and financial experts familiar with ADGM’s environment is recommended before making any strategic decisions.
Fouad Obeid
Senior Associate
11/11/2023
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For personalized guidance in Investment Funds, please do not hesitate to contact our team by sending an email to: attorneys.ad@omlfirm.com.
DISCLAIMER: This blog post does not constitute legal advice, and no attorney-client relationship is formed by reading it. Additional facts or future developments may affect the content of this blog post. Before acting or relying upon any information within this newsletter, please seek the advice of an attorney.
[1] As defined in Rule 2.3 of the FSRA’s Conduct of Business Rulebook (COBS) (VER15.150823).
[2] As defined in Rule 2.4 of the FSRA’s Conduct of Business Rulebook (COBS) (VER15.150823).
[3] As defined in Rule 2.4 of the FSRA’s Conduct of Business Rulebook (COBS) (VER15.150823).
[4] The UAE fund passporting program is a regulatory initiative by the Emirates Securities and Commodities Authority (SCA), the Financial Services Regulatory Authority (FSRA) of Abu Dhabi Global Market (ADGM), and the Dubai Financial Services Authority (DFSA) intended to facilitate the marketing and sale by fund managers of their domestic funds to potential investors based anywhere in the UAE, including in one of the financial free zones, without having to obtain separate licenses from each regulator (relevant rules are found in FSRA’s Fund Passporting Rules (FP)).