Cyprus Alternative Investment Funds
What are AIFs?
AIF includes any collective investment undertaking, including investment compartments thereof (investment compartments are considered as separate AIFs), which, collectively:
(a) raise capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors; and
(b) do not require authorisation pursuant to section 9 of the Open-ended Undertakings for Collective Investments Law of 2012 or pursuant to the legislation of another Member State which harmonises the article 5 of the Directive 2009/65/EC;
According to the Alternative Investment Funds Law of 2014, an AIF of the Republic (of Cyprus) refers to:
(a) an AIF established in the form of a common fund, authorised by the Cyprus Securities and Exchange Commission (CySEC); or
(b) an AIF established in the form of an investment company, authorised by CySEC and having its registered office and its central offices of operation the Republic;
(c) an AIF established in the form of partnership, authorised by CySEC having its main location for the exercise of its activities in the Republic;
(d) an ‘Alternative Investment Fund with limited number of persons’ (AIF-LNP) which refers to an AIF authorised, by CySEC, as such in accordance with section 115(2) of the Law;
The Legal Form of an AIF:
Therefore, an AIF may be set up in one of the following legal forms:
(a) as a mutual fund;
(b) as an investment company in the legal form of a limited liability company with shares (shall be defined whether fixed-capital or variable capital); or
(c) as a limited liability partnership.
An AIF, subject to any authorization/registration requirements under AIFM Law, may be either:
(a) Self-Managed, where it does not appoint an external manager, if it is established as an investment company and one of the following applies:
(i) the assets of the portfolio of the AIF, including any assets acquired through use of leverage, in total do not exceed a threshold of €100m;
(ii) the assets of the portfolio of the AIF, where the AIF does not employ leverage and its unit-holders have no redemption rights exercisable during a period of 5 years following the date of initial investment in each AIF, do not exceed a threshold of €500m;
(iii) the persons that sign the instruments of incorporation of the investment company under incorporation or the members of the board of directors, in case of an incorporated company, decide not to appoint an external manager and to exercise internal management in accordance with the provisions of the Alternative Investment Fund Managers Law of 2013 (“AIFM Law”); either obligatory, in case the assets of the portfolio of the investment company exceed the thresholds of subparagraphs (i) or (ii) accordingly, or by choice, because they choose to opt in the AIFM Law, whereby the investment company would be considered as an AIFM and fall within the scope of the AIFM Law; or
(b) Externally Managed, where it appoints an external portfolio manager, who;
(i) is an AIFM authorised in accordance with the AIFM Law; or
(ii) where subparagraph (i) does not apply, may operate as, either an AIFM authorised in accordance with the AIFM Law, or as a management company authorised in accordance with the Open-ended Undertakings for Collective Investments Law, or as an Investment Fund authorised in accordance with the Investment Services and Activities and Regulated Markets Law, as amended.
Therefore, an AIF is authorised and licensed by the Cyprus Securities and Exchange Commission (“CySEC”) where the specific requirements introduced on the type of the IF and whether the IF will be self-managed or externally managed are met; and, CySEC may specify by directive any investment restrictions on AIFs according to the nature of the assets in which they invest in and the type(s) of investors which the AIF targets.
AIF General Requirements
- The Initial Capital of the AIF, as appropriate, shall be consisted of cash or assets relevant to the investment policy of the AIF, free from any kind of charge, as follows:
(i) Common Fund: €125,000 minimum
(ii) Investment Company (Fixed/variable capital):
- Externally-Managed: €125,000, or
- Self-Managed: €300,000.
(iii) Limited Liability Partnership: €125,000.
- The AIF must maintain and apply appropriate risk management systems to monitor its risk with regards to its operations, its position, and the overall risk profile of its portfolio.
- The AIF must maintain the appropriate organisational structure to minimise conflict-of-interest risk.
- AIF Management of Operations: By at least 2 natural persons with sufficient experience and specialisation (who cannot participate in the management of the depositary).
- The AIF must appoint a Depositary to entrust the assets of the AIF for safe-keeping.
- The AIF must develop and be in compliance with its Common Fund Rules
- The AIF must comply with all obligations regarding disclosure to investors (Prospectus, annual report, half-yearly report, rules & instruments of incorporation).
Cyprus Alternative Investment Funds with Limited Number of Persons
AIF-LNP General Characteristics:
- In accordance with the AIF Law, the establishment of an alternative investment fund with limited number of persons (“AIF-LNP”)is allowed, provided that it shall not fall within the scope of the AIFM Law nor shall be managed by an AIFM and, additionally, its incorporation documents or partnership agreement:
(i) defines specifically that the relevant fund is only addressed to professional or/and well informed investors; and
(ii) limits the number of its unit holders, including the co-holders, to the maximum limit of 75 persons; and
(iii) does not allow the issue of bearer shares.
- The AIF-LNP Incorporation documents shall define measures and procedures to ensure that the maximum number of persons/unit-holders is complied with at all times.
- An AIF-LNP is allowed to have more than 1 investment compartments however each investment compartment shall be treated as a standalone AIF-LNP.
- An AIF-LNP can be established as:
(i) An investment company of fixed or variable capital; or
(ii) An LLP.
- To operate, an AIF-LNP, requires authorisation by CySEC.
- It can be either externally managed or self-managed (if in the form of an investment company) or only externally managed (if in the form of an LLP).
- It must prepare an annual report to be audited by an independent auditor and filed with CySEC.
- The assets of AIF-LNP shall be entrusted to a Depositary (subject to certain exceptions)
- There is a requirement for a Prospectus to be issued to investors.
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