There are two types of VCCs in Cyprus; UCITS which we will discuss in the following article, and AIFS.
Click here to read more about AIFs.
Open-Type Undertakings for the Collective Investment in Transferable Securities (UCITS):
For a UCITS to operate as a Variable Capital Investment Company, it shall take the legal form of a limited liability company, its name shall include the reference: “Variable Capital Investment Company”, and it shall be in compliance with the provisions/requirements of the Law 78(I)/2012, outlined below:
A. Main characteristics of a Private Company Limited by Shares:
- It limits the right to transfer its shares.
- It limits the number of its members to 50.
When two (2) or more persons own one (1) or more shares in common then, for the purposes of the calculation of the number of the Company’s members, they are considered as one member.
- It prohibits a public offer to subscribe for any shares or debentures of the company.
- It allows for one person to be the sole shareholder of the Company.
B. Main characteristics of the Variable Capital UCITS – Law 78(I)/2012
General Characteristics of a UCITS:
- Its objects are strictly limited to collectively investing capital raised from the public, in securities and/or in other liquid financial instruments, as more specifically outlined in Section 40 of Law 78(I)/2012.
- It operates on the principle of risk-diversification/risk-spreading, as more specifically outlined in Section 41 of Law 78(I)/2012.
- Its Units are, at the request of investors, redeemed or repurchased, directly or indirectly, out of this undertaking’s assets. Action taken by a UCITS to ensure that the stock exchange value of its units does not significantly vary from their net asset value shall be regarded as equivalent to such redemption or repurchase. If the stock exchange value of the units of a UCITS does not deviate by a percentage higher than 5% of their net asset value, it is deemed that this deviation is not significant.
- It must be an open-ended type of investment undertaking.
- It must promote the sale of their Units to the public within the European Union or any part of it, and
- Its regulations or instruments of incorporation must not limit the sale of its units only to the public in third countries.
Special characteristics for Variable Capital Investment Companies, under UCITS legislation:
- Its sole purpose is the collective management of its portfolio, by investing in transferable securities and other financial instruments, in accordance with section 40 of law 78(I)/2012, to the interest of its shareholders;
- It collects the funds it invests for the above purpose from the public.
- It operates on the principle of risk-spreading/diversification; and
- Its shares are redeemed or re-purchased, directly or indirectly, by its assets, following an application of its shareholders, whereas its capital is increased or decreased by the issue of new shares or the redemption or re-purchase of the old ones, without resorting to a capital increase or decrease under Companies Law.
C. Registration of VCC under UCITS legislation, Procedure Outline:
Obtain an operation license (Section 9 of 78(I)/2012 Law), formerly issued and communicated, by the Securities and Exchange Commission. To issue the operation license, CySEC must:
- Approve the application of its Management Company to manage that Common Fund, the Common Fund’s Regulation, and the choice of Depositary.
- Special conditions apply if the UCITS will operate as a Variable Capital Investment Company. *see below
- Special conditions apply if a UCITS is managed by a Management Company established in a member state other than the Republic; and
The Management Company of a UCITS constituted as a Common Fund shall further communicate the following information to CySEC for approval:
- A statement regarding the assumption of obligation to deposit the initial assets of the Common Fund in cash.
- The name of the Management Company and of the Depositary of the Common Fund, as well as the data regarding to the directors of the Management Company and of the Depositary that shall be responsible, as the case may be, either to manage or to monitor the activity of the Common Fund.
- A statement by the Depositary, confirming that it agrees to exercise the duties of the Common Fund’s Depositary, in accordance with the provisions of the Law,
- A Common Fund draft Regulation signed by the Management Company and the Depositary,
- A Common Fund’s draft prospectus and
- A Common Fund’s draft key investor information.
Variable Capital Investment Company:
If the UCITS takes the form of a Variable Capital Investment Company, the company to be constituted or its Management Company, if such Management Company has been designated, shall communicate to CySEC the following information for approval:
- The name of the Management Company and of the Depositary, as well as of the directors of the Management Company and of the Depositary that shall be responsible to manage the Variable Capital Investment Company.
- A statement by the Depositary, confirming that it agrees to exercise the duties of the Variable Capital Investment Company’s Depositary, in accordance with the Law.
- A statement of the Management Company, confirming that it agrees to manage the portfolio of the Variable Capital Investment Company; and
- Variable Capital Investment Company’s draft instruments of incorporation, a draft prospectus and a draft key investor information.
Furthermore, in the case where a Variable Capital Investment Company has not designated a Management Company, CySEC will grant a license of operation only where it is satisfied that:
- The Variable Capital Investment Company has a sufficient initial capital of at least three hundred thousand Euros (300.000), and in the case that the VCC is comprised by more than one investment compartments, the aforementioned minimum amount of the initial capital shall apply to each one of these compartments; and
- The application for an operation license is accompanied by a programme of operations setting out, at least, the organisational structure of the Variable Capital Investment Company; and
- The directors of the Variable Capital Investment Company must be of sufficiently good repute and be sufficiently experienced also in relation to the type of business pursued by the Variable Capital Investment Company. To that end, the names of the directors and of every person succeeding them in office must be communicated forthwith to the Commission. The conduct of a Variable Capital Investment Company’s business must be decided by at least two persons meeting the above mentioned conditions; and
- Where close links exist between the Variable Capital Investment Company and other natural or legal persons, the Commission grants operation license only if those close links do not prevent the effective exercise of its supervisory functions.
D. Other key information relevant to VCCs under UCITS law:
- The VCC or its Management Company must be compliant with the rules of conduct referred to in section 123 of the 78(I)/2012 Law.
- The VCC or its Management Company must appoint a Depositary in accordance with the provisions of section 10 of the 78(I)/2012 Law, and the Depositary so appointed must comply with sections 11-15 of the same Law.
- It is a general rule that the VCC, or a Management Company while acting on the behalf of a VCC, shall not borrow money. Exceptions to this rule are provided in Section 50 of the 78(I)/2012 Law.
- The profits from the sale of transferable securities or other liquid financial instruments shall be distributed to unit-holders at the discretion of the Management Company of the Common Fund or at the discretion of the Variable Capital Investment Company, to the extent these are not cancelled out by possible capital losses occurring by the end of the year.
- As a general rule, the VCC, or a Management Company while acting on the behalf of a VCC, shall not grant loans or act as a guarantor on behalf of third parties; unless so permitted in sections 40 and 41 of the 78(I)/2012 Law;
- The VCC and Management Companies have the obligation to provide certain information, to investors, within specific time frames, as provided in sections 55 to 66 of the 78(I)/2012 Law.
- Special provisions apply to UCITS which market their units in a member state other than the member state in which they are established.
Legislation: 1. Open-type Collective Investment Firms Law of 2012 (78(I)/2012) (GR)
2. Alternative Investment Funds Law of 2014 (131(I)/2004) (GR)
3. Companies Act, CAP. 113 (GR)
4. CySEC regulatory framework: UCITS (EN), AIF (EN)