Introduction
According to the Investment Services Act (Chapter 370 of the Laws of Malta) (ISA), a collective investment scheme (CIS) is not permitted to issue or create any units or carry on any activity in or from within Malta unless it is licensed by the MFSA. For an investment fund to be licensed as a CIS by the MFSA, it would have to fall within the definition of a CIS as set out in the ISA which provides for specific criteria which must be satisfied by a structure in order for it to qualify as a CIS, namely it must be a scheme or arrangement which must:
The Companies Act allows a SICAV to issue shares for a cash consideration that is subject to full payment by a settlement date, provided that the SICAV is authorized to issue shares in such manner by its Memorandum and Articles of Association, the settlement date and terms of payment are clearly disclosed in the offering documents issued by the SICAV, and the person acquiring the shares undertakes in writing to pay the full subscription price no later than the settlement date.
- Have as its objective, or as one of its objectives, the collective investment of capital acquired by means of an offer of units for subscription, sale, or exchange;
- Operate according to the principle of spreading risk; and
- Possess one among the three characteristics of pooling of investments, unit holders that are able to request the fund for redemption of their units, or units that will be issued continuously or in blocks at short intervals.
The Companies Act regulates SICAVs by restating certain rules that are normally applicable in the context of a limited liability corporate structure (in particular, those relating to share capital and distribution of profits) in order to render such rules more appropriate for investment vehicles. SICAVs are generally incorporated in the form of an umbrella or multi-fund structure. In this structure, each sub-fund represents a distinct class or classes of shares in the company, with each class capable of being designated with a different currency. SICAVs established as multi-fund or umbrella companies enjoy the benefit of the segregation of assets and liabilities of each of their sub-funds, each to be treated as a patrimony separate from the others.
Funds can be established as companies (SICAVs or INVCOs), contractual funds, unit trusts, or limited partnerships. Funds may either be open-ended or closed-ended.
CISs are issued with a CIS license by the MFSA. CISs are also extensively regulated by the Investment Services Rules. Different rule books apply to the different types of CISs that can be established. Hedge funds, private equity funds, real estate funds, and other alternative investment funds would fall within professional investor funds and alternative investment funds categories. These rule books were amended as part of the implementation of the Alternative Investment Fund Managers Directive (AIFMD). UCITS funds and non-UCITS retail funds are subject to different sets of rules. The rules applicable to UCITS funds reflect EU- harmonized directives and regulations.
The recognized incorporated cell company (RICC) was introduced in Malta in 2012, to directly target fund platform providers. Maltese law permits the creation of (or conversion into) an incorporated cell company type vehicle where the core or RICC’s activities would be limited to providing, in exchange for payment of a platform fee, certain administrative services to its incorporated cells. RICCs are required to apply for a recognition certificate in terms of the ISA. In this respect, the MFSA has issued a new sub-set of rules outlining the recognition requirements and application and documentation required as well as setting out the ongoing requirements for RICCs.
The most popular form of Maltese investment vehicle is a corporate variable capital fund (SICAV), usually established as an open-ended fund. SICAVs also can be established as umbrella funds. A SICAV that is established as an umbrella fund may have segregation of the assets and liabilities of each of its sub-funds.
The objects of a SICAV are limited to the collective investment of its funds in movable or immovable property, with the aim of spreading risk and giving the shareholders the benefit of management of its funds. The variability of a SICAV’s capital allows for significant flexibility in shareholder operations.
The Companies Act allows SICAVs to issue fractional shares and provides for full flexibility in relation to the redemption of units by their holders, as long as the redemption procedure is provided for in the SICAV’s articles of association.
When the SICAV or one of its sub-funds is constituted with multiple classes of shares, each class of shares is devised with a particular set of rights and scheme of distribution, allowing the promoter to segregate one group of investors from another according to the needs of the fund and the investors.
A SICAV’s memorandum and articles of association will be kept on the public file maintained by the Companies Registry. The names of the SICAV’s officers are available to the public. The register of shareholders of the company is not public, although members and officers have access to it. The prospectus/offering memorandum of a SICAV has to be lodged with the Companies Registry (and will therefore be available to the public), but only if the units of the SICAV are offered to the public for subscription.
The directors of a SICAV must ensure that records, accounts, statements, and any other documents belonging to a particular sub-fund are maintained separately, on an ongoing basis, from those belonging to other sub-funds. This segregation of documentation must be such as to clearly identify the assets and liabilities of one sub-fund as separate and distinct from those of another sub-fund.
When a Maltese umbrella fund has opted for segregation of its various sub-funds, it will nonetheless still be possible for its articles or offering memorandum to provide for certain expenses of the umbrella fund to be attributable and borne by all the various sub- funds. Typically, these would include such expenses as directors’ fees and audit fees that are charged to the SICAV as a whole. It is up to the promoters to determine how these expenses are to be attributed, whether on a proportional basis to the net asset value of each sub- fund or otherwise.
Maltese law clearly states that creditors of a particular sub-fund will have no ‘claim or right of action’ against any other assets which may belong to the SICAV or to other segregated classes of that SICAV.
As part of the implementation of the AIFMD, the MFSA has issued rules applicable to alternative investment funds (“AIFs”). The Rules provide that an AIF may be managed by an external manager, which must be an AIFM, or may opt to be a self-managed AIF. A self- managed AIF must have an initial capital of at least €300,000, which must be increased once the portfolio of the AIF exceeds €250 million. A self-managed fund is also subject to a number of additional rules that are similar to those applicable to AIFMs.
Unit Trusts
A CIS also can take the form of a unit trust that is governed by Maltese law or the laws of any other jurisdiction. A unit trust is a contractual agreement entered into between the management company and the trustee.
The trust deed sets out, inter alia, the unit holders’ rights; the duties, appointment, and removal of the manager and trustee; investment and borrowing powers and restrictions; and the methods of administration, termination, and winding up of the affairs of the trust. Unit trusts must seek MFSA licensing as CISs.
Limited Partnerships
A fund also can be set up as a limited partnership, known as a partnership en commandite. The legislation governing Maltese limited partnerships is contained in the Tenth Schedule to the Companies Act, as a result of which limited partnerships benefit from more structural and operational flexibility.
A limited partnership consists of one or more general partners and one or more limited partners. The general partners are jointly and severally liable for all the debts of the partnership without limitation, and each of the partners must satisfy the MFSA that he is a fit and proper person to carry out the activities or functions of the partnership. On entering the partnership, the limited partners contribute or agree to contribute a specified sum to the capital and, save for the unpaid portion of their contribution to the partnership, will not be liable for any debts of the partnership.
A limited partnership must have a legal personality separate and distinct from that of its partners. The administration and representation of the partnership will vest in the general partners and, unless the deed of partnership provides otherwise, such administration and representation will vest in each of the general partners severally.
A limited partner may not participate in the conduct or management of any business of the partnership and may not transact the business of the partnership, nor may he sign or execute documents on behalf of the partnership.
The partnership agreement must state the nature of the business to be carried out by the partnership. The partnership must maintain a registered office in Malta where it must, among other things, keep a register of the limited partners.
Limited partnerships that are divided into shares and are open-ended are generally subject to the same rules that apply to SICAVs. The major difference is that such a limited partnership must have at least one general partner instead of a board of directors.
A limited partnership also may be constituted as a multi-class or multi-fund partnership with the written approval of the MFSA. Multi-fund partnerships may elect to segregate the assets and liabilities of separate funds.
Investment Company with Fixed Share Capital
The general information relating to any company incorporation also will apply to closed-ended funds. An INVCO is a closed-ended fund to which particular rules on distribution and capitalisation of profits apply. INVCOs are required to invest in securities, distribute 85 per cent of their income, and are listed on a recognized investment exchange.
Contractual Funds
Contractual funds, also known as mutual funds, are CISs that are set up by a deed of constitution (entered into by the fund manager and the depositary of the fund) and consequently do not have legal personality. The enactment of the Investment Services Act (Contractual Funds) Regulations 2011 sets out a functional framework.
A contractual fund is licensed and regulated by the MFSA as a CIS under the Investment Services Act, and it may be an open-ended or closed-ended scheme. The liabilities of a unit holder are limited to the amount agreed to be contributed by the unit holder for the subscription of units in the contractual fund.
Listing of Funds
Investment funds licensed in Malta or in a reputable jurisdiction can seek a listing on the Malta Stock Exchange. A fund that is licensed in Malta also is permitted to be listed on an investment exchange overseas. The promoters of the particular fund would have to go through a listing application process with the Listing Authority (which also is the MFSA). This process is not very extensive and does not usually involve major expense.
Undertakings for Collective Investment in Transferable Securities (UCITS)
Passporting into Malta
The Investment Services Act (Marketing of UCITS) Regulations (UCITS Regulations) came into force on 1 July 2011, following local transposition of the UCITS Directive. Under the UCITS Regulations, a UCITS fund which is licensed as such by its home state regulator in a Member State of the EU or the European Economic Area (EEA) may market its units in Malta without obtaining a license in Malta.
Funds Licensed in Malta
The promoters of a fund are able to submit an application to the MFSA for their fund to be licensed in Malta as a UCITS fund (Maltese UCITS). Such a fund would be able to benefit from the passporting provisions of the UCITS Directive.
A Maltese UCITS must go through the same application process as that applicable to non-UCITS funds (discussed in detail in the following subsection). A written notification of the UCITS fund’s intention to market itself in the EU or EEA must be submitted to the MFSA together with the appropriate documentation and information on the arrangements made for the marketing of its units abroad.
All Other Funds
A non-UCITS fund is subject to the licensing regime of the Investment Services Act. All funds which are not UCITS funds are non-UCITS funds (including professional investor funds and alternative investment funds, which are discussed next). However, non-UCITS funds that are intended to be made available to a retail investor without any limitation (or a low limitation) on the minimum investment which the investor can make are subject to more detailed regulation by the MFSA under the Investment Service Rules, particularly with respect to the fund’s investment objectives, policies, and restrictions.
A non-UCITS fund (whether made available to the retail market or to professional investors) cannot benefit from the passporting rights under the UCITS Directives. A non-UCITS fund which qualifies as an alternative investment fund, may make use of passporting rights under the AIFMD.
The MFSA will consider the nature of the fund and the kind of investors to whom it will be marketed. It also will look into the experience and track record of all parties who will be involved with the fund. Such service providers should be of good standing and should be competent to perform the services for which they will be retained by the fund.
The application process takes approximately three months to complete, depending on the standing and repute of the fund promoters and the service providers and the financial instruments in which the fund intends to invest. At the end of this period, the MFSA will issue the necessary licenses to the fund and, in case of an umbrella fund, all its sub-funds.
As a general rule, the depositary of a non-UCITS retail fund must be established in Malta, but alternative custodial arrangements may be considered by the MFSA, as long as those arrangements provide appropriate protection for unit holders and for the fund’s assets.
Preferably, the fund management company of a non- UCITS retail fund should have an established place of business in Malta. The MFSA has the power to exempt an overseas fund management company of sufficient standing and repute from this local presence requirement.
Professional Investor Fund and Alternative Investment Fund
The professional investor fund (PIF) structure was designed for fast-track regulatory approval of funds aimed at investors sophisticated enough to do their own due diligence. A PIF is a non-retail fund that can be private or public in nature. Since PIFs are considered to be too risky for the public at large, only certain types of investors qualify to invest in them. PIFs also qualify as alternative investment funds.
Malta’s EU membership in May 2004 generated substantial interest from fund promoters interested in using Malta as the domicile of choice for their funds. The promoters of the PIFs licensed so far by the MFSA originate from a number of jurisdictions, such as Canada, the Czech Republic, Egypt, Greece, Guernsey, Italy, Liechtenstein, Norway, South Africa, Switzerland, Turkey, the United Kingdom, and the United States. The investment strategies of these PIFs range from investing in the foreign exchange markets, investing in traditional instruments such as equities and debt securities, to investing in commodities, real estate, private equity, and insurance policies. Other PIFs are funds of funds or invest through a number of managed accounts or selected trading advisors.
Certain funds achieve their investment strategies by investing through trading companies incorporated outside Malta. A number of these funds have appointed a fund administrator in Malta, while others have opted to engage an administrator based overseas.
The MFSA has introduced the concept of cross sub- fund investment for professional investor funds targeting qualifying or extraordinary investors. A sub-fund of a professional investor fund may invest up to 50 per cent of its assets in units of one or more sub-funds within the same professional investor fund, subject to this being permitted in the offering document of the professional investor fund.
The memorandum of association of the SICAV must elect to have assets and liabilities of each sub-fund comprised in that SICAV treated as a patrimony separate from the assets and liabilities of each other sub-fund in the SICAV. The target sub-fund may not itself invest in the sub-fund that is to invest in the target sub-fund. Where the manager of the sub-fund is the same as, or an affiliate of, the manager of the target sub-fund, only one set of management, performance, redemption, and subscription requirements would apply.
For purposes of compliance with capital requirements, cross-investments are counted once. Furthermore, any voting rights acquired by the sub-fund in the target sub- fund would be disapplied.
PIFs licensed prior to 22 July 2013 have the option to remain classified as professional investor funds and subject to the professional investor fund regime only if they are managed by an investment manager that falls within the de minimis exemption of the AIFMD, or are self-managed funds availing themselves of the de minimis exemption.
The MFSA has recently declared that as from the 1st June, 2015, an EU AIFM may not set up a professional investor fund but may only set up an AIF. A de minimis EU AIFM can only establish a PIF; however if the fund manager transitions to an EU AIFM, the fund will have to be converted to an AIF. A third country fund manager can establish a PIF or an AIF, subject to compliance with special provisions applicable to non-EU AIFMs managing EU AIFs. A self-managed de minimis fund can only be established as a PIF. A self-managed fund which is above threshold can only be established as an AIF.
What about the Costs and Benefits?
Malta offers the Freedom to Use Foreign Administrators
While required to appoint at least one resident director, Funds in Malta are not required to appoint a local administrator, although a high percentage of funds still opt to have a Maltese administrator due to the high quality of service offered. To support this expanding sector, major banks in Malta have expanded their fund administration and custody business, and, with the World Economic Forum 2014-2015 Global Competitiveness Index positioning Malta within the top 10 with respect to soundness of banks from 134 countries, this could only mean good prospects. A number of accountancy and law firms have reinforced their specialisation in this field and can therefore provide such services at a higher standard and greater efficiency.
Competitive Set-up and Operational Costs
The tax structure in Malta also provides a significant incentive. Companies that list securities on the Malta Stock Exchange are not charged with capital gains tax; nor is stamp duty due on the transfer of such shares or securities. Malta is cost competitive with respect to registrar and listing fees and also with respect to the renting of office space in prime areas, labour costs and communications expenses – especially when compared to other, fellow EU-based domiciles.