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How UCITS Funds Can Expand Their Investor Base into the US

Undertakings for Collective Investments in Transferable Securities (UCITS) have become increasingly popular as an attractive cross-border investment fund product. UCITS funds are readily sold in the European Union under its harmonized regulatory regime, allowing member nations to passport the product — i.e. a UCITS fund based in one member state can be sold in another member state without any further authorization by the host country. As UCITS funds’ popularity has grown in Europe, they have also attracted investors outside of the European Union. Qualifying U.S. investors can take advantage of the investment opportunities presented by UCITS funds. This article provides a brief overview of the regulatory requirements that UCITS funds must follow when marketing to U.S. investors.

U.S. Private Placement Rules Apply

In short, UCITS brought to market in the U.S. must meet the U.S. private placement rules. These rules are self-executing and well defined. In order for a UCITS to make an offering to a U.S. Person without registering with the Securities and Exchange Commission, it must comply with the eligibility requirements set forth under Regulation D of the Securities Act of 1933 (the “Securities Act”) as well as Sections 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940 (the “Company Act”). Under Regulation D, interests in the fund can be offered either:

  1. through the traditional private placement concepts (Rule 506(b)), up to 35 non-accredited investors and the rest accredited and placed privately to persons with whom the issuer or agent has preexisting relationship, or
  2. under the new JOBS Act rule (Rule 506(c)) which, among other things, requires only accredited investors and verification of each accredited investor’s status as such but can be subject to a general solicitation.

In each case, the interests are placed consistent with Sections 3(c)(1) and 3(c)(7) of the Company Act. Section 3(c)(1) limits the beneficial ownership of U.S. investors (who are accredited investors) in the fund to 100. Section 3(c)(7) has no limit to the number of U.S. investors in the fund so long as they are all qualified purchasers.

Marketing to U.S. Investors: Key Documents

Procedurally, UCITS are offered to U.S. investors by providing them with the product’s offering memorandum and a U.S. supplement and subscription documents tailored for U.S. investors. To be read in conjunction with the main (non-U.S.) offering memorandum, the U.S. supplement contains information that must be disclosed to U.S. investors in order for them to be sufficiently informed about the investment opportunity. Supplements contain disclosures pertaining to the applicable U.S. tax laws that apply to an investment in the fund and definitions with respect to the eligibility of the potential investor (U.S. person, accredited investor, qualified purchaser, etc.). In addition, U.S. supplements contain risk factors that are disclosed based on the investment strategy of the fund and U.S. regulations.

Subscription documents contain a series of questionnaires that the fund relies on to determine whether the U.S. investor is eligible to invest in the fund. Such questionnaires include an accredited investor questionnaire, a qualified purchaser questionnaire (when applicable) and an anti-money laundering questionnaire. The document also contains representations and warranties for each of the investor, the investment fund and the fund’s investment advisor. Finally, subscription documents provide the fund with necessary administrative information, such as the wiring instructions and contact information for each of the investor and the fund.

Additional attention is given to the distinction between the tax needs of U.S. taxable investors and U.S. nontaxable (tax exempt) investors such as charities, foundations and pension schemes. While the precise structure may differ, the same basic private placement rules apply in each case.

For more information on the topic discussed, contact Michael G. Tannenbaum at tannenbaum@thsh.com or at 212-508-6701, Wayne H. Davis at davis@thsh.com or at 212-508-6705, or any attorney in Tannenbaum Helpern’s Financial Services, Private Funds and Capital Markets practice.

*A special thank you to Daniel Altabef for his contribution to the article.


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