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:
- 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
- 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
firstname.lastname@example.org or at
Wayne H. Davis at
email@example.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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