13 November 2012 – Source: Maclay Murray & Spens LLP
There has long been some debate in the market as to whether an EIS fund (and indeed, a Seed EIS fund) is a collective investment scheme (“CIS”). To date, this has had implications for investment managers in terms of their scope of permissions and regulatory capital requirements, but following the FSA’s recent issue of its consultation paper concerning the marketing of unregulated collective investment schemes (“UCIS”) and the impending implementation of the Retail Distribution Review (“RDR”) and the Alternative Investment Fund Managers Directive (“AIFMD”), the structure of an EIS fund is of even greater importance.
Is an EIS Fund a CIS?
EIS funds are not funds in the usual sense in that a fund vehicle is established which sits between the manager on the one hand and the underlying investors on the other. Rather, EIS funds operate as a series of investment management agreements between the investment manager and each of the investors in the fund. Investments into underlying portfolio companies (and any income or proceeds of realisation arising from them) are generally owned by each individual investor separately (although in practice, investments may be aggregated across all investors in the fund to form a single investment into the relevant investee companies).
One of the requirements that must be met for investment arrangements to fall within the scope of the definition of a CIS is that there must either be an element of pooling or of collective management involved in relation to those investment arrangements. That is, either the contributions of the investors and the profits or income out of which payments are to be made must be pooled or the property the subject of the relevant investment arrangements must be managed as a whole by or on behalf of the investors.
In the context of EIS funds, the usual structure adopted for these funds does not involve the requisite element of pooling in order to meet the requirements of a CIS. While investments into portfolio companies are often aggregated across investors in the fund and income and proceeds of realisation of interests in investee companies may be held collectively in a single bank account, those interests in the fund’s investments are owned by each investor separately. On this basis, the contributions of investors and the profits or income out of which payments are made are not pooled. Similarly, because each investor enters into a separate investment management agreement with the investment manager under which a separate portfolio of shares is managed, the property of the fund (being shares in the underlying investee companies) is not managed as a whole by or on behalf of the fund’s investors.
While most EIS funds are not CIS, it is possible to structure them as such. This would usually be achieved by ensuring that the requisite element of pooling was met in relation to the fund, by ensuring that the profits or income of investors are owned collectively across the fund or by providing common management.
Whether an EIS fund is structured as a CIS has important implications for fund managers/operators including in relation to the pool of investors to whom the fund may be marketed, the payment of adviser commissions and the potential cost and regulatory requirements arising under AIFMD.
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