On 15. Directive No. 2024/927[1] (“AIFMD II“). EU Member States must transpose AIFMD II into their national laws by 16 June at the latest. April 2026 , while the transposition deadline for some provisions has been postponed until 16. April 2027. AIFMD II fundamentally changes not only in particular the provisions of Directive No. 2011/61/EU[2] (“AIFMD“), but also partially amends Directive No. 2009/65/EC[3]. The changes introduced by AIFMD II apply to all management companies licensed under the AIFMD, but do not apply to the so-called “AIFMD II”. They do not apply to under-limited AIFMs.

We took a closer look at the topic of investment funds, including the differences between management companies and registered managers, at our conference on regulated structures in real estate:

Lending by alternative investment funds

One of the key objectives of AIFMD II is to harmonise the rules for alternative investment funds (AIFs) providing credit. The aim is to create an efficient and functioning internal market for AIF lending within the EU. The harmonisation of AIF lending is further intended to ensure a consistent level of investor protection across Member States and also to facilitate access to (alternative) finance for businesses.

What is an AIF lending?

A lending AIF[4] is such an AIF under AIFMD II:

(a) whose investment strategy consists primarily of lending; or

(b) the loans granted have a nominal value of at least 50 % of its net asset value.

At the same time, the term “extension of credit”[5] within the meaning of AIFMD II means the granting of credit:

(a) directly from the AIF as the original lender; or

(b) indirectly through a third party or special purpose vehicle(SPV) that originates the loan for or on behalf of the AIF, or an AIF management company (‘AIFM‘) for or on behalf of the AIF in relation to the AIF, where the AIFM or AIF is involved in structuring the loan or in defining or pre-approving its characteristics before acquiring exposure to the loan.

At this point it should be noted that the Slovak translation of AIFMD II uses a single term “loan origination”, while the English version of AIFMD II differentiates between “loan origination” and “originating a loan”. It is important to see this distinction in the context that a loan-originating AIF is an AIF that meets the above criteria, but at the same time some of the provisions of AIFMD II will also apply to those AIFs that do not qualify as loan-originating AIFs but are involved in the origination of loans (” AIFs that originate loans”).

The term “loan “ itself is not defined in the AIFMD II, which may cause some interpretative confusion in the future, specifically as to what all transactions will qualify as a “loan” for the purposes of the AIFMD II. In this respect, ESMA can be expected to provide its opinion on the issue[6].

What will it mean for asset management companies if they want to manage AIFs providing loans or. AIFs involved in lending?

Under AIFMD II, an AIFM will also be able to apply for authorisation to provide an additional service[7], namely credit management activities. In such a case, the AIFM will be obliged to, for example[8]:

(a) establish effective policies, procedures and processes for the assessment of credit risk and the management and monitoring of its loan portfolio, ensure that those policies, procedures and processes are kept up to date and effective and review them at least annually;

(b) ensure that the nominal value of loans granted by the AIF it manages to any one borrower does not exceed in aggregate 20% of the capital of that AIF where the borrower is a finance company[9], another AIF or a UCITS fund;

(c) comply with lending restrictions under which the AIF will not be able to lend to, for example, its AIFM, or. its employees, its depositary or entities in the same group as the AIFM;

(d) disclose all costs and expenses associated with loan servicing; and

(e) ensure that the AIF it manages retains 5% of the nominal value of each loan made by the AIF and subsequently transferred to third parties.

However, authorisation for the activity of loan management shall not be required for the granting of shareholder loans, provided that the nominal value of such loans does not exceed in total 150 % of the AIF’s capital.

Can a lending AIF be an open-ended investment fund?

AIFMD II provides[10]that the AIFM is obliged to ensure that the AIF lending which it manages is closed. At the same time, however, this Directive allows for such an AIF to be kept open if the AIFM is able to demonstrate to its supervisory authority that the liquidity risk management system of such an AIF will be compatible with its investment strategy and redemption policy.

Liquidity management tools available to AIFMs managing open-ended AIFs include[11] under AIFMD II will include, for example, suspension of subscriptions, redemptions and redemptions, restrictions on redemptions, extension of notice periods for redemptions, redemption fees or swing pricing mechanisms. These instruments may only be used if they are provided for in the AIF’s statutes or constituent documents.

New requirements for the performance of AIFM activities and the outsourcing of activities to third parties

AIFMD II introduces a new requirement to appoint at least two natural persons who are either full-time employees of the AIFM or full-time executive or management board members of the AIFM and who reside in the EU to carry out the activities of the AIFM.[12]

AIFMs that delegate portfolio management or risk management functions will be subject to enhanced reporting obligations and will be required to provide additional information to their supervisor as part of the reporting process on the delegated persons, e.g. the number of full-time equivalents of staff used by the AIFM to perform day-to-day portfolio management or risk management tasks, a list and description of the activities related to portfolio management and risk management functions that are delegated, the number of full-time equivalents of staff used by the AIFM to monitor delegation arrangements, the number and dates of periodic due diligence reviews carried out by the AIFM to monitor delegated activity, and others.

Similarly, the enhanced conditions regarding entrustment will also apply when applying for an AIFM authorisation, where the applicant will also have to provide, for example, the following information: (i) a detailed description of the human and technical resources used by the AIFM to carry out the day-to-day tasks of portfolio management or risk management and monitoring of the entrusted activities, or, for example (ii) a description of the regular due diligence measures to be carried out by the AIFM to monitor the delegated activity.

Depositary from another Member State

In order to increase competition in depositary services, AIFMD II introduces a regime under which Member States have the possibility to allow their supervisory authorities to allow the designation of a depositary established in another Member State. Currently, under Art. 21 para. 5 of the AIFMD, the depositary must be established in the home Member State of the AIF (if the AIF is domiciled in the EU).

The designation of a depositary from another Member State will be possible under AIFMD II provided that the following conditions are met[13]:

(a) the AIFM has received a reasoned request from the competent supervisory authority for permission to designate a depositary established in another Member State and that request demonstrates a lack of depositary services in the AIF’s home Member State that are capable of effectively meeting the needs of the AIF with regard to its investment strategy; and

(b) the total amount of assets entrusted to custody on the national market of the depositaries of the home Member State of the AIF on behalf of EU AIFs authorised or registered under the relevant national law and managed by the EU AIFM does not exceed EUR 50 billion or the equivalent in any other currency.

Provision of information to investors

The regulation of the provision of information to investors, which is regulated in Article 23 of the AIFMD, will also undergo changes. Under the new legislation, the AIFM will be required to make available to investors before making an investment, in addition to the information previously required, for example (i) the fees, costs and expenses which it incurs and which subsequently accrue, directly or indirectly, to the AIF or to one of its investments; or (ii) information on redemption rights in both normal and exceptional circumstances, existing redemption arrangements with investors and the possibilities and conditions for the use of liquidity management tools.

The AIFM will also be required to provide investors with the following information on a regular basis for each AIF it manages and distributes in the EU:

(a) the composition of the loan portfolio,

(b) once a year, all fees, costs and expenses directly or indirectly borne by investors,

(c) once a year, any parent undertaking, subsidiary or special purpose vehicle used in connection with the AIF’s investments by or on behalf of the AIFM.

Given the transposition deadline of two years, we will have to wait some time for the relevant draft amendment to the Collective Investment Act. It will also be interesting to see whether Slovak AIFMs take the opportunity to create AIFs with an investment strategy focused on lending. In the Slovak realities, this issue is inevitably linked to the fact that it is common for a Slovak AIFM to be part of a group that includes a banking institution, thus potentially representing direct competition for the AIF providing credit.

If you are interested in this topic, please do not hesitate to contact us:

• Peter Varga, e-mail: peter.varga@hg.amcef.com
• Roman Baranec, e-mail: roman.baranec@hg.amcef.com

We have been involved in the field of collective investment for a long time, as evidenced by our award in the prestigious Law Firm of the Year 2024 competition , in which we won the “Capital Markets” category.

Alternatively, you can address your specific questions in a consultation with our partner Peter Varga, who specialises in financial regulation and tax law. You can book a consultation here:

[1] Directive (EU) 2024/927 of the European Parliament and of the Council of 13. 2024, amending Directives 2011/61/EU and 2009/65/EC as regards delegation agreements, liquidity risk management, supervisory reporting, the provision of depositary and custody services and the provision of credit by alternative investment funds.

[2] Directive 2011/61/EU of the European Parliament and of the Council of 8. June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulation (EC) No. 1060/2009 and (EU) No 1095/2010.

[3] Directive 2009/65/EC of the European Parliament and of the Council of 13. Directive 2009/65/EC of the European Parliament and of the Council of 16 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS).

[4] Article 4, para. 1 lit. (at) AIFMD, as amended by AIFMD II.

[5] Article 4, para. 1 lit. (ar) AIFMD, as amended by AIFMD II.

[6] European Securities and Markets Authority.

[7] In the Slovak Act No. 203/2011 Z. z. on collective investment, as amended (hereinafter referred to as the “Collective Investment Act“), the additional services that an AIFM may currently perform (if it is authorised to do so) are defined in section 27 para. 6. The adoption of AIFMD II will require an amendment of this provision as well.

[8] Article 15 of the AIFMD, as amended by AIFMD II.

[9] As defined in Article 13(25) of Directive 2009/138/EC of the European Parliament and of the Council.

[10] It does not apply to AIFs engaged in lending, only to AIFs engaged in lending.

[11] Annex V of the AIFMD, as amended by AIFMD II.

[12] Art. 8 par. 1 lit. (c) AIFMD, as amended by AIFMD II.

[13] Art. 21 par. 5a AIFMD, as amended by AIFMD II.

Článok AIFMD II: Summary of the key changes introduced by the new Alternative Investment Fund Managers Directive je zobrazený ako prvý na Highgate.

In addition, Highgate Law & Tax is also celebrating its win in the “Capital Markets” category, proving itself to be a comprehensive law firm with an extensive portfolio of expertise and the ability to successfully navigate diverse legal challenges.

The awards gala evening, which was organized by the media and educational group EPRAVO Group and the weekly TREND, was held at the Double Tree by Hilton hotel in Bratislava. For Highgate Law & Tax it was not only an opportunity to celebrate its success, but also to thank its clients and partners for their trust and support, without which this milestone would not have been possible.

This double triumph confirms Highgate Law & Tax’s excellent reputation for legal and tax services and reinforces its position as a leading player in the legal services market in Slovakia.

Článok Highgate Law & Tax and its double triumph in the prestigious Law Firm of the Year competition je zobrazený ako prvý na Highgate.

Several such digital platforms have been operating in Slovakia for a long time. Some of them operate on a charitable basis (donations), others on a reward and pre-sale basis (priority access to the product) and others on an investment (share or loan) basis. In our consulting practice, we mainly deal with crowdinvesting – a type of collective financing (crowdfunding), which enables startups and smaller start-up companies, for which bank financing is not yet available, to obtain external financing.

Until recently, the area of collective financing lacked systematic regulation. However, as of November 2023, the so-called “collective collective bargaining scheme” has ended. The transitional period for the provision of crowdfunding services under national law has now ended. From 11. 11. 2023, the provision of crowdfunding services in Slovakia is now also subject to authorisation by the National Bank of Slovakia. At Highgate Law & Tax, we provide comprehensive advice to clients on crowdfunding, including representing our clients in licensing proceedings before the National Bank of Slovakia.

Our partner Tomáš Demo commented on the topic of crowdfunding regulation in more detail in the Investing show on TA3 television. You can watch the full video here: https://www.ta3.com/relacia/929027/crowdfundingove-poziciavanie-penazi

Článok Tomáš Demo on regulation of crowdfunding in Investujeme on TA3 je zobrazený ako prvý na Highgate.

Článok Hello world! je zobrazený ako prvý na Highgate.

The full recording of the conference can be found here:

If you are interested in this topic, please do not hesitate to contact us.

Článok Peter Varga at the NBS conference on the digitalisation of the capital market je zobrazený ako prvý na Highgate.

For those who did not attend the conference, we have provided a more detailed overview of the topics covered at the conference in a separate article. The article can be found at this link. At the same time, if you would like to watch the whole conference, or just some parts of it, we have video recordings of the conference available for you, which can be found at this link.

Taxation of Slovak funds

The form and amount of taxation for Slovak funds depends primarily on the legal form of the fund. By default, there are transparent and non-transparent forms, whereas in the case of mutual funds we see a hybrid between the two.

It is the analysis of a fund’s tax set-up that can be crucial to the efficiency of the fund structure and ultimately the investor’s return.

Taxation of foreign funds

During the lecture at the conference, as well as during the methodological days of the Chamber of Tax Advisors, we also devoted a certain part to various foreign fund structures and individual income from the perspective of classification according to Slovak tax and general legal regulations. In some fund structures, given the incompleteness of Slovak law, it may also be the case that the income from the fund, as well as the income of the fund itself, will not be taxed at any level.

In general, however, there are a number of non-tax reasons why fund managers or founders choose a foreign structure. At the conference we talked about the following:

Thus, taxes are only one consideration and should not be the primary consideration for purposes of defending a foreign fund’s tax position.

VAT

In the lecture we discussed in detail the topic of management fees in fund management. The problem with the interpretation of our VAT Act was caused by the Slovak legislator who forgot to amend the VAT Act when introducing the SICAV legal form. Today, in principle, funds in Slovakia may face the risk of a mechanical interpretation that would be contrary to EU law and could significantly harm the fund structure (including investors).

However, it is important to note that not every fund administration is exempt from VAT, and in practice it is relatively common to find that trustees (including institutional trustees) are not sufficiently knowledgeable on the subject. When setting up the fund structure, it is therefore essential to bear this in mind and try to set up the structure as efficiently as possible within the legal framework.

If you are interested in this topic, please do not hesitate to contact us.

Článok Petr Varga’s lecture at the methodological days of the Chamber of Tax Advisors on the topic of taxation of funds in Slovakia je zobrazený ako prvý na Highgate.

In our practice, we often encounter structures where it is not entirely clear whether or not they should be regulated. Unfortunately, in some cases, ignorance can even lead to criminal law. Peter Varga demonstrated this risk with examples at our conference, which focused on real estate financing through various regulatory and tax structures. However, Peter Varga also spoke briefly about this at the TA 3 investment conference.

Scams with funds, bonds or other investment structures and opportunities?

As the regulatory jurisdiction of the NBS and the OČTK is often territorially limited, many investors in Slovakia fall victim to fraud. However, some of these fraudulent schemes are purely Slovak.

Taxation of funds in Slovakia?

At the time of the conference, there was a law in place that gave tax advantages to certain types of fund structures that was to be effective January 1, 2024. Although Peter Varga described the new tax regime, he quite astutely stated that the debate on the taxation of funds may be premature given the activities of the new government.

We have been actively dealing with the topic of funds in our practice for a long time, if you are interested in this topic, we attach links where we deal with it in more detail, namely:

in the following articles or lectures:

at our successful unique conference:

or in our video podcasts and online training:

Tokenised financial instruments and real estate

Tokenisation of assets undoubtedly brings with it a number of benefits, but also challenges. Peter Varga summarized them at the conference as follows.

If you are interested in the topic of tokenised financial instruments, we have covered it in more detail in the following article:

Taxation of portfolio rebalancing

In most cases, Slovak tax law has the ambition to tax the generation of income when rebalancing portfolios. However, there are institutes where taxation on rebalancing does not occur. Peter Varga also commented on this at the conference.

Článok Peter Varga on financial regulation and taxes at TA3 conference on investing je zobrazený ako prvý na Highgate.

For those who did not attend the conference, this article provides a brief overview of the topics we covered. At the same time, if you would like to watch the whole conference, or just some parts of it, we have video recordings of the conference available for you, which can be found at this link.

What types of investment funds do we know in Slovakia?

We opened the conference with a comprehensive discussion of different types of investment funds. When setting up a structure through investment funds, a number of factors have to be taken into account, hence their division mainly according to:

• investment policy;
• legal form;
• passport options;
• taxability of income;
• application of VAT on management fees;
• the type of investor to whom the investment fund may be distributed;
• the type of offer; or
• whether a permit is required for its establishment and operation.

At the same time, not all types of investment funds are suitable or possible to use for real estate financing, and those that may have real estate in their portfolio consequently differ significantly in their specific parameters. Therefore, an initial comprehensive regulatory, legal and tax assessment of the above factors is crucial in the creation and establishment of investment funds.

What are the rules for distributing a retail investment fund? Slovak SICAV?

The first panel was devoted to the so-called. Small investment funds. These are investment funds whose managers are limited by the maximum amount of assets they can manage. On the other hand, these investment funds are subject to very limited application of collective investment legislation, do not have a statutory investment policy (so they can invest in real estate) and are primarily aimed at professional investors and, to a limited extent, qualified investors.

The following factors play a key role in the distribution of small investment funds that invest in real estate:

• identification and assessment of the professional investor;
• taking into account the criteria of a professional investor with regard to the investment policy of the fund;
• limits for qualified investors in terms of their number, their share of the fund’s assets and their share of the assets managed by the manager;
• the distribution channels through which qualified investors may be approached; and
• restrictions on the promotion of such funds.

Small investment funds can be set up as a variety of companies or cooperatives. At the same time, only an investment fund can take the legal form of a company limited by shares with a variable share capital (SICAV). This is a flexible legal form which is adapted to the needs of collective investment. Only a small investment fund set up as a SICAV can create sub-funds as accountably separate parts of the assets with different investment strategies.

Where is the collective investment frontier? When do I need the fund?

The second panel focused on various alternative forms of raising capital from investors and investing in foreign real estate. The first topic was defining the boundaries of collective investment, i.e. answering when a particular business model constitutes a fund and when it is a legal structure without any permission from the NBS. When analysing a particular business model from a collective investment perspective, it is necessary to assess whether this business model:

• cumulatively fulfils all the statutory characteristics of collective investment;
• meets the characteristics of one of the collective investment exemptions, e.g. it is a joint venture (JV) or a holding entity;
• there are other indications that are a prerequisite for a business model to be a fund or not.

Crowdfunding and bond financing

Crowdunfing is a relatively still new regulation that makes it possible to connect investors on the one hand and entrepreneurs seeking funding for their projects on the other. The Crowdfunding Regulation aims to facilitate financing, especially for small and medium-sized enterprises, for which, for example, bond financing with a prospectus may be too costly. At the same time, crowdfunding platforms, as online platforms, are widely accessible to a large range of investors, including retail, and thus allow project owners to find funding, either through loans or by placing the securities they issue on that platform.

Thus, for example, a crowdfunding platform allows a developer to issue bonds (only up to a certain amount) in order to build a specific development project. Bonds can of course also be offered outside the crowdfunding platform, while the issuance of bonds represents a standard traditional method of financing, which is widely used in Slovakia and by developers. The legal regulation of bond issues is very flexible, which gives issuers a lot of room to set the individual parameters of the bonds according to their needs, starting with the way of calculating the yield, setting the rules for early maturity of the issue, the period during which the bonds will be issued, or their subordination to bank financing. At the same time, when financing real estate through bonds, an interesting institute is the security agent, in whose favour, as an agent of the bondholders, the bonds can be secured by the real estate.

How is it possible to invest in foreign real estate?

Acquiring real estate outside the Slovak Republic can be an interesting investment opportunity. For investment structures that allow Slovak investors to make such investments, taxes are one of the most crucial parameters. Setting up the structure in such a way that it can be competitive for investors with other “domestic” investment products is a very complex matter, taking into account in particular the existing risk of double taxation.

European Investment Funds EuVECA and ELTIF

The third panel, which also included two panelists from Slovak asset management companies, was devoted to larger investment funds, i.e. funds whose establishment and operation in Slovakia requires the permission of the NBS. The venture capital fund or “EuVECA” is primarily intended for investments in the so-called “EuVECA”. However, with a relatively broadly defined investment policy, it is possible under certain circumstances for such a fund to invest, for example, in companies owning real estate. While such a fund can also be established by a registered manager, in order to use the EuVECA designation, a number of requirements that are normally required (of course to a greater extent) for licensed management companies must be met, such as qualification requirements for persons managing venture capital funds, prudential requirements for the manager, and a number of internal policies. Not forgetting the correct tax set-up.

EuVECA and ELTIFs have the advantage that they can be distributed across the EU to a wider range of investors than other AIFMD alternative investment funds. ELTIF is also the only alternative investment fund that can be offered to retailers across the European Union. The investment policy of this fund is primarily focused on investments in long-term assets (including real estate). Although ELTIF is a closed-end fund, under certain conditions investors may be allowed to redemption before the life of the fund expires.

Qualified investor fund, real estate fund and alternative investment fund

Typical investment funds used by Slovak asset management companies to invest in real estate (and which they also refer to as “real estate funds“) are qualified investor funds, which do not have a statutory investment policy, and then public special real estate funds, which can invest directly in real estate or in so-called “real estate funds”. They can also invest in real estate, in particular in real estate companies, and have to follow rules for limiting and spreading the risk in their portfolio. If certain criteria are met, it is also possible to acquire a commercial company that may own real estate as part of the assets of a public special alternative investment fund. Both real estate funds and alternative investment funds can be offered in Slovakia and to the retail sector without a minimum investment amount limitation.

Why investment funds are set up abroad?

The fourth panel was devoted to foreign funds whose securities or holdings can be offered to Slovak investors. There are various motivations for the decision not to set up an investment fund that will be offered (to a large extent) to Slovak investors, ranging from the stability of the legal environment, the variability of structures that do not exist in Slovakia, for example, but also for reasons of a more robust infrastructure (many Slovak entrepreneurs set up, for example, SICAVs in the Czech Republic, which are managed by “external” management companies).

A big challenge for Slovak investors in setting up investment funds abroad (also) is their tax structuring. Adding to the complexity of this issue are the various legal and tax-transparent structures that need to be dealt with when disbursing income to Slovakia.

In terms of distribution, foreign alternative investment funds (including non-European alternative investment funds) can be offered in Slovakia to all types of investors, but the individual conditions for achieving such distribution will vary depending primarily on:

• where the management company that wants to distribute the fund is based;
• where the Fund is established;
• whether the securities or holdings of such a fund should be offered only to professional investors or also to retail investors.

Acquisition financing

In the fifth and final panel, we addressed the topic of acquisition financing. In a broader sense, financing includes not only bank financing, but also the use of own funds, which have several specificities and limitations, and, for example, various alternative forms of foreign financing.

At the same time, different types of financing can be combined, in which case the potential regulatory aspects of such combinations also need to be considered.

Slovak law brings several specifics, resp. Legal restrictions related to the provision and subsequent repayment of own financing. This not only implies high demands for creative structuring of acquisition transactions using own funds, but also places on the statutory bodies the burden of responsibility for compliance with these rules and a common obligation to compensate for damages in the event of their breach. In particular, the following institutes serve to protect the company’s capital and its shareholders and creditors against transactions between the company and its related parties which are not market-standard:

• prohibition on the return of deposits;
• a society in crisis;
• financial assistance.

If you are interested in the above topics and would like to learn more about them, you can find video recordings of the individual conference panels right here:

If you are interested in this topic, please do not hesitate to contact us.

Článok Real Estate – Taxes and Financing Conference (Unique conference on fund and tax structures, crowdfunding, bonds, bank financing, etc.) je zobrazený ako prvý na Highgate.

Current legislation

According to the currently applicable legislation[5], securities and participations of small Slovak investment funds may be distributed only to (i) professional investors[6] and (ii) qualified investors[7]. The Collective Investment Act directly refers to the term professional investor in Section 8a(a)(1) of the Collective Investment Act. 2 to 7 of the Securities Act. Professional investors[8] can be divided into two categories:

1. Per se professional investors[9], i.e. entities that automatically qualify as professional investors, e.g. financial institutions, called. large commercial companies, state authorities, local authorities or even the NBS and the ECB;
2. Professional investors who can qualify as such (after meeting the statutory criteria) at their own request.[10]

The inclusion of qualified investors as persons to whom it is possible to distribute securities and participations of small Slovak investment funds is a relative novelty in the Collective Investment Act. Until 31.12.2022, it was possible to distribute securities and participations of small Slovak investment funds only to professional investors. Partly thanks to our efforts, Act No. 208/2022 Z. z. extended the possibility of distribution of securities and equity participations of small Slovak investment funds also to qualified investors whose investment in such funds is at least EUR 100 000. At the same time, however, the following conditions have been set:

1. the number of qualified investors investing in one small Slovak investment fund does not exceed 50 persons;
2. the share of qualified investors in the net asset value of the small Slovak investment fund does not exceed 20 %; and
3. share of qualified investors in the total value of small Slovak investment funds managed by the registered manager[11] shall not exceed 20 %.

The above-mentioned criteria will be relaxed with effect from 1 January 2024 (again partly thanks to us), in accordance with Act No. 315/2023 Coll., which also amended the Collective Investment Act, so that (i) the minimum investment of a qualified investor will be reduced to EUR 50,000.[12] and (ii) increase the threshold for the share of qualified investors in the net asset value of a small Slovak investment fund from 20% to 30%. Given our relatively extensive experience in establishing and operating investment funds in Slovakia, we perceive market demands for a relaxation of these requirements. At the same time, however, we understand the NBS’s concerns, which stem primarily from experience in the Czech market.

Based on the investment criteria for qualified investors set above, it is obvious that small Slovak investment funds must still be distributed primarily to professional investors (without whom the above limits for participation of qualified investors cannot be achieved). Therefore, while the expansion of the distribution options for securities and equity holdings of small Slovak investment funds to include qualified investors is a welcome change, a significant boost to the distribution of small Slovak investment funds would be a relaxation of the criteria under which investors could be deemed to be professional investors on their own application.

A legislative initiative at European level that includes easing restrictions for investors to be considered professional investors

The European Commission’s objective in the above-mentioned Capital Markets Union Action Plan is that consumers should be able to take full advantage of the investment opportunities offered by capital markets and that retail investors should be able to[13] are able to achieve better investment results from participation in EU capital markets than before.

The European Commission’s legislative initiative in this respect is a proposal for a Directive amending Directives (EU) 2009/65/EC, 2009/138/EC, 2011/61/EU, 2014/65/EU and (EU) 2016/97 as regards Union rules for the protection of retail investors (“theDraft Directive“).

The draft Directive includes a number of measures, including measures that are expected to increase the protection of retail investors and lead to better quality investment products for retail investors that deliver better value for money (i.e. better quality and more cost-effective products). Part of the measures under the Draft Directive also include a relaxation of the criteria for an investor to be considered a professional investor. The draft Directive states that the relaxation of the criteria is intended to ensure a more appropriate classification of investors and to reduce the administrative burden.

Currently, MiFID II requires investors who may be treated as professional investors on request to have an adequate assessment of their expertise, experience and knowledge, such assessment to provide reasonable assurance that, given the nature of the intended investment, the investor will be able to make investment decisions and understand the risks involved. At the same time, at least two of the following criteria must be met during such an assessment[14]:

1. the investor has executed transactions of significant size in the relevant markets at an average frequency of 10 transactions per quarter over the previous four quarters;
2. the size of the investor’s portfolio of financial instruments, defined as the aggregate of cash deposits and financial instruments , exceeds EUR 500 000; and
3. the investor works or has worked for at least one year in the financial sector in a professional position that requires knowledge of the transactions or services envisaged.

The criteria set in this way are relatively strict, and in practice we also encounter the fact that it is quite difficult for small Slovak investment funds (or their managers) to find investors who could meet these criteria. Taking into account that small Slovak investment funds can only be distributed on the territory of the Slovak Republic and taking into account the size of the Slovak market, the number of potential investors who can qualify as professional investors in this way is objectively low.

The draft Directive relaxes the above criteria as follows:

1. Reduces the size criterion for an investor’s portfolio of financial instruments, defined as the sum of cash deposits and financial instruments, from an amount exceeding EUR 500 000 to an amount exceeding EUR 250 000 on average;
2. It expands the third criterion of ‘professional competence and experience’ to read: ‘the client (investor) has worked or has worked for at least one year in the financial sector or has carried out activities in the capital markets that require the buying and selling of financial instruments and/or the management of a portfolio of financial instruments, in a professional position that requires knowledge of the transactions or services envisaged’;
3. It adds a fourth criterion: ‘the client (investor) can provide the firm with evidence of recognised education or training that demonstrates its understanding of the relevant transactions or services contemplated and its ability to assess the risks appropriately’; and finally
4. In the case of legal persons, it allows them to be treated as a professional investor if they meet two of the following criteria: (i) total balance sheet: EUR 10 000 000; (ii) net turnover: EUR 20 000 000; or (iii) own resources: EUR 1 000 000. At the same time, in this case, the relevant distribution entity will be required to assess whether the representative of the legal person responsible for investment transactions on behalf of that legal person understands the relevant transactions or services contemplated, is able to make investment decisions in accordance with the legal person’s objectives, needs and financial capacity, and is able to make an appropriate assessment of the risks.

If the above changes were adopted and approved as part of the legislative process in the European Union, as part of the Draft Directive, they would have the potential to significantly broaden the range of investors who could be considered professional investors on their own application. They would also have the potential to significantly expand the number of small investment funds in Slovakia, as we currently know from our experience that there is a relatively widespread appetite for foreign solutions. First of all, it would be necessary to meet 2 out of 4 criteria (not 2 out of 3), which creates room for other new combinations when evaluating a particular investor as a professional investor. Second, by reducing the financial limit of the portfolio of financial instruments from an amount exceeding EUR 500 000 to an amount exceeding EUR 250 000 on average, the “entry bar” for investors is halved.

Conclusion

We welcome the legislative initiative in the form of the Draft Directive as a step in the right direction. At the same time, however, it should be noted that the administrative burden of assessing whether an investor can be treated as a professional investor may not ultimately be significantly reduced. Assessment of the fourth criterion of education, i.e. training, will require careful examination of whether such education, or. training sufficient to enable the investor to understand the relevant transactions contemplated and to be able to assess the risks appropriately. On the other hand, the reduction of the financial limit of a portfolio of financial instruments does not in itself have an impact on the procedure and processes for assessing that portfolio of financial instruments.

Of course, the Draft Directive may still be subject to significant changes during the legislative process and, ultimately, its final form may differ significantly. However, one of the set objectives, namely the easing of restrictions for investors to be considered as professional investors, clearly determines the direction in which the categorization of professional investors and, consequently, the distribution of small Slovak investment funds will go.

[1] For the purposes of this Article, the term “small Slovak investment fund” shall mean a collective investment undertaking pursuant to Section 4(4)(a) of the Act on Collective Investment Undertakings. 2 lit. (b) of Act No. 203/2011 Coll. on Collective Investment, as amended (hereinafter referred to as the “Collective Investment Act“);

[2] Act No. 566/2001 Coll. Securities Act, as amended (the “Securities Act“);

[3] Directive 2014/65/EU of the European Parliament and of the Council of 15. of May 2014 on markets in financial instruments amending Directive 2002/92/EC and Directive 2011/61/EU (“MiFID II“);

[4] Available here: https://finance.ec.europa.eu/capital-markets-union-and-financial-markets/capital-markets-union/capital-markets-union-2020-action-plan_en (cited as of 25.9.2023);

[5] As of 25.9.2023;

[6] § 4 para. 4 of the Collective Investment Schemes Act;

[7] § 31d of the Collective Investment Act;

[8] The Securities Act uses the term “professional client”, but since this article is concerned with the distribution of small Slovak investment funds, we use only the term “professional investor”;

[9] § 8a para. 2 lit. (a) to (d) of the Securities Act;

[10] § 8a para. 2 lit. (e) the Securities Act;

[11] A legal person carrying out the management of alternative investment funds to which the exemption under § 31a par. 1 of the Collective Investment Schemes Act;

[12] The term “qualified investor” shall be unified for the purposes of the Collective Investment Schemes Act;

[13] The official translation of the Draft Directive uses the term “retail” investors;

[14] Section II.1 of Annex II to MiFID II;

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On 15.3.2023, the European Parliament approved Regulation No. 2023/606[1] (“ELTIF Regulation 2.0“), which constitutes a major modification of Regulation No. 2015/760[2] (“ELTIF Regulation“) establishing the legal framework for the so-called “ELTIFs“. European Long-Term Investment Funds (“ELTIFs“). As of the date of this article, only 90 ELTIFs[3] with a home Member State in Luxembourg, France, Italy or Spain are registered with the European Securities and Markets Authority (“ESMA“). At the same time, according to the register, none of these investment funds is distributed on the territory of Slovakia (e.g. in the Czech Republic there are 6 ELTIF funds distributed according to the register). It is precisely as a result of the relative failure of the ELTIF segment that the ELTIF 2.0 Regulation was adopted , the purpose of which is, in particular, to make these alternative investment funds more attractive, including by broadening their investment policy and removing the limits to entry for retail investors.

General characteristics of ELTIFs and their distribution

The purpose of the legislation establishing ELTIFs was to provide financing for the ‘real’ economy of the Union, namely for various infrastructure projects, for unlisted companies or listed small and medium-sized enterprises (SMEs) issuing equity or debt instruments for which there is no readily identifiable buyer[4]. ELTIFs were conceived by the ELTIF Regulation as closed-end funds with less liquid assets for long-term investment (over the life-cycle of the respective ELTIF).

Only alternative investment funds authorised in accordance with the ELTIF Regulation may use the ELTIF designation. They may apply for a permit only the so-called. licensed alternative investment fund managers[5], so the creation and management of ELTIFs is not as widely accessible as for other European investment funds, EuVECA or EuSEF. The competent authority for granting the authorisation is the National Bank of Slovakia, which must decide within two months from the date of submission of a complete application for authorisation.

ELTIFs can be distributed within the EU. Under the ELTIF Regulation, an ELTIF manager may market the units or shares of an ELTIF it manages to both professional and retail investors in other Member States, subject to notification to the regulator in its home Member State. While the AIFMD[6] regulates the European passport only for the distribution of alternative investment funds to professional investors, in the case of ELTIFs this regime is extended to retail investors.

Investment policy

An ELTIF may only invest in (i) the so-called. eligible investment assets or (ii) the assets eligible for investment for UCITS[7] within the meaning of Article 50 of Directive No. 2009/65/EU[8].

Under the ELTIF 2.0 Regulation , eligible investment assets are primarily the following asset categories:

1. equity instruments (e.g. shares) or quasi-equity instruments issued by so-called qualified portfolio undertakings (“KPPs“), and KPPs are (with certain exceptions): (i) undertakings that are not financial undertakings, (ii) unlisted companies or listed companies with a market capitalisation of EUR 1.5 billion or less; or (iii) businesses established in the EU or certain third countries.
2. debt instruments issued by KPPs;
3. loans granted by ELTIFs to KPPs whose maturity does not exceed the life of the ELTIF;
4. under specified conditions, units or shares of one or more other ELTIFs, EuVECAs, EuSEFs, UCITS and EU AIFs managed by EU AIFMs;
5. so-called “real assets“, which the ELTIF 2.0 Regulation defines as “an asset that has intrinsic value by virtue of its nature and characteristics”. In terms of the recitals of this regulation, these will be assets comprising immovable property such as communications, environmental, energy or transport infrastructure, social infrastructure including nursing homes or hospitals, as well as infrastructure for educational, health and social support facilities or industrial facilities, and other assets including intellectual property, vessels, equipment, machinery, aircraft or rail vehicles. Eligible investments in real assets should also include investments in water rights, forests, construction and minerals;
6. green bonds issued by KPP

(“Eligible Investment Assets“).

The ELTIF 2.0 Recitals also specify what is not to be considered Eligible Investment Assets, namely works of art, manuscripts, wine stocks, jewelry, or other assets that do not themselves constitute long-term investments in the real economy.

Currently, an ELTIF must invest at least 70% of its capital in Eligible Investment Assets, but the ELTIF 2.0 Regulation has reduced this limit to only 55%. Taking into account the very broad definition of Eligible Investment Assets, the investment limit thus set creates a relatively wide latitude in the implementation of the investment policy.

Retail investors

The current legal situation requires that when ELTIF units or shares are distributed to retail investors, inter alia (i) provided appropriate investment advice; and (ii) where the value of a potential retail investor’s portfolio of financial instruments does not exceed EUR 500 000, the ELTIF manager must ensure that the potential retail investor does not invest in ELTIFs an aggregate amount exceeding 10% of the value of its portfolio of financial instruments and that the initial minimum investment in one or more ELTIFs is at least EUR 10 000.

The ELTIF 2.0 Regulation simplifies these conditions considerably, by removing both the minimum investment limit of €10,000 and the requirement of 10% of the value of a retail investor’s portfolio of financial instruments. ELTIF units or shares will only be able to be distributed to a retail investor if a suitability assessment has been carried out in accordance with MiFID II[9]. A retail investor will be able to make an investment even if the ELTIF is not considered suitable for them on the basis of the suitability assessment carried out, in which case they will have to explicitly agree that they understand the risks of investing in the ELTIF.

Lifetime of the ELTIF investment

As mentioned above, ELTIFs are primarily designed as closed-end investment funds. That is to say, investors are not allowed to request the redemption of their units or shares before the end of the life of the ELTIF, which is a specific date set out in the ELTIF’s statutes or constitutive documents.

At the same time, however, the legislation allows an ELTIF to admit in its statutes or constituent documents the possibility of redemption even before the end of the ELTIF’s lifetime, subject to fixed conditions reflecting in particular the management of the investment fund’s liquidity risk.

Entry into force and application of the ELTIF Regulation 2.0

The ELTIF 2.0 Regulation entered into force on 9.4.2023. It will apply in the European Union from 10.1.2024.

Sources

[1] Regulation No. 2023/606 amending Regulation (EU) 2015/760 as regards requirements relating to the investment policies and operating conditions of European long-term investment funds and the range of eligible investment assets, portfolio composition and diversification requirements and cash borrowing and other fund rules

[2] Regulation (EU) 2015/760 of the European Parliament and of the Council of 29. April 2015 on European long-term investment funds

[3] The register is available here: https:%2Flibrary%

[4] Recital 1 of the ELTIF Regulation

[5] Managers authorised under the AIFMD or the AIFMD Directive, respectively. according to § 28a of the Collective Investment Act

[6] Directive 2011/61/EU of the European Parliament and of the Council of 8. June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulation (EC) No. 1060/2009 and (EU) No. 1095/2010

[7] Undertakings for collective investment in transferable securities or so-called “undertakings for collective investment in transferable securities”. UCITS funds;

[8] Directive 2009/65/EC of the European Parliament and of the Council of 13. July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS)

[9] Directive 2014/65/EU of the European Parliament and of the Council of 15. on markets in financial instruments amending Directive 2002/92/EC and Directive 2011/61/EU

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