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.

Crowdfunding is a modern and increasingly established method of alternative fundraising, especially for startups and small and medium-sized enterprises. The essence of crowdfunding is to bring together investors (individuals and legal entities) who have free capital with businesses seeking to finance their activities. As the term ‘crowdfunding’ itself implies, crowdfunding generally involves a large number of investors in the financing of individual projects. This type of financing also allows access to finance for a group of entities that find it difficult or almost impossible to obtain bank financing.

The most common forms of crowdfunding

Crowdfunding can most commonly be divided into four basic categories:

• Donor crowdfunding: In this model, investors contribute money without expecting any reward. This type is often used to fund charitable and social projects.
• Reward crowdfunding: contributors receive some form of reward, which can be a physical product, service or other form of compensation. This model is popular among creative projects and startups.
• Investment crowdfunding: investors take a stake in a company or project to which they have contributed. This model is similar to the traditional investment process, where contributors expect a financial return.
• Loan crowdfunding: this model allows contributors to provide loans which are then repaid with interest. It is an alternative to traditional bank loans and microfinance.

Crowdfunding legislation

Crowdfunding legislation is harmonised across the European Union. The basic legislation governing crowdfunding is Regulation (EU) 2020/1503 of the European Parliament and of the Council of 7. October 2020 on European crowdfunding service providers for business and amending Regulation (EU) 2017/1129 and Directive (EU) 2019/1937 (the “Crowdfunding Regulation“), which has been applicable in the European Union since 10. November 2021.

Crowdfunding is further regulated by the Commission’s implementing and delegated regulations, which are a set of regulatory and implementing technical rules further regulating certain provisions of the Crowdfunding Regulation.

Finally, the European Securities and Markets Authority (” ESMA “) also provides interpretative opinions on the legal regulation of crowdfunding.ESMA“).

In particular, the Crowdfunding Regulation regulates:

• requirements for the provision of crowdfunding services,
• the organisation of providers of crowdfunding services, and
• the authorisation of providers of crowdfunding services, including the supervision of their activities.

Our partner Tomáš Demo also commented on the topic of crowdfunding regulation in the Investing show on TA3 television:

Crowdfunding actors and crowdfunding platform

In crowdfunding, three types of entities meet:

• crowdfunding service provider – is a legal entity authorised by the relevant regulator to manage or operate a so-called ‘crowdfunding service provider’. A crowdfunding platform through which supply and demand meet between project owners and investors,
• project owner – any legal or natural person seeking to raise capital to finance the performance of its activities through a crowdfunding platform; and
• investor – is any legal or natural person that provides financing to project owners through a crowdfunding platform.

As is also clear from the above, the key concept for the Crowdfunding Regulation is therefore the “crowdfunding platform”, which is defined as a publicly accessible online information system operated or managed by a crowdfunding service provider.1 The provision of crowdfunding is thus defined in the Crowdfunding Regulation exclusively as crowdfunding that is carried out in an online space.

Loan and investment crowdfunding

The Crowdfunding Regulation regulates two types of crowdfunding:

• loan crowdfunding, which facilitates loans from investors as lenders to project owners as borrowers, at an agreed interest rate; and
• investment crowdfunding, whereby transferable securities are placed through a crowdfunding platform and the so-called ” investment crowdfunding“, whereby transferable securities are placed through a crowdfunding platform and the so-called “investment crowdfunding“. The crowdfunding platform involves the placement of accepted instruments for crowdfunding purposes issued by project owners or special purpose vehicles and the acceptance and forwarding of investor instructions to acquire these transferable securities and so-called “securities”. accepted instruments for the purpose of crowdfunding.

Loan crowdfunding and investment crowdfunding are activities through which a crowdfunding platform matches the interests of investors and project owners for funding (crowdfunding services).

A loan under the Crowdfunding Regulation has the following characteristics:

• has a due date,
• the project owner’s commitment to repay the borrowed funds is unconditional,
• the loan is interest-bearing, and
• the project owner is obliged to repay the principal of the loan together with interest in accordance with the repayment schedule.

Investment crowdfunding involves the provision by the crowdfunding service provider of two investment services and activities defined in MiFID II[2]:

• Receiving and forwarding instructions, and
• Placement without firm commitment.

Both of the above services relate to transferable securities[3] and the so called. accepted instruments for the purposes of crowdfunding which are specific instruments defined and defined in the Crowdfunding Regulation. This defines them as ‘shares in a private company limited by guarantee which are not subject to restrictions which would effectively prevent their transfer, including restrictions on the manner in which such shares are offered or advertised to the public’. The National Bank of Slovakia (hereinafter referred to as “NBS“) states that it “does not consider shares in limited liability companies, limited partnerships, public partnerships or cooperatives to be such instruments.”[4] The list published by ESMA[5] also shows that there are no instruments that would qualify as accepted instruments for the purposes of crowdfunding in the Slovak Republic.

Authorisation to provide crowdfunding services

Only the following may provide crowdfunding services (i) legal persons which (ii) are established in the Union; and (iii) have been authorised to carry on activities under the Crowdfunding Regulation . Povolenie podľa prechádzajúcej vety udeľuje v Slovenskej republike NBS, a to po splnení podmienok stanovených v Nariadení o crowdfundingu.

A provider of crowdfunding services with an authorisation granted by the NBS may subsequently, after submitting the relevant notification, also provide crowdfunding services in other Member States of the European Union.

The basic conditions for obtaining a licence to provide crowdfunding services are that the following requirements are met in particular:

• Prudential (capital) requirements. Crowdfunding service providers must continuously comply with financial guarantees, which must amount to at least EUR 25 000 and to one quarter of the fixed overheads for the previous year, if the crowdfunding service provider also facilitates loans. The crowdfunding service provider may meet these requirements through its own resources, an insurance policy or a combination thereof.
• Staffing requirements. Persons responsible for the management of a crowdfunding service provider must demonstrate that they are of good repute and have sufficient knowledge, skills and experience to manage a crowdfunding service provider.
• Organizačno-technické požiadavky. Poskytovatelia služieb hromadného financovania musia vypracovať postupy a opisy systémov, ktorými sa bude riadiť ich činnosť, ako napríklad:
  • opis mechanizmov riadenia a vnútornej kontroly poskytovateľa služieb hromadného financovania na zabezpečenie súladu s Nariadením o crowdfundingu, vrátane riadenia rizík a účtovných postupov;    
  • a description of the systems, resources and procedures of the crowdfunding service provider to control and protect the data processing systems;
  • a description of the crowdfunding service provider’s internal rules to avoid conflicts of interest; and other.

Obligations of the provider of crowdfunding services

In accordance with the Crowdfunding Regulation, a crowdfunding service provider is obliged, inter alia, to:

• make an assessment in relation to the non-professional (retail) investor, in particular to assess whether the investment is suitable for them. To this end, the crowdfunding service provider shall assess the investor’s investment experience, investment objectives and understanding of the risks associated with the investment,
• provide potential investors with a Key Investment Information Document prepared by the project owner,
• publish annually the failure rate of projects offered through the crowdfunding platform; and
• advise investors that their investments are not covered by the Deposit Protection Fund or the Investment Guarantee Fund.

How long does it take to get a crowdfunding license?

Before actually applying for a licence (authorisation to provide crowdfunding services), the entire application must be thoroughly prepared. Depending on the specific business model and the range of services to be applied for, this pre-licensing process can take a couple of months.

In the case of an application for authorisation to provide crowdfunding services, the NBS is obliged to assess whether the application is complete within 25 working days of receipt of such an application. If the application is not complete, the NBS shall set a deadline by which the application must be completed.

Only upon receipt of a complete application is there a time limit of 3 months to assess whether the applicant meets the conditions set out in the Crowdfunding Regulation and to decide whether to grant or refuse the application.

For whom does it make sense to apply for a crowdfunding license?

The crowdfunding platform’s revenue comes from the fees of its users. The crowdfunding service provider does not directly lend its funds or act as an issuer of securities. Therefore, when considering setting up a crowdfunding platform, it is necessary to consider, among other things:

• Whether the entrepreneur wants to manage the funds himself on his own behalf and on behalf of investors,
• Whether the entrepreneur is interested in collective or individual portfolio management,
• Whether the entrepreneur wants to enter directly into the investment or is content to act as an intermediary, and
• What resources does the entrepreneur have and how is their financial plan built.

At the same time, it is always necessary to comprehensively compare and assess other available regulated structures, not only from a legal but also from a tax perspective, with the relevant adviser dealing with the issue. Only after such an assessment (feasibility study) can it be evaluated whether a crowdfunding licence is a suitable solution for a particular business model.

Crowdfunding vs. peer-to-peer (P2P) lending

Crowdfunding and peer-to-peer (P2P) lending share a similar goal – financing projects or needs of individuals and businesses through online platforms. However, there are important differences between them in terms of the legal framework.

In P2P lending, individuals most often borrow funds from other individuals, while such a model is not legally regulated in Slovakia, neither by the Regulation on Crowdfunding, nor is it subject to consumer credit regulation. However, the regulation of P2P lending may be different in other Member States.

A common feature of P2P lending and crowdfunding is the existence of a platform that, in the role of intermediary, links the interests of investors (lenders) on the one hand and borrowers on the other, with these two groups entering into direct contractual relationships.

How can Highgate help you with crowdfunding?

If you are interested in providing crowdfunding services under the Crowdfunding Regulation, we at Highgate can help:

• assess your business plan and its compliance with relevant legislation, including tax analysis,
• prepare an application for authorisation to provide crowdfunding services, including the necessary by-laws and other annexes,
• to provide comprehensive representation throughout the licensing procedure before the NBS, up to the actual granting of the licence.

Highgate has a long-standing interest in financial regulation and capital markets, an area in which crowdfunding regulation clearly falls. Our expertise in this area is evidenced by our recent success in the prestigious Law Firm of the Year 2024 competition, in which Highgate, in addition to winning the Tax Law category, also won the Capital Markets category.

If you have any questions about the legal regulation of crowdfunding, please do not hesitate to contact our experts:

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

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

[1] Art. 2 par. 1 lit. (d) Crowdfunding Regulations.

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

[3] Transferable securities as defined in Article 4(1)(a) of Directive 2009/65/EC shall not be transferable securities as defined in Article 4(2) of Directive 2009/65/EC. 1(44) of MiFID II.

[4] Cited on the NBS website here: https://nbs.sk/dohlad-nad-financnym-trhom/dohlad/trh-cennych-papierov/crowdfunding/ (cited on 13.7.2024).

[5] Available online here: https://www.esma.europa.eu/sites/default/files/library/esma35-42-1305_crowdfunding_tables.pdf (cited on 13.7.2024).

Článok Crowdfunding or crowd funding 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.

The MiCA regulation, commonly known as. The Markets in Crypto-Assets Regulation (or MiCA for short ) is a robust regulatory framework for cryptoassets within the European Union(EU).

The EU’s main objectives that led it to adopt MiCA were:

1. Creating a harmonised regulatory environment in which cryptoasset service providers and issuers of different cryptoassets can operate across the EU without the need for 27 different permits and licences;
2. Providing protection to consumers who purchase cryptoassets or use other services of cryptoasset providers;
3. Creating legal certainty for cryptoasset service providers with a clear set of rules for different services (token issuance, exchange, custody, etc.);
4. Taking EU leadership in the global regulation of cryptoassets to boost technological and economic innovation in the EU.

The MiCAs are subject to modification by:

1. Rules for the issuance of cryptoassets (known primarily as “ICOs”), the obligations of their issuers, and the rules for the admission of cryptoassets to trading on a cryptoasset trading platform;
2. Rules for the authorisation of issuers of asset reference tokens ( ARTs) and issuers of electronic money tokens ( EMTs);
3. The procedure, requirements and process for the authorisation (licensing) of cryptoasset service providers;
4. Protection of clients of cryptoasset service providers and holders of cryptoassets issued and cryptoassets admitted to trading.

Although MiCA is a comprehensive regulation, it does not regulate the following areas directly related to cryptoassets:

1. NFTs (which are therefore not yet regulated); and
2. Tokenised financial instruments (which are subject to the DLT Regulation and the regulation of “standard” financial instruments)).

MiCA applies in the European Union from 30.6.2024 in relation to ARTs and EMTs and from 30.12.2024 in the rest, in particular in relation to cryptoasset service providers.

In connection with the new MiCA regulation, we provide legal services to clients currently doing business with cryptoassets (in particular through trade licenses to provide virtual currency exchange services and virtual currency wallet services), as well as to clients interested in operating in this area as a regulated institution, on how to comprehensively prepare for the new MiCA regulation, including preliminary consultations with the National Bank of Slovakia on their (planned) business model.

The MiCA Regulation and what it entails was also covered more comprehensively in our video podcast, which you can watch here:

At the same time, we will also discuss the regulation and taxation of cryptos and implementation in investment structures in more detail at conference on cryptosto be held in October 2024.

What activities with crypto-assets will require a MiCA permit?

According to MiCA, a permit will be required for:

1. Public offering of tokens other than ART and EMT;
2. Acceptance of tokens other than ART and EMT for trading on a cryptoasset trading platform;
3. Public offering of ARTs and their admission to trading;
4. Provision of cryptoasset services.

What are the benefits of a MiCA permit?

MiCA is a harmonised regulation of crypto-assets, i.e. an authorisation granted in one EU country is valid in other EU countries. Therefore, for example, public offerings of crypto-assets will be feasible throughout the EU and it will not be necessary to analyse legislation in individual Member States for this purpose. Also, the provision of cryptoasset services will be able to be carried out across borders on the basis of the so-called passporting, as MiCA will make cryptoasset services subject to uniform rules across the EU.

At the same time, by imposing different conditions on cryptoasset service providers or token issuers to carry out their activities, MiCA provides a greater guarantee for the security of cryptoasset investments and investors/clients compared to the completely unregulated environment in many EU countries.

The MiCA also establishes a level playing field for cryptoassets business across the EU, thus creating the prerequisite for a healthy business environment in this area.

What are the consequences of doing business without a permit under the MiCA?

In the event of any activity being carried out in contravention of the MiCA, i.e. even in the case of activities requiring authorisation under MiCA, the competent authorities of an EU Member State, in Slovakia the National Bank of Slovakia, have the power to impose sanctions under national law, which may be administrative or criminal sanctions. In particular, under the MiCA, Member States must ensure that the following financial sanctions are imposed:

1. in the case of a natural person, a maximum administrative fine of at least EUR 700 000;
2. in the case of a legal person, a maximum administrative fine of at least EUR 5 000 000;
3. for certain infringements by a legal person, fines of at least 3 % to 12,5 % of the total annual turnover; and
4. maximum administrative fines of at least twice the amount of the gains made or losses avoided as a result of the infringement.

Token issuance and admission to trading

Tokens other than ART and EMT

The public offering of tokens other than ART and EMT will not be possible in the EU unless a cryptoasset whitepaper is produced. This document will then have to be notified to the NBS at least 20 working days before the date of its publication, without the approval of the NBS being required.

Public offerings of these cryptoassets are subject to similar exemptions as public offerings of securities under the Prospectus Regulation.

The development, notification and publication of a whitepaper are also required for the acceptance of tokens other than ARTs and EMTs for trading on a cryptoasset trading platform.

ART and EMT

The public offering of ART for legal entities other than credit institutions will be possible only upon the granting of permission by the NBS. Again, a whitepaper is required to be produced and published.

The public offering of EMT will only be possible for credit institutions or electronic money institutions that develop, announce and publish a whitepaper on the relevant EMT.

Cryptoasset service providers

Who are the cryptoasset service providers, the so-called. CASP?

MiCA introduces a new concept of “Crypto-asset service providers” ( CASPs), which are regulated persons who will be authorised to provide cryptoasset services within the European Union.

CASPs will be authorised to provide cryptoasset services and will be required to comply with a number of requirements, in particular:

1. Prudential (capital) requirements, which for CAPS must be at least EUR 50 000 to EUR 150 000 (depending on the services provided) or one quarter of the fixed overheads for the previous year, whichever is higher. CASP may meet these requirements with its own resources, an insurance policy, or, where appropriate, a. a comparable guarantee, or a combination thereof.
2. Personnel requirements, namely, both the requirement that the members of the CASP’s governing body be of sufficiently good repute and of sufficiently good knowledge, skill and experience to manage the CASP, and that all direct or indirect shareholders and members who hold qualifying interests in the CASP be of sufficiently good repute.
3. The internal rules that will govern the CASP’s activities, e.g. Regulations relating to the procedure for segregation of crypto assets and client funds, complaint handling procedures, governance mechanism, internal control mechanisms, policies and procedures for identifying, assessing and managing risks, including money laundering and terrorist financing risks, business continuity plan, etc.
4. Other requirements, e.g. IT provisioning requirements, or the location and place of effective management in the EU.

What are cryptoasset services under MiCA?

Cryptoasset services are those services and activities related to any cryptoasset under the MiCA:

(a) providing custody and management of cryptoassets on behalf of clients;
(b) operating a cryptoasset trading platform;
(c) the exchange of cryptoassets for funds;
(d) the exchange of cryptoassets for other cryptoassets;
(e) the execution of orders relating to cryptoassets on behalf of clients;
(f) placement of crypto-assets;
(g) receiving and transmitting orders relating to cryptoassets on behalf of clients;
(h) the provision of advice on cryptoassets;
(i) the provision of cryptoasset portfolio management;
(j) the provision of cryptoasset transfer services on behalf of clients;

Who will need a CASP licence under MiCA?

In practice, any legal persons or businesses that wish to carry out the above cryptoasset activities, respectively. to provide the above cryptoasset services in the European Union will need a CASP authorisation. This includes, for example, the following current business models:

(a) Various cryptocurrency platforms and exchanges;
(b) Cryptocurrency wallet providers;
(c) Managers of various cryptomining strategies;
(d) Intermediaries of exchange of cryptocurrencies for FIAT currency or other cryptocurrency;
(e) Advisory services for investments in cryptocurrencies or cryptoassets in general.

How long does it take to get a CASP license?

(a) Prior to the actual hearing of an application for a permit before CASP, the recommended to consult the business plan of the prospective CASP with the NBS and then proceed with the preparation of the application itself – this process may take varying lengths of time depending on the readiness of the CASP, in our experience with licensing proceedings for financial institutions, approximately 3 months should be expected;
(b) Once the application has been prepared, the application shall be submitted to NBSwhich must confirm whether the application is complete within 25 working days of receipt of the application;
(c) If the application is not complete, NBS will set a deadline for completion of the application (this deadline will be individual depending on the extent of the required completion, we expect this deadline to be between 30 and 60 days). If the application is complete, NBS will notify the applicant; if it is not complete even within the additional time period, NBS will reject the application.
(d) Within 40 business days of the submission of a complete application, NBS will issue a decision (grant permission / deny permission). This period may be suspended for 20 working days if the NBS requests further documentation.

What is Highgate’s role in obtaining a permit under MiCA?

What are our services?

Given that no one except CASP and some financial institutions will be allowed to provide cryptoasset services under MiCA, we advise clients both in analysing their business models to determine whether they fall under the new regulation or other regulation within the financial sector (e.g. collective investment or provision of investment services and activities) and in the case of applying for a CASP authorisation before the National Bank of Slovakia.

If the client decides to apply for a CASP licence, we represent the client from the initial consultation of its business plan with the National Bank of Slovakia and subsequently in the preparation of the licence application, including the individual annexes, in cooperation directly with the client and, where appropriate, its other advisors, for example, in the field of IT security. After the application for a licence has been submitted, we represent the client before the National Bank of Slovakia in the licensing procedure itself, in which the National Bank of Slovakia will comprehensively assess the application with all its annexes.

Given our experience with ICOs and STOs, as well as with securities issues, we also advise clients on the preparation of whitepapers for various types of tokens, the preparation of their marketing communications for the purpose of token issuance in accordance with the requirements of MiCA, and the fulfillment of obligations to the NBS in connection with the issuance of tokens or their admission to trading.

What is our experience in cryptoassets legal advice?

Although MiCA is a relatively new piece of legislation, the regulation of cryptoassets has long been comprehensively addressed, whether in the context of taxation, in the field of tokenised financial instrumentsor by speaking directly at NBS conference on MiCA. In the past, we have provided legal and tax advice to clients in, for example:

(a) the creation of a platform for cryptocurrency trading, including the legal structuring of staking strategies,
(b) the primary issuance of hybrid tokens, as well as their placement on a decentralised exchange as part of a secondary sale,
(c) primary token issuance (ICO) and security token issuance (STO),
(d) the establishment and management of alternative investment funds located in offshore jurisdictions and investing in crypto-assets,
(e) structuring the business model in connection with the creation of cryptocurrency portfolio management services,
(f) assessing the compliance of the cryptocurrency business model with the regulation of payment services and electronic money,
(g) creating investment products investing in crypto assets for client customers,
(h) creating a study for the client aimed at establishing the legal and tax framework for the operation of its internal token system.

At the same time, as we have been involved in financial regulation for a long time and thus represent clients in authorisation, registration and sanction proceedings before the National Bank of Slovakia, our know-how is an elementary prerequisite for qualified representation of a client before the National Bank of Slovakia in the licensing procedure for CASP activities, in the preparation of white papers or in applications for a public offering of tokens or their admission to trading. Demonstrating our extensive experience in the area of financial regulation are the successful conferences (some of the largest of their kind in the country) that we have organised, whether regarding real estate financing or regarding the establishment and operation of investment funds.

If it is not clear to you whether your business model will be regulated by MiCA and therefore whether you should prepare for licensing proceedings before the National Bank of Slovakia, do not hesitate to contact our experts:

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

Alternatively, you can discuss your specific questions with our partner Peter Varga, who has long been involved in the regulation and taxation of cryptocurrencies:

If you are interested in the taxation of cryptocurrencies, please do not hesitate to contact us.

Článok Licensing procedures under the MiCA Regulation 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.