Introduced in Luxembourg in 2016, the Reserved Alternative Investment Fund (RAIF) offers a simpler set-up and quicker time to market than its regulated counterparts. All asset classes and investment strategies are permitted, and many secondary sources say that you may even distribute these funds directly in Luxembourg – and to well-informed investors to boot…
Sound too good to be true? Well, it might be... There's a chance you may be risking a regulatory breach without knowing it!
Let us take you through everything you need to know to navigate the initial compliance procedure.
First things first: appoint an AIFM
Despite being unregulated, the fund must appoint a regulated alternative investment fund manager (AIFM) located anywhere in the European Economic Area (EEA).
Here in Luxembourg, the AIFM must inform the CSSF (within 10 working days) that the RAIF is under its management in accordance with Circular 15/612. Upon completion of the relevant form (found on the CSSF website), and provision of the necessary information and fund documents, the CSSF issues an identification code. It is only at this point that the management of the fund is recognized and the distribution compliance part can be initiated.
What's the next step?
In order to distribute the fund in Luxembourg, a notification in accordance with art. 31 of the AIFM Directive must be given to, and accepted by, the CSSF. This process is very similar to cross-border notifications (AIFMD art. 32) which are required in order to market AIFs in other EEA countries. Marketing (to professional investors only) can commence as soon as CSSF approval has been given.
What about well-informed investors?
Units of Luxembourg alternative investment funds that are not subject to permanent supervision by the CSSF – such as RAIFs – cannot be marketed to local non-professional investors (see article 46 of the Luxembourg law of 12 July 2013 on alternative investment fund managers).
This article lays out the terms and conditions under which AIFs may be marketed to retail investors. Any well-informed investor which does not qualify as a professional, as defined under MiFID, is technically a retail investor and thus an ineligible target for a RAIF.
In response to an AIFMD FAQ on whether Luxembourg Authorised AIFMs are permitted to "market EU AIFs to retail investors in its territory", it clearly states that regarding non-regulated Luxembourg AIFs, "marketing is limited to professional investors".
This is reiterated in the subsequent section of the same FAQ referring to the case where the AIFM is outside of Luxembourg.
The fact that well-informed investors are specifically mentioned in the law of 23 July 2016 on Reserved Alternative Investment Funds is likely the source of confusion for many. However, as CSSF validation on the art. 31 notification is required, what remains clear is that the authority's position takes precedence.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.