Undertakings for Collective Investments in Transferable Securities (UCITS) have become increasingly popular as an attractive cross-border investment fund product. UCITS funds are readily sold in the European Union under its harmonized regulatory regime, allowing member nations to passport the product — i.e. a UCITS fund based in one member state can be sold in another member state without any further authorization by the host country. As UCITS funds’ popularity has grown in Europe, they have also attracted investors outside of the European Union. Qualifying U.S. investors can take advantage of the investment opportunities presented by UCITS funds. This article provides a brief overview of the regulatory requirements that UCITS funds must follow when marketing to U.S. investors.
U.S. Private Placement Rules Apply
In short, UCITS brought to market in the U.S. must meet the U.S. private placement rules. These rules are self-executing and well defined. In order for a UCITS to make an offering to a U.S. Person without registering with the Securities and Exchange Commission, it must comply with the eligibility requirements set forth under Regulation D of the Securities Act of 1933 (the “Securities Act”) as well as Sections 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940 (the “Company Act”). Under Regulation D, interests in the fund can be offered either:
- through the traditional private placement concepts (Rule 506(b)), up to 35 non-accredited investors and the rest accredited and placed privately to persons with whom the issuer or agent has preexisting relationship, or
- under the new JOBS Act rule (Rule 506(c)) which, among other things, requires only accredited investors and verification of each accredited investor’s status as such but can be subject to a general solicitation.
In each case, the interests are placed consistent with Sections 3(c)(1) and 3(c)(7) of the Company Act. Section 3(c)(1) limits the beneficial ownership of U.S. investors (who are accredited investors) in the fund to 100. Section 3(c)(7) has no limit to the number of U.S. investors in the fund so long as they are all qualified purchasers.
Marketing to U.S. Investors: Key Documents
Procedurally, UCITS are offered to U.S. investors by providing them with the product’s offering memorandum and a U.S. supplement and subscription documents tailored for U.S. investors. To be read in conjunction with the main (non-U.S.) offering memorandum, the U.S. supplement contains information that must be disclosed to U.S. investors in order for them to be sufficiently informed about the investment opportunity. Supplements contain disclosures pertaining to the applicable U.S. tax laws that apply to an investment in the fund and definitions with respect to the eligibility of the potential investor (U.S. person, accredited investor, qualified purchaser, etc.). In addition, U.S. supplements contain risk factors that are disclosed based on the investment strategy of the fund and U.S. regulations.
Subscription documents contain a series of questionnaires that the fund relies on to determine whether the U.S. investor is eligible to invest in the fund. Such questionnaires include an accredited investor questionnaire, a qualified purchaser questionnaire (when applicable) and an anti-money laundering questionnaire. The document also contains representations and warranties for each of the investor, the investment fund and the fund’s investment advisor. Finally, subscription documents provide the fund with necessary administrative information, such as the wiring instructions and contact information for each of the investor and the fund.
Additional attention is given to the distinction between the tax needs of U.S. taxable investors and U.S. nontaxable (tax exempt) investors such as charities, foundations and pension schemes. While the precise structure may differ, the same basic private placement rules apply in each case.
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FAQs
Marketing to U.S. Investors: Key Documents
Can US investors invest in UCITS funds? ›
But for U.S. investors, buying into UCITS funds is a little different than buying traditional mutual funds. You can purchase UCITS funds through a U.S.-based fund manager. That said, only an authorized EU-based management company can oversee that fund.
What are the benefits of a UCITS fund? ›
Cost Savings – Many of the fixed overhead costs of a platform are allocated to each of the underlying sub-funds therefore lowering costs to the investor. In addition, most UCITS platforms are able to negotiate lower costs with service providers due to operational efficiencies.
What are the key features of a UCITS fund? ›
UCITS Key Features
Asset Eligibility – At least 90% of assets must be in liquid (UCITS eligible) instruments. No direct short selling is permitted. Direct exposure to real estate and commodities is not permitted. Asset Diversification – No single asset can represent more than 10% of the fund's assets.
How often are UCITS funds required to supply redemption facilities to investors? ›
UCITS must be able to offer redemptions at least twice a month, i.e. fortnightly. A 10% fund level gate is permitted. Redemption proceeds must be received within 14 calendar days / 10 business days of the redemption deadline.
What are the disadvantages of UCITS? ›
Costs: UCITS funds can have higher costs due to compliance and regulatory reporting requirements. Investment restrictions: Strict investment rules might limit the fund's ability to take advantage of certain market opportunities.
How can foreign investors invest in US stocks? ›
There is no citizenship requirement for owning U.S. stock and foreigners can easily access U.S. stock through U.S.-based brokers and international brokers. Despite its popularity among foreign investors, many foreigners haven't properly planned for the U.S. estate tax consequences of owning U.S. stock.
What is the primary aim of UCITS? ›
UCITS stands for Undertakings for the Collective Investment in Transferable Securities. It is a regulatory framework that allows for the sale of cross-boundary mutual funds for EU member states. UCITS were created so that retail investors have transparent, regulated, and cross-border investment opportunities.
Who invests in UCITS funds? ›
Any person may invest in a UCITS fund. UCITS funds are a highly popular form of investment, especially for European retail investors. While they may be offered worldwide, they're especially popular with Europeans making smaller investments.
How do UCITS work? ›
A UCITS must invest its funds in transferable securities and other liquid assets. This includes transferable securities admitted or dealt on a regulated market, investment funds, financial derivative instruments, cash and specific money market instruments. Uncovered short sales and borrowings are not permitted.
This has been enshrined in what is commonly known as the 5/10/40 rule which is that a UCITS may invest no more than 10% of its net assets in transferable securities or money market instruments issued by the same body, provided that the total value of transferable securities or money market instruments held in issuing ...
Can UCITS invest in commodities? ›
In the case of direct investment, the index must be comprised of eligible assets. A UCITS may also invest in an FDI based on a financial index comprised of ineligible assets, such as commodities or property, but may only do so once the index complies with the criteria in paragraph 1.4 below1.
Where can UCITS funds be domiciled? ›
Luxembourg and Ireland are among the most popular EU member countries to be chosen as a fund domicile. Almost half of all European UCITS and AIFs net assets are domiciled in Luxembourg and Ireland.
Who can buy UCITS ETFs? ›
UCITS ETFs are ETFs (Exchange Traded funds) domiciled in Europe and subject to European Union regulation. These ETFs are mainly held by European investors, but they are also becoming increasingly popular among investors in Latin America, Asia, and other markets due to tax advantages.
What are the investment restrictions for UCITS? ›
Regulation 49 (1) (a) of the European Communities (UCITS) Regulations 2003 provides that a UCITS may invest no more than 10% of its assets in transferable securities or money market instruments issued by the same body provided that the total value held in the issuing bodies in each of which it invests more than 5% of ...
Can US investors buy Sicav funds? ›
Who are qualified US purchasers? Subject to certain exceptions, to be a qualified purchaser, a natural person must have at least $5 million in “investments” and an institution must have at least $25 million in “investments,” in each case as defined in Rule 2a51-l under the U.S. Investment Company Act.
What is the difference between UCITS and ETFs? ›
For ETFs using derivatives, exposure should be covered with collateral valued at 90% of NAV and meet minimum risk management standards. UCITS funds cannot use leverage other than on a temporary basis and up to a maximum of 10% of their NAV.
