• Different Types of Collective Investment Schemes

    Pursuant to applicable Cyprus legislation, there are different types of Collective Investment Schemes, which may be classified according to the type of investors they are addressed to or according to their type of operations, as follows:
    • Categorisation by Type of Investors:

      • Private International Collective Investment Schemes (“ICIS”)
        In May 1999, Cyprus enacted the International Collective Investment Schemes Law 47 (I)/97, as amended in 2000 (Law 63(I)/2000).

        This sets out the necessary legal framework to provide incentives for the establishment of such schemes in Cyprus.
        Under the relevant law, the Central Bank of Cyprus is responsible for supervising such investment schemes.

        To be specific, all kinds of investment schemes must maintain records which may be inspected at any time by the Central Bank of Cyprus and must prepare financial statements which they must file every six months with the said supervisory authority. The Central Bank also has the power to intervene in legal proceedings to ensure that the manager and custodian comply with their duties under the relevant law.

        The Central Bank may also issue and implement regulations with respect to the investment restrictions of the various schemes envisaged by the law, set the relevant procedures to establish such schemes, the code of conduct of managers, custodians and directors, as well as the method and frequency of calculation of the Net Asset Value of the schemes.

        These schemes are usually marketed to high net worth individuals. They have the following restrictions / characteristics:

        • The maximum number of unit-holders is one hundred (100);

        • They prohibit an invitation to the public for the purchase of its shares;

        • They prohibit the issue of bearer shares; and

        • They Restrict the right to transfer shares in the scheme.

        These schemes are called ICIS and are regulated by the Central Bank of Cyprus. In other words, these are “Private Funds”.

      • Schemes Marketed to Experienced Investors (“ICIS”)
        These schemes are usually marketed to insurance companies, investment firms, financial service providers, or persons who frequently enter into investment transactions of a substantial size, taking into account the risks involved.

        In Cyprus these are also governed by the International Collective Investment Schemes Law 47(I)/1999, which is a national law.

        These schemes are called ICIS and are regulated by the Central Bank of Cyprus.

        “Experienced Investor” is defined as a natural or legal person who provides financial services or frequently enters into investment transactions of substantial size, taking into account the risk involved.
        • Must contain in its constitutional documents and offering memorandum clearly defined rules and procedures in order to ensure that marketing of the ICIS is restricted to experienced investors;

        • Minimum subscription is USD 50,000;

        • May not issue bearer units; and

        • Not required to make public the sale and redemption or repurchase prices of its units but shall make the sale and redemption or repurchase prices of its units available to experienced investors at their request.

        ICIS - Legal Form and Structure
        An ICIS can take any of the following legal forms:
        • International Fixed Capital Company; or

        • International Variable Capital Company – most common; or

        • International Unit Trust Scheme; or

        • International Investment Limited Partnership.

      • Schemes Marketed to the General Public (“UCITS”)
        These schemes are governed by the Open-Ended Undertakings for Collective Investment in Transferable Securities (UCITS) and Related Issues Law, which transposed the relevant EU Directive.

        These schemes are called UCITS and are regulated by the Cyprus Securities and Exchange Commission (CySEC).
        Legal Framework
        UCITS are governed by the EU Directive 85/611/EC (Undertakings for Collective Investment in Transferable Securities Directive). The Directive sets out the registration procedure, requirements for UCITS and how they can offer their services in the EU via the Single Passport Mechanism.

        Cyprus implemented this Directive into national legislation with was harmonised with this directive and her modifications with Open-Ended Undertakings for Collective Investments in Transferable Securities Law of 2004.
        Legal Form which the UCITS may take:
        • Common Fund

          This is a pool of assets, of which the assets belong, jointly and separately, to unit-holders and of which the operation shall be governed by the Common Fund Regulation; and

        • Variable Capital Investment Company:

          The variable capital investment company is a limited liability company with shares, established in accordance with the provisions of this Law and the Cyprus Companies Law, Cap. 113 by which they are governed; The main objective of the variable capital investment company is the collective investment in transferable securities or other liquid financial assets; This company only manages its assets and cannot undertake the management of third-party assets.

    • Categorisation by Type of Operation:

      Investment schemes can be:

      • Close-Ended Schemes; or

      • Open-Ended Schemes.

      Close - Ended Schemes
      A Close-Ended Collective Investment Scheme publishes a specific (fixed) number of units (shares). These shares are traded in a stock exchange or via a management company. These Schemes are not compelled to buy back their own shares. As a result, the price of their share may differ from the net-asset value. If the demand is high, these can negotiate in price higher than their net-asset value. If the demand is lower then they are negotiate in price lower than the net-asset value.
      Open - Ended Schemes
      An Open-Ended Collective Investment Scheme may publish and repurchase its units at any time. In the USA the organisms Open-Ended Collective Investment Scheme are mutual funds, in England they are unit trusts or Open-Ended Investment Companies and in Europe they are SICAV (these are companies).

      These schemes draw capital via the sale shares to the investors (unit-holders) and invest them in various investments, according to the investment policy of each scheme. The investments can be in shares, securities or government bonds. The unit-holders acquire units in the scheme and can sell them back to the scheme whenever they want.

      The way the value of the share is calculated is as follows: The scheme calculates daily the value of its portfolio, from which the expenses are deducted, which include management expenses, administration expenses and wages of stockbrokers. The remaining assets are divided in a number of units. The scheme is thus compelled to buy and to sell shares at such price.

      An open-ended undertaking for collective investment in transferable securities (UCITS) is an undertaking the sole object of which is the collective investment in transferable securities and/or in other liquid financial assets referred of capital raised from the public, and which operates on the principle of risk-spreading and the units of which are, at the request of holders, redeemed, directly or indirectly, out of this undertaking’s assets.

      These are:

      • addressed to the general public;

      • their investments are only in transferable securities; and

      • are certified as UCITS by the competent authority in a Member State of the EU.

  • General requirements to establish an international collective investments scheme which applies to all the above types of entities:

    Any of the above entities must satisfy a number of minimum requirements:

    • The memorandum and articles of association of the companies must contain terms approved by the Central Bank;

    • The companies must submit documents as requested by the Central Bank; and

    • Their manager and ‘custodian’ must be approved by the Central Bank of Cyprus. A custodian must be a bank or a recognized custodian in a regulated jurisdiction or a subsidiary thereof registered in Cyprus. The requirement of a ‘custodian’ may be waived, however, by the Central Bank in a specified set of circumstances, including when the shares of the relevant scheme are widely traded on a major stock exchange;

    Both managers and custodians:

    • must be a fit and proper person, organized and having appropriate staff on board; and

    • must maintain a place of business in Cyprus (though this requirement may be waived by the Central Bank); and

    • finally, are not liable to pay taxation in Cyprus.

    In addition to the above, managers must not employ any directors who are also custodians. It is also noteworthy that both managers and custodians may assign their rights to third parties, provided that this does not discharge them from their requisite duties as imposed by the relevant law.