Professional Investment Fund Investing in Virtual Financial Assets

Professional Investment Fund Investing in Virtual Financial Assets

In Malta the regime of the Maltese Professional Investor Fund (PIF) regime has been extended to Virtual Financial Assets. A PIF can be structured as an investment company (SICAV or INVCO), unit trust or as a limited partnership.

Such Funds shall not be established as:

1. European Venture Capital Funds in terms of Regulation (EU) No 345/2013 of the European Parliament and of the Council of 17 April 2013 on European Venture Capital Funds; or
2. European Social Entrepreneurship Funds in terms of Regulation (EU) No 346/2013 of the European Parliament and of the Council of 17 April 2013 on European Social Entrepreneurship Funds.

A PIF set up under Maltese law would require a CIS licence under the Investment Services Act, 1994 (the ‘Act’). A PIF established outside Malta would only require a license for the purpose of obtaining a listing on a regulated market in Malta or if it undertakes any licensable activity, such as managing itself in or from Malta.

Category-Qualifying Investors

PIF targeting Qualifying Investors:

1. For an investor to become “Qualifying” to invest in the PIF he/she/it must meet one or more of the following criteria: Invest a minimum of EUR 100,000 or its currency equivalent in the PIF which investment may not be reduced below this minimum amount by way of a partial redemption; and
2. Declares in writing to the fund manager and the PIF that he/ she/it is aware of and accepts the risks associated with the proposed investment; and
3. At least one of the following must be satisfied:
   1. a body corporate which has net assets in excess of EUR 750,000 or which is part of a group which has net assets in excess of EUR 750,000
   2. an unincorporated body of persons or association which has net assets in excess of EUR 750,000;
   3. a trust where the net value of the trust’s assets is in excess of EUR 750,000;
   4. an individual whose net worth or joint net worth with that person’s spouse, exceeds EUR 750,000;
   5. a senior employee or director of service providers to the PIF.

Before a PIF may accept any investment, the PIF must obtain a completed “Qualifying Investor Declaration Form” in which the investor confirms that he/she/it has read and understood the mandatory risk warnings and describes why he/she/it is a “Qualifying Investor”.

PIFs promoted to Qualifying Investors are not subject to any investment or borrowing (including leverage) restrictions other than those which may be specified in their Offering Document.

Competence

The Malta Financial Services Authority (MFSA) requires that the parties who are involved in the PIF and the service providers of the PIF have sufficient knowledge and experience in the field of information technology, Virtual Financial Assets and their underlying technologies, including but not limited to Distributed Ledger Technology, at all times.

Administrator

The Administrator shall have the business organisation, systems, experience and expertise deemed necessary by the MFSA for it to act as an Administrator to a PIF investing in Virtual Financial Assets.

Custodian or Prime Broker

The Custodian or Prime Broker, where appointed, shall have the business organisation, systems, experience and expertise deemed necessary by the MFSA for it to act as an Custodian or a Prime Broker to a PIF investing in Virtual Financial Assets.

Auditor

The Auditor shall have the business organisation, systems, experience and expertise deemed necessary by the MFSA for it to act as an Auditor to a PIF investing in Virtual Financial Assets.

Compliance Officer

The Compliance Officer is expected to have the experience and expertise deemed necessary by the MFSA for it to act as Compliance Officer of a PIF investing in Virtual Financial Assets.

Money Laundering Reporting Officer

In addition to the requirements under the Prevention of Money Laundering and Funding of Terrorism Regulations (LN 372 of 2017 as may be amended from time to time) and the Implementing Procedures issued by the Financial Intelligence Analysis Unit as may be amended from time to time, the MLRO is expected to have the experience and expertise deemed necessary by the MFSA for it to act as MLRO of a PIF investing in Virtual Financial Assets.

If the appointed individual has the necessary competence and experience, then such individual can carry out both the duties of the Compliance Officer as well as the Money Laundering Reporting Officer. Such appointed individual must be a Malta resident.

Investment Manager

The Manager shall have such business organisations, systems, experience and expertise deemed necessary by the MFSA for it to act as Manager to a PIF investing in Virtual Financial Assets.

Risk Management

The PIF shall ensure that the appointed Investment Manager:

1. Implements an appropriate, documented and regularly updated quality assessment process when investing on behalf of the PIF, according to the investment strategy, objectives and risk profile of the PIF;
2. Ensures that the risks associated with each investment position of the PIF and their overall effect on the PIF’s portfolio can be properly identified, measured, managed and monitored on an ongoing basis, including through the use of appropriate stress testing procedures; and
3. Ensures that the risk profile of the Scheme corresponds to the size, portfolio structure and investment strategies and objectives of the Scheme as provided for in its constitutional document and Offering Document.

The PIF shall ensure that the Manager, within the parameters of the risk management function and prior to investing in a Virtual Financial Asset on behalf of the PIF, assesses whether the risk profile of the said Virtual Financial Asset falls within the scope of the risk management policy of the PIF.

Where a Risk Manager has been appointed (s)he shall also assess whether the quality assessment carried out provides reasonable assurance that the Virtual Financial Asset being invested in on behalf of the PIF falls within scope of the risk management policy of the PIF

Self-Managed PIFs investing in Virtual Financial Assets

A self- managed PIF shall have in place an in-house investment committee made up of at least three members. The Investment Committee of a self-managed Fund investing in Virtual Financial Assets shall, at all times, have at least one individual who has sufficient knowledge and experience in the field of information technology, Virtual Financial Assets and their underlying technologies, including but not limited to the Distributed Ledger Technology. For the avoidance of any doubt, where a Portfolio Manager/s is appointed it is to be understood that this competence requirement shall also be applicable to such Portfolio Manager/s.

The self-managed PIF must carry out appropriate research in order to assess the quality of the Virtual Financial Assets being invested into. The self-managed PIF shall keep a record of the quality assessment and makes it available to the governing body.

While assessing the quality of the Virtual Financial Asset to be invested in, the self-managed PIF shall take into account inter alia the following factors:

1. the Inventor/s and/or Issuer/s, as applicable;
2. the protocol/s and the underlying infrastructure;
3. the availability and reliability of information and the providers thereof
4. the service providers involved; and
5. the Exchange/s on which the Virtual Financial Asset is traded.

The self-managed PIF shall also carry out the necessary risk management checksprior to investing in a Virtual Financial Asset as mentioned in the Risk Management section above. Furthermore, it shall also ensure that an appropriate liquidity management system is in place to ensure that so that liquidity risk can be monitored.

Licensing Procedure

PIFs are subject to tailored licence conditions and the MFSA shall only grant a collective investment scheme licence to a PIF targeting Qualifying Investors, if it is satisfied, that the fund will comply in all respects with the provisions of the Act, the applicable regulations and the Investment Services Rules. The applicant, its senior staff and its service providers (if any) and the latter’s senior staff must be “fit and proper” and must thus demonstrate solvency, competency and integrity in all their dealings both at licensing stage and on an ongoing basis thereafter.

The Application Process in relation to a PIF

The application process for a PIF licence, consists of three phases:

1. Preparatory phase
2. Pre-Licensing phase
3. Post-licensing/Pre-Commencement of Business phase

Preparatory phase

EMD has a very good working relationship with the MFSA and we have on various occasions advised and assisted clients in obtaining a Collective Investment Fund licence. Initially, a preliminary meeting with the MFSA is held in order for us to outline the proposal to the regulator. After all queries/pending issues are settled, a draft licence application form is submitted together with the supporting documentation required.

The application and documentation are then reviewed by the regulator. The MFSA may ask for more information and may make such enquiries as it considers necessary together with any ‘fit and proper’ checks, in order to determine integrity, solvency and competence.

Pre-licensing phase

Once the draft application and supporting documents have been reviewed and the draft licence conditions have been agreed to, the MFSA will determine whether to issue its ‘in principle’ approval for the issue of the licence. Any outstanding matters such as company incorporation and the final copies of the documentation are to be settled at this stage, upon in principle approval being granted. The licence is issued once all pre-licensing issues are resolved.

Post-Licensing/Pre-Commencement of Business phase

In certain cases, the applicant may also be required to satisfy a number of post-licensing matters prior to formal commencement of business.

The speed at which the Preparatory Stage is completed depends a lot on the completeness of the documentation submitted and on the applicant’s efficiency.

Additional requirements

The PIFs governing body must carry out an assessment confirming that the proposed service providers have the business organisations, systems, experience and expertise in the field of information technology, Virtual Financial Assets and their underlying technologies, including but not limited to Distributed Ledger Technology, to act as service providers to PIFs investing in Virtual Financial Assets.

The PIF must also provide evidence that the Investment Committee Member/s has/have a sufficient and proven track record of trading on an established DLT exchange.

Application Fee

The Application Fee is payable on submission of the Application for a PIF Licence and is not refundable. The first Annual Supervisory Fee is payable on the date the Licence is granted and thereafter annually upon the anniversary of the granting of the Licence.

PIFs licensed pursuant to Article 4 of the Investment Services Act