Small fund in Estonia (AIF)

INVESTMENT FUND IN ESTONIA

Registration and support of small alternative investment fund (AIF)

We are a team of professionals and have many years of experience in the field of Estonian and EU commercial and financial law. Competence of our specialists enables us to offer a full range of services for the regulation and implemetation of activities of small alternative funds, starting with preliminary advice, assistance in obtaining the necessary licence and ending with further maintenance of the fund and the preparation of financial statements.

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• Legal acts:
  • Investment Funds Act of the Republic of Estonia
  • Directive 2011/61/EU of the European Parliament and of the Council (AIFMD)
• Regulatory authorities:
  • Financial Supervisory Authority (FSA)
  • Financial Intelligence Unit (FIU)

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Capabilities of a small alternative investment fund

Small alternative investment fund (AIF) is the simplest and most efficient form of attracting private capital for the further investment in accordance with the fund’s predetermined investment policy. Current legislation gives the fund manager wide-ranging powers in selecting investment areas and instruments and therefore a small alternative fund can be the best solution for organising collective investments in venture capital, stocks, derivatives, fiat currencies, cryptocurrencies, tokens and other virtual values, real estate and other financial and commodity assets.

A small alternative fund can, among other things, provide an effective basis for the establishment of projects or funds in the following areas:

Private Equity Fund

A Private Equity Fund is a type of investment fund that raises capital from a limited group of investors to invest in private companies not traded on the open market. The goal of such a fund is to acquire stakes in companies with the aim of developing them and increasing their value, ultimately leading to high investment returns when the stake in the company is sold. Private Equity funds often focus on long-term investments and can include management restructuring, operations optimization, and developing growth strategies to enhance the value of investments.

Venture fund

An investment fund aimed at engaging with innovative businesses and start-up projects. The activities of venture funds are characterised by an expectation of substantial profits at the same time as high investment risks, and the investment policy is designed in such a way that profits from successful investments should fully offset the losses that arise.

Cryptocurrency fund

An investment fund in which cryptocurrencies (such as BTC, ETH, XRP, etc.), tokens and other virtual assets are the main object of investment. Within the framework of the cryptocurrency fund, it is also possible to invest the raised funds in individual cryptocurrency or blockchain projects, initial coin offering (ICO), staking, or to use other investment opportunities offered by the developing blockchain technology industry, as well as combining investment opportunities with each other.

Real estate fund

This fund specialises in investing the raised funds of depositors in highly liquid real estate and development projects, both for short-term speculative purposes and for the long term, in order to manage the real estate objects effectively and to receive regular dividends or royalties from landlords.

Crowdfunding

The structure of a small alternative fund can be used successfully to raise collective funds and investments in a transparent and efficient way through crowdfunding or crowdinvesting to finance a pre-defined project, start-up or other idea, and for the fund investors to profit from their investment in such projects.

Advantages of registering a small alternative fund in Estonia

Registering a small alternative fund in the jurisdiction of the Republic of Estonia has many advantages, which include, among others:

• Simplicity of establishment.

  The process of registering a small alternative fund takes up to 60 days.

• Transparency of management

  The fund is managed and represented by a fund management company in accordance with the predetermined investment policy and the provisions of the articles of association.

• Ample opportunities

  The total assets under the management of a single AIF manager in a long term investment without leverage can be up to 500 million euros. In case of short-term investments or the use of financial enhancement, total investment assets are limited to the amount of 100 million euros.

• Universal investment portfolio.

  Ability to make collective investments in venture capital, stocks, cryptocurrencies, derivatives, money market instruments, precious metals, etc.

• Limited liability

  Material liability of investors is limited to the amount of their investment.

• Complete confidentiality

  The lists of the small fund’s investors and the size of their investments are not public information.

• Low costs

  Relatively low costs of registering and maintaining a small alternative fund compared to other jurisdictions such as Luxembourg or the UK.

STRUCTURE OF THE SMALL ALTERNATIVE FUND

The functioning of a small alternative fund is carried out through the interaction of the investment fund manager and the AIF itself, which is registered with the Commercial Register as a separate legal entity – a limited partnership fund, or LPF (Est. Usaldusfond).

Fund manager

The fund manager is usually a legal person – a fund management company established specifically for this purpose. The main task of the fund manager is to manage investors’ financial assets in order to generate profits in accordance with the predetermined investment policy of the fund. The manager of a small alternative fund is entitled to control several AIFs whose total assets may not exceed 100 million euros (short-term investments, leveraged investments) or 500 million euros (long-term investments only). The AIF manager is entitled to receive a management fee as well as a success fee if the fund achieves certain results.

The list of tasks and responsibilities of the fund manager, among other things, includes the following:

• formation of investment policy;
• making investment decisions;
• investment and disposition of financial assets of the AIF;
• representing the interests of the fund to third parties;
• attraction of new investors;
• organising the issue of fund units;
• organising the redemption of fund units;
• distribution of income to unit holders;
• maintaining accounting and financial records;
• interaction with the regulatory authorities and other government instituitions.

An ordinary limited liability company (Est. Osaühing) with at least 2 board members (directors), who may be non-residents of Estonia, is suitable for organising the activities of a small fund manager. There are no other additional requirements for the legal entity of the fund manager or its structure, including no mandatory contribution of reserve capital or share capital.

Limited Partnership Fund (LPF)

A small alternative fund is most often registered with the Commercial Register as a limited partnership fund or LPF (Est. Usaldusfond), which is the simplest, most convenient and common legal form for the operation of an AIF. The structure of the LPF is very similar to that of a limited partnership (est. Usaldusühing). Thus, LPF members include at least one general partner (Est. Täisosanik), who is usually the fund management company, and several limited partners (Est. Usaldusosanik), who are the investors in the fund, whose relations are regulated by the foundation agreement and the provisions of the Estonian Commercial Code. The fund management company has the right to represent the fund to third parties and is obliged to deal with the day-to-day management and various issues related to the operation of the AIF. Investors, as limited partners, do not participate in the day-to-day management of the fund, but have the right to vote at general meetings of unit-holders.

FUND REGISTRATION PROCEDURE

Setting Up an Alternative Fund: A Step-by-Step Guide

In order to establish a legally correct structure of a small alternative fund and to start attracting and placing investments in accordance with all the nuances and requirements of Estonian and EU legislation, certain registration and licensing steps must be taken for the activities of the future fund.

Our experts will provide you with comprehensive support in development and preparation of all required documentation and formulation of business processes of the future AIF, as well as qualified legal support in each of the following steps required for successful registration and licensing of your AIF.

Registration of a fund management company

First of all, it is necessary to register a legal entity to act as a fund manager. You can register a company either in person or remotely on the basis of a power of attorney or with an e-residency card. The registration process takes no more than five working days.

Obtaining a permission to register a fund from FSA

In order to register a fund as a separate legal entity, permission must be obtained from the Financial Supervisory Authority (FSA). Along with the application for the authorization to register the fund, it is necessary to provide the Financial Supervision Authority (FSA) with a legal analysis of the Alternative Investment Fund’s (AIF) activities in accordance with the directives of the European Securities and Markets Authority (ESMA), and a set of fund documentation. This documentation should include the founding documents, articles of association, and contact information of the fund management company, the fund’s foundational agreement, as well as information about the AIF’s investment policy, planned investments and investment instruments, trading platforms, principal risks, and other mandatory information in accordance with the Estonian Investment Funds Act and the European Parliament and Council Directive 2011/61/EU. It takes approximately 2 months to process an application for an AIF registration permit, the submission and processing of this application can take place in parallel to the AML licensing process.

Obtaining an AML licence for a fund manager from FIU

A fund management company is required to obtain an AML licence of a non-banking financial institution issued by the Financial Intelligence Unit (FIU). As part of the process of obtaining this licence, internal anti-money laundering and counter-terrorism financing procedural rules (internal AML policy) must be prepared and submitted to the regulatory authorities for review, which must include, among other things, a description of the model for applying precautionary measures and KYC to investors in onboarding and further engagement, as well as guidance on operation and risk management. The AML licence application process takes up to two months. The AML licence application process takes up to two months.

Registration of a small alternative investment fund

After receiving authorisation from the FSA to establish an AIF, the small alternative fund must be registered within 2 months as a limited partnership fund (LPF) with the Estonian Commercial Register. You can register your LPF either in person or remotely. The LPF registration process takes up to 5 working days.

Preparing the infrastructure

In the final stage of preparing a small alternative fund for profile activities, all issues and nuances related to the infrastructure of the future AIF should be carefully explored. For example, current accounts in banks or payment systems, investment or securities accounts, corporate accounts in various stock exchanges and investment platforms, etc. have to be envisaged and opened. It is also necessary to consider a correct and transparent system for accounting for the fund’s assets and calculating their current value, to organise the accounting and financial reporting process, etc. Our specialists are qualified and will assist you with the above-mentioned issues.

LIMITATIONS AND EXCEPTIONS

Decoding the Regulations: Small Alternative Fund Limitations

The small alternative fund operates within a specific legal framework that imposes certain limitations on its activities. One of the key restrictions, as mandated by current legislation, is that the offer of small fund units cannot be made publicly.

A Closer Look at Small Fund Restrictions and Opportunities

This means that the fund’s units are typically marketed through private placements or to a select group of qualified investors. Such restrictions are designed to protect less experienced investors from complex or higher-risk investments, while still allowing knowledgeable and capable investors to participate in these unique investment opportunities. Additionally, these limitations ensure that the fund operates within a controlled and regulated framework, maintaining financial stability and integrity.

The Non-Public Nature of Small Fund Unit Offerings

According to the Investment Funds Act of the Republic of Estonia and Regulation 2017/1129 of the European Parliament and of the Council, an offer of fund units is not considered public in the following cases (it is enough to meet one condition):

• The total offer of fund units does not exceed 2.5 million euros within one year for all member states of the European Union;

• Only professional investors are offered to buy fund units;

• The offer to buy fund units is made to a maximum of 150 non-professional investors in each member state of the European Union;

• Only units with a nominal value of at least 100,000 euros are offered under the fund’s unit purchase offer;

• Each individual fund unit offer has a minimum entry threshold of at least 100,000 euros per investor.

In summary, it’s important to note that meeting just one of these specified conditions is sufficient for an offer of small fund units to be classified as non-public under the current regulations.

This flexibility allows small alternative funds to navigate the legal landscape effectively, providing them with multiple pathways to comply with the regulatory requirements while reaching their targeted investor base.

Despite the restrictions established by the law, the small alternative fund is one of the simplest and most effective tools for attracting and managing private capital.

Small Funds, Big Potential

In conclusion, while small alternative funds are subject to specific legislative restrictions, they offer unique advantages and opportunities for both fund managers and investors. These funds can be particularly attractive to those looking for innovative investment strategies, personalized management, and potential for higher returns.

Contact us

For personalised advice and a personalised proposal for registering and operating a small alternative fund in Estonia, please contact our specialists.