What are Blockchain and Crypto fund?
Blockchain funds provide investors with exposure to companies that have business operations in blockchain technology. Crypto funds give investors the ability to invest in a more flexible manner in various cryptocurrencies, such as Bitcoin, Ethereum and Ripple. Investment managers with these strategies provide their investors with a portfolio of blockchain companies or cryptocurrencies.
What are Blockchain and Crypto fund?
Blockchain funds provide investors with exposure to companies that have business operations in blockchain technology. Crypto funds give investors the ability to invest in a more flexible manner in various cryptocurrencies, such as Bitcoin, Ethereum and Ripple. Investment managers with these strategies provide their investors with a portfolio of blockchain companies or cryptocurrencies.
Why set up an investment fund to invest in Blockchain and Crypto?
Investment funds are collective investment vehicles, which invest in assets and may operate according to the principle of risk spreading. Capital can then be raised from a group of investors that go beyond the small circle of persons or may raise capital in a private placement from a selected group of investors. Setting up a Blockchain or Crypto fund may allow investors to spread their investment risks between a selection of Blockchain companies and cryptocurrencies.
Why establish a Blockchain or Crypto fund in Luxembourg?
Luxembourg is the globally leading fund centre in the world for cross-border funds, Luxembourg is the second largest investment fund centre in the world after the United States and the largest fund domicile in Europe with currently more than EUR 4,7 trillion of assets under management.
The country is a politically and financially stable EU country with a AAA-Rating. As an EU domicile, investment funds established in Luxembourg can be more easily distributed within the EU and have gained furthermore global recognition for the ease of cross-border distribution.
The key advantages of Luxembourg as a fund domicile are:
1. Stability
Luxembourg is a stable and recognized fund centre in the heart of Europe, ideally positioned to use the EU passporting rights to distribute an investment fund across the EU and to global markets.
2. Global Leadership
Luxembourg is the global leader for cross-border fund distribution. All relevant service providers in the asset management industry have a presence and offer services in Luxembourg. The country is known around the world for its capabilities in asset management and its funds are distributed and known around the world.
3. One Stop Solution
Setting up a fund with an EU passport, using leading service providers, listing it on a recognized stock exchange, setting up SPVs to benefit from double tax treaties and outsourcing certain functions back to other countries. Luxembourg has the flexibility to offer a one stop solution for operating and distributing investment funds, as well as deploying the funds in an efficient and structured manner.
Which fund vehicle for a Blockchain or Crypto fund?
Luxembourg offers a range of solutions for setting up an investment fund, ranging from supervised to non-supervised. A highly flexible fund vehicle that has been very successful in the last years has proved to be a suitable choice for Blockchain and Crypto funds: The special limited partnership (SLP).
What is the SLP?
The Luxembourg SLP was inspired by partnerships in the US, UK and the Cayman Islands, where these fund entities are commonly used in the alternative fund space. They typically have illiquid strategies and invest into real estate, private equity or the debt market.
Luxembourg took the advantage of the introduction of the Alternative Investment Fund Managers Directive (AIFMD) in 2013 to fundamentally modernize its partnership regime and to improve its standing as a fund domicile for alternative investment funds.
Luxembourg revolutionised its partnership regime with the introduction of the SLP. The SLP is a highly flexible fund structure with no legal personality. It gives asset managers new structuring possibilities whilst using a framework that is familiar to them from other fund jurisdictions. According to PWC there were more than 2500 SLPs established in Luxembourg in 2019.
The limited partnership agreement (LPA) is a main document organizing the functioning of the SLP, which gives the fund the contractual flexibility to organize the structure of the fund. The SLP is not restricted to any asset type and not subject to any risk diversification rules.
Who manages the SLP?
The SLP must appoint a general partner (GP), typically a private limited liability company (Société à responsabilité limitée or S.àr.l.) established in Luxembourg, to manage the fund on behalf of the limited partners (LPs). The SLP must at all times have a GP, who has unlimited liability for the debts and obligations of the SLP, the reason why the GP is typically another corporate entity.
What are the main advantages of the SLP?
The main advantages of the SLP are:
(i.)Speed of constitution: The SLP can be quickly established by private deed, as there is no requirement to form the SLP in front of a notary. The SLP can therefore be formed through the approval and signing of the LPA by all LPs and the GP.
(ii.)Confidentiality: There is no obligation to publish the LPA. Only certain information must be published in the public register, such as the identity of the GP, the identity of the managers and the corporate purpose of the SLP. The identity of the LPs can remain confidential.
(iii.)Contractual freedom: The functioning of the SLP is governed by the terms agreed in the LPA. Matters relating to the issuance of the partnership interests, the distribution of profits or different share classes and voting rights can be freely agreed on without the need to disclose this information.
(iv.)No Minimum Capital Requirements: The SLP is not subject to any capital contribution requirements, making the SLP a cost-efficient structure to establish. Contributions of the partners can be in cash or in kind.
(v.)Tax Transparency: The SLP is tax transparent to Luxembourg income tax and net wealth tax.
What are the regulatory options?
There are several options to achieve different levels of regulation for the SLP:
(i.)The SLP can be supervised by the Luxembourg Financial Supervisory Authority (Commission de Surveillance du Secteur Financier or CSSF), if established as a Specialised Investment Fund (SIF) or an investment company in risk capital (SICAR). In this case the SLP itself would be regulated. If the fund falls within the scope of the AIFMD, then it would also need to appoint an AIFM.
(ii.)The SLP itself remains unregulated, but appoints an AIFM, who is regulated by the CSSF.
(iii.)The SLP remains unregulated and remains outside of the scope of the AIFMD and is therefore not required to appoint and AIFM.
Does the SLP have access to the EU passport for distribution of the fund?
The SLP may have the benefit of the EU passport, if it has appointed an AIFM, allowing the fund to be passported to professional investors within the European Union.
How long does it take to set up a SLP in Luxembourg?
SLPs not subject to supervision can be established quickly within a few days. The timeframe for the drafting of the documentation, in particular the LPA, will depend on the complexity and the input of the parties.
The set-up of a SLP subject to supervision (such as those created as a SIF or SICAR) will require more time, as the approval of the CSSF is required.
Following the constitution of the fund, the alternative investment fund manager (AIFM) will be subject to a registration procedure with the CSSF.
How much does it cost to establish a SLP?
This greatly depends on solution chosen and the service providers used to service the SLP. Setting up a non-supervised SLP, is less costly than a supervised fund. Please note that the SLP is managed by a GP, which is a corporate entity, to be incorporated at the same time as the SLP.
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