Funds establishment

The investment fund intended according to its status to investments in real estate, or participation in real estate companies

Brief introduction to the topic

This document summarizes in general the actual legal process of establishing an investment fund focused on investment in real estate or in real estate companies, along with a brief introduction of fundamental legal services and related documentation. The document aims to outline the overall extent and the complexity of the entire process only. The material does not focus on any particular legal form or type of fund.

This document in any case does not aim to be a comprehensive legal analysis of emission of bonds and all the legal framework of associated process. The individual aspects mac vary depending on the specific requirements and specific needs of the client.

You might also be interested in – Trust funds.

1. A brief description of legal regulation

I. General overview

The investment fund is a way to invest money as a part of a group along with other investors to get profit. Funds focused on investing in real estate allow property ownership with minimal investment. For the means of owners of issued bonds are bought properties that are in collective ownership of investors.

This form of investing in real estate entails the following advantages:

• Appreciation of the investment in the form of own real estate valuation
• Income from rental
• Investment protection in the form of “inflation clauses” in lease contracts1 – the fund in a subject to the Czech National Bank supervision, which is undoubtedly benefit of this instrument

II. Legal regulation

The main source of legal requirements is the Act no. 240/2013 Coll., On investment Companies and Fonds2. To illustrate the complexity of the subject area it should be noted that the issues are related to dozens of other acts and subordinate legislation, eg.:

• Law no. 89/2012 Coll., Civil Code
• Law no. 90/2012 Coll., On Commercial Companies and Cooperatives (Law on Commercial Corporations)
• Act no. 304/2013 Coll., On Public Registers of Legal and Natural Persons
• Act no. 125/2008 Coll., On Transformations of Commercial Companies and Cooperatives 
• Act no. 591/1992 Coll., On Securities
• Act no. 253/2008 Coll., On Selected Measures against Legitimization of Proceeds of Crime and Financing of Terrorism
• Act no. 101/2000 Coll., On Personal Data Protection
• Commission Regulation clarifying certain provisions of the AIFMD

1- On annual basis is to update the amount of rent based on the average annual inflation rate announced by the Czech National Bank.
2- Replaced the Act. no. 189/2004 Coll., About Collective Investment.

• Regulation of the European Parliament and the Council no. 345/2013 on European Venture Capital Funds
• Government regulation of 31 July 2013 on investing in investment funds and on techniques to manage them (Specifies the 
• Decree no. 249/2013 Coll., On data reporting by the investment adviser and administrator of the investment fund and foreign fund Czech National Bank
• Decree no. 244/2013 Coll., On closer regulation of certain rules of the Act on Investment Companies and Investment Funds
• And more

III. General dividing

The Law on Investment Companies and Investment Funds exhaustively defines the division into specific forms of investment funds. To simplify the following we introduce a brief overview of the context of the establishment of a specific fund.

The determining factor for establishing the Fund’s balance sheet is whether the fund aims to collect funds from the public or qualified investors. On this basis, in preparation and discussion with the client we decide whether it will be a collective investment fund or a fund for qualified investors. For the initial idea we introduce a brief descriptions of legal forms that come into consideration for individual types of funds.

A) Collective investment funds

• a) mutual funds
• b) joint-stock company

Collective investment fund may be required by law only as open-ended mutual fund or so. SICAV, a joint stock company with variable share capital.

These funds are further divided into standard funds and special funds, depending on whether the fund complies with the Directive of the European Parliament and of the Council coordinating regulations governing the collective investment3 and as such is registered in the appropriate list maintained by the Czech National Bank.

3 Directive of the European Parliament and Council Directive 2009/65 /EC.

B) Qualified Investor Funds

Qualified Investor Fund is regulated instrument with statutory mandatory parameters. It is designed for professionals investment institutional investors and experienced private investors. Institutional investors are mainly banks, securities dealers, insurance companies, pension funds, etc. Private investors are particularly qualified individuals who invest at least 125,0000 EUR and confirm that they are aware of the risks associated with investing in this type of fund. Investors may therefore be both legal persons, as well as physical, domestic and foreign. Securities issued by the investment fund may be offered to investors and publicly traded..

Of the exhaustively defined forms of qualified investor funds, we recommend based on their popularity especially joint-stock companies or mutual funds. For completeness, we note that in addition to these two forms there are also other – a limited liability company, a European company, cooperative, limited company, etc.

The funds in the legal system of the Czech Republic are also divided on:

• Personal – the self-investment fund is an investment fund with legal personality for his activities, self-management itself, the management of its assets and implement its administration must obtain a permit of the Czech National Bank.
• Nonautonomous – nonautonomous investment fund with legal personality is an investment fund with individual statutory body which is a legal entity, typically an investment company, authorized to manage such an investment fund to manage its assets, conducting its administration and also to act in such a fund.

What particularly distinguishes newly nonautonomous funds with legal personality of autonomous funds, it is the fact that longer subject to licensing or supervision of the Czech National Bank only be entered into the list of the Czech National Bank. This is on the other side countered by clearly defined requirements for the Management Company, the Administrator, the Custodian and promoter of the Fund, as will be outlined below.

2. Expected procedure

I. Introduction phase – preparation

In the initial phase will be held series of meetings with the client to gather comprehensive information on the basis of which it will be possible to suggest the best option for further action, reflecting the client’s individual needs. Within discussion, we focus on the client’s objectives, scope of services, for the provision of services, and others. The aim will also be discussions among other issues, the resolution of which is essential in terms of fulfilling the regulatory requirements of the Czech National Bank.

The following text can, given the complex legislation and the multiplicity of variants, does not attempt to provide an exhaustive description of all the alternatives establishment of investment funds. It focuses mainly on nonautonomous qualified investor fund managed by the investment company, which according to provisional disclosure, considered the best way to meet the client’s investment plan.

II. The following stage – the permit of the Czech National Bank

Human resources for Fund

The management of the investment fund or foreign investment fund means the management of assets of the fund, including investment on behalf of the fund and manage the risks associated with such investments. To manage the investment fund is only possible on the basis of the authorization granted by the Czech National Bank. Investment fund management includes management of its potential sub-funds.

Approval by the Czech National Bank assumes that persons with which the investment fund management company carries on business, were credible and that they have sufficient knowledge and experience necessary for the proper performance of their assigned tasks, especially knowledge of the procedures and regulations necessary for the fulfillment of their obligations related to this activity. Furthermore, the management company to ensure that the scope and nature of activities carried out by these persons do not hinder their proper performance. It is also necessary to have at least two senior officers, having sufficient experience in real estate management and performance of activities necessary for the proper performance of their duties.

Staffing the management company, an investment fund or foreign investment fund must be proportionate to the nature, scale and complexity of activities performed by him, especially:

• a) management of investment funds,
• b) carrying out the administration of investment funds
• c) management of customer property, which includes an investment instrument, at the sole discretion of the contractual agreement,
• d) implementing the safekeeping and administration of investment instruments, including related services, but only in relation to the securities and book-entry securities issued by the investment fund,
• e) receiving and transmitting instructions concerning investment instruments and
• f) providing investment advice concerning investment instruments.

Definite limit for the Management Company

The law states decisive limit for the investment fund management company, which amounts min. 100 mil. EUR or in some cases 500 mil. EUR for the value of the assets of investment funds managed by it. Otherwise it is under-management company, which automatically is entitled to manage investment funds.

Adjustment of organizational structure, management and control system

• a) strategic and operational management,
• b) organizational structure and internal regulations that govern it, with a clear definition of activities, including bodies of the management company and committees set up, and the associated powers and decision-making; within the organizational structure shall also be defined whose performance is mutually incompatible,
• c)  the risk management system, part of which is always
  • 1. accessing the management company to the risks it is or may be exposed he or his management of investment funds or foreign investment fund, including risks arising from internal or external environment and the risk of insufficient liquidity, and
  • 2. identifying, evaluating, measuring, monitoring, reporting and risk reduction, including adopting measures to reduce the incidence or risk of occurrence and impact
• d) the internal control system, part of which is always
  • 1. verification of their employees and individuals who carry out their activities according to the command of another, their superiors,
  • 2. monitoring compliance with legal obligations specified in this Act, legislation issued on the basis thereof, directly applicable EU regulation on management of investment fund, internal regulations and the statute of the investment fund or comparable documents and foreign investment fund or comparable documents and foreign investment fund
  • 3. The internal audit to ensure independent and objective internal controls of the activities of the Management Company and the presentation of clear recommendations to remedy shortcomings identified so appropriate management level.

Financial plan

Another step is the allocation of funding and the range of investments. Account should be taken of the legal requirements for initial capital that has to do with the investment company, which manages an investment fund, a minimum of 125,000 EUR or equivalent in CZK or another currency fund, which must be repaid within 12 months of its inception. The initial capital is the sum of

• 1. The first paid-up capital (capital enrollee),
• 2. The paid-up share premium,
• 3. Obligatory reserve funds,
• 4. Other reserve funds created from profit after tax, excluding reserves purposeful, and
• 5. Difference between any retained earnings from previous periods in the financial statements audited and approved by the General Assembly, whose division was decided by the General Meeting, and accumulated losses from previous periods, including the loss for the previous financial year.

Adjustment of the strategic plan

The strategic plan is the intention of the applicant for approval to the acquisition or increase of a qualifying asset in a legal entity or its mastery regarding:

• 1. The period for which is to be held by a qualified participation or that person should be controlled
• 2. The anticipated changes in the amount of qualifying holdings in the short and long term,
• 3. Projected degree of involvement in the strategic management of a legal person,
• 4. Any support for the legal person with additional own funds if it is necessary to develop activities or to sustain its activities,
• 5. Agreements with other shareholders or members of a legal person.

III. Final phase – realization

In the final phase we ensure a smooth launch of an investment fund into operation. It is again a complex process consisting of many individual steps, which are mutually intertwined, depending on the gradual commissioning of the investment fund into operation.

III. Overview

For clarification of visual orientation below diagram shows the establishment and functioning of the first phase of the fund managed by the investment company:

• Preliminary consultations
• The investment plan, strategy
• Staffing and other necessary requirements
• The request to the Czech National Bank, registration fund to the list
• Making profit
• Start-up and investment in selected assets
• An audit of the Fund and the annual report
• The General Meeting of the investment fund, income tax returns

3. Overview of legal and associated services

Given the complexity of the issue, as well as the disparity between progress in various forms and types of collective investment is below an overview of the legal (and associated) services that are actually indicative, and what do compulsoriness individual acts for the procedure, and in terms of their stratification in each phase.

The initial phase

• a) Consultation with the client (usually repeated personal meetings and consultations by means of communication at distance)
• b) Setting a timetable
• c) Preparation of the Fund’s organizational structure, staffing, etc.
• d) Corporate affairs – all the activities associated with the founding of the company, drafting statutes etc.
• e) In case of a joint operations associated with subscribing to the founding and investment shares
• f) fund rules
• g) Administration Agreement (DRAFT), and the subsequent negotiations on its conclusion
• h) Custodian Agreement (DRAFT), and the subsequent negotiations on its conclusion
• i) The contractual documentation with clients (investors) (DRAFT)

The Czech National Bank

• Request for authorization
• a) Representation in proceedings before the Czech National Bank
• b) Documents for approval
• c) investments offering – setting
• d) A list of shareholders
• e) Share certificates

Realization

• a) Legal assistance of the Fund
• b) Valuation of property
• c) Purchase contracts, sale or lease of real property contracts
• d) investments Offer
• e) The implementation of the contracts and making investments
• f) Audit of the fund management and annual reports
• g) Securing corporate agenda fund

4. Conclusion

All information contained in this material is for informational purposes only and should not be regarded as legal advice, what in any case is not the purpose of this document.

Information contained herein, as well as the opinions and views on the issue are solely the opinions of the authors of this material who are not responsible for their use by third party.

If you would require legal advice or legal assessment do not hesitate to contact our law firm to assess the suitability of the described procedure for your individual needs, if necessary propose appropriate modifications or addition.