While it is known to many that the UAE has become a major hotspot for expansion or commencement of business operations due to its ideal location, strategic infrastructure and business-friendly policies, the global prominence and popularity of investment funds in the UAE should also be at the center of discussion. UAE has become a popular jurisdiction for the establishment of investment funds due to a variety of reasons which include readily available world-class infrastructure, stable political and economic environment, business-friendly governmental policies, additional incentives for foreign investors, tax incentives and a favorable corridor for the access of capital at global level.
Why invest in the UAE?
As per the data made available by the Ministry of Investment, UAE, the administration of the UAE believes in prioritizing long-term national goals by building a safe, secure and sustainable economy. This commitment has helped the UAE to maintain a GDP over the past decade at an average of 7%. This vision statement of the Ministry of Investment reflects in the business-friendly governmental policies which helped the UAE to secure the top spot in the Gulf region and 16th spot globally in terms of the ease of doing business as per the ranking issued by the World Bank.
This blog is a part of our General Corporate and Commercial Services.
Why establish an investment fund in the UAE?
The UAE is one of the most preferred options for fund managers and private equity firms because of the following major reasons:
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- No foreign exchange restrictions – the UAE promotes and encourages foreign investment within the region and to promote this vision, foreigners are allowed to freely repatriate the profits and capital out of the UAE.
- Foreign ownership laws – With effect from 2020, the Federal Laws of the UAE allow 100% foreign ownership of certain business structures.
- Impressive federal budget – Federal budget of the UAE for the period of 2022-2026 is pegged at AED 290 Billion, which is the highest in the history of the UAE.
- Stable currency – The federal government of the UAE has been able to constantly keep the AED currency stable against the international currencies. The AED currency is constantly pegged against the US currency at a constant exchange rate of 1:3.67. This stability instills great confidence among the foreign retail and institutional investors.
- Free Zone Areas – the UAE managed to attract foreign investment into different emirates by the development of various free zone areas. It is worth noting that each free zone area has been set up with an aim to grow a specific sector or industry within the UAE. For instance, the Dubai International Finance Centre (DIFC) was established with an aim to boost different financial services within the UAE.
Importance of understanding legal aspects of incorporation of investment funds in the UAE
Understanding the legal aspects of incorporating an investment fund within the UAE is important for legal teams and business teams alike because of the following main reasons:
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- Ensuring compliance: Being aware of the applicable laws, compliances and regulations laid down by the Securities and Commodities Authority (“SCA”), DIFC, ADGM etc. (as may be applicable) helps the businesses to operate and administer the fund in a legally compliant manner and avoid any fines and penalties which may be levied by the regulatory authorities.
- Greater investor confidence and trust: Compliance with legal requirements in letter and in spirit helps in gaining the trust of the investors. Being aware of the legal aspects of the fund establishment and administration helps the fund managers to create a fair and secure investment environment as the investors feel safe about adherence to adequate safety standards.
- Better risk management strategies: Legal aspects also define the scope of liability for the fund managers, investors, and other stakeholders involved. A deep understanding of these regulations helps in designing proper risk management strategies and knowing the legal limits of personal and organizational liability in case of legal disputes or financial losses.
Understanding investment funds in the UAE
What is a fund? What is its purpose?
An investment fund is an investment vehicle incorporated in the form of a company, or a trust and its main purpose is to invest a certain sum of money in other body corporates in lieu of shareholding in such companies. Depending upon the kind of body corporates a fund invests in, the funds can be categorized into different kinds of funds. For instance, a fund which invests in early-stage startup companies are known as venture capital funds.
Overview of the fund structures in the UAE
A fund may be incorporated in the mainland of any of the emirates such as mainland Dubai or may be incorporated in the designated free zone areas located in different emirates of the UAE. For instance, Dubai International Financial Centre (DIFC) situated in Dubai and Abu Dhabi Global Market (ADGM) are two favorite free zones for the establishment of investment funds in freezone areas of the UAE.
The regulations under which a particular fund is incorporated and governed depend on the jurisdiction within which such fund is incorporated in the UAE. For instance, if a fund has to be incorporated in the DIFC, the regulations which exclusively apply within the DIFC shall be applied. Similarly, if a fund has to be established within the mainland UAE, the regulations as laid down by the Securities and Commodity Authorities (“SCA”) in relation to the investment funds shall apply.
Types of Investment Funds in the UAE
While each jurisdiction (such as ADGM, DIFC and mainland UAE) in the UAE offer different kinds of specialist funds with each kind of fund having its own advantages and features, the main kinds of investment funds remain the same regardless of the jurisdiction. A few major categories of funds are briefly described below:
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- Domestic Fund: Domestic funds are the funds which are domiciled within a particular jurisdiction within the UAE. A domestic fund can either be a public fund, an exempt fund or a qualified investor fund (also known as private fund).
- Foreign Fund: A fund which is not a domestic fund is a foreign fund.
- Public Fund: A public fund is a fund which offers some or all of its units to the investors by way of public offer.
- Exempt Fund: A fund is an exempt fund (a) if units are offered by such fund through private placement, (b) all its unitholders are the persons who meet the criteria to be classified as professional clients, and (c) the initial subscription to be paid by a person to become a unitholder is not less than US$ 50,000 (United States Dollars Fifty Thousand) and such fund does not qualify to be a qualified investor fund.
- Qualified investor fund: A Fund is a qualified investor fund if it meets the criteria (a) and (b) of the exempt fund as described above and the initial subscription to be paid by a person to become a unitholder is not less than US$ 500,000 (United States Dollars Zero point Five Million).
- Venture capital fund: A venture capital fund is either an exempt fund or a qualified investor fund which invests only in the securities of the companies which are at an early stage of development and that are not listed or admitted to trading on an exchange directly or indirectly.
Regulatory Framework and Governing Authorities
Regulatory Framework in the mainland of UAE
Securities and Commodities Authority (“SCA”) is the regulatory authority in the mainland UAE which regulates the incorporation, and the activities of the investment fund incorporated in the mainland UAE. For the effective regulation, the SCA issued Resolution No. 01/Chairman of 2023 concerning the regulation of investment funds (“UAE Mainland Regulations”). The UAE Mainland Regulations are applicable to the local funds, local funds service providers and the related parties of the local funds.
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- Who shall be responsible for the compliance of UAE Mainland Regulations – the fund manager is the legal representative of the local fund before the courts and in relationship with the others and shall be responsible (along with the service providers of the local fund) for the compliance by the Local Fund with the provisions of the UAE Mainland Resolutions.
- Who can establish a local fund in the mainland UAE: Following persons/entities are eligible to register a fund in the mainland of UAE: (i) An entity licensed by the SCA to carry on the activity of management of Investment Funds investments, (ii) an entity licensed by the SCA to conduct the activity of family investment management in relation to the family fund provided that the units of the fund shall be 100% owned by one or more members of the family, whether such member is a natural person and/or corporate person which is wholly owned 100% by them, and provided that the unit holder shall be the beneficial owner. The fund manager has to file an application for establishment and licensing of the local fund along with the requisite documents.
- Compliances of the fund manager: (i) Preparation of the local fund offering document in Arabic or English, (ii)signing the offering document and its summary, and (iii) make available to the unit holders on constant basis, and update on regular basis, the prospectus and its summary on the website of the fund manager and make them available to the unit holders without consideration.
- Provisions on subscription of units: (i) there is no minimum or maximum limit for the ownership of the local funds concerning the nationality of the investment funds units’ holders unless the prospectus states otherwise, and (ii) subscription shall be received by an entity licensed for doing this in the state according to the provisions of the companies law.
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Regulatory framework in DIFC
Dubai Financial Services Authority (“DFSA”) is the regulatory authority in DIFC which regulates the incorporation, and the activities of the investment fund incorporated in DIFC. DFSA, pursuant to Collective Investment Law (DIFC Law No. 2 of 2010), regulates the activities of investment funds within DIFC. As explained earlier, two major types of fund recognized in DIFC are domestic fund and foreign funds.
Fund Manager: A legal person which is a body corporate and is an authorized firm whose license authorizes it to act as the fund manager of the specialist class of fund and meets any additional criteria, requirements or conditions that may be prescribed in the investment fund rules laid down by DFSA. A fund manager is legally accountable to the unitholders in the fund for the management of the fund.
Trustee: A legal person which is a body corporate and is registered as an authorized firm with a license to act as a trustee or provide custody services or a person regulated and supervised by a financial services regulator in a recognized jurisdiction with respect to its custody or depository services can be a trustee of a domestic fund with an investment trust.
Registration of a public domestic fund: Every public domestic fund has to be registered with DFSA and DFSA is under an obligation to register such public domestic funds if the fund meets all the requirements of law.
Notification requirement to Exempt Funds and Qualified Investor Funds: The fund manager of an Exempt Fund or a Qualified Investor Fund shall notify DFSA at least 14 days prior to the initial offer to issue units in the Fund.
Regulatory framework in ADGM
Financial Services Regulatory Authority (“FSRA”) is the regulatory authority in ADGM which regulates the functioning and incorporation of investment funds within ADGM. Pursuant to the Fund Rulebook issued by ADGM, FSRA regulates the commercial activities of investment funds within ADGM. The said rulebook applies to every person who carries on the following (i) managing a collective investment fund, (ii) acting as the administrator of a collective investment fund, (iii) providing custody, or (iv) acting as trustee of an investment trust.
Registration of Public Funds: An application for the registration of a public fund must be made to FSRA by the legal person which is to be a fund manager or a domestic fund. If the fund is an investment trust, then the Trustee and Fund Manager must apply jointly.
Notification requirement applicable to Exempt Fund and Qualifier Investor Funds: A fund manager of an Exempt Fund of a Qualified Investor Fund is required to provide a prior notification to FSRA before making an initial offer to the relevant unitholders.
FSRA consent: A protected cell company and an incorporated cell company cannot be established in ADGM without the consent of ADGM. Additionally, a domestic fund (other than a qualified investor fund) that is a protected cell company or an incorporated cell company may not create a new cell unless approval has been granted by FSRA.
Comparative analysis of the incorporation of investment funds in the mainland UAE, DIFC and ADGM
| Criteria | Mainland UAE | DIFC (Dubai International Financial Centre) | ADGM (Abu Dhabi Global Market) |
|---|---|---|---|
| Regulatory Authority | Securities and Commodities Authority (SCA) | Dubai Financial Services Authority (DFSA) | Financial Services Regulatory Authority (FSRA) |
| Legal Framework | UAE Federal Law | DIFC operates under its own legal system, based on English common law. | ADGM directly applies English common law and selected English statutes. |
| Fund Types | Public Funds, Private Funds, Exchange-Traded Funds (ETFs), Real Estate Investment Trusts (REITs) | Public Funds, Exempt Funds, Qualified Investor Funds (QIFs), REITs | Public Funds, Exempt Funds, Qualified Investor Funds (QIFs), REITs |
| Target Investors | Retail and institutional investors | Primarily institutional and high-net-worth investors; retail investors under specific conditions | Primarily institutional and high-net-worth investors; retail investors under specific conditions |
| Fund Structures | Limited Liability Company (LLC), Private Joint Stock Company (PJSC) | Company, Investment Partnership, Investment Trust | Company, Limited Partnership, Investment Trust |
| Regulatory Capital Requirements | Varies based on fund type and structure | Specific capital requirements depend on the type of fund and activities undertaken | Specific capital requirements depend on the type of fund and activities undertaken |
| Fund Manager Requirement | Fund managers must be licensed by the SCA | Fund managers must be licensed by the DFSA; external fund managers may be permitted under certain conditions | Fund managers must be licensed by the FSRA; external fund managers may be permitted under certain conditions |
| Foreign Ownership | Subject to UAE Federal Law | 100% foreign ownership permitted | 100% foreign ownership permitted |
| Regulatory Approvals & Timeframe | Regulatory approval process can be lengthy and complex | Streamlined approval processes; timeframes vary depending on the fund type and complexity | Streamlined approval processes; timeframes vary depending on the fund type and complexity |
| Investor Protection & Compliance | Governed by SCA regulations, focusing on investor protection and market integrity | Strong emphasis on investor protection, adhering to international standards and best practices | Strong emphasis on investor protection, adhering to international standards and best practices |
| Flexibility in Fund Management | More rigid regulatory environment, with stricter controls and oversight | Offers a flexible regulatory framework, encouraging innovation and accommodating various fund structures | Offers a flexible regulatory framework, encouraging innovation and accommodating various fund structures |
| Suitable For | Domestic funds targeting local investors; entities seeking to operate under UAE Federal Law | International and regional fund managers seeking a common law framework and a well-established financial ecosystem | International and regional fund managers seeking a common law framework with a focus on innovation and fintech initiatives |
| Regulatory Authority | Securities and Commodities Authority (SCA) | Dubai Financial Services Authority (DFSA) | Financial Services Regulatory Authority (FSRA) |
Essential Legal Documentation for Fund Incorporation in the UAE
While the legal documentation varies as per the specific type of fund to be incorporated and the jurisdiction within which the fund has to be incorporated, the major categories of legal documentation remain the same. Major categories of legal documents to be prepared are as follows:
Fund constitutional documents
a) Private placement memorandum (“PPM”)
This is a document which sets out the aims, objectives and investment strategy of the fund in detail. It also provides for the investment risks, applicable fees and governance steps that shall be taken by the fund. If the fund intended to be incorporated is a private fund, PPM is circulated only to the identified investors.
b) Articles of Association of the Fund
Articles of Association of an investment fund is a constitutional document which governs the operational procedures of the fund. Any act committed by the fund which is contrary to the provisions of the AOA is ultra vires and shall be deemed to be null and void from the beginning.
c) Fund Management Agreement
This is an agreement which is signed between the fund and the fund manager. It governs the relationship between the fund and the fund manager and sets out the roles and responsibilities of the fund manager.
Regulatory Approvals Documents
a) Regulatory Application Form:
Each regulator has its own format for the regulatory approval form required to be filed with the relevant regulator. As a part of such Form, the applicant is required to submit details which include but is not limited to the structure of the fund, management team, investment strategy and measures to be taken to ensure effective compliance of the regulations. This Form is an initial application which is a mode of information about the proposed fund to the regulator.
b) Fund License Application
While the Regulatory Application Form is a preliminary application which contains basis details about the fund intended to be incorporated, Fund License Application is a more detailed Application and is a formal application requesting a fund license after the regulatory authority has reviewed and approved the initial application.
c) Registration Certificate
This is a certificate which is issued by the regulatory authority upon final approval of the license application by the regulatory authority. The registration certificate is conclusive proof that the fund meet all the regulatory requirements. Once the registration certificate is obtained, the fund can commence its business operations.
d) Fund management authorization
If the fund is managed by a fund manager which is registered outside the relevant jurisdiction, the fund manager should also satisfy the regulatory requirements as applicable to the relevant jurisdiction. Such fund manager must comply among other things with capital adequacy, reporting requirements etc.
Compliance and Anti-Money Laundering/Know Your Customer Policies
As per the regulatory requirements, investment funds are also required to also comply with the anti-money laundering and know your
customer requirements. As a part of such compliance, the fund may be required to prepare AML compliance policy and internal risk
assessment policy.
