Disclaimer: This chapter was last updated on 15 September 2023 and does not reflect any subsequent developments. The information provided is intended for general informational purposes and should not...

The 4th edition of the Venture Capital Review by Lexology, In-Depth: Venture Capital Law (formerly The Venture Capital Law Review), is now available online. You can access it via the following link: Lexology – In-Depth: Venture Capital Law. Our Partners at CMS Geneva, Jérôme Levrat and Vaïk Müller, have co-authored the Switzerland chapter for the fourth consecutive edition. This chapter offers an in-depth analysis of the Swiss venture capital and start-up landscape, along with expert commentary on the latest legislative developments in the field.

Update On 4 September 2024, the Swiss Federal Council approved the dispatch on the Berne Financial Services Agreement (the Agreement). The Agreement is a landmark international treaty that recognises the equivalence of the legal and regulatory frameworks in selected financial sectors of both countries and aims to streamline cross-border financial services between these two major international financial centres. Supplemented by enhanced regulatory and supervisory cooperation to ensure stability, integrity and customer protection, the agreement will facilitate access to each other's markets. Background In particular, the Agreement covers the recognition of equivalence in the areas of banking, investment services, insurance, asset management and financial market infrastructures for sophisticated clients. For asset management services, the Agreement confirms the existing mutual access for marketing, including advertising and offering collective investment schemes to per se professional clients, institutional clients/eligible counterparties and elective professional clients. It also acknowledges the ability of UK and Swiss financial services firms to delegate portfolio and risk management activities to financial services providers in both jurisdictions. With regard to banking and investment services, the Agreement allows Swiss financial service providers to provide financial services, in particular portfolio management and investment advice, to per se professional clients, eligible counterparties as well as high net worth individuals with assets in excess of GBP 2 million either on a cross-border basis or as part of a temporary local operation (without prejudice to UK visa and other entry requirements). For UK financial service providers, the Agreement adds additional flexibility for client advisers acting on behalf of UK investment services firms as such advisers will no longer need to individually register with Swiss registration bodies to serve certain high net worth clients. Instead, their firm can give confirmation on their behalf that they meet the prerequisites for giving business or investment advice to Swiss clients. However, not all high net worth clients as defined under the Swiss Financial Services Act (FinSA) are covered by the Agreement and UK financial service providers that are exempt from the registration requirement under the Agreement must still ensure that some specific requirements prescribed by FinSA are met. Further, temporary presence in Switzerland of UK client advisers is possible (without prejudice to the respective visa and other entry requirements of Switzerland). For central counterparties (CCPs), the Agreement provides for a regulatory recognition by both Switzerland and the UK. This will ensure that Swiss and UK CCPs can provide their services with greater certainty. The Agreement also includes a commitment to firm up current access to trading venues (e.g. stock exchanges and multilateral trading facilities). With respect to non-centrally cleared OTC derivatives, Swiss and UK counterparties will be free to rely on either recognised Swiss or UK risk mitigation rules (subject to UK standards and supervision of initial margin models and variation margin on physically settled FX swaps and forwards applicable to UK counterparties in accordance with UK domestic law). For insurance services, the Agreement allows Swiss insurance undertakings to provide cross-border insurance services to large UK corporate clients. Reciprocally, the Agreement offers the same to UK insurance undertakings in Switzerland. The recognition concerns certain lines of non-life insurance, including liability insurance in specific and selected lines of business for professional policyholders. Provision of life, accident and health insurance, liability insurance for non-covered lines of business, monopoly insurance of any kind or business interruption insurance are not in-scope and do not benefit from mutual recognition. Based on the Agreement, non-tied insurance intermediaries in the UK are also relieved from the new Swiss localisation requirement, which entered into force on 1 January 2024. This gives them an advantage over their competitors from all other jurisdictions, which have to establish a local presence in Switzerland. Timeline The Agreement was signed by the Swiss Federal Council and HM Treasury in the UK on 21 December 2023. Before it can enter into force, the Agreement must be approved by the parliaments of both countries. The dispatch is expected to be debated by the first chamber of the Swiss parliament in its winter session in December 2024, followed by a review by the second chamber in spring or summer 2025. Subsequently, the referendum period will begin. The timetable for this process in the UK Parliament is unknown. The earliest possible date of entry into force of the Agreement is not expected to be before 1 January 2026.

On 30 May 2024, the European Securities and Markets Authority (ESMA) has issued a comprehensive statement on the use of Artificial Intelligence (AI) in the provision of retail investment services. ESMA acknowledges the transformative potential of AI in enhancing efficiency, innovation, and decision-making for investment services. However, the statement also underscores the associated risks, including algorithmic biases, data quality issues and transparency concerns that come with the adoption of AI technologies (see further information here).

An article by Dr Vaïk Müller for Agefi

An article by Dr. Vaïk Müller for Agefi

Switzerland is not very well known as a fund jurisdiction, in particular when it comes to alternative investment funds. One reason has been the lack of a fund vehicle, which does not require approval by the local supervisory authority, such as, for instance, the Luxembourg Reserved Alternative Investment Fund (RAIF). Therefore, Switzerland has introduced the Limited Qualified Investor Fund (L-QIF), which is available from 1 March 2024. The L-QIF is a fund for qualified investors which does not require approval by the Swiss Financial Market Supervisory Authority (FINMA). The present briefing gives an overview on the new Swiss fund vehicle, by providing an executive summary and addressing, in more detail, the following topics:Legal for­m­Ad­min­is­tra­tion and investment man­age­mentIn­vest­ment re­stric­tionsIl­li­quid investments or investments difficult to valuateTaxThe L-QIF may be of interest to Swiss Managers and others looking at being active in the Swiss market. Executive summary The L-QIF is a new Swiss fund for qualified investors, which does not require approval by FINMA. The L-QIF is available from 1 March 2024 (date of entry into effect of the respective legal provisions). The L-QIF can take on the form of a Swiss contractual fund, a Swiss investment company with variable capital, or a Swiss limited partnership for collective in­vest­ments. L-QIFs must be administered and managed by a licensed fund management company or, under certain circumstances, a manager of collective assets. These institutions must, as a rule, be Swiss. However, to a certain extent also licensed foreign managers may be involved, which presents an opportunity for them to enter the Swiss market. The standard risk diversification rules and investment restrictions applicable to regulated vehicles do not apply to L-QIFs. L-QIFs may thus be attractive for alternative or illiquid investments. Despite the new vehicle, the main disadvantages of Swiss funds in an international context, which are the lack of EU market access and Swiss withholding tax, remain. A L-QIF will thus likely be most suitable if mainly Swiss investors shall be targeted, or for asset pooling by sophisticated investors when an active distribution is not required to raise funds. Which legal forms are available to structure L-QIFs? L-QIFs can be structured as Swiss contractual funds (SCFs), Swiss investment companies with variable capital (SICAVs), or Swiss limited partnerships for collective investments (Swiss LPs). They will not need FINMA approval, which does, however, not imply the absence of any regulation. Rather, the L-QIF remains subject to the provisions of the Swiss Collective Investment Schemes Act and Ordinance unless they are expressly disapplied. In particular, L-QIFs must be administered or managed by a supervised entity.  What are the requirements concerning the administration and management of L-QIFs? L-QIFs structured as SCFs can only be managed by a Swiss fund management company, which may, in turn, delegate the investment decisions to a manager of collective assets.L-QIFs structured as SICAVs will be required to delegate both the administrative and investment decisions to a fund management company, which may sub-delegate the portfolio management to a manager of collective assets.L-QIFs structured as Swiss LPs must delegate their executive management, including investment decisions, to a manager of collective assets. There will be no such requirement, however, if the general partners of the Swiss LPs are banks, insurance companies, securities firms, fund management companies, or managers of collective assets. Managers of collective assets, as defined in the Financial Institutions Act (FinIA), must be fully regulated investment managers under FinIA. De minimis collective asset managers with a license as portfolio manager are thus not eligible. When it comes to the delegation of the investment decisions, also foreign managers with an equivalent license may be involved. This may in particular be of interest to foreign managers with experience in managing similar vehicles, such as RAIFs. Which investment restrictions apply? The standard risk diversification rules and investment restrictions applicable to regulated vehicles do not apply to L-QIFs. This increased flexibility, however, will not exempt L-QIFs from defining in their documentation the applicable investment restrictions in line with the applicable limitations on leverage, collaterals and total exposure of net assets of L-QIFs. In addition, specific provisions, restrictions and limitations apply to open-ended L-QIFs investing in real estate, such as rules on co-ownership, risk diversification, transactions with related parties and requirements for experts in charge of valuation. Specific rules also apply to L-QIFs structured as Swiss LPs (i.e. closed-end vehicles) in terms of transactions with related parties. Requirements for valuation experts will also apply to such L-QIFs. Furthermore, the partnership agreements of Swiss LPs must expressly mention investment restrictions and authorised investment tech­niques.L-QIFs will be able to use the model-based approach as a risk measurement method (i.e. value at risk, VaR). The method will not be examined by FINMA, but ex post by the auditor. Finally, requirements applicable to securities lending, repo transactions, derivatives and security management for regulated vehicles apply also to L-QIFs. Are L-QIFs suitable for illiquid or investments difficult to valuate? L-QIFs may in particular be considered for alternative or infrastructure portfolios with illiquid investments. The most suitable legal form for such purposes is the Swiss LP. The open ended structures (SCFs and SICAVs) are generally less suitable for such type of investments, even if open ended L-QIFs with investments that are difficult to value or not negotiable may provide for termination possibilities only at specified intervals, but at least every five years.L-QIFs in the form of Swiss LPs may for instance be used for investments in private (early stage) companies. Open-ended L-QIFs, on the other hand, may be relevant for real estate investments as well as investments in digital or other alternative assets. For real estate investments, the Swiss LPs may, however, again be the better alternative depending on the type of real estate in question. Eventually, we may point out that side pockets require a specific approval by FINMA, in the absence of existing international standards or other points of comparison as well as empirical values. As a result, it will currently – unfortunately – not be possible for L-QIFs to create side pockets. What is to be considered from a tax perspective? L-QIFs are not treated differently in terms of tax, compared to other regulated funds/collective investment schemes. On the one hand, the L-QIF thus enjoys favourable treatment in terms of stamp duty and VAT. To the extent the L-QIF does not hold direct real estate, it is also treated transparently for income tax purposes. On the other hand, distributions and reinvested net income are subject to 35% withholding tax. This is an evident obstacle to the use of the L-QIF once also foreign investors shall be addressed. Coupled with the limited EU market access, the L-QIF will thus – like other Swiss funds – probably remain most suitable if (mainly) Swiss investors shall be targeted, or for asset pooling by sophisticated investors when an active distribution is not required to raise funds. Despite these limitations, the L-QIF is an attractive new fund vehicle, in particular when it comes to alternative investments. It also offers possibilities for foreign managers to enter into the Swiss market considering their experience with similar foreign vehicles. Looking ahead It will be interesting to see how L-QIFs evolve and if they become a popular investment vehicle for fund managers looking to enter the Swiss market. If you are interested in popular investment vehicles across Europe, please also see our popular investment vehicles guide. The information in this publication is for general purposes and guidance only and does not purport to constitute legal or professional advice.