Private placement rules and law in Cyprus

The private placement regime in Cyprus is contained in the CySEC Marketing Directive 2015 implemented further to the AIFM Law and the AIF Law. There is no definition of private placement in the Cyprus regime, but the term is generally taken to mean any placement outside of the scope of the AIFMD as implemented in Cyprus.

The CySEC Marketing Directive distinguishes between diverse categories of AIFs, AIFMs and target investor bases and the rules that will apply will vary accordingly.

In respect of AIFMs seeking to market units of AIFs without a passport to professional investors in Cyprus, the AIFM must communicate its intention to CySEC and submit the required documentation outlined in the CySEC Marketing Directive. The AIFM may commence the marketing of units in the AIF following the expiration of two months from the date of submitting the notification unless CySEC expressly rejects the submission.

Sub threshold AIFMs intending to market to professional and “well-informed investors” must seek express prior authorisation from CySEC to do so. Well-informed investors refer generally to an investor which is not a professional investor, confirms its status as such and invests at least EUR 125,000 (or its expertise is subjected to assessment by a credit institution). The documentation required to be submitted for authorisation is set out in an Annex to the CySEC Marketing Directive. CySEC must decide on the authorisation within three months of submitting a complete application and the Sub-threshold AIFM may commence marketing following authorisation.

AIFMs intending to market AIFs to retail investors in Cyprus may do so provided they obtain authorisation in a similar way to Sub-threshold AIFMs (see above) and on the understanding that the relevant AIF is subject to continuous prudential supervision and other requirements relevant to funds marketed to retail investors.

Recently, the Directive (EU) 2019/1160 with regard to cross-border distribution of collective investment undertakings was transposed into local legislation by way of amendment of the AIFM Act. As relevant topresent purposes, the transposition:

• Introduces clear rules relating to EEA AIFMs engaging in pre-marketing in Cyprus; and
• requires EEA AIFMs, intending to market units or shares of an AIF to retail investors in Cyprus, to make facilities available for the performance of certain tasks by retail investors.

In addition, the Mini AIFM Law regulates the marketing of AIFs by Mini AIFMs in Cyprus. Mini AIFMs, which include sub-threshold AIFMs authorised in other EU Member States, intending to market to professional and “well-informed investors” the units of an AIF established in another EU Member State or in a third country must confirm to CySEC in writing that the marketing of the AIF in Cyprus is permitted by the legislation of the home country of the AIF. Sub-threshold AIFMs established in other EU Member States may market units of an AIF established in another EU Member State or a third country, provided the relevant application is submitted. Further, Mini AIFMs established in another EU Member State may market to retail investors in Cyprus, provided that the AIF has the relevant licence under AIF Law.

The CySEC Marketing Directive imposes on-going obligations on persons marketing AIFs in Cyprus on a notified or authorised basis as outlined above.

The obligations include certification of individuals involved in marketing, transaction reporting requirements, disclosure obligations towards unit-holders and obligations relating to marketing over the internet.

An EEA AIFM can engage in pre-marketing of an AIF in Cyprus to the extent that the information provided to potential professional investors:

• does not enable such investors to commit to acquiring units or shares of a particular AIF; and 
• does not amount to a subscription form or similar document, whether in draft or final form; and
• does not amount to constitutional documents, a prospectus or offering documents of a not-yet-established AIF in a final form.

Where a draft prospectus or offering documents are provided, these should not contain information sufficient to allow investors to take an investment decision and should clearly state that they do not constitute an offer or an invitation to subscribe to units or shares of an AIF and that the information presented therein should not be relied upon because it is incomplete and may be subject to change. 

An EEA AIFM who engages in pre-marketing in Cyprus must ensure that investors do not acquire units or shares in an AIF through pre-marketing and that investors contacted as part of pre-marketing may only acquire units or shares in that AIF provided the applicable marketing procedures under the AIFMD are followed. The position as to how an EEA sub-threshold AIFM, relying on the Cypriot private placement regime, may comply with this requirement is ambiguous. 

Furthermore, for a period of 18 months after the start of the pre-marketing of the AIF, any subscription by Cyprus-based professional investors should be considered to be the result of marketing and therefore subject to the applicable marketing procedures under the AIFMD. 

The EEA AIFM is not required to notify CySEC of the content or of the addressees of pre-marketing, or to fulfil any conditions or requirements other than those set out above, before it engages in pre-marketing. An EEA AIFM will, under its home state implementation of the Directive (EU) 2019/1160, be subject to an obligation to notify the competent authority. However, the AIFM Act empowers CySEC to request further information on pre-marketing actions taken or taking place in Cyprus from the home Member State of the AIFM. 

Lastly, an EEA AIFM must ensure that any pre-marketing activities in Cyprus are adequately documented. 

No equivalent rules apply in relation to pre-marketing conducted by non-EEA AIFMs in Cyprus. 

Reverse solicitation, i.e. the acquisition of fund interests at the initiative of the investor, lies outside the fund regulations. However, any intermediary where applicable, e.g. an investment advisor, must not receive any other remuneration apart from the investment advice fee, in order for the reverse solicitation to be lawful.

Another placement possibility outside the scope of the fund regulations is where a portfolio manager acting under a discretionary portfolio management mandate decides to include fund units in the client’s portfolio. In the case of non-discretionary portfolio management, no additional remuneration, other than the management fee, must be received, for the purchase to take place outside the fund regulations.

Further, interests in European Social Entrepreneurship Funds (“EuSEF”), within the meaning of EU Regulation 346 / 2013 and in European Venture Capital Companies (“EuVECA”), within the meaning of EU Regulation 345 / 2013 are out of the scope of the marketing provisions of the AIFM and the AIF Law.

If there is a breach of the AIFM Law marketing provisions, the AIFM Law sanctions will apply. These consist of administrative and criminal sanctions. Administrative sanctions in the form of an administrative fine are provided in section 74 of the AIFM Law.

The administrative fine may be up to EUR 350,000 and may increase to EUR 700,000 for repeated breaches. Where the person in breach of the AIFM Law marketing provisions obtains a benefit pursuant to the breach, the administrative fine imposed may be up to twice the amount of the benefit. Criminal sanctions are laid down in section 75 of the AIFM Law, and apply to a breach of AIFM Law marketing provisions in the following situations:

• Marketing of AIFs by an unauthorised person takes place. In such a case the applicable criminal sanctions will be imprisonment of up to five years and/ or monetary sanctions of up to EUR 700,000;
• A false, misleading or deceiving statement or submission of documents is made, or evidence is concealed or omitted to be submitted or the exercise of CySEC’s controlling or investigatory duties is obstructed. In these cases, the applicable criminal sanctions will be imprisonment of up to five years and/ or monetary sanctions of up to EUR 700,000. Administrative fines according to section 74 of the AIFM Law may also be imposed; advertising material or subscription forms relating to AIFs which are not permitted to be marketed in Cyprus under the AIFM Law are knowingly issued, circulated or distributed. In these cases, the applicable criminal sanctions will be imprisonment of up to three years and/ or monetary sanctions of up to EUR 200,000.

Sanctions under the AIF Law also comprise administrative and criminal sanctions. Administrative sanctions in the form of an administrative fine are provided in section 120 of the AIF Law and relate to breaches of the AIF Law or any of the CySEC Directives issued further to the AIF Law. The administrative fines imposed may be up to EUR 350,000 and may increase to EUR 700,000 for repeated breaches. Where the person in breach of the AIF Law marketing provisions obtains a benefit pursuant to the breach, the administrative fine imposed may be up to twice the amount of the benefit. In addition to administrative fines, administrative sanctions also include withdrawal of the relevant marketing licence.

Criminal sanctions are laid down in section 121 of the AIF Law, and apply to a breach of AIF Law provisions, including marketing provisions, in the following situations:

• When, in the course of providing information for any matter regulated under the AIF Law, thus including marketing of AIF; a false, misleading or deceiving statement or submission of documents is made, or evidence is concealed or omitted to be submitted or the exercise of the controlling or investigatory duties of the CySEC is obstructed. In these cases, the applicable criminal sanctions will be imprisonment of up to five years and / or monetary sanctions of up to EUR 350,000;
• Use of a brand, name or description that creates the false impression of an AIF being licensed under the AIF Law. In these cases, the applicable criminal sanctions will be imprisonment of up to five years and/ or monetary sanctions of up to EUR 350,000;
• Advertising material or subscription forms relating to AIFs, which are not permitted to be marketed in Cyprus under the AIF Law, being knowingly issued, circulated or distributed. In these cases, the applicable criminal sanctions will be imprisonment of up to three years and / or monetary sanctions of up to EUR 200,000; and Administrative fines according to section 120 of the AIF Law may also be imposed.

Regulation under the Prospectus Directive should also be considered when seeking to market on a private placement basis. The Prospectus Law transposes the Prospectus Directive in Cyprus. To avoid the requirement to prepare a prospectus, the person marketing would need to ensure that the offering in Cyprus does not constitute an offering of securities to the public or otherwise qualifies for a safe harbour under the Prospectus Law. 

The most important safe harbours in practice under the Prospectus Law are the de minimis threshold whereby an offering to fewer than 150 persons who are not “qualified investors” will be exempt; and a safe harbour relevant to offers to any “qualified investors”. For these purposes a Cyprus qualified investor will be either an eligible counterparty or professional client under the Investment Services and Activities and Regulated Markets Law 2017, which transposes MiFID II. 

The Cypriot Companies Law Cap. 113 also imposes a requirement for a prospectus in relation to an offer to the public. There is an exemption for shares or debentures to which the Prospectus Law applies. 

The outline above also projects regulatory practice, following the enactment of the AIF Law.