Spain was one of the first countries to establish a regulatory framework for private equity firms and their management companies through Law 1/1999. This Law was repealed following the entry into force of Directive 2011/61/EU in 2011 on European Alternative Investment Fund Managers, with the approval of Law 22/2014 (hereinafter, Private Equity Law). This law transposes the Directive in Spain and therefore includes other regulated closed-ended alternative investment entities, in accordance with the following provisions.
Types of alternative investment entities in Spain
The Venture Capital Law regulates the following closed-ended collective investment vehicles, which must be registered in the corresponding administrative register of the National Securities Market Commission (Spanish acronym “CNMV”) in order to be marketed:
- Venture Capital Entities;
- European Venture Capital Funds, regulated by Regulation (EU) No 345/2013;
- European Social Entrepreneurship Funds, as regulated by Regulation (EU) No 346/2013; and
- Other Closed-ended type Collective Investment Entities.
Legal form, management and marketing of regulated entities
The above entities may take the form of (i) business enterprise, which are therefore subject to certain limitations of the Capital Companies Law, mainly in relation to corporate governance issues, and may choose to self-managed or delegate management to a regulated Management Company; or (ii) funds, whose assets belong to the unitholders and lack legal entity, and which must necessarily be represented and managed by a regulated Management Company.
Regulated Management Companies may be incorporated as either a Management Company of Closed-Ended Type Collective Investment Entities or as a Management Company of Collective Investment Schemes, both of which are subject to authorisation and supervision by the CNMV. Management Companies of Closed-Ended Type Collective Investment Entities, which are mainly used in Spain for the management of venture capital projects, may choose to be authorised in accordance with the requirements of Chapter II of Title II of the Private Equity Law (this requirement will be mandatory if they have assets under management over EUR 500 million, without leverage), which entails certain additional obligations in terms of resources and supervision by the CNMV.
All Closed-Ended Type Collective Investment Entities registered with the CNMV may be marketed in Spain to investors who qualify as professional investors in accordance with the provisions of the Securities Market Law. Likewise, those Private Equity Entities managed by a Management Company of Closed-Ended Type Collective Investment Entities subject to Chapter II of Title II may be marketed in Spain to retail investors (as long as they invest a minimum of 100,000 euros and declare in writing that they are aware of the risks associated with the commitment) and, through the processing of a marketing passport with the CNMV, to professional investors in other European Union countries. European Venture Capital Funds and European Social Entrepreneurship Funds may also be marketed outside Spain within the European Union to retail investors who meet the above conditions.
The Private Equity Law requires Private Equity Entities to invest at least 60% of their eligible assets in assets of their main purpose, being the taking of temporary stakes in the capital of companies: (1) which are not listed on the first stock exchange market or other equivalent regulated market (except for delisting within twelve months of the investment); (2) which are not financial institutions; and (3) which are of a non-real estate nature (although to invest in companies securities whose assets are formed for at least a 50% of real estate will be admitted, provided that the real estate representing 85% of the total book value of the real estate is assigned to the development of an economic activity). They may also extend their main purpose to invest in other venture capital companies.
For the above purposes, financial institutions will be considered to be those included in any of the following categories (whether domestic or foreign and regardless of their legal name): credit institutions and financial credit institutions; investment services companies; insurance companies; investment, pension and security funds; management companies of collective investment, pension or security funds; institutions whose main activity is the holding of shares issued by financial institutions; mutual guarantee companies; electronic money institutions; and payment institutions.
The European Regulations governing European Venture Capital Funds and European Social Entrepreneurship Funds also establish specific limitations, including those related to the investment in financial institutions. However, the rest of the Closed-Ended Type Collective Investment Entities are not subject to investment limitations specific to the core venture capital activity that was described above.
Alternative investment: Fintech and Insurtech ecosystem
In accordance with the above, it should be highlighted that Private Equity Entities are not usually structured in Spain as vehicles for channelling investments in the financial sector (thus including all new investment activity in the Fintech and Insurtech sector). All of this without detriment to their making investments in this type of asset within their free disposal ratio and considering that the asset in which they intend to invest must be analysed on a case-by-case basis, given that some of these companies whose main activity is related to the financial sector could be excluded from the strict categorisation of financial institution.
Market operators therefore use other Closed-Ended Type Collective Investment Entities for this type of operation, which can devote all their eligible assets to investment in financial institutions, as well as unregulated structures or financial collective investment entities. Nevertheless, none of these alternatives can benefit from the special tax regime that the Spanish Corporate Income Tax Law establishes for Venture Capital Entities, which is usually one of the main reasons for setting up these structures for collective investment in company assets.
Other European jurisdictions establish fewer limitations in relation to investment in this type of assets by closed-ended type collective investment vehicles. This is the reason why some countries, are positioning themselves as leaders in this market. In this sense, we undoubtedly highlight the innumerable advantages Luxembourg offers.