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Taking counsel: Recent changes in regulation of investment funds in Estonia

  • 2006-12-20
  • By Steven Lipp [ Jurevicius, Balciunas & Bartkus ]
Venture capital (also know as private equity) is one form of capital aimed at driving innovation and economic growth. This is the reason why states promote such investment by way of legislation. In Estonia, a law amending the Investment Funds Act will introduce regulations on a new kind of contractual investment fund: the venture capital fund (VCF). Previously such funds existed only in the form of private and public limited companies that made investments on behalf of shareholders.

As defined in the Investment Funds Act, a VCF is a fund investing at least 60 percent of the fund's assets in shares not traded on the securities market or in shares of other VCFs. The shares in a VCF are offered only to professional securities market participants or to a person who meets two of the following requirements:

-The initial investment is at least 10,000 euros, and the person attests that he/she has sufficient knowledge on investing and of the risk level of the VCF;
-The person has worked for at least one year in the field of finance and has sufficient knowledge of investing in securities;
-The person has in the past four quarters made in the securities market an average of at least 5 deals of substantial value per quarter
-The total value of the person's securities portfolio exceeds 100,000 euros

A professional securities market participant is a bank, investment company or institution, investment fund, local municipality, international organization, duly registered (small and medium enterprise) SME, an enterprise not qualified as an SME or a person registered as a professional securities market participant in another country of the EEA.
The management company of venture capital funds may be registered in a simplified procedure compared to that of other investment funds. The simplified procedure shall apply to the management company, if the management company manages only VCFs.

The management company of a VCF is not required to present upon registration any internal rules of the management company, data about the financial or internal auditor of the management company, additional personal information on the manager of the fund nor information about the shares belonging to the management company itself, its managers or members of the supervisory board.

Just as any other investment funds not operating on a contractual basis, the management company of a VCF may only be founded as a public limited company. A foreign management company may manage VCFs and real estate funds provided that the company has a registered branch in Estonia.
The VCF and the management company have some less strict requirements than other types of investment funds or management companies:

-A non-public VCF is not required to have a separate depository for the assets of the fund, nor is it required to follow some other rules of managing the fund that apply to other types of funds.
-The management company of a VCF may not hold the investor's portfolio nor hold assets of any other funds for the investor.
-The management company must have at least one member of the management board.
However, a major part of the requirements are the same as with other types of investment funds 's e.g., regarding the management company's share capital or minimum net asset value of the fund itself:
-The share capital of the management company shall be at least 125,000 euros.
-The VCF must have a net asset value of at least 400,000 euros after six months from its registration. Failure to comply with this gives the financial supervision authority the right to cancel the management company's right to manage the VCF.

Steven Lipp is a lawyer at the law firm Teder, Glikman and Partners.
a member of Baltic Legal Solution, a pan-Baltic integrated legal network of law firms which includes Kronbergs and Cukste in Latvia and Jurevicius, Balciunas & Bartkus in Lithuania, dedicated to providing a quality 'one-stop shop' approach to clients' needs in the Baltics.


Sandra Bliuvaite is associate advocate of the law partnership Jurevicius, Balciunas & Bartkus, a member of Baltic Legal Solutions, a pan-Baltic integrated legal network of law firms include Teder, Glikman & Parterid in Tallinn and Kronbergs & Cukste in Latvia, dedicated to providing a quality 'one-stop shop' approach to clients' needs in the Baltics.