What is a UCITS, and how do common funds and VCICs differ?

Law 78(I)/2012 transposes the UCITS Directive, Directive 2009/65/EC, into Cyprus law. A fund counts as a UCITS only if three features are present together. Its sole object is the collective investment of money raised from the public in transferable securities and the other liquid instruments the Law allows, described in What may a UCITS invest in, and what limits apply? It spreads risk. And investors can have their units bought back or redeemed, directly or indirectly, out of the fund's own assets whenever they ask. Where units trade on an exchange, steps taken to keep the market price close to NAV count as redemption, and a difference of up to 5% of NAV is not significant.

The Law expressly excludes four kinds of fund: closed-ended funds; funds that raise money without marketing their units to the public anywhere in the EU; funds whose rules let units be sold only to the public of third countries; and funds whose investment or borrowing policy does not meet the Directive's standards. It also excludes a VCIC that invests mainly, through subsidiaries, in assets other than transferable securities. A UCITS can be set up only under this Law, and it may not convert itself, by any route, into a vehicle outside it. Funds that fail the test are usually alternative investment funds: see What is an AIF in Cyprus, what forms can it take, and how must it be organised?

A common fund is a contractual pool. Its assets belong jointly and undivided to the unitholders, are kept by a depositary and are managed by a management company in the unitholders' interest. Because the pool is not a legal person, the management company speaks for the unitholders in and out of court, exercises every right attached to the assets and acts in its own name, stating that it does so for the fund. Unitholders are not liable for what the management company or the depositary does or fails to do, and the fund does not answer for their obligations. A common fund therefore always has a management company.

A VCIC is a company with shares and limited liability, whose only purpose is to manage its own portfolio collectively for its shareholders. It raises money from the public, spreads risk and redeems its shares on request. Its capital adjusts by itself: it grows when shares are issued and shrinks when they are redeemed, and redeemed shares are cancelled, without any Companies Law procedure for increasing or reducing capital. Its shares may be admitted to an exchange, but listing is optional. A VCIC either designates a management company or manages itself.

Start-up amounts differ. A common fund needs €200,000 of initial assets, and a VCIC with a designated management company needs €200,000 of initial capital. A self-managed VCIC needs €300,000 and at least two persons directing its business. Each minimum applies to every compartment.

CySEC licenses each UCITS, and the licence is valid in every Member State. It decides within 2 months of receiving a complete file, or within 6 months for a VCIC that has not designated a management company. The fund then has at most 6 months from notification of the licence to invest its assets in line with the Law's investment rules.

Size matters for a common fund. If its assets drop below two-thirds of the €200,000 statutory minimum, the management company may decide to dissolve it; it must tell CySEC without delay, and CySEC may require that decision. If assets fall to one quarter of the minimum and stay there for more than 6 months, the fund is dissolved by the management company's decision. Unitholders and their creditors cannot demand a dissolution. A VCIC acts through its shareholders instead: when its capital falls to two-thirds or one quarter of the minimum, the board must convene a general meeting, to be held within 40 days, to decide whether to dissolve it.