Funds are a vehicle (usually a type of company) which allows multiple people to co-invest in a project. They are often called Collective Investment Schemes (CISs) and generally will need to be licensed in some way or fall into a licence exemption. CISs are used in all situations where co-financing is required but which type of vehicle is appropriate will vary depending on each case. Funds may be open or closed. In open funds the value of the share capital of the company is a direct reflection of the underlying assets with new investments increasing the pool of assets and accordingly the company will generally have a variable share capital. The term is more loosely used to refer to any fund in which the assets are freely tradable at any time. In open funds investment is made directly to the company and generally achieved by buying the investments of existing shareholders. Closed funds have a fixed share capital which can be traded between investors and third parties the face value of which may be nominal and not linked to underlying assets (as with a public company). Closed funds generally have a limit on their total level of investment which they will not exceed in order to avoid diluting the influence of existing investors and may lock in investors to a certain period of time before they can sell out their position.

Funds may be either retail or professional. Professional funds are distinguished from retail funds by the requirement for a minimum deposit for each investor and they may require demonstration of investment experience on behalf of their investors (usually in the form of a questionnaire). Retail funds not having this minimum deposit and guarantee of investment experience are more regulated than professional funds and there is usually a greater associated cost in their establishment. The level of the minimum deposit to qualify as a professional fund vary greatly from country to country and may be as low as 15,000 EUR. Because of the higher amounts invested, the greater experience of the investors and the lower level of regulation, professional funds are likely to be higher risk. In accordance with many countries aim of encouraging responsible saving retail funds are more likely to benefit from tax incentives but also may be limited in what assets they can invest in.

Generally speaking any means of raising finance from the public will require a licence. The types of licence available, the level of regulatory scrutiny (and associated cost) varies from country to country and it is often linked to the reputation of the country. In some situations it may be possible to proceed without licensing but it is always advisable to obtain local advice in advance. The following types of activity are likely to require a licence: the provision of investment advice, placement of funds, management of investments, carrying out of investment instructions, executing orders.


Licensing Process
Assuming that a licence is required it will usually be necessary to apply to a local regulator along with a business plan, offering document and due diligence to allow the regulator to conduct its background checks and to pay a licence fee. Ongoing requirements also vary from country to country. They are based around a demonstration of skill, competency and fitness and may require some local presence such as a local director and/or Money Laundering Reporting Officer (MLRO) and the maintenance of minimum capital balances or a guarantee.

Factors Affecting Choice of Country
Although conceptually similar from one country to the next in matters of substance there are considerable differences with regard to the level of regulation required to operate from one country to another as well as an associated difference in reputation. For example minimum capital requirements, timescale to regulation, scope of activities permissible, retail/professional thresholds, licence fee, human resource costs etc. vary greatly. Most of the world’s funds operate from tax havens and this does not attract the same stigma as may be associated with other products such as private companies. However, tax is still relevant to choice of jurisdiction when considering the tax treatment of gains received by investors from the funds since many countries may treat income received from a Luxembourg or Maltese fund differently from income received from a Panama or Cayman fund although in most cases none of the above will have paid tax at a fund level.