Investment funds in Panama: an alternative to maximize financial assets and diversify portfolios

Paula Vives

Investment Companies, also known as Investment Funds, are usually an attractive alternative for those people who do not have the necessary capital to start in the world of investments. Specifically, investment funds work thanks to the fact that an administrator consolidates the money of several people to invest it in a basket of different assets, thus allowing investors to obtain the desired benefits.

In Panama, the legal framework for investment funds is composed of Decree Law No. 1 of July 8, 1999 (the "Securities Law") and Agreement 5-2004 of July 23, 2004, which specifically regulates the activity of investment funds in general. This framework is intended to establish the necessary elements to determine the registration and supervision obligation of a fund, such as: (i) the number of investors, (ii) the location of the operation, (iii) the types of investment and (iv) the capitalization.

The law defines Investment Funds as any legal entity, trust or contractual arrangement that, through the issuance and sale of its own participation quotas, engages in the business of obtaining money from the investing public, through one-time or periodic payments, for the purpose of investing and trading, either directly or through investment managers, in securities, currencies, metals and commodities, real estate1 , among others.

The modality of an investment fund exists both privately and publicly, and it will depend entirely on the needs and preferences at the time of investing, to decide between one or the other, since as we are going to see below, they have their differences and benefits depending on the type:

1. Public Investment Fund: are those investment funds that publicly offer their shares or quotas to persons domiciled in Panama or that are managed in or from Panama2. These funds must be registered before the Superintendence of the Securities Market (hereinafter "SMV").

An investment fund is considered to be administered in or from Panama if any of the following conditions are met:

a. If the investment fund has appointed an investment manager in the Republic of Panama;
b. If the principal domicile of the investment fund is within the Republic of Panama;
c. If the mutual fund has appointed a custodian in the Republic of Panama; or
d. If the minimum number of directors of the investment fund required to adopt a corporate resolution of the investment fund is domiciled in the Republic of Panama.

Private Investment Fund: are those investment funds that operate in or from the Republic of Panama, whose participation quotas are not offered in the Republic of Panama and whose articles of incorporation, trust instrument or deed of incorporation, contains one of the following provisions:

a. limits to fifty (50) the number of beneficial owners of the fund’s participation quotas;
b. that all offers are made through private communications and not through public means; or,
c. that it establishes that its participation quotas will only be offered to qualified investors whose minimum initial investment is USDar100,000.00.

Qualified investors are those individuals or legal entities (i) whose line of business includes the trading, on their own behalf or on behalf of third parties, of marketable assets comprising the trading portfolio of the Private Investment Fund or a substantial amount of its trading portfolio or (ii) those who have signed a declaration that their assets, individually or jointly with their spouse, are worth not less than USD1,000,000.00 and have consented to be treated as qualified investors.

It follows from the above that the primary difference between a public fund and a private fund is therefore the possibility of offering its shares or participation quotas to the public in the Republic of Panama. Unlike public funds, private funds cannot offer their participation quotas in Panama. In addition, another distinction is that public funds require registration with the SMV and, consequently, they are supervised by the Panamanian regulator, while private funds do not have to register with the SMV.

However, although private funds do not require registration with the SMV, the law establishes that, before starting operations in Panama, the private fund must do the following:

1. Appoint a representative: private funds must appoint a representative in the Republic of Panama, which may be an investment manager, a securities house, an investment advisor, a bank licensed by the Superintendency of Banks, a firm of certified public accountants, an attorney or a law firm or other persons authorized by the Superintendency of the Securities Market.

2. Notification to the SMV: Private funds must notify the Superintendence of the Securities Market, through a lawyer, that it has complied with the requirements set forth in Agreement No. 5 of 2004. This notification does not mean that the private investment fund is considered a registered person with the SMV. Simply, the private fund must deliver certain information established by law to its representative in Panama, in order to be available for inspection by the SMV.

In addition to the funds described above, the Securities Law recognizes other types of funds which are excluded from the scope of application of the rules. These types of investment funds do not have to be registered or notified to the SMV, so they can be established relatively quickly and cost-effectively. In other words, these funds are not subject to compliance with the provisions of Agreement No. 5 of 2004. The exception referred to in the law applies to:

1. investment funds whose articles of incorporation, trust instrument or articles of incorporation, establish that there shall not be more than twenty (20) investors determined by their membership in a company or association, and provided that there are no marketing or distribution activities or offering to the public of their quotas.

2. Investment funds in which their participation quotas have been distributed by virtue of a contract entered into among their participants, in which the entry of new investors is prohibited.

Taking into consideration the above, we can conclude that in Panama two types of Private Investment Funds are recognized, which are limited to: (i) a maximum of 50 investors and (ii) a maximum of 20 investors. None of these private investment funds require registration before the SMV. Private funds that limit to a maximum of 50 investors are required to comply with a notification before starting operations, while those that limit to 20 investors are exempted from the rule and therefore do not require registration or notification.

It is important to point out that, regardless of the type of fund to be created, a fund manager must be appointed:

Investment Manager: these are the persons to whom an investment company delegates, individually or jointly with other persons, the power to administer, manage, invest and dispose of the securities and assets of the investment company. They may provide administrative services to the investment companies, but the mere provision of such administrative services, such as accounting, secretarial, domiciliary or director services, handling of shareholder relations, payment, registration and transfer and other similar administrative services, does not constitute the person providing such services as an investment manager.

It is important to emphasize that only persons who have obtained an investment manager license issued by the SMV, regardless of whether such persons provide services to investment companies that are registered or not with the SMV, may engage in the business of investment manager in or from the Republic of Panama.

2. Offeror: Person who performs one or more of the following activities:

a. Offers or sells securities of an issuer on its behalf or on behalf of a person affiliated with it, as part of an offering subject to the registration requirements established by law.
b. Purchases or acquires from an issuer or a person affiliated with such issuer securities issued by such issuer with the intention of offering or reselling such securities or some of them as part of an offering subject to the registration requirements established by law. It shall be presumed that there was no intention to offer or resell such securities if the person purchasing them is engaged in the business of underwriting securities and maintains the investment in such securities for a period of not less than one year or other period established by the Superintendency.
c.Purchases or acquires from an issuer or from a person affiliated to such issuer or from another offeror, securities issued by such issuer through a private placement or offering made to institutional investors exempt from registration, and resells such securities or part thereof, within a period of one year from the last purchase, unless it does so in compliance with the restrictions or limitations established in this respect by the Superintendency.

3. Custodian: Entity that maintains custody over the money, securities or assets of another person14.

In other words, the money and securities of registered investment companies must be in the custody of intermediaries or other persons authorized by the Superintendency. The custodian of the assets of a registered investment company must have, with respect to it and its investment manager, the degree of independence established by the Superintendency for the protection of the investing public.

Likewise, the custodian must keep the assets of a registered investment company duly identified and segregated from its own assets, and shall take the necessary measures so that such assets cannot be seized or attached or be subject to actions by creditors of the custodian, nor can they be affected by the custodian’s insolvency, bankruptcy or liquidation.

As we saw above, in the particular case of private investment funds, a Representative must also be appointed in the Republic of Panama. This representative must have sufficient powers to represent the private investment company before the Superintendency and to receive administrative and judicial notifications.

In conclusion, investment funds in Panama are an attractive option for those interested in maximizing their financial assets and diversifying their business. Public funds must register with the SMV, while private funds can operate without registration if they meet certain criteria and notify the SMV before starting operations. Regardless of the type of fund, certain positions must be designated, such as: Investment Manager, Offeror and Custodian. For the case of private funds, in addition to these aforementioned figures, a Representative must also be appointed.

Author:

Paula Vives - Associate, Panama

AriasLaw.com