Investment Funds in Panama

Our expert lawyer in Capital Markets and Securities in Panama shares this article with us about the generalities of Investment Funds in Panama. The objective of this article is to provide the reader with a general notion of the types of Investment Funds that are managed in this country of the region, let's see:

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 because 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, 20004, which specifically regulates the activity of investment funds in general. One of the purposes of this framework is to establish the elements necessary to determine the obligation to register and supervise a fund, such as: (i) the number of investors, (ii) the location of the operation, (iii) the types of investment and (iv) 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, is dedicated to the business of obtaining money from the investing public, through single or periodic payments, for the purpose of investing and trading, either directly or through investment managers, in securities, currencies, metals and inputs, real estate1, among others.

Now, the type of an investment fund exists both privately and publicly, and will depend completely on the needs and preferences when investing, deciding between one or the other, since, as we will see below, they have their differences and benefits depending on the type:

2. 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 social pact, trust instrument or deed of constitution, contains one of the following provisions5:

a. limits the number of effective owners of the private investment fund participation quotas to fifty (50);
b. that all offers are made through private communications and not through public means; either,
c. which establishes that its participation fees will only be offered to qualified investors whose minimum initial investment is USD100,000.00.

Qualified investors are those natural or legal persons (i) whose line of business includes the trading, on their own behalf or on behalf of third parties, of tradable assets that make up the private investment fund 's trading portfolio 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 investors6.

From the above it follows 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. Furthermore, another distinction is that public funds require registration with the SMV and, consequently, are supervised by the Panamanian regulator, while private funds do not have to register with the SMV7.

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

1. Appoint a representative: private funds must designate a representative in the Republic of Panama, which may be an investment manager, a brokerage house, an investment advisor, a bank with a license granted by the Superintendency of Banks, a firm of authorized public accountants, a lawyer or a law firm or other persons authorized by the Superintendence of the Securities Market8.

2. Notification to the SMV: private funds must notify the Securities Market Superintendency, through a lawyer, that they have met the requirements established in Agreement No. 5 of 2004. This notification does not mean that the investment fund private is considered a person registered with the SMV9. 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 regulations. These types of funds do not have to be registered or notified with 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 to10:

1. Investment funds whose articles of incorporation, trust instrument or deed of incorporation establish that there will be no more than twenty (20) investors determined by their membership in a company or association, and if there are no marketing or distribution or offering activities to the public of their participation quotas.

2. Investment funds in which their participation quotas have been distributed under a contract concluded between their participants, in which the entry of new investors is prohibited.

Taking the above into consideration, we can conclude that in Panama two types of Private Investment Fund 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 with the SMV. Private funds that limit a maximum of 50 investors require compliance with a notification before starting operations, while those that limit 20 investors are exempt from the rule and do not require registration or notification.

Now, it is important to highlight that, regardless of what type of fund is planned to be established, a:

1. Investment Administrator: are those people to whom an investment company delegates, individually or jointly with other people, the power to administer, manage, invest and dispose of the securities and assets of the investment company. These may provide administrative services to investment companies, but the sole provision of said administrative services, such as accounting services, secretarial services, provision of domicile or directors, management of relations with shareholders, payment, registration and transfer and other administrative services similar, does not constitute the person who lends them as an investment manager11.

It is important to highlight that only persons who have obtained an investment manager license issued by the SMV may exercise the business of Investment Manager, in or from the Republic of Panama, regardless of whether said persons provide services to Investment Companies that are or are not registered with the SMV12.

2. Offeror: Person who carries out one or more of the following activities13:

a. Offer or sell securities of an issuer on behalf of such issuer or a person affiliated with it, as part of an offering subject to statutory registration requirements.
b. Purchase or acquire from an issuer or a person affiliated with these 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 will be presumed that There was no intention to offer or resell said securities if the person who purchased them is engaged in the business of subscribing securities and maintains the investment in said securities for a period of not less than one year or other period established by the Superintendency.
c. Purchase or acquire from an issuer or a person affiliated with it or from another offeror securities issued by such issuer through a private placement or offer made to institutional investors that is exempt from registration, and resells such securities or part of them, within a period of one year from the last purchase, unless it is done in compliance with the restrictions or limitations established by the Superintendency in this regard.

3. Custodian: Entity that maintains custody of another person's money, securities, or assets14.

In other words, the money and securities of the 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 public15.

Additionally, the custodian must keep the assets of a registered investment company properly identified and segregated from its own assets and take the necessary measures so that such assets cannot be seized or seized or subject to actions by creditors of the custodian or seen affected by insolvency, bankruptcy, bankruptcy, or liquidation16.

As we saw previously, for the case of private investment funds, a Representative must also be designated in the Republic of Panama. Said representative must have sufficient powers to represent the private investment company before the Superintendency and to receive administrative and judicial notifications17.

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

For more information or personalized advice on investment funds, do not hesitate to contact our lawyers specialized in Capital Markets and Securities.

Bibliography:

1. Consolidated Text of Decree Law No. 1 of 1999, article 49.58.
   
2. Consolidated Text of Decree Law No. 1 of 1999, article 158.
   
3. Consolidated Text of Decree Law No. 1 of 1999, articles 157 and 159.
   
4. Consolidated Text of Decree Law No. 1 of 1999, article 158.
   
5. Consolidated Text of Decree Law No. 1 of 1999, articles 49.59 and 180.
   
6. Consolidated Text of Decree Law No. 1 of 1999, article 180.
   
7. Consolidated Text of Decree Law No. 1 of 1999, article 157.
   
8. Consolidated Text of Decree Law No. 1 of 1999, article 181; Agreement No. 5-2004 of July 23, 2004, article 54.
   
9. Consolidated Text of Decree Law No. 1 of 1999, article 182; Agreement No. 5-2004 of July 23, 2004, article 55.
   
10. Agreement No. 5-2004 of July 23, 2004, article 1.1 (b).
    
11. Consolidated Text of Decree Law No. 1 of 1999, article 49.4; Agreement No. 5-2004 of July 23, 2004, article 1.2.
    
12. Consolidated Text of Decree Law No. 1 of 1999, article 184; Agreement No. 5-2004 of July 23, 2004, article 1.2.
    
13. Consolidated Text of Decree Law No. 1 of 1999, article 49.40.
    
14. Consolidated Text of Decree Law No. 1 of 1999, article 49.18; Agreement No. 5-2004 of July 23, 2004, article 1.3.
    
15. Consolidated Text of Decree Law No. 1 of 1999, article 169.
    
16. Consolidated Text of Decree Law No. 1 of 1999, article 169.
    
17. Consolidated Text of Decree Law No. 1 of 1999, article 181; Agreement No. 5-2004 of July 23, 2004, article 54.
    

The information provided by ARIAS® is presented for informational purposes only. This information is not legal advice and is not intended to create, and does not constitute, an attorney-client relationship. Readers should not act upon this information without seeking advice from professional advisers.