Particularities of Securities Issuance by Institutes of Collective Investment (the ICI)
By Oleg Zinkevych and Sergey Nakonechniy
Spenser & Kauffmann
The Ukrainian market remains
attractive for investments
actually made
in any form. With all this going on,
Ukrainian law provides for “national”
status for foreign investors
together with Ukrainian investors.
As a result of market diversity
Ukraine has a wide range of Institutes
of Collective Investments (the ICI). The activity of the
ICI is regulated by a special law – On Institutes of Collective Investments
(Corporate and Unit Investment Funds) Act of Ukraine
of 15 March 2001 as restated and amended (the ICI Act). The
ICI Act classifies the ICI as being of two types — corporate investment
funds (the CIF) and unit investment funds (the UIF).
The activity of the ICI basically relates to raising the funds of
investors in order to invest such funds into profitable securities
of third parties, corporate rights and real estate. As a rule, the
ICI raises money via securities issued by such ICI. The ICI Act
classifies and stipulates the legal status for the ICI, as well as
securities to be issued by the ICI. According to the ICI Act, the
CIF is to issue shares and the UIF — investment certificates.
According to the ICI law, the CIF must be established
as an open joint stock company and its activity must be related
only to collective investments. The CIF issues ordinary
nominal shares.
The issuance of the CIF shares is carried out in two stages:
1) for the purposes of creation of the initial authorized
capital of the CIF that is made using funds, state securities,
securities of third parties, which are traded on a stock exchange
or via a stock trading system and real estate, and
2) for the purposes of collective investments; thus, such
increase in the capital of the CIF is to be made only for cash
and only through offering shares issued by the CIF.
Hence, creation of the CIF, unlike the UIF, requires the
first private offering of the shares among founders.
The first offering of the shares of the CIF, pursuant to the
Securities and Stock Exchange Act of Ukraine of 23 February
2006 (Securities Act), must be a private offering (among founders
of the CIF).The initial capital of the CIF must be not less
than 1,250 minimum salaries or approximately USD 114,000.
Further increase of the authorized capital of the CIF is a mandatory
requirement of Ukrainian legislation.
Therefore, formation of the initial authorized capital must
be accomplished via a private offering. Further increases of
the authorized capital of the CIF may be made either through
private or public offerings.
At the same time, the Commercial Associations Act of
Ukraine of 19 September 1991 as amended requires that the
founders of the CIF must be shareholders of 25% of the shares
of such a CIF and for a period of not less than two years.
Therefore, the main feature of the creation of the CIF is
that it is created in two stages. In the table below you can find
the brief procedure for the creation of a CIF and approximate
timelines of its registration.
Investment certificates are securities offered by an assets
management company (the AMC) of the UIF and certifies
investor’s title to a part of an equity in the UIF. All the holders
of such certificates have equal voting rights.
According to the Securities Act, unlike the shares of the
CIF, the certificates have the following features:
• the AMC must be an issuer of the investment certificates
of the UIF. The AMC acts in the name and on behalf of the
UIF, since the UIF is not a legal entity;
• the investment certificates, including their first issuance,
unlike the CIF, are subject to public or private offering;
• investments certificates of the UIF must be paid in cash
exclusively;
• the investments certificates may entitle their owners to
be paid with dividends; however, the dividends under the investment
certificates of the open and interval unit investment
funds cannot be accrued and paid;
• the AMC may not issue derivatives based in the investment
certificates;
• the procedure for creation of the UIF is separated from
the procedure of issue of the investment certificates;
• the procedure for issue of the investment certificates is
less complicated and time consuming than the procedure for
issue of the CIF’s shares.
The brief procedure for issue of the investment certificates
of the UIF via a private offering is described below.
Hence, the procedure of issue of the CIF’s shares is rather
more complicated and requires more time than the procedure
of the issuance of the investment certificates of the UIF.
Such a factor becomes crucial for the investor while making
a choice on the investment and tax optimization approach
during execution of a certain project. In any case, an investor
is interested in selecting an acceptable the ICI, making
his decision on the basis of procedures and time required for
investing, as well as features forming his view of capital expenditures
and gain.
As a matter of fact, the purpose of creation of the CIF, for
example, is, usually, to obtain funds from individuals (public
funds), and the creation of the UIF may be an ultimate solution
for specific business goals, including financial business
schemes and tax optimization.
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