i GENERAL OVERVIEW
An aggregate amount of €2.374 billion was raised by private equity funds in Switzerland during 2018.2 While this figure is significantly higher than the amount raised in 2016 (€704 million) and in 2015 (€1.28 billion), it is below the amount raised in 2017 (€4.43 billion).3 About half of the fundraising in 2018 was related to buyout transactions. Large institutional investors such as pension funds and insurance companies remained the decisive driving force for the private equity sector. A substantial increase of the amounts invested by funds of funds occurred, from €154 million in 2017 to €235 million in 2018.4 The Swiss regulator, together with the Swiss Funds and Asset Management Association (SFAMA) and the Swiss Private Equity and Corporate Finance Association (SECA), are keen on aligning the Swiss legal framework with the developments in the European Union and are actively working to promote Switzerland as an attractive fundraising location.
In recent years, innovation has been at the centre of attention across many industries. In 2019, Switzerland was ranked in top position, for the ninth consecutive year, as the world leader for innovation by the Global Innovation Index. According to the Swiss Venture Capital Report of 2019, financing rounds increased by 31.4 per cent in 2018 from 175 in 2016 to 230 in 2018, while the total amount of money invested in Swiss start-ups increased by 31.8 per cent, from 939 million Swiss francs in 2017 to 1.24 billion Swiss francs in 2018.5 In particular, seed financing rose more than fourfold from under 20 million Swiss francs to approximately 80 million Swiss francs. The information and communications technology and fintech sector replaced life sciences as the largest Swiss venture capital sector with a total of 685 million Swiss francs invested.6 Over the past five years, the financing volume for start-ups in the technology sector has increased more than sevenfold.7 For the fintech industry, the decisive considerations remain financing and fundraising.
The venture capital market growth trend is likely to continue. In 2019, the launching of a fund by the Swiss Entrepreneurs Foundation was approved by the Swiss Financial Market Supervisory Authority (FINMA). The fund concluded a first round of funding, raising a total of 193 million Swiss francs. Although this is below the initial targeted amount of 500 million Swiss francs, it is a first step aimed at supporting Swiss start-ups. Venture capital investments in start-ups are popular with private equity investors seeking to take advantage of favourable borrowing conditions and negative interest rates. Correlatively, and as a result of, inter alia, the Ordinance Against Excessive Remuneration in Listed Companies, various obligations have increased the cost of investment in public companies so that for many investors an investment in start-ups has become more attractive.
ii LEGAL FRAMEWORK FOR FUNDRAISING
Fundraising in or from Switzerland through the use of collective investment schemes (CISs) is mostly governed by the Collective Investment Schemes Act of 23 June 2006 (CISA) and its implementing ordinances (CISO and FINMA-CISO) at product level, respectively, and the new Swiss Federal Financial Services Act (FinSA) at service level (point of sale regulations). Switzerland is not a member state of the European Union and, therefore, the EU Alternative Investment Funds Managers Directive (AIFMD) does not apply. That being said, the 2013 revision of the CISA, among other things, mostly aligned the Swiss legal framework with the third-country requirements of the AIFMD, in a bid ultimately to benefit from the extension of passporting to third countries, if and when the same will become available, if at all.
A number of significant changes to the CISA and its implementing ordinance entered into force on 1 January 2020 as part of the overhaul of the Swiss financial services regulatory regime including the FinSA and the Swiss Federal Financial Institutions Act (FinIA). While the purpose of the FinIA is to provide a new legal framework governing all financial institutions, the objective of the FinSA is to regulate financial services, whether provided in Switzerland or to Swiss clients on a cross-border basis. Both the FinSA and FinIA are complemented by implementing ordinances, namely the Financial Services Ordinance and the Financial Institution Ordinance. The new statutes are largely inspired by the EU financial markets and services regulations (the Markets in Financial Instruments Directive (MiFID), the Prospectus Directive and the Packaged Retail and Insurance-based Investment Products Regulation) and provide, among other changes, for:
- an abolition of licensing requirement for Swiss distributors, which are, however, generally qualified as financial service providers subject to the FinSA;
- the concepts of 'offer', 'financial service' and 'advertisement' to replace the former concept of 'distribution';
- an alignment of the client categorisation rules based on EU MiFID concepts; and
- a limitation of the requirement to appoint a Swiss representative and paying agent for offers of foreign collective investments to qualified investors.
In addition, non-Swiss financial service providers acting on a cross-border basis are subject to FinSA rules of conduct and organisational measures, as well as affiliation with an ombudsman office and, under certain circumstances, registration in a new client advisers register.
While the changes to the CISA and CISO in connection with the new FinSA and FinIA regime entered into force on 1 January 2020, a transitional period of two years applies for the majority of FinSA requirements. Until the implementation of the FinSA rules of conduct and organisational measures, financial service providers are required to maintain compliance with the relevant rules of the former regime. Further, registration in the client advisers register and the affiliation with the ombudsman office is subject to a six-month transitional period, which will begin to run once the client advisers register is set up and the ombudsman office is recognised. This is expected to occur during the first half of 2020.
i Preferred vehicle for private equity funds
Private equity firms investing in Switzerland are free to choose to set up both Swiss and non-Swiss structures (typically Jersey, Guernsey or Cayman structures) for fundraising and investment purposes. The preferred legal form depends on different drivers, such as (1) the tax transparency of the vehicle (i.e., whether it is subject to Swiss corporate taxes on income or capital gains), (2) restrictions and limitations on the investment activities of the private equity fund, (3) the limited liability of the management and the investors and (4) the close-ended nature of the fund.
Private equity funds investing in Switzerland may structure their investment by setting up either a Swiss structure contemplated by the CISA, namely a Swiss limited partnership for collective investments (the Swiss LP), a Swiss investment company (including the CISA-specific form called the SICAF) or any foreign law structure – whichever is the most appropriate for fundraising and investment. In practice, the predominant legal form chosen by sponsors is a non-Swiss structure – the Anglo-Saxon limited partnership (LP).
ii Swiss LP
The Swiss LP is a CIS specifically designed for alternative investments, private equity and real estate development, construction or infrastructure projects. This legal form mirrors the LP or the Luxembourg SICAR.
The Swiss LP is a partnership whose sole purpose is collective investment. It benefits from a quasi-legal personality and is entitled to hold assets or claims. It conducts investments in risk capital and is subject to particularly flexible investment guidelines.
A Swiss LP is based on a partnership agreement, with at least one member being subject to unlimited liability for the commitments of the Swiss LP (the general partner). The general partner must be a Swiss company limited by shares and can only be appointed as a general partner of a single Swiss LP. While the Swiss LP is not subject to any capital requirements, the minimum share capital of the general partner must amount to 100,000 Swiss francs and be fully paid in. In the event that the Swiss LP has several general partners, those must together have a minimum paid-up share capital of 100,000 Swiss francs. The general partner may delegate investment decisions or other activities to third parties, provided that the delegation is in the best interest of the Swiss LP. In addition, the partnership agreement must be supplemented by a prospectus, which must be consistent with the statutory provisions.
The investors in the Swiss LP are the limited partners. They are liable only up to a specific amount. Although the limited partners may not be involved in the management of the Swiss LP, they benefit from information and certain governance rights (e.g., delivery of periodic financial information or information on the financial accounts). The Swiss LP is only open to qualified investors as defined in the CISA (see Section II.vii).8 Finally, the Swiss LP is a regulated entity that must have a prior licence from FINMA and is subject to FINMA's ongoing supervision (see Section III.i).
iii Investment company and SICAF
The SICAF is a Swiss company limited by shares whose corporate purpose is limited to the investment and management of its own assets, to the exclusion of any entrepreneurial activity. Along with its prospectus, the SICAF defines its private equity investments, investment policy and investment restrictions in its articles of association, as well as in its investment guidelines. The regulatory framework set out in the CISA with respect to the SICAF is quite limited. As a result, the SICAF is substantially governed by the provisions of the Swiss Code of Obligations that are applicable to ordinary companies limited by shares.
Swiss limited companies are not subject to the CISA and therefore not regulated by FINMA if their shares are listed on a Swiss stock exchange9 or their shareholders are exclusively qualified investors as defined under the CISA (see Section II.vii). To our knowledge, all investment companies have relied to date on this regulatory safe harbour. As a result, there are no SICAFs incorporated in Switzerland under the CISA. Most of the following developments will therefore be limited to the Swiss LP as the typical Swiss vehicle for private equity funds.
iv Other forms
Foreign private equity vehicles are frequently used by promoters active in the Swiss market. The choice of the specific foreign structure used will primarily depend upon the domicile and type of target investors, as well as on tax and regulatory aspects, in particular, depending on the jurisdiction of the investee entities or projects. For example, an EU structure may be used to get access to the EU market without having to obtain an authorisation in every country in accordance with the AIFMD regulation (i.e., passporting). The Swiss private equity community frequently uses foreign structures, mostly based in other countries in Europe, such as UK, Jersey or Scottish limited partnerships or Luxembourg SICARs. Those would, therefore, solely be subject to Swiss requirements regulating fundraising (i.e., fund distribution), as described below.
v Key legal terms
Generally, a Swiss LP may be set up for an unlimited period. That being said, in practice, a Swiss LP's duration is usually contractually restricted to 10 to 12 years, with an extension option for another three years.
The partnership agreement governs the relationship between the limited partners and the general partner. Swiss law allows a significant freedom to the parties with respect to the regulation of their relationship, subject to a certain number of mandatory provisions. As a matter of principle, the partnership agreement includes provisions on the following items:
- total capital commitment;
- repayment of capital;
- duration of the fund and possible extension;
- management participation in the fund;
- management fees;
- investment policy, investment restrictions, risk diversifications, investment techniques;
- conditions for admission of new and withdrawal of existing investors;
- voting quorums and majorities;
- restrictions on the transferability of the interests; and
- distribution of proceeds.
The SFAMA and the SECA jointly developed a model prospectus and a company agreement for the Swiss LP, which has been recognised by FINMA for the purposes of authorisation applications.10
vi Key items for disclosure
Both the Swiss LP and the general partner must be registered with the Commercial Register of the canton where they are incorporated. The Commercial Register is public and provides general information regarding the Swiss LP and the general partner, such as the capital, the registered office and the authorised signatories. The partnership agreement establishing the Swiss LP must also be filed with the Commercial Register after its approval by FINMA and is, therefore, generally available to the public. However, the financial statements of the Swiss LP, although available to its investors, are not available to the public. The aggregate amount of the capital commitments of the limited partners must also be registered with the Commercial Register. However, neither the names of the limited partners nor the individual commitments are available to the public. Although the liability of the limited partners of the Swiss LP is capped at a specified amount registered in the Commercial Register, additional financial commitments may be required by the partnership agreement.
Pursuant to the SFAMA guidelines on the charging and use of fees and costs (the Transparency Guidelines), which, in accordance with FINMA Circular 2008/10, are recognised as the minimum standard, certain information duties are imposed on distributors and Swiss representatives (see Section II.vii) of both Swiss and foreign funds. In a nutshell, investors are to be informed on fees, costs, rebates and retrocessions paid or received in relation to the fund. This information shall be disclosed in the fund documentation. Furthermore, with respect to retrocessions, their recipients must spontaneously inform the investor of the amount of the compensation received by giving the calculation parameters or the spread of those inducements. Upon an investor's request, the recipients are to further disclose the amount actually received. Finally, the existence and nature of any conflict of interest that may arise from the payment of the retrocessions is to be disclosed to investors in this context.
vii Marketing rules and investor classification
Concept of offer, advertisement and financial service
Under the new regulatory framework, the former concept of 'distribution' of a CIS has been abolished and replaced by the concepts of 'offer' and 'advertisement' of financial instruments, as well as with the concept of 'provision of financial services'. Generally speaking, an offer or advertisement of a financial instrument may trigger the 'product level' requirements (1) to establish a prospectus and a key information document (KID) under the FinSA, as well as (2) to appoint a Swiss representative and paying agent for foreign CISs under the CISA. The provision of financial services (i.e., certain services relating to financial instruments) triggers various consequences under the FinSA and is described below. 'Financial instruments' not only include units or shares in the CIS, but also equity and debt securities, structured products, derivatives, structured deposits and bonds.
An 'offer' is defined as any invitation to acquire a financial instrument that contains sufficient information on the conditions of the offer and the terms of the financial instrument. The following four situations do not fall within the definition of an offer:
- the provision of information in reverse-solicitation cases, where no advertisement related to any specific financial instrument has been made by the financial service provider or an agent thereof;
- the nominal indication of financial instruments, accompanied, where applicable, by factual information (e.g., International Securities Identification Number code, net asset value (NAV), prices, information on risks, price trends, tax data);
- the mere provision of factual information; and
- the preparation, provision, publication and transmission to existing clients or financial intermediaries of information and documents prescribed by law or contract relating to financial instruments.
'Advertisement' is defined as any communication aimed at investors that draw their attention to certain financial services or instruments. Under the new regime, an advertisement for a CIS must be clearly identifiable as such. Further, it shall mention the prospectus and the KID on the CIS and where these documents can be obtained. The following, however, does not constitute an advertisement:
- the nominal mention of financial instruments whether or not related to the publication of prices, rates, NAV, price lists, price movements or tax data;
- announcements as regards issuers or transactions, in particular, if they are prescribed by law, by supervisory law or by rules specific to trading platforms;
- the provision or transmission by the financial service provider of an issuer's communications to existing clients; and
- articles in specialised press.
The definition of a 'financial service' under the FinSA includes the purchase and sale of financial instruments. Pure distribution activity understood as any activity addressed directly at certain clients that is specifically aimed at the acquisition or disposal of a financial instrument is considered as a financial service. Only the provision of information on financial instruments to end investors qualifies as a financial service, however, which excludes interactions with supervised financial intermediaries. In a nutshell, the consequences of the application of the FinSA as a result of the provision of financial services are the following: (1) client segmentation between institutional, professional and retail clients, (2) the obligation to comply with rules of conduct, (3) the obligation to comply with organisational measures, (4) the affiliation with an ombudsman office, and (5) the registration of client advisers (i.e., individuals who actually provide financial services within a given institution or on their own) in a register (with an exemption for Swiss financial service providers subject to FINMA supervision, as well as for foreign financial service providers subject to prudential supervision in their home jurisdiction, provided that they only provide services to professional and institutional clients).
Concept of 'qualified investors'
The requirements applicable to the offer and advertisement of a CIS in Switzerland depend on the regulatory status of the targeted investors. The revised CISA maintains the distinction between qualified investors and non-qualified investors, but the definition of qualified investors has been adjusted to align it with the client segmentation provided for by the FinSA. In particular, all institutional and professional clients under the FinSA are qualified investors under the CISA. The FinSA has introduced a flexible regime allowing the opting in and opting out across the different categories of clients. This election impacts the level of protection applicable to the relevant investors.
Qualified investors include the following:
- 'institutional clients' as defined by the FinSA, namely:
- financial intermediaries as defined in the Banking Act of 8 November 1934, the FinIA and the CISA;
- regulated insurance companies;
- foreign clients subject to a prudential supervision in a similar way as financial intermediaries and insurance companies; and
- central banks;
- other 'professional clients' as defined by the FinSA, namely:
- public entities with professional treasury operations;
- occupational pension schemes or other institutions whose purpose is to serve occupational pensions with professional treasury operations;
- companies with professional treasury operations;
- large companies (i.e., companies that exceed two of the following parameters: balance sheet total of 20 million Swiss francs; turnover of 40 million Swiss francs; or equity of 2 million Swiss francs); and
- private investment structures with professional treasury operations created for high-net-worth retail clients;
- high-net-worth individuals (HNWIs) and private investment structures created for HNWIs (i.e., persons with a minimum net wealth of 2 million Swiss francs, or persons with the required professional training and experience combined with a minimum net wealth of 500,000 Swiss francs) having declared that they wish to be treated as professional clients (i.e., opted-out HNWIs and private investment structures established for HNWIs); and
- managed and advisory clients of financial service providers under certain conditions.
Investors who are not included in one of the above categories are non-qualified investors. The characterisation of an investor as being qualified has a bearing on the regulatory restrictions applicable to the offering and advertisement of interests in a CIS under the CISA (see below). Further, the segmentation of private, professional or institutional client has an impact on the requirements applicable under the FinSA (with respect to information duties, appropriateness and suitability checks, accountability and documentation obligations and transparency and diligence requirements).
Offer or advertisement of units in Swiss LPs
Private equity funds that are incorporated as a Swiss LP may only be offered or advertised to qualified investors. In practice, limited partners will generally be required to confirm their status as qualified investors by signing a declaration on the subscription form for an interest in the Swiss LP.
In accordance with the CISO, individuals controlling the general partner or partners may participate in the company as limited partners if (1) this is provided in the partnership agreement, (2) the participating interest stems from the private assets of the concerned individuals and (3) the investment is made at the time of the launch of the Swiss LP.
Offer or advertisement of foreign private equity funds to non-qualified investors
Foreign private equity funds may be offered or advertised to non-qualified investors (i.e., retail investors) in Switzerland if they are registered with FINMA. The main approval requirements are the following:
- the CIS, the fund management company or the fund company, the asset manager and the custodian must be subject to public supervision with a focus on investor protection;
- investor rights, investment policy, the company or fund management company and custodian must be subject to regulation equivalent to the provisions of the CISA;
- the CIS must not be described in such a way as to deceive or confuse, namely with respect to its investment policy;
- a representative and paying agent must be appointed for units distributed in Switzerland;
- there must be a cooperation and information exchange agreement between FINMA and the foreign supervisory authorities responsible for distribution; and
- foreign CISs may not be distributed in Switzerland unless and until the fund management company has appointed a representative to assume the representation obligations set out in the CISA.
In practice, foreign private equity funds are typically not eligible for registration for offering or advertisement to non-qualified investors in Switzerland, insofar as many of the requirements (typically, items (a) and (b) above), are not met.
Offer or advertisement of foreign private equity funds to qualified investors
Notwithstanding the above, foreign funds may still be offered or advertised to qualified investors. Under the revised CISA, the requirement to appoint a Swiss representative and a Swiss paying agent for foreign funds offered or advertised to qualified investors is substantially alleviated. In this context and subject to the transitional regime, no Swiss representative or paying agent is required in relation to offers or advertisements of foreign funds made to qualified investors other than for opted-out HNWIs and private investment structures established for HNWIs.
That being said, the new regime only applies as of 31 December 2021 or once the relevant financial service provider has implemented FinSA rules of conduct and organisational measures, whichever comes first. As a result, until then, any offer or advertisement of foreign funds to qualified investors will generally require compliance with the former rules; namely, the appointment of a Swiss representative and a Swiss paying agent, as well as the entry into of a written Swiss law-governed distribution agreement with the Swiss representative of the CIS, based on the requirements of the SFAMA guidelines on the distribution of CISs (the Distribution Guidelines). Such requirements do not apply if only institutional investors are targeted or in instances where the offer would not have constituted distribution under the former regime.
Other distribution and marketing rules
The Distribution Guidelines, which are recognised by FINMA as minimum standards, provide, inter alia, for due diligence and information duties both for promoters and distributors of CISs. In particular, non-qualified investors are to be provided with objective information on investment character, opportunities and risks associated with a specific CIS on the basis of their experience and knowledge and the complexity of the CIS. In addition, the Transparency Guidelines provide for further disclosure duties with respect to fees, costs, retrocessions and rebates that apply in this context. Under these rules, foreign fund documentation, marketing materials and any other publications or websites, offered or advertised to unregulated qualified investors must disclose the identity of the Swiss representative and paying agent, the home jurisdiction of the CIS, the place where the relevant fund documents are available, as well as the place of performance and jurisdiction at the registered office of the Swiss representative. In practice, a specific wording with respect to Swiss investors is added to those materials. In connection with the two-year transitional period, both the Distribution Guidelines and the Transparency Guidelines generally remain in force until 31 December 2021 (or until the implementation of the FinSA rules of conduct and organisational measures by the relevant financial service provider, if this comes earlier).
Further, marketing activities in Switzerland are also subject to the Swiss legislation against unfair competition that addresses commercial communication with customers and prohibits unfair business practices. Under the Swiss Unfair Competition Act, any behaviour or business practice that is deceptive or that infringes the principle of good faith in any other way with the result of affecting the relationship between suppliers and customers is deemed unfair and unlawful.
viii Fiduciary duties to investors
From a Swiss regulatory perspective, a Swiss LP is not required to have a sponsor. The general partner is bound by fiduciary duties towards the investors (limited partners) that depend upon the provisions of the partnership agreement. Generally, under the CISA, the general partner fiduciary duties include loyalty, due diligence and information duties. The SFAMA Code of Conduct, which has been recognised by FINMA as the minimum standard, gives specific guidance on these duties. In a nutshell, the general partner must manage the Swiss LP in accordance with the principle of equal treatment and must refrain from favouring certain investors at the expense of others. Furthermore, all CISA institutions must have internal regulations and appropriate organisation to ensure compliance with their fiduciary duties.
Although the model documentation for Swiss LPs (see Section II.ii) does not contain provisions limiting the liability of the general partner towards the limited partners, such a limitation may generally be inserted in the partnership agreement. However, contractual provisions limiting or excluding a party's liability for wilful misconduct or gross negligence are null and void under Swiss law.
iii REGULATORY DEVELOPMENTS
i Regulatory oversight
The formation of a private equity fund established in the form of a Swiss LP must be authorised by FINMA prior to perform any activity. Both the Swiss LP and the general partner must obtain a licence from FINMA (generally through a single regulatory process). The application is to be reviewed by an audit firm recognised by the Federal Audit Oversight Authority (FAOA). In addition, individuals controlling the general partner and any qualified participants (i.e., any person or entity directly or indirectly owning at least 10 per cent of the capital or voting rights in the general partner or who can have a material influence in another way) are subject to a fit-and-proper test by FINMA. The constituting documents (partnership agreement) also require FINMA's approval. In terms of timing, subject to FINMA's workload and in the absence of any unforeseen complications, the authorisation is generally issued within a three- to four-month period once all the required documents are filed. With respect to the fees, initial registration fee amounts to between 10,000 and 40,000 Swiss francs. FINMA further levies a yearly supervision fee, which is computed on the basis of the assets of the Swiss LP.
The Swiss LP, and its general partner, are then subject to the ongoing supervision of FINMA. The Swiss authority benefits from extensive audit and inspection rights over regulated entities. The Swiss regulatory regime is based on a 'dual supervisory regime', which requires regulated entities to appoint a FAOA-recognised auditor (which cannot be the audit firm that was in charge of reviewing the application), whose task is to verify whether the regulated entity complies with all applicable legal, statutory and regulatory requirements. The auditor's report is addressed to both the entity and FINMA. Finally, the Swiss LP must appoint a depository and a paying agent, but the appointment of a custodian bank is not required.
Non-Swiss private equity vehicles may make investments in Switzerland without being subject to FINMA's authorisation, provided that the vehicle is not deemed to be centrally administered in or from Switzerland (which would result in the fund being viewed as a Swiss fund). By contrast, a registration with FINMA is required before foreign CISs can be offered or advertised in or from Switzerland to non-qualified investors (see Section II.vii).
Furthermore, Swiss management companies or investment managers of a Swiss or non-Swiss CIS are, in principle, subject to a mandatory licence requirement in Switzerland under the FinIA. An exception applies to asset managers of a foreign CIS in which all investors are qualified investors and:
- the assets under management, including those resulting from the use of leverage, are below the threshold of 100 million Swiss francs;
- the assets under management are below 500 million Swiss francs (unleveraged) and the CIS is closed-ended (such as a Swiss LP) for a period of five years; or
- the assets under management belong to persons with whom the managers have business (e.g., group of companies) or family ties.
Asset managers managing below-threshold assets in a CIS are, however, required to obtain an authorisation from FINMA as 'asset managers of individual portfolios'.
Non-Swiss managers of both Swiss and non-Swiss CISs with a branch or representative office in Switzerland are also required to register with FINMA. This presupposes that the foreign asset manager:
- is subject to adequate supervision by its home regulator;
- has sufficient financial resources and adequate organisation, as well as competent staff to operate a branch in Switzerland; and
- is incorporated in a jurisdiction where its home regulator has concluded a specific cooperation agreement with FINMA.
Advisory activity conducted by a fund sponsor or promoter, for example, is, in most cases, construed as a financial service subject to FinSA requirements (see Section II.vii).
The Swiss LP is treated as a transparent entity for tax purposes and is therefore not subject to Swiss corporate income tax on its income or gains, provided it does not directly hold real estate located in Switzerland. Income taxes are generally levied at the level of the investors. Swiss residents are subject to ordinary income tax on the ordinary income distributed by the Swiss LP. The value of their units in the Swiss LP is also subject to Swiss wealth tax.
Distributions made by Swiss LPs to both Swiss and foreign investors are generally subject to withholding tax at a 35 per cent rate, unless they correspond to distributions of capital gains or income realised from real estate held directly by the Swiss LP. Swiss investors will receive full refund, provided that they declare the income in their tax return or account for it in their financial statements. Foreign investors may qualify for an exemption from Swiss withholding tax, irrespective of the applicability of a treaty, under the affidavit procedure provided that at least 80 per cent of the underlying income is derived from non-Swiss sources and the investors demonstrate that they are not Swiss residents. In addition, foreign resident investors may also be entitled to a full or partial refund based on a double-tax treaty existing between their country of residence and Switzerland. Such refunds are typically granted by way of reimbursement rather than by way of exemption.
SICAFs and other investment companies incorporated as Swiss corporations and not regulated under the CISA (see Section II.i) are treated as non-transparent for tax purposes and therefore subject to corporate income tax and tax on net equity. The distributions are, in addition, subject to withholding tax. The issuance of shares of a SICAF or any other investment company in the form of a Swiss corporation is further subject to the Swiss issuance stamp duty. The tax treatment of the SICAF and investment company, as common limited companies, partly explains the absence of use of this type of vehicle in practice, other than as a mere intermediate investment subsidiary, as part of a larger investment structure of a foreign private equity fund (typically a foreign LP).
On 1 January 2019, a new type of licence, the 'fintech licence', was introduced into the Swiss regulatory framework for companies accepting public deposits but not using those deposits to finance a traditional banking activity (i.e., lending to business). Where this is the case, the aggregate amount of public deposits is limited to 100 million Swiss francs and may neither be invested nor interest-bearing. This new fintech licence involves less stringent regulatory requirements than a full banking licence, and leaner minimal capital requirements apply. In this context, the minimum nominal capital of companies holding such a licence has to amount to at least 3 per cent of the public deposits and be, in any case, above 300,000 Swiss francs, and in each case to be fully paid in cash.
Traditional fundraising techniques and processes have been challenged in the past couple of years by the emergence of a new form of capital raising by start-ups in the form of initial coin offerings (ICOs), token-generating events and token sales. The new cryptocurrency and blockchain business models are challenging legal and regulatory models, and enforcement action by regulators all around the world is increasing. In this context, FINMA issued guidelines addressing the regulatory treatment of ICO structures. Generally, FINMA focuses on the economic function and purpose of the tokens, and on whether they are tradeable or transferable, to classify the tokens as payment tokens (cryptocurrencies), utility tokens or asset tokens. The classification of the tokens has an impact on the applicable legal and regulatory framework, such as the application of the anti-money laundering regime, the CISA and the Banking Act. Further, the classification of tokens as securities triggers the requirement for the issuer to establish a prospectus and, depending on the circumstances, may trigger the requirement to obtain a FINMA licence as a securities dealer. On 11 September 2019, FINMA published a supplement to its ICO guidelines outlining the treatment of 'stable coins'. As a matter of fact, the requirements under supervisory law differ depending on which assets (e.g., currencies, commodities, real estate or securities) the stable coin is backed by and the legal rights of its holders. In addition, in December 2018, the Swiss Federal Council published a report on the legal framework for blockchain and distributed ledger technology in the financial sector. On this basis, a legislative process is currently under way in view of improving the Swiss legal framework conditions for distributed ledger technology by implementing a few selective amendments to existing legislations. The draft legislation, which will be discussed at the Swiss Parliament level in the first half of 2020, namely aims at improving legal certainty as regards the segregation of crypto-based assets from the bankruptcy estate and the tokenisation of assets such as shares, bonds and other financial instruments. The use of distributed ledger technology in financial markets through the tokenisation of financial instrument is increasingly popular, in particular for fundraising activities for start-ups and small and medium-sized enterprises in Switzerland.
Switzerland also aims to improve competitiveness in the area of collective investments. A legislative process is currently under way to introduce a new category of funds that are neither subject to approval by FINMA nor regulated under the CISA. A consultation process lasted until 17 October 2019. The proposal will be discussed by the Swiss Parliament in the course of 2020. This new category of funds, limited qualified investment funds (L-QIFs), would be exclusively reserved for qualified investors. The L-QIF would not be a new legal form (i.e., any existing forms of CIS, such as Swiss LPs, may be used as the basis of an L-QIF). As a result, existing Swiss CISs currently supervised by FINMA that would qualify as an L-QIF should be able to request the withdrawal of FINMA supervision. It is intended that the absence of FINMA authorisation and supervision for L-QIFs would be mitigated by the fact that L-QIFs would need to be managed by a fund management company itself supervised by FINMA. No limitation is expected to be imposed on the permitted investments by L-QIFs, which would be able to invest in any financial instruments as well as in cryptocurrencies or other specific products.
Overall, the Swiss regulatory framework is expected to continue to evolve over the coming years, with various changes designed to promote innovation and access to funding, while increasing client protection.
1 Fedor Poskriakov is a partner, Maria Chiriaeva is a senior associate and Isy Isaac Sakkal is an associate at Lenz & Staehelin.
2 Invest Europe yearbook – 2018 European Private Equity Activity Report and Data 2018.
5 Swiss Venture Capital Report 2018, available at https://www.startupticker.ch/uploads/File/Attachments/VC%20Report%202018_WEB_v.pdf.
8 As a consequence of the limitation of the circle of investors, a Swiss LP cannot be listed on a securities exchange.
9 Where this is the case, listing rules of the Swiss exchange where the Swiss limited company is listed (SIX Swiss Exchange or BX Berne Exchange) must be complied with.