WR Asset Management: Establishment of funds - Key documentation

Below we take a closer look at key documents that are typically prepared in connection with the establishment of a Norwegian alternative investment fund (AIF). The list is not exhaustive.

Company documentation

• Articles of Association: Funds established as a Norwegian private limited company (Nw. aksjeselskap) must have articles of association. The content and scope varies from fund to fund – from articles of association that only fulfil the minimum requirements of the Norwegian Private Limited Companies Act ("NPLCA") to articles of association that regulate the fund's terms in detail (as a replacement for a separate fund agreement).
  The articles of association often reflect the fund agreement on matters that are of particular significance for company law purposes, including the characteristics of different share classes (such as voting rights and waterfall/economic rights), restrictions on transfers and/or pledging of shares, and deviation from the NPLCA's rules on pre-emption rights concerning disposal of shares. It is important to note that the articles of association are publicly available in the Norwegian Register of Business Enterprises.
• Minutes: In the establishment process, board meetings should be held and minutes prepared to document key decisions and approvals related to the establishment of the fund, including the adoption of instructions and internal guidelines, approval of relevant agreements, appointment of the fund manager, election of board members, necessary powers of attorney for board members and the management team, decisions on capital increases and amendments to the articles of association, etc.
  Board meetings should be held in both the management company and the fund (alternatively in the general partner (Nw. hovedmann) if the fund is established as a Norwegian limited partnership (Nw. indre selskap)), as well as in other affiliated companies in the structure. As mentioned in our previous letter on the choice of fund structure, Norwegian funds are typically established by the management team through a separate project company that assumes the risk of establishing the fund (and the costs if the fundraising fails). If the project company is intended to be entitled to carried interest, it will be important from a tax perspective to document any establishment risk, investment risk, etc. in the project company from an early stage if one is to justify and document that the carried interest should qualify as capital income (rather than business income).

Marketing material

• Term sheet: A term sheet summarises the key terms and conditions for investing in the fund and is a document that investors often initially request. For new management environments, the term sheet can be well suited for assessing terms and structural clarifications with cornerstone investors early in the establishment process. It can also be cost-effective for negotiation purposes prior to initiating the preparation of final agreements/long-forms (e.g. shareholders' agreement or limited partnership agreement).
• Investor presentation: A well-designed investor presentation can be crucial for the marketing of the fund and typically contains information about the fund's strategy, expected returns, the team's experience, as well as information responsibilities and relevant risks. The presentation should also include information required by the Sustainable Finance Disclosure Regulation ("SFDR").
  Please note that if the fund both has a minimum subscription amount of less than EUR 100,000 per investor and is to be marketed to 150 or more non-professional investors within a single EU/EEA country, a prospectus must be prepared in accordance with the detailed rules of the Securities Trading Act (Nw. verdipapirhandelloven) and the Prospectus Regulation (Nw. prospektforordningen) (which often will replace the investor presentation). In practice, for a prospectus is only relevant for funds that target the retail market. The prospectus must be approved by the Financial Supervisory Authority of Norway ("FSAN").
• Due Diligence Questionnaire (DDQ): When establishing funds aimed at foreign institutional investors, it may be appropriate to prepare a DDQ/questionnaire that addresses the most common questions investors have regarding the fund, the strategy, the team, the market, compliance and risk management, etc. There are good templates for such forms, including from ILPA, PRI or Invest Europe.

Fund agreements

• Fund agreement: The fund agreement, whether it is a shareholders agreement or limited partnership agreement, constitutes the primary document in a Norwegian AIF, and regulates the parties' obligations and rights related to the fund. The parties to the fund agreement are typically the fund (or its general partner), the manager, the investors and if any, sponsor companies (through which the team's investment is made, for example). The fund agreement specifies, among other things, the fund's financial structure (e.g. commitment structure, payments in connection with various closings, etc.), waterfall (financial rights), investment mandate and restrictions, powers of attorney for the manager, provisions on key persons, costs, liability, terms for transfer and redemption, termination of the manager, etc.
• Management agreement: The management agreement specifies the management services to be provided by the manager to the fund and the associated fees.
• Subscription agreement/application form: Investors commit to the fund by entering into a subscription agreement or application form for a specific amount and authorise the manager at the same time to enter into the fund agreement on behalf of the investor and subscribe for shares/units in the fund, vote for the investor's shares at general meetings, etc. and at the same time confirm their understanding of the terms of the agreement, etc.

Regulatory documentation

The regulatory documentation that must be prepared and complied with depends on the manager's (and possibly also the fund's) regulatory status. A so-called registered (or "sub-threshold") manager is exempt from most of the provisions of the AIFM Act, and is thus subject to a far simpler regulatory regime than managers authorised by the FSAN under the AIFM Act. However, registered managers are subject to the same obligations as AIF managers under the SFDR and the Anti-Money Laundering Act, which will still apply.

• Internal procedures and guidelines: Both registered AIFMs and AIFMs authorised by the FSAN must have internal procedures and guidelines. For registered AIF managers, this will typically be limited to internal control frameworks, conduct of business rules (depending on the asset class), anti-money laundering and associated risk assessment. The content and the extent of the internal framework for managers authorised by the FSAN is subject to considerably stricter requirements.
• Onboarding package: In addition to the subscription agreement, investors must provide significant information about themselves, including for investor classification, AML/KYC, tax reporting, etc. and it would therefore be advantageous to prepare a comprehensive onboarding package that can be completed by investors in the fund.
• Disclosure document: Managers authorised by the FSAN must prepare a disclosure document for each fund in accordance with section 4-2 of the AIFM Act. This contains information about the fund's investment strategy, risk profile, cost structure and other important information that investors need to make informed investment decisions.
• Key information document: If an ordinary AIF is to be marketed to non-professional investors, the manager is required to prepare a key information document in accordance with Chapter 7 of the AIFM Act. New rules on key information documents for a number of products are expected to be implemented in Norway shortly, in accordance with the rules in the so-called PRIIPS Regulation. The key information document (KID) is intended to provide investors with clear and understandable information about the fund's investment objectives, costs, risks and potential returns, so that private investors can easily compare different investment alternatives.
  At the moment, the PRIIPS Regulation does not directly apply in Norway, but it bears relevance for a number of Norwegian entities engaged in cross-border activities. A legislative proposal has recently been introduced to implement the regulation in a new Norwegian PRIIPS Act. We assume that the rules will be adopted and enter into force later this year. With the implementation of the PRIIPS rules, the current rules on key information in a number of laws will be significantly changed and subject to detailed regulation of the type of information required to be disclosed to non-professional investors.
• SFDR documentation/information: Depending on the fund's classification under the SFDR regulations as an Article 6, 8 or 9 fund, there are certain disclosure requirements and requirements for the preparation of specific documentation. We have written more about this in a previous letter (Norwegian). Regardless of the fund's classification, all asset managers must also disclose on their websites information about sustainability risk, any PAI indicators and how the manager's remuneration policy is consistent with the integration of sustainability risk.

Other relevant documents

Other documents that are typically prepared in connection with the establishment of funds:

• Policies: In addition to the purely regulatory required documents, the manager will typically also prepare fund-specific policies, such as ESG policy, allocation policy (for multiple funds under management), investment guidelines, valuation, etc.
• Process letter: In the case of larger fund establishments, process letters are often prepared for the investors containing practical information and deadlines for negotiations on the fund agreement, side letters, submission of AML/KYC documentation, process for submission of subscription agreements, closing, etc.
• Agreements with service providers: Agreements with relevant service providers must also be entered into. Such service providers may, for example, be administrators, custodians, distributors or similar. For example, funds with an authorised manager are required to have a custodian.
• Investor reporting: The manager typically undertakes to report to investors on a quarterly basis on the fund's performance and must prepare an appropriate reporting format for this purpose. Investors may also have specific requirements for such reporting in separate side letters.
• Drawdown and distribution notices: Particularly in the case of closed-end funds with a commitment structure, drawdown and distribution notices must be prepared in accordance with the fund agreement regulations.
• Acceptance letter: The fund manager should prepare an acceptance letter or similar communication to the investors informing them of the accepted subscription/commitment.
• Legal opinions: International investors often request legal opinions/memos to understand and gain comfort around the legal fund structure and any tax implications.
• Appendices to tax returns: It may make sense for both investment teams, etc. and investors to prepare standard appendices to their respective tax returns describing specific tax issues in the fund, including taxation of profit sharing / carried interest, etc. For investors, such an appendix will be particularly relevant if the AIF is established as a limited partnership.