Limited Qualified Investor Fund (L-QIF)

What is an L-QIF

The L-QIF is a new collective investment scheme under Swiss law that is open exclusively to qualified investors. It is a financial instrument under the Swiss Collective Investment Act (CISA) and must be structured under one of the legal forms authorized by CISA. Therefore, the L-QIF is not an independent legal form and must be set up as a (i) contractual investment fund, (ii) an investment company with variable capital (SICAV), or (iii) a limited partnership for collective investment (KmGK).

The L-QIF does not require the authorization of the Swiss Financial Market Supervisory Authority (FINMA) and is not subject to FINMA supervision, however, it must be managed by an institution supervised by FINMA and has only an obligation to report to the Federal Department of Finance on the formation or dissolution of the fund and on data from statistical surveys on business activity and has no other reporting obligations. An L-QIF can be structured as an open-end fund or a closed-end fund.

Establishment of the fund

If an L-QIF is to be launched in the legal form of a contractual investment fund, the fund management company draws up the fund contract and obtains the approval of the depositary bank. Approval by FINMA of the fund documents including the fund contract is not necessary, but the documents must meet the requirements of the law. The institution responsible for management, in this case, the fund management company, is responsible for ensuring that the requirements are met.
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SICAVs and KmGKs can also be set up as L-QIFs when they are founded, as long as the management is entrusted to an institution supervised by FINMA. This must be stated accordingly in the articles of association or partnership agreement.

The designation "L-QIF" must in any case be included in the fund documentation or in the name of the KmGK or SICAV, but there is no obligation to publish a prospectus.

Investment regulations

Although the main investment provisions of the CISA do not apply to L-QIFs, the Collective Investment Schemes Ordinance (CISO) significantly restricts the wording of the law, which had left a great deal of freedom. Among other things, this also affects borrowing, the pledging of fund assets, and the maximum permissible total exposure in alternative investments.

Tax treatment

From a tax perspective, the main concern of an L-QIF is withholding taxes. Any distributions and reinvested net income are subject to a 35% withholding tax. Whereas for Swiss investors this is less an issue, it is a major obstacle for foreign investors.

Audit obligation

The L-QIF must be audited annually by an authorized auditing firm. The draft of the CISO currently provides not only for an annual audit but also for a “supplementary audit”. It remains to be seen what impact this will have.

Comparison of L-QIF and RAIF

Due to its orientation, the L-QIF can basically be seen as a response to and competitor of the Luxembourg Reserved Alternative Investment Fund (RAIF). There are many similarities but also significant differences as shown below:

On-Chain Fund Suitability

Switzerland occupies a prominent position as a major financial hub in the blockchain sector, standing out as a primary destination for Distributed Ledger Technology (DLT) and blockchain enterprises. The renowned Swiss Crypto Valley is the result of numerous fintech and blockchain start-ups that have established themselves in Switzerland due to the favourable regulatory framework and oversight provided by FINMA. FINMA granted the first licences to such companies as early as 2015.

The Swiss DLT bill officially came into effect in 2021, following a rapid yet comprehensive legislative process. This legislation was accompanied by a general ordinance to complement its implementation.

L-QIF presents itself as the optimal choice for launching on-chain funds in Switzerland. Using Fume, L-QIF flexibility is combined with DLT traceability. The shareholders' registrar and the fund’s metrics (e.g. official NAV calculations, fees, and more) can be transparently recorded on-chain without any intermediary approval. Get in touch to learn more.

Conclusion

The L-QIF was conceived as a simple, low-cost instrument in direct competition with the RAIF. The amendment of the CISA originally envisaged quite comparable structures. However, the final version which came into law lost some of its initial advantages.

Unlike previously known Swiss funds, the L-QIF does not require authorization from FINMA. This is a great benefit as it speeds up the entire launch process and promises to shorten the time to market for new investment ideas. This helps to implement new funds and changes to existing fund products more quickly and particularly favors funds with a focus on alternative investments such as real estate, private equity, or private debt, for which usually the approval process takes longer.

Furthermore, the L-QIF is not subject to any specifications regarding the possible investments or risk distribution. These two topics only have to be disclosed transparently in the fund contract.

A downside is the withholding tax obligation. The L-QIF is clearly less suitable as an alternative to other funds, especially for international structures. In addition, the current draft of the CISO would significantly restrict the freedoms of the L-QIF.

Ultimately, precisely these restrictions lead to additional monitoring and auditing efforts, which will probably drive up the costs of the L-QIF. Unfortunately, it currently appears as if the original idea of the L-QIF has been "diluted" too much to prevail in the competition among funds for qualified investors.