Monday, February 6, 2012

Private Equity Funds – The Prospectus and the Articles of Association

In recent years Oman’s financial sector has experienced fast-paced growth, including the introduction of new types of investment vehicles. One prominent development, which we have covered in past posts, was the launch of the first Omani private equity fund early in 2011.

Our previous articles on private equity funds focused principally on Oman’s legal framework for the regulation of investment funds. In particular, we cited several key areas in which the government authorities could do well to revisit certain provisions – which appear to have been drafted with traditional mutual funds in mind – and tailor them more closely to the unique characteristics of private equity funds.

This month, we turn to a topic that investors are more likely to encounter first-hand: the prospectus and the articles of association, which are the two key legal documents of an Omani private equity fund (a “Fund”).

The prospectus

The prospectus is an informational booklet about the Fund that the Fund’s sponsors prepare and distribute to potential investors prior to launching the Fund and accepting subscriptions from investors. The purpose of the prospectus is to provide potential investors with all of the relevant information about the Fund that the investors would need in order to make a properly informed decision about whether to invest in the Fund.

The Fund’s sponsors tend to view the prospectus as a marketing tool as well as a disclosure document. As such, prospectuses are sometimes glossy documents with ornate graphics and diagrams that make them resemble a cross between a sales brochure and a legal document. However, whether the prospectus’ format is plain or glitzy, its contents are required under Omani law to be fulsome, accurate and objective. Pursuant to the Executive Regulations of Oman’s Capital Markets Authority (“CMA”), the Fund’s prospectus (and any other promotional materials) must be approved in advance by the CMA. The Executive Regulations also contain an explicit prohibition against false or misleading advertising of a Fund, providing that “any contact or disclosure to market investment units shall disclose all facts and information pertaining thereto without exaggeration.”

The prospectus will typically contain, inter alia, the following key information about the Fund:
• A summary of the Fund’s legal and administrative structure, including the Fund’s legal relationship with the sponsor launching the Fund and the investment manager that will carry out the Fund’s investments;
• Details of Fund’s financial structure, including the framework under which investors will contribute capital to and receive returns back from the Fund; the Fund’s accounting policies and procedures; and the fee structure for the investment manager that runs the Fund;
• A description of the Fund’s investment approach, including its investment strategy, investment policy and investment processes;
• A profile of the investment manager that will operate the Fund, including a profile of the investment manager as an organization and details of the investment manager’s executive team members and their relevant experience; and
• Details of the Fund’s corporate governance structure, including the respective legal rights and responsibilities of the investors, the investment manager, and any relevant parties with respect to the governance of the Fund as a legal entity.

The articles of association

The articles of association (“AoA”) are the Fund’s constitutive legal document. The AoA is the ultimate source of legal authority over the governance of the Fund (subject, of course, to Omani law). Often, the AoA will come into play with respect to significant structural and governance issues which the Fund might confront – for example, a change in the Fund’s investment objectives, the Fund’s policies around investor redemption, or even liquidation and dissolution of the Fund.

AoA terms can vary significantly from one fund to another, but all Omani funds are required to include in their AoA certain core terms prescribed by the CMA, such as:
• Name, form, capital, and official currency of the Fund;
• Constitution of the management of the Fund;
• Investment objectives of the Fund;
• Method and frequency of transfer, issue and redemption of Fund units (if applicable);
• Procedures for dissolution and liquidation of the Fund; and
• Commencement and end of the Fund’s financial year.