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.

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Investment Management in Oman

As the Sultanate continues its drive to diversify the national economy, the past few years have witnessed both the growth of existing companies and a flourishing of new ones. With expanding industries, a robust and conservative capital markets infrastructure and increasing trade, Oman stands poised to offer an array of attractive investment opportunities. Not surprisingly, a number of investment funds and investment managers, both domestic and international, are showing increased interest in Oman.

In order to establish or manage an investment fund, it is necessary to comply with the rules and procedures of the Omani laws and regulations that govern the capital markets sector. This article provides a brief overview of the legal and regulatory framework for the investment management sector and answers a pair of frequently asked questions.


The Legal and Regulatory Framework

The Capital Market Law, established by Royal Decree No. 90/1998, provides the legal framework for, among other things, the Muscat Securities Market, the authorities of the Capital Market Authority, and general regulation of Omani capital markets activity. With regard to investment funds, the Capital Market Law prescribes general organizational and operational requirements, while more detailed requirements are set forth in the Executive Regulations of the Capital Market Law issued by Ministerial Decision No. 1/2009.

However, we note that this legal framework is currently best suited to conventional investment funds such as mutual funds. Certain provisions of the Executive Regulations – for example, requiring subscriptions to a fund to be fully paid up front or requiring equal terms for all investor classes – could make it more challenging for some alternative investment funds, such as private equity funds or hedge funds, to operate in Oman. As the Omani authorities continue their drive to enhance the nation’s capital markets, we will continue to monitor the development of this legal framework.

Which kinds of capital markets activities require a license in Oman?

The Capital Market Law states that the following securities-related activities require a license from the Capital Markets Authority:

• promotion and underwriting of securities or financing of investment in securities;
• participation in the establishment, or in increasing the capital, of companies using securities;
• depositing, clearance, and settlement of securities transactions;
• the establishment and management of securities portfolios and investment funds;
• brokerage in securities; and
• management of trust accounts and custodianship of securities.

Note that establishment and management of investment funds are included on the above list and require a license from the Capital Markets Authority.

Are there general rules on a fund’s investment allocations?

The Capital Markets Law and the Executive Regulations prescribe an array of investment rules. Among these, the most general are:

• an investment fund shall invest at least 75% of its capital to achieve its main investment objectives;
• an investment fund that invests in securities:
o shall not hold more than 10% of the outstanding securities of any single issuer;
o shall not allow its investments in the securities of any single issuer to exceed 10% of the net asset value of the fund (this provision does not apply to index funds); and
o shall not borrow more than 10% of its net asset value; and
• an investment fund investing in real estate shall not borrow more than 30% of its net asset value.

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