Investment funds in the Czech Republic are regulated by the Czech Investment Companies and Investment Funds Act (ZISIF) and by local implementing regulations (governmental decrees and decrees of the Czech National Bank – CNB).
ZISIF has broadly transposed EU regulations into Czech law – in particular, the UCITS Directive and AIFM Directive – and forms the backbone of investment fund regulation in the Czech Republic.
Types of Investment Funds in the Czech Republic
Czech law recognizes three basic types of funds: standard funds, special funds, and qualified investor funds.
Standard funds allow investments from the general public (retail investors). This type of investment fund is the most strictly regulated in the Czech Republic.
Special funds are open to both retail and qualified investors. These differ from standard funds, particularly in the range of assets they are permitted to invest in.
Qualified investor funds, on the other hand, are open only to “qualified investors.” A qualified investor is typically a financial institution or a person who declares that they are aware of investment risks and invest at least EUR 125,000 or a person who satisfies among other things the knowledge and investment experience requirements and invests at least CZK 1 million (approximately EUR 40,000).
All of these funds are regulated and must be licensed by the CNB or managed by a licensed investment company. They are also subject to rigorous reporting and disclosure requirements depending on their type.
Apart from these regulated funds, it is possible to invest in alternative funds (or “mini-funds”), which are mostly outside the scope of the ZISIF. These are regarded as the least regulated type of funds in the Czech Republic.
Alternative Funds – The Least Regulated Investment Funds in the Czech Republic
An alternative fund is a type of investment fund that intends to manage assets for a limited group of investors under a defined investment strategy. Alternative funds can invest in essentially any type of asset, including investment instruments, crypto-assets, and even collectibles, such as postage stamps and fine wines and spirits.
Alternative funds do not require a regulatory license and are not supervised by the CNB (a simple registration and reporting are sufficient). Consequently, the regulatory conditions for establishing and operating alternative funds in the Czech Republic are very lenient.
Alternative funds are intended primarily for qualified investors and they are open to retail investors to a very limited extent (no more than 20 retail investors are allowed). Alternative fund managers are also not permitted to contact the public with investment offers.
Changes to Alternative Funds
Alternative funds have become very popular in the Czech Republic due to their light-touch regulation and because they are easy to establish. However, this ease of establishment and the unlimited scope of investments have brought with them a temptation to break the rules. Indeed, retail investors have often been misled into believing that alternative funds are supervised by the CNB, which gives them false confidence in the security of their investments.
As a result, an amendment to the ZISIF was proposed (expected to come into force on July 1, 2024) which will require these funds to clearly identify themselves as venture capital undertakings. They will be prohibited from using the word “fund” in their name so as not to mislead investors into believing that alternative funds are supervised by the CNB. New disclosure and reporting obligations will also be introduced, including a mandatory warning that investing in alternative funds is high-risk and that investors could lose their funds.
A minimum investment of EUR 125,000 will be introduced for investors, with an exception for families and friends whereby up to 20 people will be entitled to invest without meeting the minimum deposit requirements.
Although Czech investment fund legislation is based on the common European framework and does not offer many surprises, it is beneficial to be aware of local specifics that include the local regulation of alternative funds. We recommend keeping an eye on developments in the Czech Republic since it is likely that establishing and operating investment funds will be subject to stricter regulatory requirements in the future.
By Filip Michalec, Head of Capital Markets, and Dominik Kralik, Associate, Wolf Theiss
This article was originally published in Issue 11.4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
