Co-authored by Constanza Rodríguez of Philippi Prietocarrizosa & Uría in Santiago, Chile and Philip T. von Mehren and Damien G. Scott of Venable LLP in New York, NY. This Overview does not constitute legal advice, and was prepared and updated as of February 8, 2016.
1. What are the Chilean regulations that affect international private equity firms investing in Chile?
Chile does not impose any specifically targeted limitations on foreign private equity funds investing, directly or indirectly, in a Chilean portfolio company. Such funds may invest in portfolio companies in all sectors of the Chilean economy, except for minor restrictions in certain sectors such as companies engaged in coastal trade, air transport and mass media.1.
Although Chile permits foreign investors to invest in almost every sector of the Chilean economy, foreign investors must comply with one of two foreign investment regimes. The first is set forth by Law No. 20,848 (“Law 20,848”), which replaced Decree Law 600,2 which required foreign investors to execute a foreign investment agreement with the State. Under Law 20,848, foreign investor will not need to enter into such an agreement, but the investment will be subject to an approval process. The rights of the investors are very similar to those contained in the foreign investment regime established by Decree Law 600, other than certain changes to the tax incentives provided to foreign investors that remain subject to further development through regulation.3 The second, which is the regime used far more often by foreign investors, is set forth in Chapter XIV of the Foreign Exchange Regulations of the Central Bank (“Chapter XIV”).4 Investments under the Foreign Investment Statute are embodied in a foreign investment contract with the State in which the State agrees to certain specific tax benefits. This approach gives an investor a higher degree of protection as the contract trumps subsequent changes in laws and regulation. Chapter XIV investments, on the other hand, are merely an administrative authorization of the Central Bank, which can be superseded by any new law or regulation. Chapter XIV is a regulation designed to allow the Central Bank of Chile to monitor the flow of international currency into and out of Chile. Once a foreign investor has registered its investment, the investor has the right to access foreign exchange in order to repatriate, at the best rate obtainable by the investor from a Chilean bank, dividends or capital gains related to the registered investment. There are no costs or taxes associated with this notice. Nor does the capital have to be deployed in any specific manner, as the investor is free to deploy the capital as a loan or a capital contribution.
While in the past both regimes (Decree Law 600 and Chapter XIV) have historically granted investors a preferential right to access foreign currency to repatriate the proceeds of an investment, going forward only investments under Law 20,848 will continue to have that right. However, many foreign investors regulated by Chapter XIV (including both equity investors and foreign lenders making loans to Chilean entities) have found this access right unnecessary due to the stability of the Chilean economy and easy access to foreign currency at market rates.
2. What are the Chilean regulations that affect international private equity firms raising funds in Chile?
An international private equity firm can raise capital in Chile as long as it complies with Chilean rules regarding offerings. In Chile, an issuer of securities, including a private equity fund, may make an offer either through a public offering or a private placement. The type of issuance has an important impact on the issuer as the placement regime regulating public offerings is far more demanding than the regime for private placements. An issuer can only issue securities through a public offering if the securities and the issuer itself are registered in the Securities Registry of the Superintendencia de Valores y Seguros (the “Chilean SEC”). The registration of a foreign public offering requires a description of the issuer, the security and the offer itself and detailed financial information about the issuer. Few foreign issuers have registered their securities with the Chilean SEC.
In Chile, a public offering can be directed to the public or to certain sectors or a specific group within the public. Accordingly, any transaction that does not constitute a public offering is exempt from the scope of the Chilean Securities Law. If the issuer is not offering the securities to the Chilean public in the manner described, the issuer can offer securities, including to Chilean residents, even if the sale is made abroad, without registering with the Chilean SEC.5
The Chilean SEC permits issuers to issue securities through a private offering. It also permits issuers to issue securities through private placement, the requirements for which are outlined below:6
- (a) The offering documents must include a disclaimer stating that the securities are not registered with the Chilean SEC and are not subject to regulation by the Chilean SEC);7
- (b)The offering shall not be communicated by means of mass media; and 8
- (c) The offering shall comply with one of the following safe harbors:9
- (i) Only Qualified Investors (as defined in number 1 to 6 of Section II of the General Rule 216 of the Chilean SEC) are offered an opportunity to subscribe to the offering; or 10
- (ii) Fewer than 250 Qualified Investors of those described in numbers 7 and 8 of Section II of the General Rule 216 of the Chilean SEC subscribe within a 12-month period (whether in one or more offers).11 Up to 50 of the 250 investors can be Non-Qualified Investors.
Offerings that do not comply are considered either a public or private offering based on a case-by-case analysis of the Chilean SEC. Nearly all funds seek to comply with these safe harbor rules.
3. What Chilean regulation and rules affect international private equity firms seeking to raise capital from Chilean pension funds and insurance companies specifically?
In addition to the requirements mentioned in question 2 above, international funds seeking to raise capital from local pension funds and insurance companies are regulated by, respectively, Decree No. 3,500 (the “Pension Funds Law”) and Decree with enforcement as Law No. 251 (the “Insurance Law”). Pension funds and insurance companies are separately regulated.
Pension funds (Administradoras de Fondos de Pensiones “AFPs”) may only invest in foreign instruments, including private equity funds, authorized under article 45 of the Pension Funds Law. Pursuant to the Pension Funds Law, off-shore investments of pension funds must also comply with the requirements set forth in the “Pension Funds Investment Regime” (the “Regulation”) and Resolution No. 1558 (the “Resolution”), both issued by the Superintendencia de Pensiones (the “Superintendency of Pensions”). The main requirements are as follows:
(i) Eligible Instruments. Article 45 of the Pension Funds Law and the Regulation specify the types of instruments in which an AFP may invest. The list of authorized securities includes, among others, the equity, including a limited partner interest or the equivalent, issued by private equity funds. The CCR considers the following factors when analyzing and approving instruments representing equity in private equity funds: (x) the risk rating of the country where the fund and the manager are registered and, where applicable, of the country where the manager’s holding company is registered; (y) the risk rating of the country that regulates the fund, the manager and the exchange where the quotas can be traded; and (z) the liquidity of the instrument.12
(ii) Rating by the CCR. Chilean pension funds are only allowed to invest in a foreign fund that has been approved by the Chilean Risk Rating Committee (Comisión Clasificadora de Riesgo or “CCR”). The requirements for the CCR’s approval are: (w) the country risk, (x) the existence of institutional regulatory systems in the fund’s jurisdiction of formation, (y) the degree to which regulators exercise control over the issuer and its instruments in the fund’s country of formation, and (z) the liquidity of such instruments in relevant secondary markets.13
(iii) Requirements for CCR’s approval. In the case of a foreign private equity fund, the application for an instrument’s approval by the CCR must be sponsored by an AFP.14
In addition, the manager, or the group to which the manager belongs, and its holding company must (a) have at least US$10 billion in third-party assets under direct management of the manager and (b) have been operating for at least five full years managing similar types of investments.15
The fund must have a minimum of US$100 million under management (not including any contributions from the manager or related parties).
The CCR requires a copy of the prospectus for the share issuance, the fund’s articles of incorporation or other formation documents, which must contain clear policies regarding leverage, pledging of the fund’s assets and the use of derivative instruments, all of which must be consistent with the overall objectives and policies of the fund.
The CCR also requires that the fund’s liabilities for its general obligations not exceed 35% of the value of the fund’s assets. Similarly, but measured separately, the liens of the fund may not exceed 35% of the value of the fund’s assets.
The frequency of valuation of the instruments considered in the coverage requirements, as well as of related derivatives instruments, must be consistent with the frequency of the valuation of the obligations of the mutual or investment fund. The manager may provide its own valuations of these instruments and obligations.
Notwithstanding these requirements, if the fund is not approved by the CCR, AFPs may still invest in the fund, but the size of such investment is significantly limited.
Chilean funds seeking to raise capital in Chile face a regulatory framework that was drafted on the assumption that such pension funds would only invest in Public Funds in accordance with the restrictions set forth in the applicable regulations. In order for a Public Fund to qualify, its equity must be “frequently traded.”16 Also, the Public Fund itself must be approved by the CCR in a manner similar to the process discussed above relating to foreign funds. Nonetheless, if the Public Fund does not comply with those requirements, AFPs may nonetheless invest a limited amount of funds.17
Insurance companies may invest only in those foreign instruments expressly authorized by Article 21 of the Insurance Law, which includes equity in an international private equity fund. The CCR must either approve of the equity instrument in the same manner described for the pension funds or the SVS must register the equity instrument in the Foreign Securities Registry18, however, the exception provided in NCG 336 mentioned above is not applicable. There is no specific restriction that refers to private equity funds, nonetheless, the following rules are applicable: (i) the aggregate investment of an insurance company in foreign shares of corporations and quotas of funds may not exceed 10% of the technical reserves and the risk equity of the insurance company, and (ii) the insurance company may not invest more than 5% of its technical reserves and the risk equity in shares of a single corporation and quotas of a single fund issued or guaranteed by the same entity. This percentage will be reduced to 2.5% if the insurance company is a related party to the issuer.
On the other hand, regarding Chilean funds, Chilean insurance companies can invest only in a Public Fund so long as the assets, such as the portfolio companies, are located in Chile. Chilean insurance companies are not permitted to invest in FIPs.
4. What are the Chilean regulations that affect the formation of local private equity funds in Chile?
In Chile private equity investments have been mainly channeled through investment funds (fondos de inversion). The applicable regulation was amended in 2014 by means of Law No. 20,712 referred to as the “Management of Funds and Individual Portfolios Law.” In Chile, there is a distinction between public funds (fondo de inversión publicos or “Public Funds”) and private funds (fondo de inversión privado or “FIP”).
The procedure to incorporate a Public Fund is different than that to form a FIP. Public Funds must register with the Chilean SEC, and consequently they are subject to the SVS’s oversight. According to Law 20,712, only Public Funds are allowed to issue securities to investors by means of a public offering of their securities. The fund itself must be listed in SVS’s register pursuant to SVS’s regulations, as does the fund manager (a separate legal entity).
On the other hand, the formation of a FIP does not require the prior approval of the Chilean SEC. The only filing requirements for FIPS are (i) a resolution of the fund manager’s board of directors approving the incorporation of the fund and (ii) the final version of the fund’s bylaws. Upon filing the resolution and bylaws, the fund can obtain an identification number from the tax authorities and begin operations. FIPs are subject only to the rules contained in their internal regulations and are not subject to the oversight of the SVS.
FIPs must be managed by a duly incorporated corporation (“Manager Company”). The Manager Company manages the fund and acts as its legal representative and as liaison between the fund and the local authorities. The Manager Company must be registered in the special registry of the Chilean SEC and it files the following reports quarterly: (i) a description of the funds managed (ii) the partners that have contributed those funds, the amounts of the contributions and the number of quotas acquired; and (iii) the current value of the assets under management, such as the value of the equity ownership of the fund in each of its portfolio companies.
5. What additional chilean regulations affect the management of private equity funds in Chile?
FIPs may generally determine the terms for their management with few restrictions. One year after incorporation, however, FIPs must comply with two relevant requirements: (i) neither the Manager Company nor its related parties may own equity representing more than 20% of the fund under management and (ii) the fund must have at least four unrelated parties as investors. This second restriction does not apply if an institutional investor has contributed more than 50% of the equity in the fund.
For Public Funds, on the other hand, a management company must register with the Chilean SEC and is required to maintain separate accounts, books and records and financial statements for each Public Fund under its management. The management company must provide to the Chilean SEC information concerning its investments, including related party transactions, corporate governance, etc. In addition, the management company must grant a guarantee in favor of the fund for at least UF 10,000 (US$380,000 approx.) and the fund has more restrictions with respect to related party transactions. Thus, the management of a Public Fund is subject to greater restrictions than a FIP.
1Respectively, Laws No. 18,916, 19,542 and 19,733.
2Decree Law 600 expired on January 1st, 2016 and Law 20,848 should have come into effect on the same date. However, Law 20,848 requires the enactment of a Decree containing the specifications of the Law, which has not yet occurred, to come into effect. Notwithstanding that the Decree has not been enacted, the authorities have already begun to operate under the new regime, which is expected to officially come into effect in the first quarter of 2016.
3Law 20,848 provides an exception to VAT for investments of over $5 million dollars for the development of projects in mining, manufacturing, forestry, energy, infrastructure, telecommunications, technology, medical or scientific fields, among others. It also authorizes the Ministry of Finance to enact a decree setting forth the rules relating to the investments and the procedures to request the exception, which the Ministry of Finance has not yet done.
http://www.bcentral.cl/normativa/cambio-internacional/manual-procedimiento/pdf/CapXIVAnexo4.pdf 5Article 4 of Law No. 18,045 regarding Securities Market. See http://www.leychile.cl/Navegar?idNorma=29472&buscar=18045.
6See (i) General Rule No. 336 (“NCG 336”), (ii) http://www.svs.cl/normativa/ncg_336_2012.pdf and (iii) Article 4 of Law No. 18,045 regarding the Securities Market.
7as specified in NCG 336
8Mass media means use of the press, radio, television and the internet, if such conduit is publicly accessible from Chile, no matter where such communication is produced or issued.
9Notwithstanding the above, it will not be necessary to comply with letter (c) if the individual denominations of the securities are at least UF 5,000 (approximately US$184,000).
10Under Chilean Law, those Qualified Investors are defined as (i) institutional investors (banks, financing entities, insurance companies, local reinsurance entities and asset managers authorized by law); (ii) regulated entities in their capacity as banking entities, insurance companies, reinsurance entities, assets managers or securities intermediaries, incorporated abroad; (iii) Stock brokers and securities intermediaries, acting for their own account; (iv) stock brokers of agricultural products, acting for their own account; (v) local or foreign persons or entities that, at the time the investment is made, have investments in Chilean or International publicly traded securities capable of being publicly offered in Chile or abroad for at least UF 10,000 (US$38,000 approx.); and (vi) local or foreign persons or entities that have delegated their investment decisions pursuant to an asset management agreement.
11These Qualified Investors are persons or entities that hold investments in listed securities for an amount equal to or greater than UF 2,000 (approximately US$73,000) and meet certain other requirements, such as having a basic knowledge of the securities market. The UF is a Chilean daily inflation-indexed monetary unit. As of the date of this report, UF 1 is approximately US$37.
12The risk ratings in the cases described in letter (x) shall be at least A and BBB, respectively, and in letter (y) shall be at least AA. The risk rating of the country must be assigned by at least two internationally recognized rating agencies (Standard & Poor’s Rating Services, Fitch Rating Services and Moody’s Investors Service). When more than one country is involved, the lowest risk rating is used.
13Agreement No. 32 of the CCR.
14 The application forms, periodic reports and all documents required to fulfill the application to register before the CCR may be presented in English.
15Where applicable, the manager must prove a direct relationship with its holding company or with the group to which it belongs.
16Article 4 letter g) of the Securities Law and Ruling number 327 of the year 2012 of the SVS (“Ruling No. 327”) indicate that securities are “usually traded” (presencia bursátil) when:
- • They are registered in the Securities Registry (Registro de Valores) of the Chilean SEC;
- • They are registered in a Chilean Stock Exchange; and
- • They fulfill with at least one of the following requirements: (x) to be traded in a stock exchange with a tight presence (presencia ajustada) equal to or higher than 25%, and (y) to have a market maker, and that they fulfill the securities’ indicative conditions on liquidity or the depth of the markets where such securities are normally traded, in order to contribute to a proper formation of the prices. Such requirements shall consider elements such as volume, regularity, number of assignors, acquirers or offerors, quantity or any other similar circumstance related to the transaction or value of securities.
he tight presence (presencia ajustada) requirement is calculated as follows: (x) Within the last 180 business days it is determined how many days have gone by in which the trading of the relevant shares has reached a minimum amount of UF 1,000; (x) Such number is divided by 180, and the quotient thereof is multiplied by 100 in order to be expressed as a percentage. Also, the abovementioned requirements may establish the “usually traded” (presencia bursátil) condition in virtue of certain contracts which ensure the existence of daily purchase and sale offers over the securities, for the amount, period of time and conditions defined by the Chilean SEC.
17AFPs may invest in Public Funds depending on what category such AFP falls within: an aggregate of 80% for pension fund class A, an aggregate of 60% for pension funds class B, an aggregate of 40% for pension funds class C, an aggregate of 20% for pension funds class D and an aggregate of 5% for pension funds class E. If a Public Fund does not comply with the approval of the CCR or they were not frequently traded, the AFPs may only invest up to 20% of the patrimony of the pension funds class A, B, C and D.
18See NCG 152 of the Chilean SEC.