Technical Standards for Closed-End Venture Capital Investment Funds

CNBCR-12/2018
NDMC-18
TECHNICAL STANDARDS FOR CLOSED-END VENTURE CAPITAL INVESTMENT FUNDS Approval: 11/21/2018 Validity: 12/10/2018 Alameda Juan Pablo II, between 15 and 17 Norte Avenue, San Salvador, El Salvador.
Tel. (503) 2281-8000 www.bcr.gob.sv

THE COMMITTEE OF STANDARDS OF THE CENTRAL RESERVE BANK OF EL SALVADOR,

CONSIDERING:

I. That Article 5 of the Investment Funds Law establishes that the Superintendence of the Financial System is the corresponding authority to supervise the compliance and execution of said Law; likewise, to supervise Investment Fund Managers, their operations, and other participants regulated by the same.

II. That Article 6 of the Investment Funds Law establishes that it is the responsibility of the Central Reserve Bank of El Salvador to issue the Technical Standards necessary for the application of said Law.

III. That Article 47, third paragraph of the Investment Funds Law, regulates that the content of the extract of the Internal Regulations of the Fund and the Placement Prospectus of participation shares shall be established by the Central Reserve Bank of El Salvador through technical standards.

IV. That Article 62 of the Investment Funds Law refers to the documents that the Closed-End Investment Fund Manager must accompany with the application to be recorded in the Register of Investment Funds kept by the Superintendence of the Financial System.

V. That Article 63 of the Investment Funds Law establishes that Closed-End Investment Funds, as well as their issuances, must be recorded in the Register kept by the Superintendence of the Financial System for such purposes and subsequently must be inscribed in a stock exchange, complying with the requirements established in the Securities Market Law insofar as they do not contradict said Law.

VI. That Article 97 of the Investment Funds Law establishes that Closed-End Investment Funds may invest off-exchange in securities issued by companies whose shares are not traded on the stock exchange and whose purpose is investment in specific business projects to be developed in the medium and long term.

VII. That Article 98 of the Investment Funds Law establishes that Funds that invest in companies whose shares are not traded on the stock exchange and whose purpose is investment in specific business projects to be developed in the medium and long term, may have direct or indirect control of an issuer, an Investment Fund, or a Securitization Fund.

VIII. That Article 99 of the Investment Funds Law establishes that when Closed-End Funds invest in companies whose shares are not traded on the stock exchange and whose purpose is investment in business projects to be developed in the medium and long term, they must clearly state this in their investment policy.

CNBCR-12/2018
NDMC-18
TECHNICAL STANDARDS FOR CLOSED-END VENTURE CAPITAL INVESTMENT FUNDS Approval: 11/21/2018 Validity: 12/10/2018 Alameda Juan Pablo II, between 15 and 17 Norte Avenue, San Salvador, El Salvador.
Tel. (503) 2281-8000 www.bcr.gob.sv

IX. That Article 9, second paragraph, numerals 10 and 11 of the Special Law for the Prevention, Control, and Sanction of Money Laundering, Terrorism Financing, and Financing of the Proliferation of Weapons of Mass Destruction, regulates that obligated subjects must establish internal audit mechanisms, using the risk-based administration principle, to verify compliance with what is prescribed in said Law; and have external or specialized audit in risk management to evaluate and issue reports on the evaluation of the management of the prevention system. (3)

X. That Article 15, first paragraph of the Special Law for the Prevention, Control, and Sanction of Money Laundering, Terrorism Financing, and Financing of the Proliferation of Weapons of Mass Destruction, establishes that obligated subjects, in order to identify their clients and users, including the controller, recipient, or ultimate beneficiary, who manage the risks associated with them and obtain appropriate information about the commercial relationships entered into or their continuity, must take reasonable measures to carry out due diligence procedures. (3)

XI. That the Consumer Protection Law establishes the rights of consumers in relation to the obligations of financial service providers. (3)

THEREFORE,

by virtue of the regulatory powers conferred by Article 99 of the Law for the Supervision and Regulation of the Financial System,

AGREES to issue the following:

TECHNICAL STANDARDS FOR CLOSED-END VENTURE CAPITAL INVESTMENT FUNDS

CHAPTER I
OBJECT, SUBJECTS, AND TERMS

Object
Art. 1.- These Standards aim to establish the provisions applicable to Closed-End Venture Capital Investment Funds regarding their authorization, registration, operation, valuation policies of their investments, and other related aspects.
Closed-End Investment Funds that include in their investment policy partial investments in securities issued by companies whose shares are not traded on the stock exchange and whose purpose is investment in business projects to be developed in the medium and long term, shall apply to said investments the provisions regulated in these Standards.

Subjects
Art. 2.- The subjects obligated to comply with the provisions established in these Standards are:
a) Investment Managers of Closed-End Venture Capital Investment Funds, authorized by the Superintendence of the Financial System, who work for an Investment Fund Manager; b) Investment Fund Managers authorized by the Superintendence of the Financial System that manage Closed-End Investment Funds in accordance with what is established in the Investment Funds Law; and c) Marketing Entities or Agents.

Terms
Art. 3.- For the purposes of these Standards, the terms indicated below have the following meaning:
a) Investment Manager: Natural person who is employed by an Investment Fund Manager for the purposes of managing the decision-making and execution of investments made with resources from Closed-End Venture Capital Investment Funds in accordance with the internal regulations and investment policy thereof. This category includes the Investment Manager or their substitute, according to the organizational structure of the Manager; b) Central Bank: Central Reserve Bank of El Salvador; c) Stock Exchange: Stock Exchange constituted in El Salvador and registered with the Superintendence of the Financial System; d) House: Brokerage House; authorized and registered with the Superintendence of the Financial System; e) Financial Conglomerate: In accordance with Article 113 of the Banks Law, it is a set of companies characterized by the fact that more than fifty percent of their respective share capital is owned by a controlling company, which is also a member of the Conglomerate. The controlling company of the Conglomerate may be a company with exclusive purpose or a bank constituted in the country; f) Shares: Participation Shares; g) Marketing Entity or Agent: Brokerage House as well as another legal entity authorized by the Superintendence of the Financial System for the marketing of Investment Fund shares and which has signed a mandate contract with a Manager for the marketing of shares of Closed-End Venture Capital Investment Funds; h) Funds: Investment Funds; i) Venture Capital Funds: Closed-End Investment Funds whose main object is to invest off-exchange, in securities issued by companies whose shares are not traded on the stock exchange and whose purpose is investment in business projects to be developed in the medium and long term; j) Manager: Investment Fund Management Company; k) Business Group: In accordance with Article 5, letter n) of the Securities Market Law, it is that in which a company or set of companies have a common controller, who acting directly or indirectly participates with at least fifty percent in the share capital of each of them or that have common shareholders who, directly or indirectly, are holders of at least fifty percent of the capital of another company, which allows to presume that the economic and financial performance is determined by common interests or subordinate to the group; l) Investor: Natural or legal person interested in acquiring shares of an Investment Fund; m) Funds Law: Investment Funds Law; n) Participant: Investor in an Investment Fund; o) Related Persons: In accordance with Article 29 of the Investment Funds Law, related persons to the Manager are those indicated in Article 204 of the Banks Law; p) Investment Policy: In accordance with Article 99 of the Funds Law, the investment policy defined in the internal regulations and prospectus of each Fund corresponds to, and indicates the minimum and maximum limits of investment in each of the types of assets contemplated in Article 36 of these Standards; q)
Placement Prospectus: Placement prospectus of participation shares; r) Register: Public Stock Register of the Superintendence of the Financial System; s) Internal Regulations: Document containing all the specific characteristics and rules that govern the operation of a certain Investment Fund; and t) Superintendence: Superintendence of the Financial System.

CHAPTER II
GENERAL PROVISIONS ON VENTURE CAPITAL FUNDS

Applicable Regulations
Art. 4.- The provisions contained in the following Standards approved by the Central Bank, through its Committee of Standards, are applicable to Venture Capital Investment Funds in all that does not contradict these Standards:
a) “Technical Standards for the Authorization of Constitution, Start of Operations, Registration, and Management of Operations of Investment Fund Managers” (NDMC -02); b) “Technical Standards for the Authorization and Registration of Investment Managers of Investment Funds” (NDMC -03); c) “Technical Standards for the Authorization, Registration, and Operation of Investment Funds” (NDMC -06); d) “Technical Standards for the Investments of Investment Funds” (NDMC -07); e) “Technical Standards for the Calculation of the Value of the Participation Share and Allocation of Participation Shares” (NDMC -11); f) “Technical Standards for the Submission and Disclosure of Information of Investment Funds” (NDMC-13); and g) “Technical Standards for the Transfer or Merger of Investment Funds” (NDMC -16).

Characteristics of a Venture Capital Fund
Art. 5.- A Closed-End Investment Fund will be considered a Venture Capital Fund when its main object is to invest off-exchange, in shares and debt securities issued by companies whose shares are not registered in a stock exchange and whose purpose is investment in business projects to be developed in the medium and long term. This type of investment will be subject to the term established in the contract that, in accordance with what is stipulated in Article 30 of these Standards, the Manager will sign with the companies in which it will invest. Such companies will be referred to as “companies subject to investment by the Fund”. A business project will be understood as the business initiative that will be developed by a company subject to investment by the Venture Capital Fund. The Manager must verify that the selected companies meet the conditions established in Article 42 of these Standards.

Art. 6.- Venture Capital Funds may have direct or indirect control of the company in which they invest in accordance with what is established in Article 98 of the Funds Law, considering their investment and the contract signed between the Manager and the companies subject to investment by the Funds, in accordance with what is established in Article 30 of these Standards. The Manager must clearly define in the internal regulations and placement prospectus of the Fund, the business activity of the companies eligible to be subject to investment by the Fund.

Identification and profile of the investor
Art. 7.- The Manager must clearly and precisely establish in the internal regulations, the risk profile of the investor to which the Venture Capital Fund is oriented, which must be in accordance with the object of the Fund.
The Manager must have policies and procedures to determine the risk profile of investors in order to correctly categorize them and determine those that match the investor profile to which the Venture Capital Fund is directed; for this, the Manager must inform clearly, timely, and precisely about its characteristics, explaining at least, the business activity of the company and the type of investments that will be acquired from the company that will be subject to investment by the Fund, that Venture Capital Funds are medium or long term, and that if the investor decides to obtain liquidity of their shares in the secondary market in a stock exchange, this will depend on the market conditions existing at that time. Likewise, the investor must declare in writing that they are aware of the risks associated with the investment they will make.

Art. 8.- It is the responsibility of the Manager to ensure that the shares of Venture Capital Funds are marketed to investors whose risk profile coincides with the investor profile to which the Fund has been directed.
In the event that the Manager markets shares to investors whose risk profile does not coincide with the profile required by the Fund, it must comply with what is established in Chapter VI of the “Technical Standards for the Process and Registration of Buy and Sell Orders of Securities of Brokerage Houses” (NDMC -01), documenting that the Manager issued a warning to the investor about the main risks related to the Venture Capital Fund and characteristics of the shares, the object and investment policy of the Fund and that said Fund is not in accordance with the risk profile determined in the analysis performed on the investor, additionally specifying the customer category determined by the Manager or agent. The aforementioned document must be signed by the participant and by the General Manager in accordance with the Technical Standards referenced in this article. If the marketing of Venture Capital Fund shares is carried out through the intermediation service provided by a House, this must comply with what is established in this article and Articles 7 and 9 of these Standards, observing in the placement and negotiation of shares, what is regulated in the Securities Market Law, other laws, and applicable regulations.

Promotion of the Venture Capital Fund
Art. 9.- The Venture Capital Fund must clearly express its object in its internal regulations, in any document sent to participants, as well as in any information regarding the Fund disseminated by the Manager through its website or any promotional or advertising material. Likewise, they must express in their internal regulations, the types of medium or long-term business projects in which the Fund will invest, indicating additionally the companies that are subject to investment by the Fund. In the disclosure of information and promotion carried out regarding the Venture Capital Fund, it is the responsibility of the Manager to ensure that the name of the Fund and its object do not induce error or confusion in investors or participants regarding its investment policy, its risk, or the liquidity of the shares. The Manager and the persons who carry out the function of marketing shares in accordance with what is established in Article 26 of the Funds Law, will be responsible for explaining to the investor the characteristics of the Venture Capital Fund, clearly specifying the companies subject to investment by the Fund, the types of medium and long-term business projects that the companies will develop, as well as the valuation methods of the investments made in the companies subject to investment in accordance with what is established in the internal regulations and placement prospectus of the Fund.

CHAPTER III
AUTHORIZATION AND REGISTRATION OF VENTURE CAPITAL FUNDS

Application for Registration of the Venture Capital Fund and authorization of documents Art. 10.- For the authorization of the entry in the Register of Closed-End Funds, the legal representative or attorney-in-fact of the Manager must present to the Superintendence, an application accompanied by the following documentation and information:
a) Certification of the agreement of the Board of Directors of the Manager in which the constitution of the Venture Capital Fund was agreed upon, as well as the approval of the internal regulations and the placement prospectus; b) Draft of the issuance deed of participation shares; c) Internal regulations, which must include the minimum content defined in Annex No. 1 of these Standards; d) Placement prospectus of participation shares, which must include the minimum content defined in Annex No. 2 of these Standards; e) Model of subscription contract of participation shares between the Manager and the participant; f) Draft of the documents related to the guarantee that the Manager will constitute or modify for the Venture Capital Fund, according to its nature, considering what is established in Article 22 of the Funds Law; g) Certification of the agreement of the Board of Directors of the Manager in which the entity that will be the representative of the beneficiaries of the guarantee is designated; h) Acceptance of the entity as representative of the beneficiaries of the guarantee; i) Valuation method of investments in securities in accordance with what is established in Article 102 of the Funds Law; j) Manual of procedures and policies for the handling of operations carried out in the administration of the Venture Capital Fund, responsible personnel who will intervene in said procedures, including flowcharts that describe the Fund management process in which the activities, departments, the hierarchical levels that intervene in them, controls on the companies in which the Fund will invest, and the models of forms that will be used in the administration of Venture Capital Funds, such as: signature registry, customer identification forms, account statements, daily availability control, among others; k) Name of the person(s) designated as investment manager(s), specifying the date of authorization of the registry entry by the Superintendence; l) Projections of income and expense flows for the first five years of the Venture Capital Fund. If the term of the Fund is less than that established in this letter, the projections will be presented for the term of maturity of the Fund; m) Accounting system of the Fund that will be used by the Manager and the description of the computer platform on which it has been developed, description of its information systems, description of information backups, security and controls in the systems. The accounting systems must be presented in accordance with the “Accounting Manual for Investment Funds” (NDMC -08), approved by the Central Bank through its Committee of Standards; and n) Other documentation and information that due to the nature of the Fund is necessary to present. In the application, the means to receive notifications and the designation of the persons commissioned for such effect must be established. (1) The projections referred to in letter l) of this article, will be carried out in accordance with the
model established by the Manager, documenting the basic assumptions of said projections which must be coherent, supporting each of the variables of the model used. The application and documentation may be presented through the means made available by the Superintendence, which may be electronic. In any case, the term referred to in the first paragraph of Article 13 of these Standards will begin to run from the next business day after the application has been presented. (1)

Model of subscription contract of participation shares Art. 11.- The subscription contract model must include at least what is established in the “Technical Standards for the Authorization, Registration, and Operation of Investment Funds” (NDMC -06) and will observe what is regulated in Article 22 of the Consumer Protection Law and what is established in the Regulation of the Consumer Protection Law regarding the contract of adhesion.

Extract of the internal regulations and placement prospectus Art. 12.- The Manager must prepare an extract of the internal regulations and placement prospectus, which will form part of the internal regulations and placement prospectus respectively. These extracts will contain in summarized form the information detailed in Annex No. 1, numeral 5) and Annex No. 2, numeral 4) of these Standards.