The Cabinet Secretary for the National Treasury and Planning recently gazetted the Capital Markets (Alternative Investment Funds) Regulations, 2023, which took effect on 15 December 2023. These new regulations are an off-shoot of the Capital Markets (Collective Investment Schemes) Regulations, 2023, also gazetted simultaneously. The Capital Markets (Alternative Investment Funds) Regulations aim to bring private equity, venture capital, hedge funds and similar entities within the Capital Market Authority’s regulatory ambit. This article summarises some of the key features of the AIF Regulations.
Alternative investment funds (AIFs)
An AIF has been widely defined as “a collective investment scheme that privately pools funds from at least two (2)but not more than one hundred (100) investors in Kenya or outside Kenya to invest on the investor’s behalf in accordance with a defined investment policy statement”. Therefore, the AIF Regulations shall also apply to entities established outside Kenya, including those already in existence. However, AIF Regulations will not apply to family trusts, employee share ownership programmes, holding companies or securitisation SPVs. Entities that are currently operating within the definition of an AIF have been given until 15 December 2024 to seek licensing from the CMA.
It is not evident at this time whether a fund that has more than 100 investors would then be exempt from the application of the AIF Regulations, and we foresee that further guidance will be required from the CMA regarding the scope of application of the AIF Regulations.
Licensing of alternative investment funds
AIFs will now require to be licensed by the CMA in order to pool funds from private investors, by submitting an application in the prescribed form under the AIF Regulations. The application fee for an AIF licence is KES 10,000 (USD 68) with an annual licensing fee of KES 250,000 (USD 1,728).
An entity shall not operate as an AIF unless they have obtained approval from the CMA. Still, they may pool money (which can only be done by private placement) from prospective investors provided the pooled funds are not invested until the CMA issues the license.
The CMA also has wide authority with respect to regulation of an AIF including but not limited to requesting information about the fund manager or fund management activities of the AIF, approving the investment policy of the AIF and approving any amendments made to the investment policy, fit and proper approvals for the directors and partners of an AIF in accordance with the Capital Markets Act, Chapter 485A, Laws of Kenya (the Act).
Investment Requirements
The AIF Regulations seek to restrain the investment criteria applicable to AIFs, including not having more than 100 participants, not permitting an initial investment from members of less than KES 1 million, and requiring the CMA’s prior approval of the private placement memorandum related to any fundraising.
The fund manager of an AIF will also be required to appoint a custodian licensed by the CMA to safeguard the assets under management.
Conclusion
An amendment to the Act empowering the CMA to regulate private equity funds that “have access to public funds” was made in 2020, but the effect of enforcing this provision has not been evident.
The AIF Regulations beckon a novel regulatory space that the CMA is entering. Their implementation is likely to be met with differing interpretations and practical enforcement challenges, given the dynamism of the diverse number of entities they try to capture. It also remains to be seen how their application will interface with the regulatory regime under the Capital Markets (Public Offers, Listings and Disclosure) Regulations 2023 (and their predecessor regulations) that entities have so far been complying with in their fundraising.
It will be prudent for entities that fall within the definition of an AIF to engage the CMA for clarity or seek legal advice on the implications of the AIF Regulations to their operations, taking advantage of the grace period provided.
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