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Collective Investment Scheme or Operating Company?


On 9 October 2018, the Swiss Federal Supreme Court published an important decision in case 2C_1068/2017, 2C_1070/2017 which addresses the qualification of a venture capital company as operating company and not as investment company with fixed capital (SICAF) within the meaning of the Collective Investment Schemes Act (CISA).

As a matter of fact, the distinction between an operating company and a collective investment scheme within the meaning of CISA is crucial for the market, as an operating company does not fall within the scope of FINMA regulation, whereas an investment company with fixed capital does, unless it is listed on a stock exchange or only open for qualified investors.

In the discussed decision, the claimant was a company active in the field of venture capital. Its core business consisted in the management of participations in (start-up) companies through mid-term or long-term investments, with the aim to receive dividends or with an exit strategy. In order to finance such investments, the company offered its own shares to investors.

The Federal Administrative Court as court of first instance confirmed FINMA's position which considered that the company operated a collective investment scheme in the form of a SICAF without having the required license. As a consequence, FINMA issued an order on the company to open immediate bankruptcy proceedings, due to a serious breach of the supervisory provisions.

However, the Swiss Federal Supreme Court retained two main criteria to reverse this assessment and to exclude the qualification of the venture capital company as a collective investment scheme, introducing a new definition for the management by a third party, which is one of four criteria when considering whether a structure qualifies as a collective investment schemes under CISA.

According to the Swiss Federal Supreme Court, the first decisive factor is whether the company exercises an active operational activity or a passive investment activity. If the company conducts an operational activity, it is excluded from the scope of the CISA. The lower court had relied on the lack of profit generated by the company to conclude that it was not an operating company. However, the Swiss Federal Supreme Court held that the plan to generate income could only be one of many relevant criteria to determine whether a company exercises an operational activity and that an analysis of the overall economic reality of the structure is more appropriate.

The second central question pertains to the management aspect. The lower court had held that the company was a SICAF subject to authorization because the shareholders of the company had no say in the investments made by the company and could only participate in the profits generated by the company. However, the Swiss Federal Supreme Court examined this question from the perspective of the concerned company rather than its shareholders. From that point of view, the Swiss Federal Supreme Court concluded that a venture capital company which participates actively in the companies in which it holds a (minority) stake is not deemed to have delegated the management to a third party and thus differentiates an active venture capital investor from a passive investor in a collective capital investment scheme.

With its decision, the Swiss Federal Supreme Court reduces certain uncertainties with regard to the assessment of an operational activity (art. 2 para. 2 lit. d CISA), and introduces a new definition of management by a third party, which is one of the central criteria when considering a collective investment scheme (art. 7 para. 1 CISA). By doing so, the Swiss Federal Supreme Court significantly departs from the approach of FINMA and the Federal Administrative Court. The impact of the decision in the market needs to be followed very closely, as it is significantly more liberal than the existing practice.

Venture capital companies are therefore well-advised to actively participate in the management of the companies in which they invest, for example by having a representative at the board of directors, in order to minimize the risk of a qualification by FINMA as a collective investment scheme under the CISA.


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