In early 2022, the Monetary Authority of Macao Special Administrative Region (AMCM) issued the Guideline on Management and Operation of Private Investment Funds (the Guideline), which allows eligible managing entities to apply to the AMCM to establish “domestic private funds” in Macao – a new concept introduced under the Guideline. The move shows Macao’s determination to involve in the development of the Hengqin Cooperation Zone (short for Guangdong-Macao In-Depth Cooperation Zone in Hengqin) in financial sectors; it will also drive the upgrading of local industrial structure and a moderate diversification of industries. Based on the Guideline, the Guide on Establishment of Private Investment Funds and other AMCM rules, we will examine and analyse the procedures for establishing a private investment fund and its managing entities in Macao and the difficulties in the establishment.
I. Flowchart
The flowchart below describes the procedures for setting up a private fund managing entity in Macao and the managing entity’s application to the AMCM for fund establishment.
II. Definitions
1. A “domestic private fund” means an investment fund that is established in the form of a legal person or by contract under the laws of Macao, which raises funds from no more than 50 professional investors in a non-public manner, and invests and manages the funds raised in accordance with the management regulations of the fund.
2. “Non-public manner” refers to the fact that the fund is not offered to the public and cannot be advertised or marketed through any public channel.
3. “Professional investors” are (1) individuals with an investment portfolio of no less than MOP 8 million (including individuals who open joint accounts with related persons); or (2) companies or partners with an investment portfolio of no less than MOP 8 million or total assets of no less than MOP 40 million.
III. Relevant entities and requirements
1. The diagram below shows the relationship between the relevant entities involved in the fund establishment:
2. Requirements for the entities:
(1) The managing entity must be a bank, a finance company, an investment fund or asset management company licensed to operate in Macao (i.e. fund manager).
(2) The depositary appointed by the managing entity for the fund must be a regulated financial institution licensed to carry out depositary business in or outside Macao. The depositary domiciled outside Macao must be subject to prudential regulation and supervision by an AMCM-recognised local regulator.
(3) The discretionary manager (if any) appointed by the managing entity for the fund must be a regulated financial institution licensed to carry out relevant business in or outside Macao. The discretionary manager domiciled outside Macao must be subject to prudential regulation and supervision by an AMCM-recognised local regulator.
3. Relationship between the entities, positions of personnel and assumption of responsibilities
(1) The depositary, the managing entity and the discretionary manager (if any) engaged by the managing entity cannot be the same entity, but they can be subsidiaries of the same entity. The depositary cannot be a subsidiary of the managing entity or the discretionary manager (if any), and vice versa.
(2) Personnel holding administrative, leadership or managerial positions in the depositary should not hold or perform any position in the managing entity or the discretionary manager (if any) that conflicts with its depositary activity, and vice versa.
(3) The depositary and the managing entity are jointly and severally liable to investors for any failure to comply with the obligations under the management regulations. The depositary and the managing entity must assume the final responsibility arising from the functions delegated or the subcontracting, and may not transfer their responsibilities to any service provider to whom certain functions are delegated or who is subcontracted.
IV. Requirements and procedures for establishment of managing entities
1. Categories of managing entities
A managing entity must be a bank, a finance company, or an investment fund or asset management company licensed to operate in Macao.
2. Application for licenses of managing entities (take an asset management company as an example)
2.1 Capital requirements
The minimum capital of the company shall be MOP 3 million. At the establishment, the capital of the company shall be fully subscribed and paid in cash.
2.2 Personnel requirements
The governing body of an asset management company (i.e., the board of directors) shall consist of at least three members recognised as suitably qualified, at least two of whom are habitually resident in Macao and have appropriate competence and experience to hold office and sufficient authority to actually direct the business of the organisation.
2.3 Materials to submit for license application (see the table below)
2.4 Factors assessed by the AMCM
In assessing an application, the AMCM will take into account factors including:
(a) Whether the objectives of the entity to be established are consistent with the economic and financial policies implemented by the Government of Macao SAR;
(b) The suitability of the shareholders and managers of the entity to be established;
(c) The allocation of the resources of the entity to be established, including the adequacy of its human, financial and technical resources;
(d) The soundness and feasibility of the business plan of the entity to be established and its contribution to the Macao financial market;
(e) The adequacy of the planned risk management measures, internal control systems (including anti-money laundering and anti-terrorist financing mechanisms), corporate governance structure and business continuity plan;
(f) The structure and characteristics of the group to which the entity to be established is affiliated;
(g) Whether the application involves any regulatory concerns; and
(h) Whether the application is in the best interests of the Macao financial system.
V. Management of funds
VI. Depositary of fund assets
1. The assets of the private investment fund must be safe kept by the depositary, and a depositary contract must be concluded to specify the responsibilities and obligations of the depositary. If any assets cannot be delivered to the depositary due to their nature, the managing entity must specify the rules and measures to ensure the security of such assets in the management regulations of the fund, and the depositary must verify the ownership of such assets and properly maintain the record.
2. The depositary may not, for the purpose of its own investment, acquire any units of the privately offered fund for which it performs the depositary functions.
3. The depositary must perform the functions specified in the management regulations and the depositary contract with the managing entity, including but not limited to developing appropriate measures to ensure the assets of the fund are properly maintained and registered, and carrying out transactions and receiving interest, dividends and other income related to the fund assets as instructed by the managing entity.
4. The depositary must monitor the operation of the fund.
VII. Marketing of funds
VIII. Supervision of funds
IX. Difficulties and outlook
1. The entities qualified to establish private investment funds in Macao are managing entities (usually fund managers) established in Macao, which can be classified into four categories: banks, finance companies, investment fund management companies and asset management companies licensed to operate in Macao. We take an asset management company as an example (whose establishment threshold is relatively low and the relevant requirements are similar to those for an investment fund management company), to describe the establishment procedures and requirements in detail above.
The establishment of an asset management company is essentially the establishment of a company and is registered with the Commerce and Movable Property Registry of the Macao SAR Legal Affairs Bureau. Unlike the establishment of a company in general, however, setting up an asset management company requires AMCM approval before the above registration. There are several issues to consider. Firstly, the AMCM approval involves more complex procedures, more factors to be considered and more abstract criteria. There is uncertainty whether the approval can be obtained. Secondly, the regulation coordination between the AMCM and the Commerce and Movable Property Registry is also an issue. Since the Guideline is recently released, there are few precedents for reference. It is unclear whether there will be obstacles in the coordination between the two authorities.
2. After its establishment, the managing entity may submit an application to the AMCM for the establishment of a private investment fund. There are few successful practical applications for the establishment of these funds in Macao. Therefore, when assisting the entity in applying for the establishment of the fund, it is difficult to identify the AMCM’s key concerns in reviewing the managing entity’s application materials and assess the AMCM’s leniency in granting the approval.
3. A private investment fund established in Macao may be managed by a discretionary manager appointed by the managing entity, which may be a non-Macao financial institution. Thus, it is possible for the Mainland’s fund managers to directly manage private funds in Macao, provided that the discretionary manager is subject to prudential regulation and supervision of an AMCM-recognised local regulator.
4. In general, the requirements of incorporation in Macao and AMCM approval both apply to private investment funds and their managing entities. It is possible, but subject to a strict condition, for fund managers domiciled outside Macao to directly manage private investment funds in Macao. With closer integration in the financial sector between the Hengqin Cooperation Zone and Macao, a possibility worth looking into is that private fund managers established in the Hengqin Cooperation Zone may directly apply to the AMCM for the establishment and management of private investment funds in Macao.
Any reference to “Macao” or “Macao SAR” shall be construed as a reference to “Macao Special Administrative Region of the People’s Republic of China”.
