When I started my legal career, collective investment was regulated by the 1992 Investment Companies and Investment Funds Act, which had less than 40 sections. In 2004, it was superseded by a new Collective Investment Act that had 141 sections. The new bill submitted by the Ministry of Finance, under the same name as its 1992 predecessor, now has 628 sections. These numbers are frightening.
Legislation on collective investment has grown significantly because of EU law. The latest bill derives in particular from the Alternative Investment Fund Managers Directive (AIFMD). European legislation applicable prior to the AIFMD was limited to retail collective investment funds offered to the public. The idea of the pre-AIFMD legislation was that EU law brought together the strictest requirements of individual national jurisdictions and thus created a standard that enabled the creation of a “European passport”, i.e. the possibility of operating in other EU member states under a license from one’s home country. Funds that failed to meet such standards remained under their home country’s jurisdiction.
In terms of European regulation, the AIFMD represents a break with the past. The concept of a higher European standard is being abandoned; the new European regulation of collective investment should apply to all forms of collective investment, including private equity and venture capital structures. Any commercial structure in which more than two investors combine their funds for a joint investment will be caught in the web of collective investment regulations. If the structure is not licensed as an investment company, it will constitute a prohibited “illicit investment fund”.
The impact of the regulation will be serious in all European countries, including the Czech Republic. Private equity funds have thus far not been subject to regulation, which emerged in particular as a specific method of protecting consumers on the capital markets. In my opinion, protecting private equity investors in this way, i.e. using the same regulatory standards and authorities, is controversial to say the least. Rather than offering protection, it is an attack. These investors do not care for assistance from regulatory authorities, the limits determined by European bureaucrats or the prescribed costs of administering investment schemes. The main objective of the AIFMD is to get venture capital amounting to 10 billion euros into the hands of European regulators. Is this capital supposed to fill the cracks in the EU’s hull? In any case, the reference to the provisions of the EU Treaty that touch on measures to ensure business freedom seems inappropriate when the purpose is the absolute opposite.
Nevertheless, the AIFMD is regarded as a great opportunity for business in the Czech Republic. If the conditions here are friendly enough, the Czech Republic could become a sort of eastern Luxembourg for venture capital, and gain a corresponding contribution to GDP. The first draft from the Ministry of Finance, however – even if unavoidably trapped in the net of EU law – does not appear very attractive. It is burdened with legislative clumsiness that could lead to a lack of clarity, gold-plating (requirements above the minimum standards of the directive), and the incomprehensibility of the regulatory concept. The bill thus appears to have been drafted by government officials for government officials. If the Czech Republic wishes to become attractive to venture capitalists, not only will the bill need a lot of work, but in particular alternative funds will have to be welcomed as neighbours and not looked upon as a threat.