December 2012
AIFMD implementation in Germany:
Draft Capital Investment Act revised
Government draft addresses industry criticism
Table of Contents
Government draft of Capital Investment Act published
On 12 December 2012, the government draft of the Capital Investment Act
(Kapitalanlagegesetzbuch, “CIA“) was published (the “Government Draft”).
As outlined in our Newsletter in July, the CIA implements the Directive
2011/61/EC on Alternative Investment Fund Managers (“AIFMD“) into German law. The implementation is required by 22 July 2013. The CIA introduces
a new and comprehensive legal framework for all German funds and the distribution of German and foreign funds in Germany and will replace the German Investment Act (Investmentgesetz).
Extensive amendments to the first draft
The Government Draft amends the first draft for discussion purposes, issued
by the German Ministry of Finance on 20 July 2012 (the “Discussion Draft”),
with respect to crucial points and thereby addresses the – partly vehement –
criticism which had been expressed after the publication of the Discussion
Draft. The substantial amendments introduced by the Government Draft are:

Extensive amendments to
the first draft ...................... 1
Overview of CIA product
regulation .......................... 6
Structure overview: Fund
categories pursuant to the
CIA and selected
characteristics ................... 7
Simplified timetable with
respect to the transition
rules of the CIA ............... 10
Contacts .......................... 11
Open-ended mutual real estate funds will not be abolished
The Government Draft no longer provides for the heavily criticized
abolishment of open-ended mutual real estate funds (“OREF”). This
fund type will continue to survive as a product category.
However, the liquidity requirements regarding the issuance and the
redemption of units for OREF will be tightened. In the future, redemptions will only be allowed for investors once a year, subject to the expiry of a minimum holding period of 24 months, which will be applicable regardless of any threshold. The period between two redemptions
must be twelve months. Furthermore, Investors need to serve a redemption notice to the fund’s management company (Kapitalverwaltungsgesellschaft – “KVG”) twelve months prior to the relevant redemption day and the units need to be blocked by the custodian. In
case an investor serves a redemption notice with less than twelve
months notice prior to the relevant redemption day, the redemption
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1
request would be binding nonetheless and should be treated as a redemption request for the next following redemption day, being a day
nearly two years after such investor’s redemption request. Such liquidity limitations would certainly need to be disclosed in the sales
prospectuses of OREF.
Furthermore, the issuance of new units will be limited to a maximum
of four dates per year, which need to be fixed in the investment strategy of the OREF. The period between two issuance days needs to be
at least three months and one of these issuance days needs to be the
same day as the redemption day.
The new provisions allow OREF which issue and redeem units only
once a year. For this type of OREF, the possibility to trade them via a
stock exchange will probably gain importance to improve the liquidity
for investors. It remains to be seen whether the NAV per unit (as published by the KVG) will become less important than the stock exchange quotation for these OREF. Consistently, the fixed liquidity requirements on the fund level have been abolished as the investor liquidity has been restricted. The fund level liquidity needs to be “sufficient” at any point in time, based on the liquidity management calculations. The sufficient amount of liquidity will increase and decrease,
depending on the proximity of the next redemption day.
At the same time, the Government Draft provides for a grandfathering
of existing investors, meaning investors already invested in an OREF
at the time the CIA comes into force (“Existing Investors”). The current regime (as introduced by the German Act to Strengthen the Protection of Investors and to Improve the Efficiency of the Capital Market – Gesetz zur Stärkung des Anlegerschutzes und Verbesserung
der Funktionsfähigkeit des Kapitalmarkts “AnsFuG”) regarding issuance and redemptions of units will continue to be applicable for those
investors. The interaction of already existing and new provisions will
probably result in a significant area of tension for a KVG. An Existing
Investor whose redemption does not exceed EUR 30,000 per halfyear may redeem daily (as far as the contractual terms provide for
daily redemptions). In comparison, units of new investors invested in
the same OREF may only be redeemed subject to a minimum holding
period of 24 months and after the expiry of such period subject to a
redemption notice period of 12 months on a single day per year. This
creates two groups of investors within the same product whose options with respect to redemptions could not be more different. Again,
these risks will – especially with a view to new investors – certainly
need to be disclosed in the sales prospectuses of OREF. Against this
background, it is difficult to assess how the KVG will be able to act in
the sole interest of the investors – i.e. all investors in the fund – (Sec.
26 para. 1 CIA). For example, a KVG may – to protect new investors
against redemptions of the Existing Investors – be obliged to suspend
redemptions (Sec. 98 para. 2 CIA) if portfolio devaluations are expected.
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
More flexibility for Special-AIF

Eligible investors for Special-AIF
The Government Draft addresses an issue created by the
Discussion Draft, pursuant to which certain investors of special funds (e.g. German foundations, so called Stiftungen and
municipalities) would not have qualified as professional investors. The newly introduced category of so called “semiprofessional investors” will be added to the list of investors eligible to invest in Special-AIF. To qualify as a semi-professional
investor, investors need to make a commitment to invest a
minimum of 200,000 Euro and confirm that they are fully
aware of the risks associated with their investment. Furthermore, the fund manager needs to assess whether an investment is suitable for the relevant investor with respect to its expertise, experience and knowledge. Furthermore, the Government Draft clarifies that investors already invested in a
Special-AIF at the time the CIA comes into force may continue
to hold their investment in the Special-AIF without jeopardising
the fund’s status as a Special-AIF.
We assume that the relevant point in time to assess whether
an investor qualifies as (semi-) professional investor is the
time of subscription. This should also apply to structures with
capital calls, as the Government Draft references to the point
in time when the investors becomes contractually obliged. In
case the qualification as (semi-) professional investor falls
away at a later point in time, the fund’s status as Special-AIF
should not be jeopardised. Unlike the German Investment Act
(which is being replaced by the CIA), the CIA does not reference to the actual status of the fund’s investors but only to the
fact that the investors of a fund are limited contractually to
(semi-) professional investors.

Eligible assets
The eligible assets for Special-AIF are no longer limited.
Open-ended and closed-ended Special-AIF have full flexibility
regarding investments in any type of assets and are not limited to mainly invest into (non-) financial instruments as it had
been stipulated by the Discussion Draft. As a consequence,
KVGs have full flexibility to structure Special-AIF as closedended or open-ended funds. For private equity funds, this clarifies that private equity participations are eligible irrespective
of whether a certain participation qualifies as (non-) financial
instrument. In practice, closed-ended Special-AIF may there-
New legal framework for funds in Germany
3
fore acquire all types of participations in companies that are
currently typically acquired by private equity funds.

More flexibility for closed-ended Mutual-AIF

Eligible assets
The catalogue of eligible assets for closed-ended Mutual-AIF
is expanded significantly. Tangible assets are eligible without
limitation. Furthermore, private investors will be able to invest
directly into private equity funds in the form of closed-ended
Mutual-AIF, as interests in non-listed companies were added
to the eligible assets of this fund type. Pursuant to the Discussion Draft, fund of funds structures would have been required
for private investors to invest into private equity. The limitation
to 49 per cent of the total AIF value for investments in securities has been removed. Debt and intangible assets like licences and copyrights will still not be eligible investments for
closed-ended Mutual-AIF.

Leverage
The leverage limitation for closed-ended Mutual-AIF is being
raised from 30% to 60% of the AIF’s total value.

Minimum investment
The minimum investment threshold for investors in closed Mutual-AIF that are not risk diversified is being lowered from
50,000 Euro to 20,000 Euro. Risk diversification means – pursuant to the CIA – an investment in at least three tangible assets where each have equivalent acquisition risk or the
spreading of the investment risk is ensured. AIF which do not
satisfy these criteria are not risk diversified and the minum investment threshold set out above will apply. An exemption applies for Mutual-AIF which are invested in private equity: such
private equity Mutual-AIF always need to adhere to the principle of risk diversification.

Tax efficient structuring of an Investment-KG
Under the Government Draft, limited partners may be appointed as
manager of an open-ended or closed-ended Investment-KG (special
forms of a German limited partnership introduced by the CIA). The
Discussion Draft previously required the management to be exercised
exclusively by the General Partner. The Government Draft allows
structuring of an Investment-KG which would not be subject to trade
New legal framework for funds in Germany
4
income tax, based on the current tax regime, the draft of the amended
German Investment Tax Act and further tax regulations.

Transitional provisions
The Government Draft also provides for amendments and clarifications of the transitional provisions.

Transition period for the administration and distribution
of new AIFs prior to licencing of business operations
KVGs which were already engaged in licensable activities
pursuant to the CIA prior to the CIA coming into force may –
until 21 January 2015 – manage and distribute new AIFs without a licence if the application for such licence is filed with the
German Financial Supervisory Authority by 21 July 2014.
In practice, this means a substantial improvement for asset
managers. Based on the Discussion Draft, no new AIFs could
have been established after 22 July 2013 and KVG licences
would have needed to be obtained at short notice. Asset managers would now have more time for the implementation of the
new requirements introduced by the CIA and the widely held
concern that for a period no new products would have been
launched has been addressed.

Alternative depositaries
For closed-ended AIF with no redemption right within the first five
years after the commencement of investment activities by the fund
and with a general investment focus on assets for which safekeeping
is not mandatory or interests in unlisted companies, a trustee can be
appointed as depositary. In performing its duties as depositary, the
trustee needs to act within the scope of its business activities and
needs to be subject to a mandatory registration or professional self
regulation ensuring (through financial/professional guarantees) the effective performance of the depositary’s duties by the trustee.
Consequentially, auditors and similar professionals may be qualified
to be appointed as trustee.

Still no private placement exemptions
The criticism regarding the lack of private placement exemptions in
the Discussion Draft went unheard. Private placement means the
non-public distribution to investors outside the scope of a placement
regime. Following the commencement of the CIA, such private
placements will not be possible in Germany. The placement regime of
the CIA is applicable to every placement of units which qualifies as
distribution within the meaning of the CIA.
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5

Limited definition of distribution
In comparison to the definition of distribution under the Discussion
Draft, the Government Draft definition has moved closer to the definition of distribution pursuant to the AIFMD. Distribution to professional
and semi-professional investors therefore requires an offering, placement or marketing on the initiative of the KVG or the (EU-)AIFM (as
applicable). A placement on the initiative of an investor (so called “reverse solicitation”) would consequentially not qualify as distribution
pursuant to the CIA and the placement regime of the CIA would not be
applicable. The German Financial Supervisory Authority (BaFin) may
introduce guidelines to determine the definition of distribution in further detail.

Distribution of Non-EU-AIF and by Non-EU-AIFM in Germany
The Government Draft extends the possibilities for distribution of NonEU-AIF in Germany and the distribution of EU-AIF by Non-EU-AIFM
in Germany, as facultatively provided by the AIFMD. The following two
further possibilities are introduced:

distribution of Non-EU funds by KVGs and EU managers to
professional and semi-professional investors in Germany and

distribution of EU funds by Non-EU managers to professional
and semi-professional investors in Germany.
Overview of CIA product regulation
The CIA leads to a new categorisation of German funds. The Government
Draft slightly amends this categorisation. The following overview of the new
product categories updates the overview attached to our previous newsletter
dated 31 July 2012. The amendments are highlighted in red.
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6
Structure overview: Fund categories pursuant to the CIA1 and selected characteristics
German Investment Funds
Characteristics
German UCITS
Open-ended/
Close-ended
German AIF
Open-ended
Mutual UCITS
Open-ended
Special-AIF
Close-ended
Mutual-AIF
Special-AIF
Eligible Investors
Professional Investors
Semi-professional Investors
Private Investors
Professional Investors
Semi-professional Investors
Professional Investors
Semi-professional Investors
Private Investors
Professional Investors
Semi-professional Investors
Permissible
Vehicles
Contractual form (Sondervermögen)
Investment Stock Corporation with
variable capital
Contractual form (Sondervermögen)
Investment Stock Corporation
with variable capital
Open-ended Investment
Limited Partnership
Contractual form (Sondervermögen)
Investment Stock Corporation with
variable capital
Investment Stock Corporation
with fixed capital
Close-ended Investment
Limited Partnership
 Securities (Sec. 193)
 No catalogue of eligible
assets but must invest
predominantly in financial
instruments (Sec. 249 para. 1)
Fixed catalogue of eligible assets,
depending on permitted fund type,
which consists of (Sec. 214):
 No catalogue of eligible
assets but must invest
predominantly in financial instruments
(Sec. 253 para. 1)
Eligible Assets
 Money Market Instruments
(Sec. 194)
 Bank Deposits (Sec. 195)
 Fund Units (Sec. 196)
 Derivatives (Sec.197)
 Other Investments (Sec. 194)
 Market value must be
assessable
 Non-controlling participations in private companies
 Special case: Open-ended
Special-AIF with fixed investment strategy
(Sec. 284)
Risk Diversification
1
Required– investment and issuer
restrictions
General principle of risk diversification – no special restrictions on eligible assets or
issuer limits
 Mixed Funds (Sec. 219)
 Other Funds (Sec. 221)
 Hedge Fund of Funds (Sec. 225)
 Market value must be
assessable
 Real Estate Funds (Sec. 231, 234,
253)
No real estate investments permitted!
Mutual-AIF
Professional Investors
Semi-professional Investors
Private Investors
Investment Stock Corporation with fixed
capital
Close-ended Investment Limited Partnership
 Tangible assets (in particular real estate,
ships, aircrafts, renewable energy, trains,
electromobiles, containers)
 PPP-Companies
 Interests in unlisted companies (Private
Equity)
 Interests in closed-ended German and
foreign Mutual-AIFs and Special-AIFs
 Securities within the meaning of Sec.
192 to 195 (max. 49%)
 Derivatives, for hedging purposes only
No direct private equity investments!
Required – depending on fund type,
special restrictions on eligible assets
and issuer limits apply
Risk diversification not required
 Risk diversification in principal
 Exemption if each investor invests a
minimum of EUR 50.000 20.000
References to Sections refer to sections of the CIA. Amendments included in the government draft of the CIA in comparison to the draft CIA dated 20 July 2012 are highlighted in red.
New legal framework for funds in Germany
7
German Investment Funds
Characteristics
German UCITS
Open-ended/
Close-ended
German AIF
Open-ended
Mutual UCITS
Open-ended
Special-AIF
Close-ended
Mutual-AIF
Special-AIF
Mutual-AIF
 Exemption not applicable for closedended Mutual-AIF investing in private
equity
(Sec. 262 para. 1 2)
Leverage
Short-term borrowing up to 10%
(Sec. 199)
 Short-term borrowing: No
borrowing limitation 
BaFin can impose limits
(Sec. 211, 274)
 Exceptions for open-ended
special AIF with fixed investment strategy
 Short-term borrowing up to 10%, for
Other Funds up to 20%
 Real estate funds: borrowings up to
30% (Sec. 254)
 short-term borrowings up
to 30%
 Short-term borrowing: No
borrowing limitation 
BaFin can impose limits
(Sec. 211, 274)
Borrowing up to 30% 60% (Sec. 263)
 Unclear to what extent
closed-ended special AIFs
can enter into long-term
borrowing
 when investing into real
estate borrowings up to
50% (Sec. 252)
Distribution
 Documentation: Prospectus and
key investor information document
 Distribution must be notified
to BaFin  BaFin response
within 20 days (Sec. 321)
 Distribution must be notified to BaFin
 BaFin response within 40 20 days
(Sec. 316)
 EU-passport for distribution to
professional and retail investors
within EC/EEA (Sec. 312)
 Documentation: Information
obligations towards investors pursuant to Sec. 307
 Documentation: Prospectus and key
investor information document
 EU-passport for distribution
to professional investors
within EC/EEA (Sec.331)2
Other
2
Special requirements for
 Distribution must be notified to BaFin  BaFin response within 20 days
(Sec. 321)
 EU-passport for distribution to professional investors within EC/EEA
(Sec.331)2
 Documentation: Information obligations towards
investors pursuant to
Sec. 307
Existing open-ended real estate funds
Special rules for private
 EU-passport for distribution
to professional investors
within EC/EEA (Sec.331)2
 Distribution must be notified to BaFin 
BaFin response within 40 20 days
(Sec. 316)
 Documentation: Prospectus / securities
prospectus with additional information
and key investor information document
 EU-passport for distribution to professional investors within EC/EEA (Sec.
331)2
Special rules for private equity funds (Sec.
Sec. 297 does not provide for a passport for distribution to semi-professional investors; in this respect the AIFMD implementation by the relevant member state will be crucial (Art. 43 para 1 AIFMD). The
German law-maker has included the possibility to be passported for distribution to semi-professional investors in Germany (Sec. 289).
New legal framework for funds in Germany
8
German Investment Funds
Characteristics
German UCITS
Open-ended/
Close-ended
German AIF
Open-ended
Mutual UCITS
Open-ended
Special-AIF
hedge funds (Sec. 283)
Mutual-AIF
benefit from unlimited grandfathering
period (Sec. 314)
Close-ended
Special-AIF
equity funds (Sec. 287 ff.)
Mutual-AIF
225 para. 7, 256 ff.)
New issuance and redemption rules for
OREF:
 24 months minimum holding period
 12 months notice period for redemptions
 permitted is:
 one redemption day
 and up to four issuance days
per year
AnsFuG redemption rules continue to
apply for Existing Investors
New legal framework for funds in Germany
9
Contacts
Contacts:
Alexander Vogt
Partner
+49 69 71003-414
[email protected]
Markus Wollenhaupt
Partner
+49 69 71003-117
[email protected]
Rocco Beck
Managing Associate
+49 69 71003-342
[email protected]
Dr. Daniel Voigt
Managing Associate
+49 69 71003-357
[email protected]
Mainzer Landstraße 16
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