IFM17310 - Genuine Diversity of Ownership (GDO): Condition A

Regulation 9A(3) SI2006/964, Regulation 75(2) SI 2009/3001 and paragraph 15(3) FA03/Sch7A

Condition A relates to the documents produced by the fund. To meet Condition A, these documents must state that interests or units in the fund will be widely available, specify who the intended categories of investor are and confirm that the fund will be marketed and made available to those target categories.

Where a fund’s target market includes a substantial body of unconnected persons, then provided it is specified in the fund documents that the fund will be marketed and made available to that target market then Condition A will be satisfied.

There is no prescribed form of wording necessary to satisfy Condition A. Although Regulation 75(2) SI 2009/3001 uses the term “undertaking”, this does not require an undertaking in the legal sense. It is sufficient for there to be a positive statement of intent in relation to the proposed marketing of the fund.

Examples of statements which could be included in fund documents are:

“The fund is targeted at retail and institutional investors. Units in the fund will be marketed and made available to these types of investors.”

“The fund is targeted at investors who are looking to make a medium to long term investment and who are looking for capital growth returns. Units in the fund will be marketed to these types of investors and will be made available to them by a network of distributors appointed by the fund.”

Intended categories of investors

Condition A requires that the documents confirm that the interests or units in the fund will be widely available. This requirement should be satisfied provided that the intended categories of investor are sufficiently wide to ensure that the fund is not limited to a few specific persons or specific groups of connected persons named or implied by the given categories.

Examples of intended categories of investor are:

  • General retail investors - individual investors, who may be tax exempt ISA investors, with no requirements as to wealth levels.
  • High net worth investors - individual investors, where there is a significant minimum investment level.
  • Institutional investors – professional investors such as pension funds, sovereign wealth funds and insurance companies.

These are not the only possible examples or an exhaustive list of acceptable categories of investor. A fund’s intended category of investor could, for example, be limited to a sub-set of one of the above examples. Any intended category of investors will be acceptable provided it is sufficiently wide to ensure that the fund is not limited to a few specific persons or specific groups of connected persons named or implied by the given categories.

A fund’s categories of investor may be limited by regulatory requirements, such as a restriction on the type of investors the fund can lawfully be marketed to or the jurisdictions in which marketing activity can take place. This will not, by itself, prevent Condition A being satisfied.

Meaning of ‘documents’

The relevant statements and undertakings to satisfy Condition A do not have to be met in any prescribed form of document. Examples of suitable documents include a published prospectus, private placement memorandum or limited partnership agreement, but it may take any form.

Regulation 75(2) of SI 2009/3001 and paragraph 15(3) FA03/Sch7A both require that the document is available to investors (including potential investors) and HMRC. This does not require the document to be submitted to HMRC, however the whole document must be capable of being provided to HMRC if requested. A document which was subject to confidentiality restrictions which meant that it could not be provided to HMRC (or only extracts could be provided) would not satisfy this requirement.

HMRC recognises that in some circumstances, a fund may need to update documents which already exist to ensure compliance with Condition A in the future. This is acceptable provided that the updated documents are provided to investors. Updates to documents would only enable Condition A to be satisfied on a prospective basis – it cannot be done to retrospectively rectify a past failure to satisfy Condition A.

Specific provisions within QAHC regime, REIT rules and NRCG rules

In the case of the QAHC regime (IFM40000+), NRCG rules (CG73995P+) and REIT rules (IFM21000+), the relevant fund may not have produced documents with the requisite statements and undertakings prior to the relevant provisions being introduced.

Accordingly, these rules provide that for funds established or, in the case of the QAHC rules, marketed, before a specified date, Condition A may be satisfied by a statement prepared by the manager of the vehicle which:

  • specifies the intended categories of investor when the vehicle was marketed,
  • confirms that the interests in the vehicle were made widely available, and
  • confirms that interests in the vehicle were marketed and made available sufficiently widely to reach the intended categories of investors and in a manner appropriate to attract those categories of investors.

The specified date is 6 April 2020 in the case of the NRCG rules and 1 April 2022 in the case of the QAHC regime and the REIT rules. In the case of the QAHC regime, it is sufficient that the fund was marketed at any time before 1 April 2022. It is not necessary that the marketing was completed before that date.

The statement must be made available to HMRC. As above, this does not require the statement to be submitted to HMRC, however the statement must be capable of being provided to HMRC if requested.