What legal structure does KAPITAL uses?
KAPITAL structures Special Purpose Vehicles ("SPV") in Luxembourg, by turning alternative assets such as private company stocks or alternative funds into marketable securities in the form of Investment Notes. Specifically, the vehicles used to structure investments via KAPITAL act as a security issuers under the Luxembourg Securitisation Act 2004 & the Luxembourg Fiduciary Act 2003.
What U.S. regulations does KAPITAL comply with?
Investments structured via KAPITAL are considered financial marketable securities, and therefore must comply with the U.S. Securities Act of 1933 and the U.S. Securities Exchange Act of 1934. The U.S. Securities and Exchange Commission (SEC) enforces these laws, and the regulations set forth by the SEC will directly impact a foreign company’s or an SPV's ability to market securities to U.S. investors.
Are SPVs structured via KAPITAL registered with the SEC ?
No, investments structured via KAPITAL are not registered with the SEC and fall under one or more of the following exemptions from registration:
- Regulation D: Offers exemptions from registration for private placements of securities to a limited number of accredited investors, generally high-net-worth individuals or institutional investors.
- Rule 144A: Enables private placements to qualified institutional buyers (QIBs), such as banks, insurance companies, and investment funds.
- Rule 506(b) and Rule 506(c) under Regulation D: Allow marketing to accredited investors with fewer restrictions than public offerings.
Generally, securities offered to the U.S. public (ie: retail investors) must be registered with the SEC. This involves submitting a registration statement containing detailed financial and corporate disclosures, including information about the management, business operations, and financial statements.
Can non-accredited Retail Investors invest via KAPITAL?
No, generally KAPITAL does not issue investment to Retail Investors. Except on rare occasion where the appropriate adjustment is made and relevant registration, disclaimers and prospectus are prepared, KAPITAL does not provide investment structuring intended to non-professional, non-accredited retail investors.
What is the difference between Retail Investors & Accredited Investors?
Retail Investors are typically buying publicly available financial products (ie: listed on Public Stock Exchange) and are subject to higher levels of protection by the regulators due to presumed lower financial sophistication. Accredited Investors meet high net worth or income criteria, allowing them access to private, higher-risk investment opportunities not available to the general public.
What is the U.S. definition of Accredited Investors?
An Accredited Investors is a person or entity meeting specific financial criteria, allowing them to access investment opportunities not available to the general public. It is defined by the U.S. Securities and Exchange Commission (SEC) primarily under Regulation D of the Securities Act of 1933 :
- Individuals: Must have a net worth of over $1 million (excluding the primary residence) or have earned income exceeding $200,000 ($300,000 jointly with a spouse) for the past two years with a reasonable expectation of maintaining that income.
- Entities: Trusts, partnerships, corporations, or other entities with over $5 million in assets or all equity owners who are accredited individuals.
- Alternative Asset Managers: Can also invest in private placements, hedge funds, private equity funds, venture capital, and other high-risk or complex financial products that are not registered with the SEC.
- Assumption of Risk: Accredited Investors are presumed to have the financial sophistication and capacity to understand the risks associated with these investment opportunities, thereby receiving fewer regulatory protections.
As a U.S. Investor, how is my investment held via KAPITAL considered?
Based on the assessment from our lawyer A&O Shearman, investments made via KAPITAL by U.S. Investors are analogous to the U.S. tax treatment for American Depository Receipts (ADRs). Generally, U.S. investors are considered to hold their interest in the underlying asset directly.
What accounting method is used for KAPITAL's SPVs?
KAPITAL uses two different valuation methods, based on the type of investment made in a SPV and the ongoing reporting on the Net Asset Value ("NAV").
- For direct private company stocks, where fluctuation in valuation is difficult to assess in between financing rounds; KAPITAL uses the Luxembourg Generally Accepted Accounting Principles ("LUX GAAP") method at-cost and with impairment.
- For VC/PE Fund investments or real-estate investments, the valuation is prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union and prepared by a professional accounting firm registered with the Financial Sector Supervisory Commission ("CSSF") in Luxembourg as Professional of the Financial Sector ("PSF").
How are currency exchange handled?
Generally, currency exchange are handled by the bank of the subscribing Investor. For each transaction, assets and liabilities denominated in currencies other than the base currency of each investment are translated into the base currency at the exchange rate prevailing at the transaction date.
What document will KAPITAL provide for my annual tax return?
KAPITAL provides an annual statement on the status of each investors portfolio at year end. This statement will include for each investment made:
- The date of investment;
- The amount invested;
- The name of the underlying asset;
- The type of underlying asset;
- The % ownership within each specific SPV;
- Any change in the asset valuation at year end;
How should I report my investments as part of my annual tax return?
KAPITAL cannot provide tax or legal advice. Instead, we provide investors with a standardised annual statement (see above) which investors can share with their own accountant in order to prepare their tax return.
Please note that the taxation of an investment might vary based on the underlying asset you're investing into; therefore it is always recommended to seek independent professional opinion before investing or when deemed necessary.
Please note that KAPITAL cannot provide tax or legal advice and encourage you to enquire independently about your specific taxation based on your country of registration, and speak to your accountants. If needed, reach out to a team and we can recommend a trusted service provider from our network.
What is considered a Passive Foreign Investment Company (PFIC) ?
A PFIC, or Passive Foreign Investment Company, is a type of foreign corporation that meets certain criteria under the U.S. tax code, specifically under the Internal Revenue Code (IRC). The PFIC rules were designed to discourage U.S. taxpayers from using offshore entities to defer tax on passive income or to convert such income into capital gains, which are taxed at a lower rate. US investors have additional reporting requirements regarding their investment in a Passive Foreign Investment Company (PFIC).
A foreign corporation (ie: located outside of the United-States) is classified as a PFIC if it meets one of the following tests:
- Income Test: At least 75% of the corporation’s gross income for the tax year is passive income (such as dividends, interest, rents, royalties, and certain types of gains).
- Asset Test: At least 50% of the corporation's assets are investments producing, or held to produce, passive income.
Upon request, KAPITAL can assist in assessing the PFIC qualification of an investment after receiving the relevant financial statement from an underlying asset.
I'm a U.S. based investor and I want to invest in a Private Company Stock, is my investment considered a PFIC ?
- Your investment is not considered a PFIC if the underlying company you're investing into is legally registered and based in the United-States.
- Your investment is likely not considered a PFIC if the underlying company you're investing into is a foreign company that is already generating income from goods or services; or is funding itself via governmental grants.
- Your investment might be considered a PFIC if the underlying company you're investing into is a foreign company that is generating a small income in comparaison to the amount it has raised in venture funding; until it starts generating more substantial income. In this case, your accountant might want to make an assessment based on the Income & Asset Tests described above.
- Your investment will likely be considered a PFIC if the underlying company you're investing into is a foreign company that is not yet income generating but has raised venture funding; and has placed its excess cash in, for exemple, a money market fund which produce passive income.
If you invested in a foreign private company already generating income, this investment will likely not be considered as a passive foreign investment companies (PFIC). In this case, Investors who have invested $100,000 or more in a single year should consult their U.S. tax advisors concerning the obligation to report under Form 962.
I'm a U.S. based investor and I want to invest in a foreign-based VC Fund, PE Fund or Real-Estate asset, is my investment considered a PFIC ?
The PFIC assessment will depend on the specific legal structure of the underlying VC / PE fund or Real-Estate asset you're considering investing into. The assessment will also depend on the type of operations and business activities the underlying asset generates; which might vary from one investment to the other.
Please reach out to your point of contact (SPV Advisor or Deal Lead); or directly to the KAPITAL team to enquire about a professional Tax Assessment for your investment.
