This article examines how sponsors of investment funds targeting Iraq can distinguish between the regulation that applies to the fund itself and the regulation that applies to the companies in which it invests. Fund proposals often combine these issues. A sponsor may ask whether its fund needs an Iraqi licence and, in the same question, whether its planned investments in banks, telecommunications or real estate are permitted. These are separate questions with separate answers, and treating them together can lead to confusion and missed requirements.
The fund level concerns how the fund is established, managed and marketed to investors. The portfolio level concerns whether the fund, as an owner, can acquire and hold interests in particular Iraqi businesses. A fund may be entirely outside Iraqi fund regulation yet need multiple approvals for its portfolio investments. Conversely, a fund that markets to Iraqi investors may need to comply with Iraqi rules even if it invests in unregulated sectors.
The Interim Law on Securities Markets, issued as Coalition Provisional Authority Order No. 74 of 2004, and Iraq Securities Commission rules govern securities markets and may apply to collective investment and the marketing of investment products in Iraq. The Banking Law No. 94 of 2004, sector legislation for insurance, telecommunications and other regulated industries, the Investment Law No. 13 of 2006, as amended, and the Competition and Antitrust Law No. 14 of 2010 govern portfolio investments. The Companies Law No. 21 of 1997, as amended, governs Iraqi portfolio companies. The Anti-Money Laundering and Counter-Terrorism Financing Law No. 39 of 2015 affects investor onboarding and source of funds.
Analysing the fund level
At the fund level, the sponsor should consider:
- Fund domicile. Where the fund is established and which jurisdiction’s fund laws apply.
- Manager regulation. Whether the fund manager needs authorisation in its home jurisdiction or in Iraq.
- Investor base. Whether Iraqi investors will be offered interests in the fund, and if so, whether offering rules apply.
- Marketing. How the fund will be marketed and whether marketing in Iraq requires approval.
- Local activities. Whether the manager or its advisers will carry out activities in Iraq that require local licensing.
A fund established abroad with no Iraqi investors and no local marketing may have limited fund-level exposure to Iraqi regulation. A fund raising money from Iraqi investors or established in Iraq will need to consider Iraqi rules carefully. Commercial and regulatory advice in Iraq can assess fund-level requirements.
Analysing the portfolio level
At the portfolio level, each proposed investment should be assessed separately:
- Sector regulation. Banks, insurers, telecommunications operators, energy companies and other regulated businesses may require approval of new owners or limit foreign ownership.
- Investment licences. Projects with investment licences may require approval for transfers.
- Competition. Acquisitions may require competition notification depending on market positions.
- Real estate. Foreign ownership of land is restricted.
- Corporate formalities. Share transfers in Iraqi companies require compliance with the Companies Law and the articles.
The fund’s structure, including its investors and ultimate controllers, may be relevant to these approvals. Sector regulators may want to know who controls the fund and its manager.
Avoiding common confusions
Common errors include assuming that a fund-level licence covers portfolio investments, assuming that a fund outside Iraq needs no Iraqi approvals for its investments and assuming that a minority investment escapes sector approval requirements. Each assumption can be wrong. A clear separation of fund-level and portfolio-level analysis avoids these errors.
Preparing for regulators’ questions about the fund
Sector regulators approving portfolio investments may ask detailed questions about the fund, such as its investors, its manager’s ownership, its governance, its investment period and its exit plans. A fund with a limited life may raise questions about its commitment to the portfolio company. Sponsors should prepare information about the fund that regulators are likely to need. Corporate advice in Iraq can help prepare submissions.
Structuring to accommodate both levels
The fund’s structure may need to accommodate portfolio-level requirements. For example, if a sector regulator limits foreign ownership, the fund may need a local co-investor. If an approval process takes time, the fund’s documents should allow for conditional investments. If regulators require continuing disclosure of the fund’s ownership, the fund should be able to provide it.
Managing tax at both levels
Tax considerations arise at both the fund and portfolio levels. The fund’s domicile affects the taxation of returns to investors. Portfolio companies are taxed in Iraq, and distributions to the fund may be subject to withholding. Tax advisory services in Iraq can assess the tax position across the structure.
Preparing the fund’s documentation for Iraqi investments
The fund’s own documents should reflect the realities of investing in Iraq. The investment policy should describe the types of Iraqi investments permitted and any restrictions. The risk disclosure provided to the fund’s investors should address political, regulatory, currency, repatriation and liquidity risks specific to Iraq.
The fund’s documents should also give the manager sufficient flexibility to meet portfolio-level requirements. Examples include the ability to:
- Provide information about investors to Iraqi regulators where required for approvals.
- Make investments through local co-investment vehicles or alongside local partners.
- Extend the investment period or fund term where regulatory approvals delay acquisitions or exits.
- Hold investments conditionally pending approval.
Fund investors, particularly institutional investors, may be reluctant to have their identities disclosed. The fund documents should explain when disclosure may be required and obtain investors’ consent in advance. These provisions avoid situations in which the fund cannot complete a portfolio investment because its own documents prevent it from meeting Iraqi requirements.
Engaging regulators at the right time
Sponsors often wonder when to approach Iraqi regulators. Approaching too early, before the fund has been raised or investments identified, may produce only general guidance. Approaching too late may leave insufficient time for approvals before investment deadlines.
A staged approach often works best. At the fund design stage, the sponsor can seek advice on fund-level questions and, where helpful, informal guidance on whether marketing to Iraqi investors would require approval. Once specific investments are identified, the sponsor can engage with the relevant sector regulators about the approvals needed for each. Early informal contact with a sector regulator, explaining the fund’s structure and investment approach, can make formal applications smoother. Throughout, the sponsor should keep a record of the guidance received and ensure that formal applications are consistent with earlier discussions.
Illustrative example. A sponsor proposes a fund to invest in Iraqi consumer businesses and a minority stake in an Iraqi bank. It asks whether the fund needs an Iraqi licence. The analysis separates the questions: the fund, established abroad and marketed only to foreign institutional investors, does not appear to require an Iraqi fund licence, but the bank investment will require Central Bank consideration, including information about the fund’s investors and manager, and one consumer business holds an investment licence requiring approval for transfer. The sponsor plans the fund documents and timetable around these portfolio-level approvals.
Conclusion & how Etihad Law Firm can help
Investment fund proposals in Iraq should separate fund-level regulation from portfolio-level regulation. Each level has its own requirements, regulators and timetable, and a clear analysis of both avoids confusion and missed approvals.
Etihad Law Firm advises fund sponsors, managers and investors on fund-level and portfolio-level regulatory requirements in Iraq. We help clients structure funds and investments that comply at every level.