Get a license to establish an investment firm or fund manager in Estonia

Located in the heart of the Baltic Sea Region, Europe’s fastest growing market of nearly 100 million people, Estonia offers businesses and investors an excellent business environment, stable government, a liberal economic policy, moderate costs, and, in the process, makes it extremely easy for foreigners to do business. 

In fact, Estonia’s economic freedom is rated among the highest in the world and it ranked 15th out of 180 countries on the 2019 the Index of Economic Freedom prepared by the Heritage Foundation. Also, the Ease of Doing Business Index by the World Bank ranks Estonia in the 16th position, and according to Transparency International, Estonia ranks 18th out of 180 countries on the Corruption Perception Index.   

This all sounds fantastic and you may be planning to establish an investment firm or fund management there, and It’s easy to see why, especially when you consider that Estonia is an established location for IT and financial services. There are, however, some requirements that you should comply with in order to get a licence to run an investment firm or fund management in the country.

This post will look at these requirements in more detail and show you exactly what you need to successfully establish your business. Before we look at the requirements, though, we’ll first look at some of the benefits of doing business in Estonia.                

Benefits of doing business in Estonia   

Apart from the above, Estonian people are entrepreneurial and innovative, while the government is supportive of technology and small and new businesses. It’s, therefore, no coincidence that Estonia has one of the highest rates of start-ups per capita in Europe.   

As such, there are a variety of reasons why you should start a business in Estonia. in fact, there are too many benefits to mention here, but some of the common ones include:

E-Services and the ease of doing business

Estonia is often called the most technologically advanced country in the world, while others refer to it as Europe’s Silicon Valley. This is simply because you can do nearly anything to run your company online without much hassle. So, whether you need to sign documents, register your company, or complete forms, you can do it all online. An added bonus is that Estonia has had the most competitive tax system in the developed world for three years in a row, and one of the drivers for this high rank is its unique corporate taxation system.

People and community

Estonia might be small, but in comparison to its population, the business environment is big in every way and the economy is in a large way being driven by foreign businesses. Although this may mean more competition, in Estonia you will be welcomed into the community very quickly and there’s no need to be wary of the language barrier, as most of the population speaks English very fluently.       

Well-developed and affordable living environment

The quality of life in Estonia is high but it doesn’t come at a higher cost of living. In fact, it’s very affordable and moving to Tallinn will likely decrease your living costs. It ranks above average in terms of education, environmental quality, social connections, and work-life balance.

Tallinn is also one of the most connected cities in the world offering almost universally free public Wi-Fi and free public transport.

The ease of hiring talents

Estonia makes it easy for businesses to hire talents. For example, in 2017, the country launched its Start-up Visa, which is meant for entrepreneurial non-EU Nationals to come and work for Estonian start-ups, relocate existing start-ups or establish new ones in Estonia on preferential terms. This all contributes to the fact that hiring the best talents doesn’t come with much hassle.

Now that we’ve dealt with the benefits of doing business in Estonia, let’s look at the legal requirements for successfully establishing an investment firm or fund management firm.    

The operating license for an investment firm

Investment firms are companies whose main activity is providing investment services to individuals or other companies or the performance of one or more investment activities on a professional basis.

Under Section 43 of Estonia’s Securities Markets act, investment activities are defined as follows:

  • Receiving and transmitting orders relating to securities.Executing orders related to securities in the name of or on the account of a client;
  • Dealing in securities for an owned account;
  • Providing securities portfolio management;
  • Providing investment advice;
  • Guaranteeing securities or guaranteeing the offer, issue, or sale of securities;
  • Organising securities offerings or issuances;
  • Operating a multilateral trading facility;
  • Operating an organised trading facility.        

In Estonia, you need a licence to operate as an investment firm and this licence is issued by the Financial Supervision and Crisis Resolution Authority or Finantsinspektsioon (FSA).

How to apply for an operating license as an investment firm?

Operating licences for investment firms are issued and can be withdrawn by the FSA. It’s important to remember that these operating licences are not time-limited, are non-transferable, and may not be used by anyone other than the licensee.

Typically, these licences are issued either separately for the provision of some investment services, or for the provision of all investment services. You should keep in mind that investment firms may only provide the services they are licenced for in terms of the licence and, as such, to provide other investment services, they’ll have to apply for an additional operating licence.  

To apply for an operating licence, applicants have to submit an application to the FSA consisting of a written notification and the annexures listed in the Securities Market Act. Therefore, in order to apply, the management of a registered company must submit the following documents and data to the FSA:

1.    A notarised copy of the foundation contract of the firm or a decision for a business being founded;

2.    A copy of the statutes of the business that is operating, any decision by the general meeting to amend the statutes, and the amended text of the statutes;

3.    A list of the shareholders of the applicant showing the name of the shareholder, their registry or ID code or date of birth if that isn’t available, and details of the equity holdings of each shareholder and their voting rights;

4.    Data on the major shareholders of the applicant;

5.    Details of the members of the management and supervisory board of the applicant and its senior managers;

6.    Data on any business that the applicant or its management holds more than 20% of, and that data should include the size of the equity, it’s areas of activity, and the size of the holding of the applicant and each manager;

7.    Data on the auditor of the applicant and the people responsible for its internal compliance;

8.    The initial balance of the applicant and a review of the income and expenses at the end of the month prior to the application for an operating licence, and annual reports for the previous three years if they exist;

9.    Documents certifying the value of net own funds for a business that is already operating together with the auditors reports;

10. If a majority of the applicant is owned by a credit institution, fund manager, investment fund, investment firm, insurer, or other body from a third country that is subject to financial supervision, confirmation of the supervisory institution that the applicant has an operating licence, and that its activities are within the law as far as the supervisory institution is aware;

11. The three-year business plan of the applicant that covers its planned activities, the organisational architecture of the applicant, the locations of its activities, the IT systems’ and other technical information, and description of its financial results;

12. The applicant’s internal rules or proposed rules for bookkeeping;

13. The operating manual required by the Money Laundering and Terrorist Financing Prevention Act and the draft internal rules that will provide a way of complying with this manual;

14. A document in which the applicant undertakes to make the once-off payment required by the Guarantee Fund Act.

Once the application and all the required documents have been submitted, the FSA will make a decision in respect thereof within two months after the application is made, and no later than six months after the application for the operating licence as an investment firm has been received.   

How to get an additional operating license

As stated earlier, when an investment firm wants to offer more services than it is licenced for on its operating licence, it has to apply for an additional operating licence.

To apply for such licence, the firm must submit the following documents to the FSA:

1.    A list of shareholders of the applicant showing the name of each shareholder, their registry or ID code, or date of birth if these are not available, and details on the share of equity holdings of each shareholder and the voting rights given to them;

2.    Documents certifying the value of net own funds for a business that is already operating, together with the auditor’s reports;

3.    If a majority of the applicant is owned by a credit institution, fund manager, investment fund, investment firm, insurer, or other body from a third country that is subject to financial supervision, confirmation of the supervisory institution that the applicant has an operating licence, and that its activities are within the law as far as the supervisory institution is aware;

4.    The applicant’s internal rules or proposed rules for bookkeeping;

5.    The operating manual required by the Money Laundering and Terrorist Financing Prevention Act and the draft internal rules that will provide a way of complying with this manual.

Remember that the above requirements all relate to a local company that aims to start an investment firm in Estonia and wants to apply for an operating or additional operating license. This means there are other requirements that you’d have to follow in order to legally establish the company before applying for a license.

There are also other requirements if you own or are part of the management of an Estonian company that wants an operating license to operate an investment firm abroad, if you’re setting up a branch of an investment firm in the country in the European economic area or setting up a branch of an investment firm from a foreign country in Estonia.

The operating license for a fund manager

Under the Investment Fund Act, fund managers are defined as any company which manages one or more funds as its main and permanent business activity. In other words, the main and permanent business of a fund management company is to manage the assets of a fund established as a company or a contractual fund. As such, a management company may manage several different funds and, alongside fund management the management company may provide the following services:

  • Managing a securities portfolio within the meaning of the Securities Markets Act;
  • Investment advice;
  • Holding fund units or shares on behalf of clients;
  • Fund management services within the meaning of the Investment Funds Act for funds whose assets it does not manage.

Like an investment firm, a fund manager has to have a license to operate as such in Estonia and this license is issued and can be withdrawn by the FSA.

It’s important to keep in mind that, under the Investment Funds Act, there is a distinction between managers that want to manage public funds, including pension funds, and non-public funds. To manage any public fund, a fund manager must be licensed. Operating licenses are also needed by fund managers who want to manage euro funds, and large-scale alternative investment funds.

Likewise, to manage a small fund, the fund manager should apply for an operating license as a small fund manager or to register its activities with the FSA. Small fund managers can only manage non-public investment funds, meaning that the business is primarily aimed at professional or corporate investors.

A management company of an unlicensed small fund that does not wish to apply to the FSA for an operating license as a small fund manager, must still register its activities with the FSA. To register, the applicant must submit the data and documents required by the Investment Funds Act to the FSA in the form described.

Here, the applicant must also submit a legal analysis that shows the circumstances of the investment fund and its management and the need for registration. The FSA’s supervision over registered unlicensed small fund managers is, however, limited to the registration process and later collection of statistical reporting.

How to apply for an operating license as a fund manager

To become a fund manager, you need to apply for an operating license. Specifically, the members of the management of the fund management firm must submit a written application to the FSA and the documents required by the Investment Funds Act. These documents include:

  • A copy of the statute for a business that is operating, any decision by the general meeting to amend the statutes, and the amended text of the statute;
  • A notarised copy of the foundation contract for a business being found and documentation proving that the share capital has been paid in;
  • A business plan that meets the requirements of the Investment Funds Act;
  • The initial balance of the applicant and a review of income and expenses or a balance and profit report as at the end of the month prior to the application for an operating license, and annual reports for the past three years if they exist;
  • The applicant’s internal rules or proposals for them.Information on the members of the management board and supervisory board, including their first and family names, personal ID codes or date of birth, place of residence, description of education, full list of jobs and positions held, and for members of the management board, a list of the areas of responsibility, together with any documentation that the applicant considers relevant to demonstrating the trustworthiness and compliance with the requirements;
  • Information on the auditor and internal auditor of the applicant, giving the names, place of residence, and personal ID codes or dates of birth or registry code if there is no ID card;
  • The first and family names of the managing director of the fund, the personal ID code or date of birth if they have no ID code, place of residence, a description of their education, a list of jobs and positions held in the past three years, and a copy of the contract with the managing director in which they agreed to take on the role of managing director once the license for a fund manager has been granted;
  • A list of the shareholders of the applicant showing the name of each shareholder or member, their registry code or ID code, or date of birth if they have none, and the details on the share of equity holdings of each shareholder and the voting weight given to them;
  • Data on the people directly or indirectly control more than 10% of the voting shares of the applicant;
  • Data on any business that the applicant or its management or supervisory board members for managing director holds more than 20% of, where those data include the size of each shareholder equity capital, a list of its areas of activity, and the size of the holding of the applicant of each member;
  • Documentation certifying the value of net own funds for a business that is already operating, together with the auditor’s report;
  • The applicant’s internal rules or proposed rules for bookkeeping;
  • If the applicant is applying for an operating license together with the right to provide the services listed in Section 9(1) 2 or 3 of the Investment Funds Act, the documents demonstrating the once-off payment to the Investor Protection Sectoral fund has been made.

If it’s not possible from the application and all the submitted supporting documents to assess whether or not the applicant for a fund manager operating license is capable of managing the fund, or whether it meets the requirements, or if it’s necessary to check any other details regarding the applicant, the FSA may request further information and documents from the applicant.

After all the documents have been submitted, the FSA will consider the decision to issue an operating license to the applicant within two months after the date of submission of the documentation and data, but not later than six months after the application for the operating license has been received.

Conclusion

Hopefully, this guide is helpful enough to show you how to get a license to operate either a fund manager or an investment firm in Estonia. They may seem complicated at first, but if you gather all the documents and data, and you follow these steps carefully, you will be able to complete your application with relatively little problems.

Once your license is granted, you’ll be able to provide the financial services referred to above to clients in Estonia and across the eurozone and beyond, depending on the terms of your operating license.

So, if you’re ready to launch your financial services business in Estonia, irrespective of whether it’s an investment firm or a fund manager, be sure to consult this guide regularly to make sure your application stays on track and keep up with the requirements.

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