A secondary sale of units is a transfer under the tier before it is a trade.

A holder in a closed-ended fund sells its units to a buyer it has found. To the two of them it is a trade: a price, a transfer form, a settlement date. To the fund it is four things at once, and each has a document, a party and a consequence. It is an admission under the tier, because the buyer becomes a holder and the tier admits only persons who pass its test. It is a transfer under the constitution, which permits transfers on conditions and gives the other holders a pre-emption. It is a placement in the buyer's state, because the seller offered a foreign fund's securities to a resident there. And it is a change in the lender's borrowing base, because the seller's undrawn commitment leaves it unless the buyer signs the acknowledgement and is graded. A transfer that was drafted as a trade produces a trade the fund cannot complete, and the seller that found the buyer learns the four things from the manager's refusal, or worse, from the manager's consent to something the fund could not do.

This note sets out the four things a secondary sale is, the tier's test on the buyer and the two records, the constitution's conditions and the pre-emption, the placement regime in the buyer's state, the lender's acknowledgement and the base, the count and the minimum, the side letters and the concession schedule, the price and what the rule does to it, the manager's own role and its rule, a comparison, a worked transfer as a type, cases, what each party holds, the sequence, questions, terms and what to read.

An admission under the tier

The buyer becomes a holder, and the tier admits only professional clients, assessed under the conduct rulebook, with the record the manager keeps. The buyer is classified as a subscriber would be: the route, the criteria, the evidence, the notice, the acknowledgement. Where the buyer sits in a Gulf state, the state's own classification is a second record: the Kingdom's glossary, Kuwait's list, Qatar's count or the bank's. A buyer that fails either test is a buyer the fund cannot register, whatever the seller agreed, and a manager that consents to the transfer on the seller's word that the buyer is professional has consented to an admission it did not perform.

A transfer under the constitution

The constitution says whether transfers are permitted, on whose consent, with what pre-emption for the other holders, and on what conditions. The conditions that hold are five: the buyer's classification in two records; the seller's statement of the route by which the buyer was approached and the manager's right to refuse where it was not lawful; the manager's right to refuse where the transfer would take the count over the cap, leave either holding below the minimum, or require a notification or permit not obtained; the buyer's execution of the subscription agreement, the lender's acknowledgement and any side-letter election before registration; and a statement of whether the manager will assist a seller. The pre-emption for existing holders runs first, on the proposed buyer's terms or at a valuation, for a short period, because a transfer to an existing holder is the one transfer that is never a placement anywhere and never moves the count.

A placement in the buyer's state

The seller's approach to the buyer is an offer of the fund's securities in the buyer's state, and the state's regime reads it as one. The Kingdom confines secondary transfers of privately placed securities to existing holders, institutional and qualified clients, or lots of two hundred thousand riyals or less, and a transfer outside those limits is an offer the distributor should have made. Kuwait's permission attaches to the scheme, and a seller's approach to a Kuwaiti buyer is marketing without permission unless the licensed person makes it under a permit. Qatar's count grows with every person a seller approaches. The centres' rules treat a secondary offer of units in a private fund as an offer to professional clients by a person with permission or under an exemption. A buyer in a Gulf state is reached through the state's route, by the intermediary, or the transfer is the result of a breach the manager is asked to consent to.

Why the four things are one

The four things are one transaction read by four regimes, and the constitution is the only document that can reconcile them, because it is the only document all four parties read. The tier reads the constitution for the investor test it requires the fund to apply. The constitution's own transfer provision is the manager's consent. The buyer's state reads the constitution's statement of the route the fund requires its sellers to take. The lender's facility reads the constitution's condition of the acknowledgement. A constitution that carries all four in one clause gives the administrator one test and the seller one procedure; one drafted as a trade, transfers to professional clients on the manager's consent, has left three of the four to be discovered by the party that failed them.

The seller's own position

A seller is usually under a clock: its own regulator's deadline, its own fund's wind-up, a policy change with a date. The seller reads the constitution for how long the transfer will take and what it will receive, and a seller that finds a sixty-day pre-emption at a fixed price mechanism has a plan; one that finds a manager's consent on undefined conditions has a negotiation. The seller also reads its own side letter for what it may tell a buyer, because the constitution's confidentiality provisions govern what a seller may disclose about the fund, and a seller that sends a buyer the fund's asset schedule without the manager's consent has disclosed what the constitution kept confidential.

The buyer's own diligence

A buyer runs its own diligence, and its questions are the manager's from the other side: the fund's documents, which the seller may give only with the manager's consent; the last net asset value and the valuer's assumptions; the side letters that travel and those that do not; the cap, the minimum and the classification; the lender's acknowledgement and what it commits the buyer to; and, for a buyer in a Gulf state, its own counsel's view of whether the approach was lawful, because a buyer that subscribed on an unlawful offer has a holding its own regulator may question. A manager whose transfer provision and placement file answer those in a week has a liquid register; one whose file does not has a register whose buyers take a quarter.

Where it surfaces

At the seller's first approach to a buyer in a Gulf state, made without the route.

At the manager's consent, given on the seller's word.

At the administrator's registration of a transfer that splits a holding below the minimum.

At the lender's annual review, when a transferee never signed the acknowledgement.

At the distributor's or the licensed person's discovery that the register changed in a way its record cannot explain.

At exit, when the buyer of the portfolio reads the register and finds a holder whose admission cannot be evidenced.

The cost of getting it wrong

An unlawful secondary transfer costs the seller a finding in the buyer's state, the manager a holder it cannot evidence and a consent it gave to a breach, the buyer a holding its own regulator may question, and the intermediaries a record that no longer describes the register. At exit it costs the buyer's discount for a register that cannot be evidenced. The five conditions, the pre-emption and the compliance rule cost a paragraph each and a week per transfer.

The lender's acknowledgement and the base

A capital-call lender counts the seller's undrawn commitment in its borrowing base on the seller's acknowledgement and grade. The transfer moves the commitment to the buyer, and the commitment stays in the base only if the buyer signs the acknowledgement and the lender grades it. A buyer the lender will not grade, a family company, a feeder, a nominee, is a reduction in the facility, and the constitution conditions the manager's consent on the acknowledgement so that the manager knows the base's position before it consents. A transfer registered without the acknowledgement is found at the lender's annual review as a commitment in the base that nobody counted.

The count and the minimum

A transfer that splits a holding adds holders, and the tier's cap is counted daily. A transfer of part of a holding leaves two holdings, each of which must meet the tier's minimum. The constitution's split rule and aggregation rule govern, and the manager's consent is conditioned on the count and the minimum after the transfer. A transfer to an existing holder moves neither.

The side letters and the concession schedule

A seller's side-letter rights, a most-favoured-nation election, reporting rights, excuse rights, are personal to the seller in most constitutions and do not travel with the units unless the manager agrees. The buyer negotiates its own, subject to the concession schedule and the manager's reading of what it has given others, and a transfer that purports to carry the seller's letter to the buyer without the manager's agreement has carried nothing. The buyer's new letter is a concession the schedule records and the other holders' elections may reach.

The price and what the rule does to it

A secondary price is set by what a buyer will pay a seller who must sell, and the rule shapes it in two ways. It narrows the buyers, because only persons within the tier's test and the state's categories may buy, and a narrower market is a lower price. It lengthens the process, because the route, the two records, the acknowledgement and the pre-emption take time, and a seller under a clock discounts for time. The pre-emption addresses both: the buyers are the existing holders, within every rule, and the process is the period and the price mechanism, fixed. A constitution whose pre-emption price is the last net asset value less a stated discount has told the seller what it will receive and the buyers what they will pay.

The manager's own role

A manager asked by a distressed holder to find a buyer is asked to place the fund's units in whichever state the buyer sits, and the request is answered under that state's regime: the distributor, the licensed person, the count or the bank, or the manager's own permission in the centre to professional clients. A manager that answers by calling three institutions it knows has placed without the route, and the placement is the manager's breach. The manager's compliance rule says four things: no approach to any person about a holder's units without compliance approval and, for a Gulf state, the intermediary; every transfer request logged with the buyer's state; the two records and the route confirmation before consent; and the pre-emption offered before any outside buyer.

By element · by document	What it requires	Who performs it	What failure produces
Admission under the tier	The buyer's classification in the centre's record and, onshore, the state's	The manager; the intermediary	A holder the tier did not admit
Transfer under the constitution	The five conditions and the pre-emption	The manager's consent; the administrator's registration	A transfer the administrator cannot register
Placement in the buyer's state	The state's route for the approach	The seller through the intermediary	An offer outside the regime
The lender's base	The buyer's acknowledgement and grade	The lender; the buyer	A commitment outside the base
The count and the minimum	Within the cap; both holdings above the minimum	The administrator's test	A breach of the tier
Side letters	The buyer's own, on the schedule	The manager	A right nobody holds

A timeline, as a type

Year one: the constitution is drafted with the five conditions and the pre-emption; the compliance rule is written; the placement file records each holder's state, route and two records. Year three: a holder must divest; it notifies the manager; the pre-emption runs for sixty days at the last net asset value less the stated discount; two existing holders take the position; the administrator registers on their executed documents; the lender's base is unchanged. Year four: a holder wishes to sell to a named buyer in the Kingdom not on the register; the manager routes the approach through the distributor, which classifies the buyer as institutional and makes the offer; the buyer signs the subscription agreement, the acknowledgement and its own side letter; the transfer is registered with the distributor's record in the file. Year six: the buyer of the portfolio at exit reads the register and finds every holder's admission evidenced, including the two transfers.

The structure paper's page

The structure paper's transfer page carries: the secondary-transfer rule of each state on the register; the pre-emption's period and price; the five conditions of the manager's consent; the manager's rule on assistance; the intermediaries to be used for a buyer in each state; the lender's requirements; the side letters' travel or non-travel; and the administrator's one test. The page is given to each holder at admission, because a holder that knows the rule uses the pre-emption and a holder that does not calls a buyer.

The secondary sale of the whole

A sale of every holding to one buyer, a secondary sale of the fund, is a transfer of the whole register to one person, and it is read the same four ways: an admission of the buyer under the tier, a transfer under the constitution with the pre-emption waived by the sellers, a placement in the buyer's state, and a replacement of the whole borrowing base with one name the lender must grade or the facility must be repaid. It is also a change of control at every asset company whose facility's clause reaches the fund's ownership, and the exit test's consents apply. A secondary sale of the whole is designed as an exit, with the exit test, and not as a transfer.

The feeder's participants

A feeder's participants sell their feeder units under the feeder's own transfer provision, in the feeder's jurisdiction, and the master's provision is not engaged. The feeder's provision is drafted to the same four things, because the feeder's participants sit in the same states; a feeder sponsored by a bank has a provision the bank drafted for its book, which the master's manager reads before the feeder is admitted. A participant's sale to a buyer in a Gulf state is a placement of the feeder's units there, and the feeder's manager is the party whose consent it needs.

The manager's consent, read closely

The manager's consent is a discretion the constitution frames, and a consent given without the frame is a consent the regulator reads as given to whatever followed. The frame is the five conditions, and the consent is given in writing on a form that records each: the buyer's two classifications with the evidence, the route with the seller's confirmation and the intermediary's record where the buyer is onshore, the count and the minimum after the transfer, the lender's acknowledgement signed, and the side-letter position. A consent that records the five is a consent the review reads as performed; one that records "approved" is a consent the review reads for what it missed.

The pre-emption's price mechanism

A pre-emption at the proposed buyer's price requires a proposed buyer, which a seller under a clock may not have, and a pre-emption at a valuation requires a valuation, which the constitution fixes at the last net asset value with a stated discount for the illiquidity the existing holders are absorbing. The discount is negotiated at formation with the register, because a discount too deep makes the pre-emption a squeeze and one too shallow makes it unattractive to the existing holders; a stated discount in the constitution is one every holder accepted at subscription. The period is short, sixty days or fewer, because a seller under a clock cannot wait a quarter, and a period the seller cannot wait is a period the seller will not use.

Reading the rule with the onshore intermediaries

The Kingdom's distributor keeps a record of the register it placed, and a transfer it did not make is a change its record cannot explain; the constitution's condition that a Saudi buyer be classified by the distributor keeps the record whole. Kuwait's licensed person holds a permit for the scheme, and a transfer to a Kuwaiti buyer outside the permit's class is a marketing the permit did not cover; the condition that a Kuwaiti buyer be approached by the licensed person keeps the permit whole. Qatar's count is a count per offer, and the seller's approaches are in it; the condition that a Qatari buyer be approached within the count or through the bank keeps the count whole. The intermediaries are parties to the fund's liquidity whether or not the constitution names them, and the constitution that names them has a liquidity the intermediaries will support.

The transfer and the continuation

A continuation vehicle's rolling holders are, in substance, buyers of units in a new fund, and the secondary sale's four things apply to each of them: an admission under the new vehicle's tier, a transfer of their old units for the new under the old constitution's provisions, a placement of the new vehicle's units in each holder's state, and the new vehicle's lender's acknowledgement. A continuation that treats the roll as a formality has skipped the four things for every rolling holder at once, and the continuation note's process includes the placement and the admissions for that reason.

A transfer, as a type

A European holder in a centre fund must divest under its own regulator's pressure. It notifies the manager. The constitution's pre-emption offers the position to the existing holders at the last net asset value with a stated discount for sixty days; two Gulf institutions already on the register take it between them. No approach is made in any state; the count does not move; the lender grades the two buyers, already graded; the administrator registers the transfer on the executed documents; the seller leaves within six weeks at a price the constitution fixed.

The same holder in a fund without a pre-emption, whose constitution permits transfers to professional clients on the manager's consent: the manager, asked to help, calls a Saudi institution and a Kuwaiti company; the Saudi approach is an offer without a distributor; the Kuwaiti approach is marketing without a permit; the distributor and the licensed person, asked afterwards to paper the subscriptions, decline; the holder sells to a buyer in a fourth state at a discount that reflects the delay, and the manager has two placement breaches in its file.

Four cases, as types

A Saudi institution sells half its position in a foreign fund to two Saudi family companies below the institutional and qualified thresholds. The transfer is outside the secondary-transfer rule; the manager consented on the footing that the buyers were "professional"; the fund's register now carries two holders the regulations did not permit to be placed to, and the distributor's record no longer describes the register.

A holder sells a third of its units to a buyer, leaving two holdings each below the qualified investor minimum. The administrator registers the transfer; the tier's minimum is breached twice; the regulator's review dates the breach to the transfer.

A seller's side letter gives it a most-favoured-nation election, and the seller tells the buyer the letter travels with the units. The manager's constitution says it does not; the buyer, who priced the units on the letter, has a claim against the seller and no letter.

A manager whose constitution carries the five conditions and a pre-emption, whose compliance rule governs its own assistance, and whose file records each buyer's two classifications and route, refuses a transfer to an unclassified buyer, offers the seller the existing holders, and registers the transfer to one of them with the lender's acknowledgement in hand.

What each party holds

The manager holds the transfer provision, the consent on the five conditions, the two records for each buyer, the route confirmation and the rule on its own assistance.

The seller holds the offer it makes and the route it takes, and the confirmation it gives the manager.

The buyer holds its classification in its own state and under the tier, its execution of the fund's documents and the lender's acknowledgement, and its own side letter.

The administrator holds the one test: classification, route, cap, minimum, acknowledgement.

The lender holds the acknowledgement and the grading.

The intermediaries in each state hold the approach to a buyer there.

The existing holders hold the pre-emption.

The sequence

1. The transfer provision is drafted with the five conditions and a pre-emption with a short period and a fixed price mechanism.
2. The manager's compliance rule on its own assistance is written and given to the placement team.
3. Every transfer request is logged with the buyer's state and read for the two classifications, the route, the cap, the minimum and the lender.
4. The pre-emption runs first; an outside buyer in a Gulf state is approached by the state's intermediary.
5. The buyer executes the subscription agreement, the acknowledgement and its own side letter before registration.
6. The transfer record is kept as a placement record: buyer, state, classifications, route, documents.

Questions a manager asks

Is a transfer between existing holders ever a placement. No. The buyer is already admitted under every regime, and the pre-emption exists to make that transfer the first option.

What if the seller found the buyer itself. The seller made an offer in the buyer's state, and the manager's consent is conditioned on the route having been lawful; a manager that consents without asking has consented to whatever happened.

Can the manager refuse to help a seller at all. It can, and many constitutions say so; a manager that helps has placed and must do so within its permissions and the state's route.

Does the lender care. The seller's commitment leaves the base unless the buyer signs the acknowledgement and is graded; a facility may need resizing.

Does the transfer affect the count. A transfer that splits a holding adds holders; one to an existing holder does not; the aggregation and split rules apply.

What about the seller's side letter. It is personal unless the constitution says otherwise; the buyer negotiates its own on the schedule.

A closed-ended fund's liquidity is that clause, and a manager that drafts it with the four things in one place has given the register an exit that works and given itself a procedure rather than a series of refusals.

Terms used

Secondary sale: the sale of existing units by a holder to a new holder.

The four things: an admission under the tier, a transfer under the constitution, a placement in the buyer's state, a change in the lender's base.

Two records: the buyer's classification under the tier and under its own state's rules.

Pre-emption: the existing holders' right to take a proposed transfer on its terms or at a valuation.

Route: the lawful path by which a buyer in a state may be approached.

Acknowledgement: the buyer's confirmation to the lender on taking the units.

Concession schedule: the manager's record of every side-letter term and who may elect it.

What to read

The constitution's transfer and pre-emption provisions; the tier's investor test, cap and minimum; the Kingdom's secondary-transfer rule, Kuwait's permission regime and Qatar's count; the facility's transfer conditions and acknowledgement; the side letters and the concession schedule. On this site, the liquidity room under Structures, the worked structure on an investor class and the financing room.