A secondary transfer of units is a placement in several states.

A holder in a closed-ended fund that must leave before the term ends sells its units to another permitted holder. The constitution governs the transfer; the manager consents; the administrator updates the register; the buyer signs the subscription documents and the lender's acknowledgement. That is the view from the fund, and it is complete as far as it goes. The view from the state the buyer sits in is different: a security of a foreign fund has been offered to a person there, and the regime that governs offers applies to the seller's approach, the buyer's standing and the route, exactly as it applied to the manager's original placement. The seller has become an offeror in a state whose rules it has never read, the manager has become a party to an offer it did not make, and the buyer has become a subscriber whose admission depends on a route nobody opened.

This note sets out what each regime says about secondary transfers, who carries the risk at each point, what a constitution's transfer provision does about it and the five things it should do, the pre-emption for existing holders as the safe transfer, the manager's own role in finding a buyer, the lender's and the tier's readings of the same transfer, a comparison, a worked transfer as a type, cases, what each party holds, the sequence, questions, terms and what to read.

What the regimes say

The Kingdom's Investment Funds Regulations say it in terms. Securities of a foreign fund placed privately may be transferred only to existing holders of the fund's securities, to institutional or qualified clients, or in transactions of two hundred thousand riyals or less, and a transfer outside those limits is an offer the distributor should have made. The same article governs the securities of Kingdom-established private funds. A Saudi holder's sale to a Saudi family company below the qualified threshold is outside all three limits.

Kuwait's module defines marketing widely enough to catch a seller's approach to a Kuwaiti buyer, and the permission requirement attaches to the scheme rather than to who is selling it. A seller that approaches three Kuwaiti institutions to sell its units has marketed the scheme to them, and the scheme's permit, if it has one, was granted to a licensed person for the manager's placement to a class, for a period, and says nothing about a holder's secondary approaches.

Qatar's count of one hundred potential buyers is a count of persons to whom the fund's securities were offered, by anybody, and a seller's approaches add to it. A bank marketing the secondary sale does so under the central bank's instructions, with the same documents and acknowledgements as a primary placement.

The centres' own rules treat a secondary offer of units in an exempt or qualified investor fund as an offer of those units, to be made to professional clients only, by a person with the permission to make it or under an exemption; a holder that is not itself a regulated firm may have no permission to offer anything.

Who carries the risk

The seller is the party making the offer, and a seller that is itself a regulated institution has its own compliance function to answer to; one that is not has made an offer it had no permission to make in a state it did not know it was offering in. The manager is the party whose consent the transfer needs, and a manager who consents to a transfer it knows to be a breach in the buyer's state has participated in it, and has put a holder on its register whose admission it cannot evidence to the lender, the buyer at exit or the regulator. The buyer is the party whose standing is tested, and a buyer who fails the test under the buyer's own state's rules or under the fund's tier is a holder the fund cannot lawfully have, whatever it paid. The administrator registers what the manager consents to, and inherits a register it cannot reconcile to the tier or to the states' rules. The intermediary that placed the fund in the buyer's state, if there was one, finds its record of a lawful placement now carries a holder it never approached.

The five things a transfer provision does

A transfer provision that holds is drafted with the placement regimes in hand, and it does five things.

It conditions the manager's consent on the buyer's classification in the buyer's own state, on evidence the manager can file, and on the buyer's classification under the fund's tier, which are two records.

It requires the seller to state the route by which the buyer was approached, and to confirm that the approach was lawful in the buyer's state, with the manager entitled to refuse where it was not and to require the seller to route the approach through the state's intermediary.

It permits the manager to refuse where the transfer would take the holder count over the tier's cap, would leave either holding below the minimum, or would require a notification or a permit the manager has not obtained.

It requires the buyer to execute the subscription agreement, the lender's acknowledgement and any side-letter election before registration, so that the borrowing base and the concession schedule move with the units and the buyer's representations are the fund's evidence.

And it says whether the manager will help a seller find a buyer. A manager who does has placed, in whichever state the buyer sits, and the provision either permits that within the manager's own permissions and the state's regime, with the intermediary involved, or forbids it.

Why the regimes reach the seller

A marketing regime that reached only the manager's own placement would be circumvented by the first secondary transfer: a manager could place to one lawful holder and let that holder sell to anyone. The regimes therefore define the offer by the securities offered and the person approached, not by who approaches, and a holder that approaches a buyer in a state has made the offer the state regulates. The Kingdom's secondary-transfer rule says so expressly; Kuwait's and Qatar's say it by the breadth of their definitions. The consequence is that every holder in a fund with Gulf investors is a potential offeror in three states, and the constitution is the only document that tells the holder so.

The consequence for the manager is that the register's liquidity, which the manager promised in the transfer provision, is liquidity under three regimes the holders do not know. A manager who drafts the transfer provision from a centre precedent has promised a liquidity the states do not permit, and the promise is discovered by the first holder that must leave.

The timing of a distressed holder

A holder that must divest is usually under a clock of its own: a regulator's deadline, a fund's own wind-up, a change of policy with an effective date. The transfer provision's mechanics are read against that clock. A pre-emption period of sixty days is a period the holder can live with; one of six months is not. A manager's consent that requires two classification records, a route confirmation and the lender's acknowledgement is a consent that takes three weeks if the documents are ready and three months if they are not. A constitution that makes the safe transfer slow has made the unsafe one attractive, and the holder under a clock will take the buyer it can find in the time it has.

The buyer's own diligence

A buyer of units in a secondary transfer runs its own diligence, and its questions are the manager's questions from the other side. It asks for the fund's documents, which the seller may give only under the constitution's confidentiality provisions and with the manager's consent. It asks for the last net asset value and the valuer's assumptions. It asks for the side letters that travel with the units and those that do not. It asks whether the holder cap, the minimum and the classification permit it to hold. It asks whether the lender's acknowledgement is required and what it commits the buyer to. And if it is in a Gulf state, it asks its own counsel 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 questions 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, before the manager knows a transfer is contemplated.

At the manager's consent, given on the seller's word that the buyer is "professional", without the two records.

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

At the lender's annual review, when a transferee that never signed the acknowledgement is found in the borrowing base.

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

At exit, when the buyer of the portfolio reads the register and finds holders 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 pre-emption, the two records and the route confirmation cost a paragraph each in the constitution and a week per transfer in the administrator's process.

The pre-emption as the safe transfer

The one transfer that is never a placement anywhere is a transfer from one existing holder to another, because every regime permits it and the buyer is already on the register. A pre-emption right for existing holders on any proposed transfer, on the same terms as the proposed buyer or at a valuation, gives a selling holder a buyer the count already includes, the tier already admits and every state already permits, and gives the manager a transfer it can consent to without a classification, a route or a headroom calculation. The pre-emption period is short enough that a seller with a buyer is not held for a quarter, and the price mechanism is the proposed buyer's price or the last net asset value with a stated adjustment, so that the existing holders cannot use the right to squeeze the seller. A constitution with a pre-emption has made the safe transfer the easy one.

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 will sit, and the request is answered under that state's regime. In the Kingdom, the distributor makes the approach; in Kuwait, the licensed person; in Qatar, the count or the bank; in the centres, the manager under its own permission to professional clients. A manager who answers the request by calling three institutions it knows has placed without the route, and the placement is the manager's breach rather than the seller's. The constitution says whether the manager will assist and how, and the manager's compliance function holds the rule.

The lender's and the tier's readings

The lender reads the transfer for the borrowing base: the seller's undrawn commitment leaves the base unless the buyer signs the acknowledgement and is graded, and a buyer the lender will not grade is a reduction in the facility. The tier reads the transfer for the count, the minimum and the classification, and a transfer that breaches any of the three takes the fund outside its tier. The transfer provision carries both readings, so that the administrator has one test to apply, and the transfer that passes it is lawful to the lender, the tier and the buyer's state at once.

By state · by secondary transfer	What the rule permits	Who makes the approach	What the buyer must be	The record
The Kingdom	Transfer to existing holders, institutional or qualified clients, or lots under two hundred thousand riyals	The distributor, for any other buyer	Within the glossary's categories, evidenced	The distributor's
Kuwait	Marketing only under permission for the scheme	The licensed person	Within the class the permit covers	The licensed person's
Qatar	Within the count, or through a bank	The seller within the count, or the bank	A person in the count, or the bank's client	The count's list, or the bank's
The centres	Offer to professional clients by a person with permission	The manager or a regulated seller	A professional client under the tier	The manager's classification record
Any state	Transfer to an existing holder	Nobody; the pre-emption	Already admitted	The register

A timeline, as a type

Year one: the constitution is drafted with the five conditions and the pre-emption; the placement file holds 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 that is 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 and the acknowledgement; 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 carries a page on transfers: 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; and the administrator's one test. The page is the holder's answer when it asks how it leaves, and it 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.

Reading the rule for a 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 transfer provision is not engaged. The feeder's provision is drafted to the same regimes, because the feeder's participants sit in the same states, and a feeder sponsored by a bank has a transfer provision the bank drafted for its own 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, under that state's regime, and the feeder's manager is the party whose consent it needs.

The price of a secondary, 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 state's categories and the tier's test may buy, and a narrower market is a lower price. And it lengthens the process, because the route, the two records and the acknowledgement take time, and a seller under a clock discounts for time. The pre-emption addresses both: the buyers are the existing holders, who are within every rule, and the process is the period and the price mechanism, which are 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 told the buyers what they will pay, and the only negotiation is whether the existing holders take the position at all.

The side letters that travel

A buyer takes the units and asks what else it takes. The constitution says whether side-letter rights transfer with units, and most say they do not unless the manager agrees; a seller's most-favoured-nation election, its reporting rights and its excuse rights are personal. The buyer negotiates its own, subject to the concession schedule, and the manager reads the buyer's requests against what it has given others. A transfer that purports to carry the seller's side letter to the buyer without the manager's agreement has carried nothing, and the buyer that relied on it has a claim against the seller.

The manager's compliance rule, written

The manager's rule on secondary transfers is a page in its compliance manual, and it says four things. No member of the placement team approaches any person about a holder's units without compliance approval and, for a Gulf state, without the state's intermediary. Every transfer request is logged with the buyer's state on receipt. The two classification records and the route confirmation are obtained before consent is considered. And the pre-emption is offered before any outside buyer is sought. The rule is the manager's protection against its own helpfulness, which is the commonest cause of an unlawful secondary placement.

A transfer, as a type

A European holder in a centre fund must divest under its own regulator's pressure. It tells the manager. The constitution's pre-emption offers the position to the existing holders at the last net asset value with a stated discount; two Gulf institutions already on the register take it between them within the period. 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 existing holders' executed documents. The seller leaves within six weeks at a price the constitution fixed.

The same holder in a fund without a pre-emption: 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.

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 of a lawful placement no longer describes the register.

A European holder, under regulatory pressure to divest, approaches four Kuwaiti institutions directly. The approaches are marketing of the scheme without a permit; the licensed person that obtained the fund's permit learns of them from one of the institutions; the manager, asked to consent to the resulting transfer, is asked to consent to the result of a breach in a state where its own licensed person now declines to act.

A manager's constitution permits transfers to professional clients on the manager's consent, drafted from a centre precedent. A Qatari holder sells to a Qatari buyer approached directly; the buyer is the hundred-and-first person to whom the fund's securities have been offered; the count was never kept because the constitution did not ask for the route.

A manager whose constitution conditions consent on classification in two records, the route, the cap, the minimum and the buyer's execution of the fund's documents, with a pre-emption for existing holders, refuses a transfer to an unclassified buyer, offers the seller the existing holders under the pre-emption, and registers the transfer to one of them with the lender's acknowledgement in hand. The seller leaves; the register stays lawful; no state's regime is engaged.

What each party holds

The manager holds the transfer provision, the consent on each transfer, the two classification 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, and its execution of the fund's documents.

The administrator holds the one test and the register.

The lender holds the acknowledgement and the grading.

The intermediaries in each state hold their records, which a secondary transfer outside the route contradicts.

The regulators hold their own rules, which read the seller's offer as an offer.

The sequence

1. The transfer provision is drafted to the secondary-transfer rule of every state a buyer could sit in, with the five conditions.
2. A pre-emption for existing holders is drafted with a short period and a fixed price mechanism.
3. The manager's rule on assisting a seller is written and given to the placement team.
4. Every transfer request is read for the buyer's state, its classification in two records, the route, the cap, the minimum and the lender.
5. The transfer record is kept as a placement record: buyer, state, classification, route, documents.
6. Where the buyer is outside the register and in a Gulf state, the state's intermediary makes the approach.

Questions a manager asks

Is a transfer between two 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, without the manager's involvement. 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 who 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 about a secondary transfer. The seller's commitment leaves the borrowing base unless the buyer signs the acknowledgement and is graded, and a facility may need resizing.

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

What about a transfer of the whole register, in a secondary sale of the fund. That is a transfer to one buyer of every holding, and the buyer's state's regime reads it as an offer to that buyer; the structure of the sale is designed to it.

Terms used

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

Secondary-transfer rule: the Kingdom's limits on such transfers of privately placed securities.

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: distributor, licensed person, count, bank, or the manager's permission in the centre.

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

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

What to read

The Kingdom's Investment Funds Regulations on secondary transfers of privately placed securities; Kuwait's module on marketing and the permission; Qatar's offering rules and the central bank's instructions; each centre's rules on the offer of units in the private tiers; the constitution's transfer and pre-emption provisions; the facility's transfer conditions. On this site, the liquidity room under Structures and the marketing rooms for the Kingdom and Kuwait in the onshore interfaces.