A Guide to Seamless Transfer of Financial Licenses: When contemplating the acquisition of a financial company, a myriad of challenges emerges, some stemming from the buyer’s aspirations and others linked to the necessity of broadening the company’s operational scope through license upgrades. These challenges underscore the importance of meticulous strategic planning. For further insights, feel free to reach out to us at connect@swissfintechpro.com
Navigating the acquisition terrain of a financial entity, especially one endowed with a pre-existing license, unveils a spectrum of unique challenges and divergent objectives between the buyer and seller.
Typically, the motivation behind purchasing a ready-made financial license is time efficiency. For instance, in the UK, obtaining licenses like EMI or Brokerage can extend beyond 18 months. Across various jurisdictions, acquiring any financial services license could span 6 to 12 months, provided everything proceeds according to regulations. It’s important to note that this is a generalized observation; certain licenses may be acquired more swiftly (for specific inquiries, do not hesitate to contact us).
It’s evident that buyers targeting a ready-made license are driven by the goal of rapid market entry, aiming to capitalize on the license without delay.
The conundrum arises when the buyer wishes to immediately leverage the license but is hesitant to finalize the sale and purchase price upfront, due to the pending full ownership transfer which awaits regulatory endorsement. This phase, particularly with entities like the UK FCA, could be protracted.
Consequently, the buyer proposes to allocate the selling price into an escrow account, awaiting the completion of the regulatory transfer process.
Conversely, the seller’s apprehension towards ceding operational control prior to securing full payment is grounded in the potential jeopardy to the license’s standing during this transitional phase.
Herein lies a strategy to reconcile these opposing interests:
In numerous jurisdictions, acquiring a minor shareholding in a financial services company—typically below 10% or even 20% in some cases—does not trigger a regulatory review.
Thus, we recommend segmenting the transaction into multiple agreements.
For example, two partners might each acquire a 9% stake in the target company, collectively holding 18% of the share capital. The remaining 72% of the shares are then placed in trust by the Seller in favor of the Buyer until the regulatory approval process concludes.
This arrangement ensures that the Seller receives payment and alleviates concerns over losing operational control.
Simultaneously, it safeguards the Buyer’s interests, granting them both direct and indirect control over the company through their shareholding and the trust arrangement.
Take for example the case of an investor that is looking to start fund management business in Switzerland but cannot find a Swiss Cisa license of the shelf. The next best option would be to acquire a Swiss Portfolio Asset Management Finma license. Why because while they are still rare on the market it is possible to find them (we can help you with this).
Also, the Swiss portfolio management license under specific regulatory provisions, like the ‘De Minimis’ rule, permits limited fund management operations under defined financial thresholds as follows:
Therefore, while awaiting the upgrade to a more comprehensive license, such as the CISA license in Switzerland the buyer could start operating immediately his business model.
What should a buyer in such circumstance do, should he start by the regulatory transfer of the shares first or should he start by the upgrade of the license first. But before to get to this we will examine a common transfer issue.
Initiating the process for a license upgrade prior to the transfer of ownership offers several advantages:
Regulatory Continuity: Starting with the license upgrade utilizes the company’s existing regulatory rapport, potentially simplifying the approval process. It’s based on the premise that an established relationship with the regulatory body (e.g., FINMA) can streamline the review, as the entity is not introducing a completely new operational model but extending its existing license.
Strategic Positioning: This approach aligns with the buyer’s immediate goal to commence fund business operations under the existing ‘De Minimis’ rule, thus avoiding delays that could stem from ownership restructuring or perceived initiation of a new business model by the regulators.
Given regulatory scrutiny, particularly from bodies like FINMA, a phased transfer of ownership is advisable as explained above:
Initial Share Transfer: A direct and immediate transfer of total ownership might invite intense review. A phased approach, beginning with the transfer of a minor shareholding block (e.g., each below 9%), avoids immediate comprehensive regulatory scrutiny.
Swiss Fiduciary Agreement: The remaining shares can be held under a fiduciary agreement, with the seller acting in the best interests of the buyer until regulatory approval for the license upgrade is obtained. This step ensures that the buyer can effectively control the company while avoiding regulatory complications during the upgrade process.
The strategic division of the sale into separate agreements for minor shareholders and a main agreement for the majority of the shares aids in simplifying the regulatory process:
Narrative for FINMA: This structured approach allows for the disclosure of new minor shareholders to FINMA as part of the license upgrade process, contributing positively to the narrative that new shareholders with expertise in fund business are joining to leverage and expand the company’s capabilities.
Finalizing the Ownership Transition
Upon successful license upgrade, a formal application to change shareholders can be submitted:
Streamlined Approval Process: This phase is expected to encounter less resistance, as it represents an internal reshuffling rather than a third-party takeover, facilitating a smoother approval by regulatory bodies.
Conclusion
In this last case, prioritizing the license upgrade before full ownership transfer offers a strategic pathway to achieving immediate operational goals while navigating regulatory challenges. It allows the buyer to commence their desired fund business swiftly under existing regulatory provisions and sets the stage for a smooth transition of ownership that aligns with regulatory expectations and strategic business objectives. Do not hesitate to contact us for more information on A Guide to Seamless Transfer of Financial Licenses.
