(Co-) investments of strategists and financial investors in technology companies

With the advancement of digitalization in nearly every world of life and business, the importance of technology M&A transactions has also increased significantly – a trend that is expected to intensify in the years to come. Established business models of traditional industrial companies are challenged by easily scalable digital offerings; and institutional and financial investors, struggling with low or negative interest rates, seek appropriate and lucrative investment opportunities while minimizing risk amid the “money glut”. As a result, companies and financial investors are welcoming emerging start-ups, especially in the IT / software and healthcare sectors: in 2020 alone, according to PitchBook (European Venture Report 2020), European start-ups have raised nearly € 43 billion in investor funds, including nearly € 20 billion from strategic investors – two records that will (most likely) be set again in 2021.

Interest and instruments

In their (co-) investments in start-ups, financial investors mainly seek the highest possible financial return, which they realize in the event of an exit, i.e. a sale or an IPO of the company concerned. Depending on the respective orientation of the industry and the phase of the business, corresponding venture capital funds are set up and invest in selected start-ups over a certain period of time. The motivations of industrial companies, on the other hand, are more complex, but mainly strategic and aim, among other things, at access to new innovative technologies, a strengthening of the innovation pipeline or, in general, “learning effects”. and / or presence in the new emerging sector ecosystem of market players. Companies can cooperate with or participate in start-ups in different ways. Depending on the strategic objective and the sector, the following may be considered: (technological) development and cooperation agreements, licensing agreements, joint ventures, incubation / acceleration programs or investments in start-ups for which companies receive a minority stake in return. Firms generally invest through specially designed investment vehicles (called “enterprise venture capital”), but sometimes also directly “from the balance sheet”. In Germany and in Europe, enterprise risk capital is now an integral part of the (external) innovation strategy of companies.

Structuring of (co-) investments

Financial investors and strategic investors who invest in technology companies typically aim for a 10-25% minority stake. Depending on the stage of development or the liquidity needs of the start-up concerned, convertible bonds are issued as an alternative, allowing the investor to become a shareholder of the company during a financing round subsequent to a valuation of capped company (plus any discount). Financial investors are primarily exit oriented in their investments and tend to interfere less in operational issues of management. On the other hand, strategic investors attach particular importance to contractual regulations that allow them to acquire the start-up completely at a later date, or at least grant them a right of veto on the sale to competing companies, as well as a right of veto on the sale to competing companies. active influence and involvement in relevant decision-making processes, which is reflected accordingly in the governance of the start-up. However, the contractual fixing of acquisition rights in favor of strategic investors is a double-edged sword: it limits the start-up to a concrete exit option and can therefore have a negative impact on its valuation (achievable in the event of exit) in the long run.

Particularities of technological investments

The essential value of technology companies lies in the technology they have developed, their know-how and their key employees. Therefore, the “protection” of these critical assets plays a major role in technology investments. This is done, on the one hand, by contractual guarantees with which the respective company (and the founders behind it) ensure that the rights to the software concerned and the source code underlying it belong to the company and that the possible use of “open source” does not oblige the company to disclose its source code (“copy-left” effect). However, such standard guarantees are often not worth much in the case of start-ups (and the corresponding W&I insurance policies are not yet in place). Depending on the size of the specific investment, it may therefore be wise to subject the start-up to in-depth IP / IT due diligence and, for example, to identify the risks associated with the use of open source software by means of back duck due diligence as well as analyzing the existing IT infrastructure (s) and data protection management systems. In order to “lengthen” the risks to a certain extent, financial and strategic investors also invest in technology companies whose technology is still in the early stages of its development and commercialization depending on the achievement of certain technological milestones and / or commercial – and it is only when these milestones are reached that contractually agreed installments of the total investment are due. Finally, creating incentives for founders and other key employees as well as their retention in the company is of particular importance in technology investments. Particular attention must therefore be paid to the appropriate provisions to bind key employees to the start-up as well as to the usual non-competition clauses (and their support by appropriate contractual sanctions) in the event of departure from the company.

Success factors for technology investments

The key structural success factors for investment strategies for technology investments, in particular by industrial companies as part of their corporate venture capital activities, are: well networked within the parent company itself; a clear investment objective aligned with the industrial company’s strategy as well as clear indicators of success by which technological investments in the company are assessed (and, if necessary, terminated); rapid decision-making processes on (follow-up) investments that are not influenced by hierarchical levels; and finally, the establishment of organizational and human “bridges” between the start-up and the company, which on the one hand allow the start-up to access critical resources and company experts, and on the other hand allow the knowledge gained from the technological investment for the company to be used in the best possible way and in the right place in the company.

Outlook

(Co-) investments in technology companies open up great opportunities for financial investors and strategic investors to participate financially and / or strategically in current growth trends. At the same time, the structuring of such investments entails a complexity that should not be underestimated. Due to lowered thresholds (according to the 17th Amendment currently in force to the German Foreign Trade and Payments Ordinance, already from an acquisition of 10% or 20% of the shares) and further expansion in related areas security – in particular technological fields such as artificial intelligence, autonomous driving, robotics or cybersecurity – depending on the origin of the investor, the obstacles of foreign trade law must increasingly be taken into account and treaties in technology investments – a development that is expected to intensify in the coming years in view of the struggle between the United States, China and Europe for global supremacy in key technology industries.


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Net zero commitments, financial vehicles evolving in a context of decarbonization trend

Companies’ commitments to net carbon emissions can be difficult to decipher and measure, which is an issue energy companies must address as the market for linking commitments to finance tools grows, people said. investment and industry experts.

“It’s a real minefield,” said Moody’s vice president for climate solutions Andrew Grant of variations in the wording and scope of companies’ commitments to reduce and offset their gas emissions. Greenhouse effect.

Many companies avoid both the use of binding language in net zero commitments and the inclusion of end-use emissions from Scope 3, Grant said during a series of panels hosted by his credit rating agency on September 23.

Energy companies are taking action to resolve this issue or being offered remedies. Oil and gas supermajors such as Royal Dutch Shell PLC and Eni SpA have gone further than other fossil fuel companies by setting mandatory “targets” instead of “softer targets,” Grant said.

The science-based targets initiative Steps up pressure on companies by changing their net-zero best practice criteria to increase required Scope 3 emission reductions from 67% to 95%, according to Cynthia Cummis, SBTi board member and director of the World Resources Institute . SBTi is a partnership between the global operator of the CDP Disclosure System, the United Nations Global Compact, the World Resources Institute and the World Wide Fund for Nature.

Tackling these emissions “is becoming the biggest problem for businesses,” Cummis said at the virtual event.

Difficult targets

Grant noted that while some fossil fuel exporters take Scope 3 emissions into account, the system of labeling shipments as carbon neutral remains problematic.

“One of the real stories this year was the start of sales of LNG and crude bundled with offsets to be carbon neutral, including Scope 3,” Grant said. “Clearly there are a lot of challenges with this … just because you’ve bought enough offsets to offset your emissions doesn’t mean you’re risk free.”

The distinction between the different types of compensation is critical. “Only 4% of carbon credits ever issued are phase-out credits,” said Richard Manley, director of sustainable investing for the Canada Pension Plan Investment Board. “[Ninety-six percent] of them are avoidance credits, so in terms of building disposal capacity… at the end state of net zero we still have a long way to go. “

Green bonds

Some energy companies go beyond net zero targets by linking measures to frameworks of sustainability obligations. In December 2020, Utility NRG Energy Inc. issued $ 900 million in senior notes in what was North America’s first use of the emerging finance instrument, and Canadian pipeline giant Enbridge Inc. announced in June, a similar vehicle linked to environmental, social and governance performance indicators.

Jeanne-Mey Sun, vice president of sustainable development at NRG, said the bond issue has been underwritten more than four times and the utility has already “surpassed the target” of reducing emissions as defined. as part before issuing a $ 1.1 billion sustainability note in August. .

“We want to be part of the solution,” Sun said. “And our customers want us to do it.”

According to a May 17 memo from Moody’s ESG Solutions Group, global sustainability bond issuance totaled $ 8.5 billion in the first quarter, “already comparable to the annual total from 2020.”

Iinvestment company Nuveen Investments Inc. has seen the market for these alternative financial instruments grow significantly in North America. “On the contrary, we have a lot of untapped potential demands from the United States that haven’t even been fully explored,” said Sarah Wilson, Managing Director of Responsible Investment.


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RedSwan CRE accepts Dogecoin for 2 Multi-Family Real Estate Investment Vehicles – Dogecoin – US Dollar ($ DOGE)

RedSwan CRE, a tokenization platform focused on the leading commercial real estate sector, now accepts Dogecoin (CRYPTO: DOGE) as one of its payment options for investing in two multi-family properties.

What happened: The properties are Lakehouse, a 270-unit luxury multi-family development located on Lake Merritt near downtown Oakland, California, and the 251-unit Apollo Apartments in the Seattle suburb of Edmonds, State. Washington.

“Accredited investors will be able to use Dogecoin to purchase fractional ownership in buildings, which can then be traded like stocks,” the company said on its website. “This will be the first time that a major real estate asset will be available for a specific crypto community.”

Investments in properties start at $ 1,000 each, and the company also accepts US dollar and dollar-indexed stablecoins in addition to Dogecoin.

RedSwan CRE added that the combined fundraising for these two deals is $ 36 million, including $ 20 million for Lakehouse and $ 16 million for Apollo.

Related Link: 10 Actions To Consider For The First Day Of Fall

Why is this important: Despite Dogecoin’s growing popularity as an investment vehicle, trading opportunities for cryptocurrency have been relatively limited.

In March, Mark Cuban’s Dallas Mavericks has started accepting Dogecoin payments, making it the largest US company to adopt the asset. Other companies that also accept Dogecoin is the Latvian carrier AirBaltic, UK based web hosting company HostMeNow and Canadian Internet service provider EasyDNS.

But the vast majority of US businesses are excluding Dogecoin payments from their agenda, although a few have acknowledged the presence of cryptocurrency. This week, AMC Entertainment Holdings, Inc. (NYSE: AMC) CEO Adam Aaron Conducted Poll Asking The Movie Chain To Accept Dogecoin As A Payment Option; The company has excluded Dogecoin from cryptocurrency options it plans to make available for online payments later this year.

Elon Musk, who spent a seemingly endless time tweeting about Dogecoin, conducted a similar poll in May asking if people wanted Dogecoin payment options for buying You’re here (NASDAQ: TSLA). Despite overwhelming public support for the idea, Tesla has yet to accept Dogecoin.

Photo: KNFind from Pixabay.


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Ameriprise Financial: Investors Watching Fiscal Policy Changes Closely

The stimulating federal policy regime that has supported the current bull market so much is changing. The Federal Reserve is about to begin the process of removing monetary stimulus, while fiscal policy is about to refocus. Taken together, these emerging developments create a degree of uncertainty, to the point that some market watchers warn of a period of higher volatility, and perhaps a correction in the stock market. The fact that such uncertainty coincides with a period of seasonal weakness historically makes such warnings all the more troubling. Of course, it remains to be seen whether the markets react unfavorably to these developments.

The Federal Reserve has been preparing the ground for the start of its reduction in its bond buying program for some time. It is not a question of if, but when this process will begin. The Fed is meeting next week and could then present its plan. The weaker-than-expected August employment report could push that decision back to November, although the Federal Open Markets Committee (FOMC) hawks would rather not wait. But how much of a difference a few weeks makes is debatable. Either way, the weakening is coming. The bigger question for investors is how quickly the tapering ends, further setting the stage for the first rate hike of the next tightening cycle. President Powell was careful to point out that the rate cut and the rate hikes must be considered independently. And while this distinction may be important, it’s also likely that rate hikes are unlikely to start until the cut is complete. If the Fed acts faster than expected to end its bond purchases, it would advance the market’s estimate of how quickly rates might rise and how quickly the Fed would get rid of them.

Rising inflation gives the Fed a reason to act quickly; But the employment situation justifies caution

The argument for moving faster down this path is rising inflation. The Fed has stuck to its judgment that much of the increase is due to supply side constraints that will dissipate over time, and therefore a modest concern. But not all FOMC members agree. On Tuesday of this week, the August Consumer Price Index (CPI) report will be released and should show some welcome moderation from the previous month. The headline rate is expected to rise 5.3% year-on-year, down slightly from 5.4% in July, its highest level since 2008. The policy rate is expected to rise 4.2%, from 4%. 3 in July. and 4.5 percent in June.

An uneven recovery in the labor market has been the counter-argument for moving more slowly towards reduction. The Delta variant is partly responsible for this, as is the mismatch between job vacancies and skills. But it is undeniable that jobs are plentiful and working conditions are improving, despite the disappointment of August. Initial jobless claims last week fell to a new recovery low, and the July Job Openings and Workforce Turnover (JOLTS) report showed a record 10, 9 million job openings.

Fiscal policy is changing and investors are on the lookout for any surprises

Fiscal policy is also changing. Emergency spending designed to move the economy forward rapidly in the aftermath of the pandemic has been financed primarily through debt. The federal budget deficit for fiscal 2020 was 14.9% of GDP. The 2021 budget deficit, which ends in three weeks, is expected to total 13.4% of GDP. (For those with a nostalgic inclination, the budget was last balanced twenty years ago).

By contrast, the current surge in spending on both physical and social infrastructure is expected to be funded, at least in part, by higher taxes. High income businesses and individuals are in the crosshairs. Developments are moving rapidly, although Democratic Senator Manchin said yesterday that he doubts the September 27 voting deadline can be met. But a glimpse of the proposed tax increases is starting to emerge. A discussion paper released to Congress would call for an increase in statutory corporate income tax to 26.5 percent, from the current 21 percent. That’s lower than the 28 percent preferred by the White House, but higher than the 25 percent rate preferred by moderate Senate Democrats. The top individual bracket would rise to 39.6% and include a surtax on income above $ 5 million. Capital gains would drop from 20% to 25%, excluding the current increase in investment income. The proposal also contains some changes to the inheritance tax regime, although an effort to eliminate the current raised base provision has met strong opposition, even among Democrats.

There is no doubt that politics is changing and investors are on the lookout for any surprises. But it’s also important to remember that the economy remains healthy and that balance sheets, both corporate and personal, are strong. And while some tax code changes are on the way, they will come against the backdrop of yet another round of massive federal spending, even if that spending turns out to be lower than the White House would prefer.

Important disclosures:
Opinions expressed are as of the date indicated, may change based on market trends or other conditions and may differ from views expressed by other associates or affiliates of Ameriprise Financial. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether on its own behalf or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into account the individual situation of investors.

Some of the opinions, conclusions and forward-looking statements are based on an analysis of information compiled from third-party sources. This information has been obtained from sources believed to be reliable, but the accuracy and completeness cannot be guaranteed by Ameriprise Financial. They are given for information only and do not constitute a solicitation to buy or sell the securities mentioned. The information is not intended to be used as the sole basis for investment decisions, nor should it be construed as advice designed to meet the specific needs of an individual investor.

There are risks involved in investing, including the risk of losing capital.

The GDP now The forecasting model provides a nowcast of the official GDP estimate prior to its release by estimating GDP growth using a methodology similar to that used by the US Bureau of Economic Analysis. GDPNow is not an official forecast from the Atlanta Fed. It is best viewed as a running estimate of real GDP growth based on the economic data available for the current measured quarter. No subjective adjustment is made to GDPNow – the estimate is based solely on the mathematical results of the model.

The Philadelphia Fed Poll is a survey that tracks regional manufacturing conditions in the Northeastern United States. The aim of the survey is to provide an overview of current manufacturing activity in this region, as well as to provide a short-term forecast of manufacturing conditions in the region, which can provide an indication of conditions in the region. entire United States.

The New York Fed’s Nowcast GDP Model produces a “nowcast” of GDP growth, incorporating a wide range of macroeconomic data. The aim is to read the information flow in real time and assess its effects on current economic conditions.

Past performance is no guarantee of future results.

The third-party companies mentioned are not affiliated with Ameriprise Financial, Inc.

The investment products are not insured by the Federal Government or the FDIC, are not deposits or bonds of, or guaranteed by any financial institution, and involve investment risks, including possible loss of principal and a fluctuation in value.

Ameriprise Financial Services, LLC. FINRA and SIPC member.


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Treasury advice on corporate collective investment vehicles

On August 27, 2021, the Australian Government’s Treasury Department (Treasury) has issued a set of documents comprising an Exposure Draft on Legislation and an Exposure Draft Explanatory Memorandum for Industry Comments on the Regulatory and Tax Components of the Corporate Mutual Fund (CCIV) diet (see here for relevant materials). The Treasury has proposed that a commercially viable form of the CCIV scheme be in place as of July 1, 2022.

In the 2016-2017 federal budget, the government announced that it would introduce regulatory and tax frameworks for two new types of collective investment vehicles, namely a CCIV and a limited partnership collective investment vehicle. Since then, the Treasury has overseen a number of periods of consultation and revisions of the CCIV regime. Johnson Winter & Slattery previously published an article outlining the main features of the CCIV diet during industry consultations in September 2017, which can be accessed. here.

Overview

CCIVs must be structured as an umbrella vehicle or an umbrella fund incorporating one or more compartments. A CCIV is a public limited company, most of its powers, rights, duties and legal characteristics are in accordance with those of a natural or legal person. A compartment, on the other hand, will not have legal personality.

CCIVs constitute an alternative vehicle to that of managed UCITS (MIS) with closer alignment with European-type corporate funds (under the European Undertakings for Collective Investment in Transferable Securities (UCITS) Directive). The latter is a popular vehicle in parts of Asia.

It is also proposed that when CCIVs are considered attribution managed investment funds (AMIT) under section 276 of the Income Tax Assessment Act, 1997 (Cth) (Law of 1997), they will be taxed as AMITs. Otherwise, the general provisions relating to the taxation of trusts will apply to CCIV and, in both cases, each sub-fund will be treated as a separate trust for tax purposes.

Regulatory framework

What is a CCIV?

A CCIV is a company limited by shares and the sole director of which is a public company holding an Australian Financial Services License (AFSL) with the appropriate authorizations to operate a CCIV. A CCIV must have a constitution and at least one compartment which has at least one member.

Like the MIS regime, CCIVs can be retail or wholesale, with a more comprehensive regulatory regime applying to retail CCIVs to protect retail investors. However, unlike the MIS scheme, all CCIVs must be registered as a company with the Australian Securities and Investments Commission.

A CCIV cannot transform into another type of company and another type of company cannot transform into a CCIV.

What is a compartment of a CCIV?

A compartment is the vehicle through which the business and operations of the CCIV are to be conducted. When registering CCIV, at least one sub-fund must be established and be identifiable by a unique name and Australian registered fund number (ARFN). Registration of additional compartments after CCIV registration is a separate process.

The securities issued by the CCIV must be attached to a sub-fund. The assets and liabilities of the CCIV must be allocated to a specific compartment. If necessary, the director of the company should convert a single asset that would otherwise be distributed among several compartments into cash or some other form of fungible property to allow separate attribution of the property. Any award made by the director of the company must be “fair and reasonable in the circumstances”. The assets of the CCIV (and each sub-fund) may be held by the CCIV or by another person (such as a custodian) in trust for the CCIV.

What is a corporate director of a CCIV?

The Director General of the CCIV is responsible for the operation and affairs of the CCIV. These functions are attributed to the executive corporate officer by the constitution of the CCIV and the Companies Act 2001 (Cth) (Corporations Act). Since the CCIV itself has no officers or employees who are natural persons, the corporate director is responsible for the conduct of the CCIV. The Law on legal persons imposes a series of statutory obligations incumbent on the director of companies in his capacity as director of the CCIV and on the members of the CCIV.

As indicated above, the company director is required to hold an AFSL with a new type of authorization for the provision of the financial service of “operation and conduct of the affairs of a CCIV”. While a CCIV is expected to provide more than one type of financial service during its operations, the Treasury anticipates that a CCIV will generally provide the financial service of “negotiating a financial product”.

What is a member of a CCIV?

An entity will be a member of a CCIV if it holds one or more shares of the CCIV. As indicated above, each share must be attached to a sub-fund. Each share will have certain rights and obligations. These include in particular voting rights, rights to dividends and distributions of CCIV capital under a sub-fund.

What are the requirements for securities issued by a CCIV?

A CCIV may issue both shares and bonds on the basis that any security issued relates to a single compartment of the CCIV. Subject to its constitution, a CCIV may also buy back redeemable shares, pay dividends to members or reduce the share capital if the sub-fund to which the redeemable shares, dividends or capital relate is solvent immediately before the operation and if the The transaction would not result in the sub-fund becoming insolvent immediately after its closure.

Although they are a form of company, CCIVs are not subject to the disclosure obligations set out in Chapter 6D of the Law on legal persons. Rather, CCIVs must adhere to the product disclosure statement (PDS) disclosure regime contained in Part 7.9 of the Corporations Act as amended by amendments proposed by the Consolidated Revenue Fund. Therefore, CCIVs are required to provide a PDS to retail clients who wish to acquire its securities. This means that retail CCIVs will also be subject to design and distribution obligations under Part 7.8A of the Corporations Act.

Main proposed changes

This section highlights the main changes to the CCIV regime proposed by the Treasury during this last round of consultation.

Depositary requirements

A custodian is a separate company appointed by the CCIV that holds its assets in trust and whose functions include overseeing certain operational activities of the CCIV The Treasury has removed the requirement for retail CCIVs to have an independent custodian on the bank. basis that there should be sufficient flexibility to allow alignment of business models with particular markets and investors as needed.

Cross investment

Cross-investment refers to the practice of a compartment of a CCIV holding one or more shares which are attached to another compartment of the same CCIV. Cross-investing could be used to achieve managerial and operational efficiencies, as well as to enable the possibility of establishing fund-of-fund structures in a single CCIV.

The Treasury declares that cross-investments will allow CCIVs to use fund management structures such as:

  • master-feeder building blocks / structures, which involve the creation of multiple compartments that hold particular asset classes (building block compartments) and other compartments that have different levels of exposure to those building block compartments ; and
  • hedging structures, which involve the creation of a compartment which holds the basic assets of the CCIV and additional compartments which hold shares and hedging instruments in the basic compartment.

Listing on the prescribed financial markets in Australia

The Treasury proposes that retail CCIVs with one compartment can now be included in the official list of a prescribed financial market operating in Australia from July 1, 2022. However, wholesale CCIVs and retail CCIVs with multiple compartments remain. banned from listing in Australia. These prohibitions do not affect the ability of a CCIV to list a security on a financial market such as the ASX Quoted Assets Market, subject to the financial market’s own rules.

Fiscal framework

While the regulatory framework is designed to provide certainty as to the legal status and operation of CCIVs and compartments, the tax framework aims to ensure that members can obtain the attribution and transfer of income and tax treatment. on the income of a CCIV through either the current AMIT regime or the default trust tax regime in section 6 of part III of the Income Tax Assessment Act 1936 (Cth) (Section 6).

The Treasury explained that despite its registration as a company under the Companies Act, the principles of presumption in proposed subsection 195-C of the 1997 Act will have the effect of considering that there is a relationship trust between the CCIV, the company, the assets and commitments of a compartment and its members for the purposes of applying tax laws. This deeming provision will have the following consequences:

  • the assets, liabilities and business relating to a specific sub-fund will be treated as a separate trust;
  • the CCIV will be considered as the trustee of each compartment which will be considered as a separate mutual fund known as the CCIV compartment trust; and
  • CCIV members will be considered as beneficiaries of the CCIV compartment trust fund.

In addition, each sub-fund of a CCIV will be treated as a separate trust for tax purposes with the relevant tax laws that apply to trustees, trusts and beneficiaries applying to the CCIV.

Subject to meeting the AMIT eligibility criteria for a CCIV compartment, a CCIV compartment may allocate amounts of taxable income, exempt income, non-exempt non-taxable income and tax compensation received. or perceived by the CCIV which have a particular character to the members. These amounts will retain their character and will then be taxed as such in the hands of the members as if the member were directly drawing such amounts.

Unlike managed investment funds qualified as AMIT which may choose to be taxed as AMIT, CCIV sub-funds qualified as AMIT will be compulsorily taxed as AMIT. The CCIV compartments will have no choice.

In cases where a CCIV does not meet the eligibility criteria for the AMIT regime in connection with a specific sub-fund for a particular tax year, the tax treatment will by default be that of the general tax framework for trusts in section 6. .

Johnson Winter & Slattery intends to prepare a new tax analysis of the proposed CCIV model in the coming weeks.

Conclusion

Submissions on this public consultation can be made until September 24, 2021. Please contact us if you would like more information on the regulatory or tax implications of the proposed CCIV regime.


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