ADGM is proposing to exempt properly structured employee investment vehicles from fund licensing and minimum subscription rules. The details matter — one ineligible participant can blow up the entire structure.
Every fund manager I talk to wants their team to have skin in the game. LPs expect it. Employees expect it. And it makes good business sense, because aligning the investment team's personal capital with fund performance creates incentives that no bonus structure can replicate. The problem is that in many jurisdictions, setting up an employee co-investment vehicle means either treating it as a regulated fund (with all the associated costs and compliance) or operating in a grey area where the rules are unclear.
ADGM is moving to fix this. Consultation Paper No. 12 of 2025 proposes explicit rules for Employee Investment Vehicles that would exempt them from standard fund licensing, investor classification, and minimum subscription requirements [1][2]. If finalised as drafted, this gives emerging managers a clean pathway to structure team co-investment alongside their main fund. But the exemption comes with strict eligibility criteria, and the consequences of getting it wrong are severe.
The current problem
Under ADGM's existing Fund Rules, any vehicle that pools capital from multiple investors to invest collectively could be classified as a fund, triggering the full set of regulatory requirements: licensing, prospectus preparation, minimum subscription thresholds, and ongoing reporting [3]. For employee co-investment vehicles, this creates an awkward situation.
If your team members invest through a separate vehicle that feeds into or invests alongside the main fund, that vehicle might technically be a fund under the Fund Rules. That would mean your junior analyst committing $10,000 needs to be classified as a Professional Client, satisfy the $50,000 minimum subscription for an Exempt Fund (or $500,000 for a QIF), and go through the same onboarding process as your institutional LPs.
In practice, managers have worked around this through various structuring approaches (direct LP interests at reduced carry, side letters, individual co-investment arrangements), but none of these are clean. They create administrative complexity, potential regulatory risk, and sometimes tax inefficiency.
What the FSRA is proposing
The consultation paper proposes explicit provisions in the Fund Rules for Employee Investment Vehicles [1][2][4]. The core elements:
- Exemption from fund licensing. A properly structured EIV would not be treated as a regulated fund. No separate licensing, no prospectus, no minimum subscription thresholds [1][2].
- Exemption from investor classification. EIV participants would not need to satisfy Professional Client net worth tests. This matters, because the standard $1 million net asset threshold for Assessed Professional Clients [5] excludes many junior investment professionals who should be able to participate in co-investment.
- Exemption from minimum subscription rules. Neither the $50,000 Exempt Fund minimum nor the $500,000 QIF minimum would apply. Team members can commit amounts proportional to their actual financial capacity [1][2].
Who can participate
The proposed eligibility criteria are narrow and intentional. Participation is limited to [1][2][4]:
- Front office employees, meaning investment professionals directly involved in executing the fund's investment strategy.
- Directors of the fund manager, meaning board members of the GP or management company.
- Investment advisors, meaning individuals directly advising on the fund's investment decisions.
Explicitly excluded are back office, middle office, and administrative personnel who do not directly participate in investment decision-making [1][4]. Your fund accountant, compliance officer, office manager, and HR team are out. The line the FSRA draws is between people who make or advise on investment decisions and everyone else.
This is narrower than what many managers expect. In some firms, the head of investor relations or the CFO considers themselves part of the core team and expects to participate in co-investment. Under the proposed rules, unless they are directly involved in investment execution, they may not qualify.
The eligibility timing question
The consultation suggests that eligibility testing should apply at the time of initial investment [1][4]. But there is ambiguity around what happens if someone's employment status changes after they invest. If an eligible front-office employee leaves the firm mid-fund or transfers to a non-investment role, must they divest their EIV interest?
The consultation does not clearly address this, and it matters. Forced divestment from an illiquid vehicle investing in private companies is messy: there may be no market for the interest, and requiring a sale could trigger capital gains at an inopportune time. Most managers would prefer a rule that eligibility is determined at subscription and not revisited, but the final rules may take a different approach.
Similarly, the proposals do not address whether independent contractors and consultants performing equivalent investment roles can participate, or whether family members of eligible employees can invest, both common arrangements in the industry [1][4].
Structural considerations: feeder fund or direct LP?
How the EIV invests alongside the main fund matters for regulatory classification. Two approaches are common:
Direct LP approach. The EIV invests as a limited partner in the main fund, alongside institutional LPs. The EIV holds a single LP interest, and its internal allocation among team members is an internal matter. This is the simpler structure and avoids triggering the master-feeder provisions in Rules 12.4 and 12.5 of the FUNDS module [1].
Parallel vehicle approach. The EIV invests directly in the same portfolio companies as the main fund, through a parallel investment arrangement. This avoids any question about the EIV being a feeder fund but adds administrative complexity, since each investment needs to be replicated in the EIV with pro rata allocations.
For most emerging managers, the direct LP approach is cleaner. The EIV is simply another limited partner in the fund, subject to the same fund terms (though often with modified economic terms: reduced or zero management fees, and full carry participation). The exemption from minimum subscription thresholds means the EIV can commit whatever amount the team can collectively afford.
Carried interest and tax treatment
EIVs are frequently the vehicle through which carry participation is structured for the broader team beyond the founding partners. The carried interest allocation flows from the main fund to the EIV, and the EIV distributes it to individual participants according to the internal allocation.
Under UAE federal tax law, the tax treatment of these distributions depends on the EIV's own QFZP (Qualifying Free Zone Person) status [6]. If the EIV is domiciled in ADGM and meets the substance and income classification requirements, carry distributions and capital gains can benefit from 0% corporate tax treatment. But if the EIV generates income that does not qualify (advisory fees, non-investment income, or income from activities outside the free zone), it could jeopardise the EIV's QFZP status and potentially create tax consequences that spill over to the main fund's 0% treatment.
Getting the EIV's tax structuring right requires coordination between the fund structuring team and tax counsel. Getting it wrong costs far more than getting it right from the start.
The poisoned-pill risk
This is the point I emphasise most strongly with every manager I advise on EIVs: the exemption is all-or-nothing. If even one ineligible person participates in the EIV, the entire vehicle loses its exempt status and becomes subject to full fund regulation [1]. Retrospectively.
That means every participant needs to be documented as eligible at the time of investment. Employment contracts, role descriptions, and investment committee membership records need to be on file. If the FSRA audits the EIV and finds that the marketing coordinator was admitted alongside the investment team, the consequences apply to the whole vehicle, not just that one participant.
This comes down to administrative discipline, not legal complexity. Put the eligibility verification process in place at setup, document everything, and review it whenever a new participant is admitted. Your fund administrator should be managing this alongside the main fund's investor onboarding.
What managers should do now
The EIV proposals are part of the broader Consultation Paper No. 12 package, with implementation expected during 2026 [1][2]. While the rules are being finalised, managers planning to include employee co-investment should:
- Define eligibility carefully. Map your team against the proposed criteria now. Identify who qualifies and who does not, and have honest conversations about it before expectations are set.
- Choose the structural approach. Direct LP or parallel vehicle? The choice affects administration, tax treatment, and regulatory classification. Make it deliberately.
- Budget for the EIV. Even with the exemption from fund regulation, the EIV needs its own entity formation, legal documentation, tax advice, and ongoing administration. These are real costs, typically $10,000–25,000 in setup and $5,000–15,000 per year in ongoing admin.
- Coordinate with tax counsel on QFZP. The EIV's tax status needs to be considered alongside the main fund's. Do not treat it as an afterthought.
How Infra One handles EIV administration
We administer employee investment vehicles as part of our broader fund administration service. That means participant eligibility documentation, capital call and distribution processing for the EIV, carry allocation calculations, and ongoing compliance monitoring. We treat the EIV as part of the fund complex (same platform, same reporting cycle, same team) rather than as a separate engagement that adds cost and friction.
For managers structuring their first co-investment vehicle and wanting to understand the operational and compliance requirements, we are happy to talk through the details.
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