PUERTO RICO Law and Practice Contributed by: Miguel E Otero-Sobrino and Alexis R González-Pagani, Ferraiuoli LLC
National security regulators typically do not actively participate in the inspection of investors, as the over - sight and regulatory powers are vested in the OCIF. During the due diligence process, the OCIF therefore requires sufficient disclosure of the circumstances surrounding investments so that an accurate assess - ment of the regulatory environment is realised. Addi - tionally, the new EU FSR regime does not play a role in transactions in Puerto Rico, and the authors do not anticipate any changes in the near future. The OCIF has shown increasing interest in investment vehicles in Puerto Rico. In recent months, it has spe - cifically focused on the registration status, corporate organisation, investment managers and investment advisers, offerings and requested tax grants (under the Incentives Code – if any) of PEF and venture capi - tal funds. OCIF Regulation 9461 On 15 May 2023, the OCIF enacted Regulation No 9461 as a means of increasing oversight of PEFs in Puerto Rico. Among other inspection and compli - ance requirements imposed by Regulation 9461, one of its main focuses is to compel PEFs to provide the OCIF with the same periodical reports and informa - tion required for investors under the Incentives Code. Additionally, Regulation 9461 imposes certain penal - ties and fines for non-compliance with its provisions. Regulation 9461 therefore drives forward the OCIF’s interest in monitoring and regulating PEFs and the sur - rounding regulatory environment. The level of legal due diligence required in Puerto Rico varies, but there is certain information that is gener - ally requested, mostly consisting of confirmatory verifications and validations. This means that, when the investment is to be made by the investors and the fund, they should very much be assured of their decision to move forward in the absence of any new material findings. The key purpose of legal due diligence in private equi - ty transactions is to corroborate assumptions made 4. Due Diligence 4.1 General Information
by the buyer in arriving at a certain valuation, to sub - stantiate that the target investment is not exposed to large unidentified liabilities or contingencies, and to thoroughly evaluate the target investment’s structure and compliance with applicable laws and regulatory frameworks. A due diligence exercise typically covers the following: • general corporate information; • governmental and regulatory documents; • real estate and assets; • environmental matters; • employee compensation and benefit documents; • intellectual property; • tax matters; and • insurance. 4.2 Vendor Due Diligence Vendor due diligence is not a common feature of pri - vate equity transactions in Puerto Rico. • financial documents; • litigation documents; • material contracts; Most acquisitions by PEFs are typically carried out by private stock or membership interest purchase agree - ments. Other acquisitions by PEFs are performed by acquiring the debt of the target company, issuing new debt to the target company and/or entering into debt that converts to ownership of the target company (eg, convertible promissory notes). Furthermore, acquisi - tions by PEFs are commonly structured by using a special-purpose vehicle (SPV), which will be the entity directly responsible for the purchase of the invest - ment or the issuance of the debt. Recently, the use of series limited liability companies (SLLCs) has become common practice. The use of SLLCs provides greater flexibility to funds and their investors. 5.2 Structure of the Buyer As a general rule, funds that will target both their investments and investor base in Puerto Rico are organised as limited liability companies (LLCs). LLCs organised in Puerto Rico are taxed as corporations by 5. Structure of Transactions 5.1 Structure of the Acquisition
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