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Converting a Cayman 4(4) Fund to a 4(3) Fund

So, your fund is up and running, your portfolio performance is in the upper quartile for your asset group, you’re attracting more and more interest. Your own marketing (or your newly appointed marketing team) is beginning to gain traction and you are now at the stage where you are bringing in more investors. In fact, you have a closing in just over two weeks which will significantly bump up your asset under management figure. Is it time to break out the next bottle of Cristal (or whatever your preferred choice is – Highland Park single malt is always a popular choice of your average Cayman attorney and we’re always happy to help celebrate your success)?

Whilst you’re basking in the slight glow of your success, you stop and think. Wait. Is there a Cayman regulatory issue I have to deal with? Wasn’t there a magical number set out in the offering memorandum that I have to think about?

So you flip to the page in the offering memorandum that you think no one really pays much attention to, the fine print, and there it is….“It is not expected that the Fund will have more than fifteen investors and the Articles provide for the appointment and removal of the Directors by the investors. Accordingly the Fund is not required to be registered with the Cayman Islands Monetary Authority”.

In two weeks, you’ll have more than fifteen investors. Damn….

This isn’t such a big deal as you might think. Yes, you do have a regulatory issue to deal with in that you have to get the fund registered as a mutual fund with CIMA. However, your Cayman attorney can easily handle this for you (whilst putting aside the gratefully received Highland Park just for the moment). (Now for the law bit) What we’re doing is converting a fund which has an exemption from CIMA registration under Section 4(4) of the Mutual Funds Law into a fund which is registered with CIMA under Section 4(3) of the Mutual Funds Law. The assumption from here on in is that you have a corporate structure, however the issues are almost identical for partnerships and unit trusts.

The first thing to think about is your voting rights in relation to the directors. You remember that your investors have the right to appoint and remove the directors. What you may have forgotten is that you had already come up with a plan for this in setting up the fund in the first place. Either the articles have a provision which removes this voting right automatically in the event that the fund is registered with CIMA, or else you knew that your existing investors would be willing to have this right removed in the event you started hitting the big time. In the latter case, you need to have a special resolution (at least 2/3 majority voting in favour) amending the articles to remove this right. Note that you want to have this resolution dated the same day as your CIMA registration pack is submitted.

The second thing you have to think about is minimum subscription for investors. For a standard CIMA registered fund, the minimum initial subscription must be US$100,000 or its equivalent in any currency. You do have other options such as licensed funds or administered funds, however we won’t muddy the waters here and save those for another time. What happens if you already have an investor whose initial subscription was less than US$100,000? The truth is that we have not seen CIMA question this although the lawyer in me suggests that you should have the investor raise their subscription to the $100k level.

Once you’ve dealt with voting rights and minimum initial subscription, you need to deal with the CIMA registration of your fund. Since you’re already up and running with an offering memorandum, this is a fairly straightforward process. You then need to deal with the following:

1. Registration of the directors with CIMA

You need to have at least two directors and each of those directors also needs to be registered themselves with CIMA. We’ve talked about this issue previously. Once the directors get registered, you then have to the ability to have the fund’s registration processed.

2. Appointment of auditors

The fund needs to have “approved auditors”, ie those who appear on the list of approved auditors issued by CIMA. If you’ve already appointed one of the big four accountancy firms, then you’re set. If not, take a look at the list, speak to your Cayman attorney and get one of the approved firms signed up.

3. Update the offering memorandum

You will have to update the section which talks about voting rights (if you are changing them) regarding directors, the Cayman regulatory section and also the section on minimum initial subscriptions. You should also take an afternoon to read through the document and update any other areas which are starting to look dog eared or tired.

4. Form MF1

Your Cayman attorney will draft this for you. This is essentially the registration application form which summarises basic details of the fund: registered office, directors, investment manager, auditor, administrator, liquidity, etc. Really simple stuff, you’re not going to be subjected to intense interrogation here.

5. CIMA affidavit

Again, your Cayman attorney will draft for you. One of the directors will have to sign and attest that your Cayman attorney is authorised to submit electronic records to CIMA. Simple. Have your director sign in front of a notary public and send to your Cayman attorney.

6. Consent Letters

CIMA requires evidence from each of the auditors and administrator that they are each willing to act for the fund, so you need to submit consent letters. Each auditor and administrator will have been through this before so should understand what you’re asking them for without hesitation. That said, if they do hesitate, think about appointing an alternate service provider in the near future….

7. Registration Fee

Everything in life comes with a price, and so does your CIMA registration. At the moment, that price is approximately US$4,268 plus a filing fee of US$366. You pay an initial registration fee which covers the period in the first calendar year of registration. After that, you pay the same amount in January of each following year.

The great thing about registering a fund with CIMA is that there is no wait period. There is no approval period where you pace the floor for weeks waiting for any additional questions or outright rejection. Provided your Cayman attorney has done their job (you remember, we placed the Highland Park to the side right?), your registration is effective from the date of submission. That’s right. As soon as you submit, you’re good to go and your investors can come in as planned leaving you to enjoy that Cristal... or else get on with the next item of business...

The original author of this post is no longer with Harneys. For more information on this topic, please reach out to the contact listed above.