in this episode, our partner stéphane karolczuk and managing director danny howell from fundsight explore the third-party aifm model, its role in supporting non-eu asset managers, and the key challenges it solves. they discuss the aifm’s core responsibilities in portfolio and risk management, the delegation versus advisory models, and fund sponsor preferences in asia. the conversation also highlights the aifmd passport, and the steps to onboard an aifm and launch a fund for eu distribution. a concise guide for managers navigating european fund structures and strategies.

stay tuned for our next episode, where we will explore parallel fund structuring from a fund sponsor’s perspective.

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if you’re considering establishing a fund in the cayman islands, luxembourg, or the british virgin islands, visit our funds hub for guidance.

as of 1 january 2026, luxembourg has introduced a modernised and permanent tax regime for carried interest, positioning itself as one of the most competitive jurisdictions in europe for alternative investment fund professionals. this briefing summarises the key features of the new regime and what it means for fund managers, directors, advisors and other industry participants.

why the reform was necessary

the previous carried interest regime had significant limitations. only individuals who became luxembourg tax residents between 2013 and 2018 could benefit, the advantage was capped at ten years, and eligibility was restricted to employees of fund managers. since 2018, no new individuals could qualify under the old rules. a modernised, permanent regime was therefore essential to ensure luxembourg remains attractive to international talent in the alternative investment sector.

this reform forms part of a broader strategy to strengthen luxembourg's position as a leading financial centre. alongside the carried interest enhancements, the government has revamped the inpatriate regime (offering a 50 per cent tax exemption on income up to €400,000), improved profit-sharing schemes, and introduced a new tax regime for stock options aimed at start-ups.

two categories of carried interest

the new law creates two distinct categories of carried interest, each with its own tax treatment.

contractual carry is the simpler of the two structures. under this arrangement, the individual receives a share of the fund's profits through a carry payment without making any investment into the fund. it is essentially a performance-based bonus. the tax treatment is highly favourable: only one quarter of the normal income tax rate applies, resulting in an effective rate of approximately 11.5 per cent (or 13 per cent including the dependency contribution).

participation carry (sometimes referred to as "carried invest") involves the manager paying money to acquire the right to share in carry distributions. this is distinct from traditional co-investment; it relates specifically to the taxation of the carry distribution itself. there is no minimum euro amount required, nor any specific percentage of fund capital that must be invested. the key distinction lies in how the carried interest is acquired: contractual carry involves receiving a contractual right without payment, whereas participation carry requires a genuine investment. provided two conditions are met—holding the investment for at least six months and owning no more than 10 per cent of the fund's capital—the carried interest is completely exempt from luxembourg tax.

expanded eligibility

the new regime significantly broadens the categories of individuals who may benefit. it now covers all individuals actively involved in the management of an alternative investment fund, whether directly or indirectly. this includes employees of fund managers and management companies, partners and directors of those entities, individuals providing advisory services to the fund (provided they are active in management rather than purely administrative functions), independent board members of the fund, shareholders of management companies, and other non-employees who receive carried interest entitlements.

importantly, the preferential regime applies only to individuals, not to companies. to qualify, an individual must be tax resident in luxembourg under both domestic law and any applicable double tax treaty.

structuring flexibility

the new regime accommodates both eu-style whole-of-fund waterfall models and us-style deal-by-deal carry arrangements. the legal form of the fund—whether partnership, company or otherwise—does not affect whether the regime applies. in most cases, participation carry is structured through a dedicated special purpose vehicle, such as a luxembourg special limited partnership, providing additional flexibility for clawback and other structuring considerations.

practical next steps

fund managers and advisors should consider reviewing existing carried interest arrangements to assess their compatibility with the new regime, examining fund documentation (including lpas and waterfall provisions) to ensure alignment with the new requirements, and carefully planning any relocation to luxembourg to establish proper tax residency under all relevant rules.

depuis le 1er janvier 2026, le grand-duché de luxembourg a dispose d'un nouveau régime fiscal applicable aux carried interest, confortant ainsi sa position de place financière de premier plan au sein de l'union européenne pour les acteurs institutionnels du secteur des fonds d'investissement alternatifs. la présente note a vocation à présenter de manière synthétique les caractéristiques substantielles de ce nouveau régime.

pourquoi cette réforme était-elle nécessaire ?

le dispositif fiscal antérieur applicable aux rémunérations de type carried interest présentait des limitations substantielles. seules les personnes physiques ayant acquis la qualité de résident fiscal luxembourgeois au cours de la période comprise entre 2013 et 2018 étaient susceptibles d'en bénéficier ; le bénéfice dudit régime était limité à une durée maximale de dix années et les conditions d'éligibilité étaient restreintes aux seuls salariés des sociétés de gestion de fonds. par conséquent, depuis l'exercice 2018, aucun nouveau contribuable n'était en mesure de se prévaloir des dispositions de l'ancien régime. l'instauration d'un nouveau cadre normatif s'avérait dès lors indispensable afin de préserver la compétitivité du grand-duché et de maintenir son attractivité à l'égard des professionnels du secteur des investissements alternatifs.

cette réforme s'inscrit dans le cadre d'une stratégie gouvernementale de plus grande envergure visant à consolider la position du grand-duché de luxembourg en qualité de place financière de premier rang à l'échelle européenne. concomitamment à la refonte du régime fiscal des carried interest , les autorités luxembourgeoises ont procédé à une modification du dispositif fiscal des impatriés — prévoyant désormais une exonération d'impôt sur le revenu à hauteur de 50 % pour les revenus n'excédant pas 400.000 euros —, ont renforcé les mécanismes légaux d'intéressement aux bénéfices et ont instauré un nouveau cadre fiscal dérogatoire applicable aux options de souscription d'actions (stock-options) au bénéfice des start-ups.

deux catégories de carried interest

la nouvelle loi crée deux catégories distinctes de carried interest, chacune avec son propre traitement fiscal.

le contractual carry constitue la structure la plus simple des deux dispositifs. dans ce cadre, le bénéficiaire perçoit une quote-part des bénéfices du fonds par le biais d'un versement au titre du carry, sans être tenu d'investir. cette rémunération s'apparente à une prime liée à la performance du véhicule d'investissement. le régime fiscal applicable est particulièrement favorable : seul le quart du taux normal d'imposition sur le revenu s'applique, soit un taux effectif d'environ 11,5 % (ou 13 % en incluant la contribution dépendance).

le mécanisme du participation carry (également désigné sous le terme de « carried invest ») implique que le gérant procède à un investissement en capital afin d'acquérir un droit de participater aux distributions de carry. ce dispositif se distingue du co-investissement classique en ce qu'il porte spécifiquement sur le traitement fiscal de la distribution du carried interest elle-même. le nouveau régime ne prévoit ni seuil minimal d'investissement, ni pourcentage déterminé du capital devant être souscrit. la distinction fondamentale entre les deux mécanismes réside dans les modalités d'acquisition du carried interest : le contractual carry confère un droit contractuel sans contrepartie financière, tandis que le participation carry requiert un investissement effectif. sous réserve du respect de deux conditions cumulatives — à savoir une période de détention minimale de six mois et une participation ne pouvant excéder 10 % du capital du fonds — le carried interest bénéficie d'une exonération totale de l'impôt luxembourgeois.

éligibilité élargie

le nouveau régime élargit substantiellement les catégories de personnes éligibles. sont désormais visées l'ensemble des personnes physiques participant activement, de manière directe ou indirecte, à la gestion d'un fonds d'investissement. peuvent ainsi bénéficier du régime : les salariés des gestionnaires de fonds et des sociétés de gestion, les associés et dirigeants de ces entités, les personnes physiques fournissant des prestations de conseil au fonds (sous réserve qu'elles exercent des fonctions de gestion effective et non purement administratives), les administrateurs indépendants siégeant au conseil d'administration du fonds, les actionnaires des sociétés de gestion, ainsi que les autres personnes non salariées titulaires de droits à carried interest.

il est important de noter que le régime préférentiel ne s'applique qu'aux personnes physiques, pas aux sociétés. pour y être éligible, une personne physique doit être résident fiscal au luxembourg tant en vertu du droit national que de toute convention de non double imposition.

flexibilité de structuration

le nouveau régime permet de répondre aux besoins tant des modèles de carried interest en cascade (waterfall) à l'échelle du fonds, de type européen, que des modèles de carried interest opération par opération (deal-by-deal), de type américain. la forme juridique du fonds — qu'il s'agisse d'une société de personnes, d'une société de capitaux ou de toute autre forme — n'a pas d'incidence sur l'applicabilité du régime. dans la plupart des cas, les carried interest sont structurés par l'intermédiaire d'un véhicule ad hoc dédié, tel qu'une société en commandite spéciale luxembourgeoise (scsp), offrant ainsi une flexibilité accrue en matière de clauses de restitution (clawback) et d'autres considérations de structuration.

étapes pratiques

les gérants et conseils de fonds d'investissement sont invités à procéder à un réexamen des dispositifs existants de carried interest afin d'en apprécier la compatibilité avec le nouveau régime, à analyser la documentation contractuelle des fonds — notamment les lpa et les clauses relatives aux mécanismes de distribution en cascade (waterfall) — en vue de vérifier leur conformité aux nouvelles exigences réglementaires, ainsi qu'à anticiper avec diligence tout transfert de résidence au luxembourg aux fins d'y établir une résidence fiscale conforme à l'ensemble des dispositions légales et conventionnelles applicables.

this guide sets out the continuing obligations under cayman islands law of a closed-ended fund registered with the cayman islands monetary authority (cima) under the private funds act (private funds act).

part a of this guide covers the ongoing obligations of a private fund that is registered under the private funds act, as well the various fatca and crs requirements, and anti-money laundering compliance.

a private fund, registered with cima under the private funds act, can be structured as an exempted company, limited partnership, limited liability company or unit trust, each of which also have ongoing obligations.

part b applies to a fund that is an exempted company incorporated with limited liability and an authorised share capital. if the fund is an exempted limited partnership see also part c. if it is a limited liability company (llc) incorporated under the limited liability companies act (llc act) see also part d and if it is an exempted trust, see also part e.

please see our guide to private funds in the cayman islands for more details of the closed-ended fund structures and requirements under the private funds act.

administrative fines

cima has the power under the monetary authority act (ma act) to impose significant administrative fines of up to ci$1 million (us$1.2 million) for each breach of certain provisions of the anti-money laundering regulations (aml regulations) and other cayman islands regulatory laws and regulations, including the private funds act and securities investment business act. the level of an administrative fine will depend on various factors including whether the breach is committed by an individual or a body corporate and if the breach is classified as minor, serious or very serious.

compliance calendar

an overview of the annual compliance dates is set out in our compliance calendar, which can be found here on our website.

note in particular that penalties frequently apply for late filings and so the registered office should be informed promptly of any notifiable changes to allow the appropriate filing/s to be made.

part a – registered private fund obligations

anti-money laundering (aml) obligations

part b – exempted companies

please see our guide to cayman islands exempted companies for details of exempted companies incorporated in the cayman islands under the companies act.

part c: exempted limited partnerships

please see our guide to exempted limited partnerships in the cayman islands for details of exempted limited partnerships established in the cayman islands under the exempted limited partnership act (the elp act).

part d: limited liability companies

please see our guide to limited liability companies in the cayman islands for details of llcs established in the cayman islands under the llc act.

part e: unit trusts – exempted trusts

a unit trust may be registered as an exempted trust under the trusts act provided none of the investors are, or are likely to be, resident or domiciled in the cayman islands. a unit trust which is registered as an exempted trust can apply to the cayman islands government for an undertaking that for 50 years no tax or duty on income or capital assets, gains or appreciation, or any estate duty or inheritance tax, will apply to the assets or income arising under that unit trust. a unit trust can also be set up as a star trust, which is a statutory purpose trust established under the trusts act. ongoing filing obligations for unit trusts which are registered as an exempted trust are set out below.

this guide sets out the continuing obligations under cayman islands law of an open-ended fund registered with the cayman islands monetary authority (cima) under section 4(3) or 4(4)(a) of the mutual funds act (mutual funds act).

part a of this guide sets out the ongoing requirements under the mutual funds act as well the various fatca and crs requirements, director registration obligations and anti-money laundering compliance.

an open-ended investment fund, registered with cima under the mutual funds act, can be structured as an exempted company, limited partnership, limited liability company or unit trust, each of which also have ongoing obligations.

part b applies to a fund that is an exempted company incorporated with limited liability and an authorised share capital. if the fund is an exempted limited partnership see also part c. if it is a limited liability company (llc) incorporated under the limited liability companies act (llc act) see also part d and if it is an exempted trust, see also part e.

please see our guide to mutual funds in the cayman islands for more details of the open-ended fund structures available in the cayman islands.

administrative fines

cima has the power under the monetary authority act (ma act) to impose significant administrative fines of up to ci$1 million (us$1.2 million) for each breach of certain provisions of the anti-money laundering regulations (aml regulations) and other cayman regulatory laws and regulations, including the mutual funds act, securities investment business act and directors registration and licensing act (drl act). the level of an administrative fine will depend on various factors including whether the breach is committed by an individual or a body corporate and if the breach is classified as minor, serious or very serious.

compliance calendar

an overview of the annual compliance dates is set out in our compliance calendar, which can be found here on our website.

note in particular that penalties frequently apply for late filings and so the registered office should be informed promptly of any notifiable changes to allow the appropriate filing/s to be made.

part a – registered mutual fund obligations

anti-money laundering (aml) bbligations

part b – exempted companies

please see our guide to cayman islands exempted companies for details of exempted companies incorporated in the cayman islands under the companies act.

part c: exempted limited partnerships

please see our guide to exempted limited partnerships for details of exempted limited partnerships established in the cayman islands under the exempted limited partnership act (the elp act).

part d: limited liability companies

please see our guide to limited liability companies in the cayman islands for details of llcs established in the cayman islands under the llc act.

part e: unit trusts – exempted trusts

a unit trust may be registered as an exempted trust under the trusts act provided none of the investors are, or are likely to be, resident or domiciled in the cayman islands. a unit trust which is registered as an exempted trust can apply to the cayman islands government for an undertaking that for 50 years no tax or duty on income or capital assets, gains or appreciation, or any estate duty or inheritance tax, will apply to the assets or income arising under that unit trust. a unit trust can also be set up as a star trust, which is a statutory purpose trust established under the trusts act. ongoing filing obligations for unit trusts which are registered as an exempted trust are set out below.

this guide provides a high level summary of the main obligations for cayman islands investment funds under cayman islands automatic exchange of information (aeoi) legislation.

background and legislative framework

over recent years governments around the world have agreed international standards for the automatic sharing of financial account information between global fiscal authorities, with the aim of reducing tax evasion.

as part of its commitment to international transparency standards, the cayman islands government is a signatory to:

• a model 1b intergovernmental agreement with the united states (us iga) which provides the framework for the implementation of the united states (us)foreign account tax compliance act (fatca) in the cayman islands
• the organisation for economic co-operation and development sponsored multilateral competent authority agreement and certain bilateral agreements or tax treaties regarding the common reporting standard on automatic exchange of information (crs, together with the us iga, aeoi agreements)

as cayman islands entities are not directly subject to the aeoi agreements, the cayman islands has introduced legislation to implement the aeoi agreements under the tax information authority act (tia act) including the tax information authority (international tax compliance) (united states of america) regulations (fatca regulations) and the tax information authority (international tax compliance) (common reporting standard) regulations, as amended (crs regulations), together aeoi legislation). definitions used in this guide are as set out in the aeoi legislation unless otherwise indicated.

the department of international tax co-operation (ditc) is the cayman islands government department responsible for tax affairs and the tax information authority (tia), created by the tia act, is the cayman islands competent authority for tax co-operation and is housed within the ditc. the ditc has issued guidance notes (guidance notes) on the aeoi legislation, which can be found here and here, which provide details of the notification, reporting and ongoing obligations that apply, as well as a useful reminder of the differences between fatca and crs.

how are investment funds classified for aeoi purposes?

in practice, the vast majority of cayman islands investment funds fall within the definition of an investment entity (one of the types of financial institution under aeoi legislation) and will be classified as cayman islands reporting financial institutions (reporting fis). reporting fis are required to report on financial accounts held by specific us persons or individuals or entities resident in certain jurisdictions (reportable accounts). there are certain differences between the definitions in each of the fatca regulations and the crs regulations, with the term foreign financial institution being used under fatca. in this guide we will be discussing ‘fis’ or ‘financial institutions’.

what are the notification obligations?

the most notable notification obligations are:

• to register with the internal revenue service of the us (irs): to obtain a global intermediary identification number (giin) (even if a reporting fi has no us reportable accounts) either through the irs fatca portal or through a paper submission. ‘registered deemed compliant fis’ (which are specific low risk fis that are exempt from full fatca reporting obligations) are also obliged to register with the irs.
• a cayman islands investment fund which is a reporting fi is required by the fatca regulations to register with the irs within 30 days of ‘starting business’. while a fund is not technically operating until it starts to accept subscription payments from investors (for the purposes, at least, of the mutual funds act), in reality, all funds have to provide their giin numbers to banking and other counterparties at a very early stage of their creation in order to open accounts. it is therefore important to get this registration done as soon as possible after the vehicle has been formed.

when registering for a giin, the irs fatca portal requires the name of a natural person to be listed as the fi’s responsible officer. the responsible officer of a reporting fi will be the person required to deal with the irs online registration, certify that certain information (entered as part of the online registration) is accurate, and certify that the reporting fi will comply with its fatca obligations. it does not invoke the us treasury concept of a responsible officer and those obligations are not imported into the cayman islands legal framework. very often this person will be the compliance officer of the investment manager or one of the directors of the fund (if it is a corporate vehicle).

• to register with the tia through its portal: all cayman islands financial institutions (both reporting and non-reporting) must register with the tia on the tia’s portal (the portal) and provide the required information including details of their principal point of contact (ppoc) and authorising person (authorising person). this information must be submitted by a pdf authorisation letter, signed by a director, trustee or general partner of the fi, as applicable, and is intended to provide the ditc with details of all cayman islands financial institutions. where an fi has reporting obligations under the fatca regulations, it will also be required to enter its giin when it registers on the portal. the authorising person will be the only person from whom the tia will take instructions that the ppoc has changed.

all ppocs must be resident in the cayman islands (fis formed prior to 2026 must appoint a cayman islands resident ppoc by january 2027). the same person/entity cannot be appointed as both authorising person and ppoc, unless in the case of an entity it is licensed by the cayman islands monetary authority. for fis which were already registered on the portal for fatca compliance purposes, their ppoc must file a variation in reporting obligations on the portal to register the fi for crs purposes and an updated authorisation letter giving details of the fi’s authorising person.

• notification of changes: a cayman islands fi must notify the tia of changes to its portal registration details. notice of a change (including a change of ppoc or authorising person) must be filed with the tia via the portal within 30 days of such change occurring.

what are the due diligence, reporting and ongoing obligations or penalties?

the main due diligence, reporting and ongoing obligations for fis are:

• written policies and procedures: every cayman islands reporting fi must establish and maintain written policies and procedures in respect of its obligations under aeoi legislation and related guidance notes and implement and comply with those policies and procedures. investment funds which have delegated this role to their administrator or another third party service provider must still have written policies and procedures in place, which describe the functions delegated, the oversight of the delegation and performance of any obligations that have not been delegated. for cayman islands reporting fis which have not delegated these obligations, more comprehensive written policies and procedures must describe the performance of those obligations in a way that is reasonable for their business.
• identify reportable accounts (ie ‘us reportable accounts’ under the fatca regulations and ‘reportable accounts’ under the crs regulations) in accordance with the due diligence requirements set out in the fatca regulations, crs regulations and related guidance notes. the directors, general partner, manager (for a limited liability company established in the cayman islands under the limited liability act) or trustee(s) (each an operator) of the reporting fi must ensure that they have a compliance and diligence program in place to allow the reporting fi to identify and report reportable accounts. in the funds context, a financial account is ‘any equity or debt interest in the investment entity other than interests which are regularly traded on established securities markets’. as the majority of cayman islands funds do not issue debt or have their equity interests listed on an exchange, the classification of what the financial accounts are is relatively straightforward. for example, for a standard cayman islands corporate hedge fund, the financial account will be the shares held by the investor and the value will be the net asset value as reported from time to time.

the ditc has confirmed that the cayman islands is taking the ‘wider approach’ to due diligence under crs. this means cayman islands reporting fis should ensure that they identify the tax residency of all ‘account holders’ and relevant controlling persons (in the context of investment funds this means investors) and not just those that are in ‘reportable jurisdictions’. under crs, there is still a distinction between a ‘participating jurisdiction’ (which has indicated that it will sign up to and implement crs) and a ‘reportable jurisdiction’ (for which reporting is required). ‘participating jurisdiction’ and ‘reportable jurisdiction’ is subject to change by the tia. the latest information to be found on the tia website.

• report annually to the tia certain specified information with respect to any reportable accounts.

separate xml files must be submitted for each crs ‘reportable jurisdiction’ for which a cayman islands reporting fi has reportable accounts and for us reportable accounts. reporting obligations under the fatca and crs regulations can also be satisfied by submitting a manual entry return.

the information which must be provided in these filings includes the name, address, taxpayer identification number (tin), date of birth (where applicable), account number and account balance or value as at the period end. if the account holder is a passive non-financial entity whose controlling persons are ‘specified persons’ (with regard to fatca) or ‘reportable persons’ (with regard to crs) then the name, address and tins of those persons must be provided. please note that the full definitions of a ‘passive nffe’ or ‘passive nfe’ are beyond the scope of this guide but can be found in the guidance notes and the self-certification forms issued by the ditc.

• nil returns cayman islands reporting fis must file nil returns for all crs ’reportable jurisdictions’ for which they have no reportable accounts. this is done by submitting a crs filing declaration once all the crs ‘reportable jurisdiction’ returns for the cayman islands reporting fi have been submitted. the cayman islands reporting fi has not discharged its crs reporting obligation for any given year until the crs filing declaration has been submitted. although not mandatory, our view is that reporting fis should also file nil returns for fatca purposes if they have no us reportable accounts.
• submit a crs compliance form annually to the tia this form was introduced in 2020 and requires the cayman islands reporting fi to give a categorical breakdown of its crs data and certain information about its crs data collection process.
• liquidation reporting obligations the crs guidance notes require that cayman islands fis which are in liquidation or being wound up must fulfil their crs notification and reporting obligations as normal. liquidators must also make sure that the fi notifies the tia of its final dissolution or winding up and reporting fis must comply with their reporting obligations for the previous calendar year and the current calendar year. unlike under fatca, under crs a cayman islands investment entity, like an investment fund, remains classified as such even if it is closed (has no remaining participating investors or is not open to further investors), or is in liquidation.
• offences and penalties the crs regulations introduce various offences, including providing materially inaccurate information, tampering with information and hindering the tia in its functions, with substantial fines/penalties applying on breach. the offences include potential criminal liability for directors and certain officers where their financial institution commits an offence, unless they exercised reasonable diligence to prevent the breach. any defendant has a defence if they have a reasonable excuse - insufficient funds and reliance on an agent are not classed as reasonable excuses. there will also be a deemed breach of policies and procedures if a cayman islands reporting fi relies on a self-certification or documentary evidence which it knows or has reason to believe is materially inaccurate. in addition, it is now an offence for any person to provide a false self-certification to a cayman islands fi. it is therefore important for a cayman islands fi and anyone who has been engaged to assist with the crs due diligence process to be aware that if they do receive a false self-certification and they are aware of that fact, it may give rise to a requirement to make a suspicious activity report under the proceeds of crime act.

what are the key dates each year?

cayman islands fis have to register on the portal by 31 january in the first calendar year in which they become a cayman islands fi (provided that a cayman islands fi that commenced activities in 2026 may register on the portal by 31 january 2027) and so are obliged to comply with aeoi legislation.

reporting fis have to submit their fatca and crs reports to the tia by 30 june in each year.

the crs compliance form must be submitted to the tia by 30 june each year.

fatca, non-participating fis and withholding tax

reporting fis are not subject to withholding tax for fatca purposes unless they are designated as ‘non-participating fis’. the irs may classify a cayman islands reporting fi as a ‘non-participating fi’ following the conclusion of the procedures set out in the us iga. the irs may determine that a reporting fi is in ‘significant non-compliance’ with the fatca obligations. it may then notify the tia and require it to compel the reporting fi to obtain and report the required information. failure to do so within 18 months of first notification permits the irs to deem the reporting fi to be a ‘non-participating fi’ and the cayman islands entity will be subject to withholding tax.

there are no withholding tax provisions under crs.

what steps should cayman islands funds continue to take?

to address the issues arising under aeoi legislation, investment managers and operators of existing cayman islands investment funds should continue to review their existing documentation to ensure that:

• there is sufficient disclosure regarding the various aeoi regimes
• the fund has the ability to obtain self-certification documentation at subscription or on a regular basis
• there is a power for the fund to take broad steps to deal with investors who do not provide information or updated information and to allocate costs to those investors
• there are exculpation provisions for the operators of the fund from liability arising from aeoi compliance

all cayman islands fis should periodically review their crs compliance policies and update them to make sure that they have suitable written policies and procedures in place, that they are correctly registered with the ditc, including having provided details of their authorised person and ppoc on the portal, and that they are able to file any nil returns needed.

subscription documents require special attention and should include:

• an obligation on the investor to provide information and comply with due diligence requests which may require the provision of nationality, permanent residency information and tax residency representations. this can be in the form of a self-certification form. links to the entity and individual self-certification forms issued by the cayman islands ditc can be found here and here.
• an acknowledgement that the fund will disclose information to the tia, which in turn will provide that information to tax authorities globally.
• a general waiver of any legal restrictions which might otherwise prevent disclosure of information by the fund (although it should be noted that the aeoi legislation makes it clear that compliance with the disclosure obligations under the aeoi legislation will not amount to a breach of other cayman islands laws).
• an acknowledgment of the effect of non-compliance and lack of disclosure by an investor and an acknowledgement that the fund may take any of the broad selection of powers that are reserved to the fund in its constitutional documents.
• an agreement that the investor shall not have any claim against the fund for any damages or liability arising as a result of actions taken by the fund or remedies pursued by the fund in order to comply with any existing or future obligations imposed by any existing or future aeoi agreements or any enabling legislation enacted in the cayman islands.

at harneys we have a dedicated team of fatca and crs specialists who can help advise on your compliance with these obligations. in addition, we can also provide registration, reporting and principal point of contact and authorising person services.

last week, the cayman islands welcomed an influx of professionals in the digital assets space for its inaugural “cayman crypto week”. as a jurisdiction at the forefront of innovative structuring for the digital assets space, this event was testament to the strength of the offering and experience of the professionals based here, and the increasing institutionalisation of crypto.

tokenised funds were the talk of the town, and unsurprisingly so, given the aptly timed draft legislative updates published in early february heralding a clear regulatory framework for tokenised funds set up in the cayman islands.

what exactly is a tokenised fund?

to add context, let’s briefly summarise a traditional fund – an investment vehicle pooling capital from a number of investors. investors typically will hold their interests in the fund by subscribing for shares in the fund vehicle (in the case of a company), limited partnership interests (in the case of a limited partnership), or membership interests (in the case of an llc). the concept of a tokenised fund, fundamentally, is an investment fund which allows investors to subscribe for interests in the fund by acquiring tokens on a blockchain. the fund would mint and send tokens to an investor who has successfully subscribed for fund interests and sent capital to the fund (usually via a smart contract).

conceptually, in the ideal of a tokenised fund, the tokens issued by the fund vehicle would be the sole representation of fund interests (investors would not need to hold shares or other forms of interest), and the fund would operate entirely on-chain. in practice, due to other requirements and regulations applicable to operating an investment fund (as well as investor readiness), for now the most typical “tokenised fund” would issue tokens which represent/mirror the more traditional shares which are also issued. while investors in such a fund will likely consider the tokens to be the representation of their ownership interest in the fund, in reality there would be a conventional share register behind the scenes as well, which would reflect the ownership of those shares mirrored by the tokens.

the cayman islands framework and proposed changes

tokenised funds are not new in cayman or the offshore world generally, and many prominent tokenised funds already operate in cayman. that said, many such funds to date have been set up within the constraints of frameworks designed for traditional funds, with solutions to issues raised by tokenisation being developed to fit without a clear framework or certainty as to expectations of the regulator. the proposed legislative changes[1] (once in force) will provide a definitive and clear framework allowing for certainty in setting up in cayman, boosting confidence for both managers and investors.

critically for offering certainty for tokenised fund launches in cayman, the issuance, creation, sale, transfer or other disposition of tokenised equity or investment interests by regulated private and mutual funds will not constitute the ‘issuance of virtual assets’ under the virtual assets (service providers) act, and will therefore not be a regulated activity under that act. the changes add clarifications and additional requirements specific to digital tokens to the existing funds regime. the key operational requirements and considerations to comply with the licensing regime as tokenised funds formed in the cayman islands are set out below:

• comprehensive token records and availability to the cayman islands monetary authority (cima). tokenised funds must obtain and securely maintain all records of the issuance, creation, sale, transfer and ownership of tokenised interests (including any additional data cima may require), and make them available within periods specified by cima. for mutual funds, licensed administrators must be satisfied these records exist and are accessible; for private funds this is framed as a registration‑stage and ongoing obligation.
• annual operator confirmation. the operator must confirm to cima annually that all token‑related records have been properly kept and maintained in compliance with the relevant act.
• transfer approvals. a tokenised equity/investment interest is only transferable with the operator’s approval in accordance with the offering document.
• offering document disclosure and mitigation. token specific risks, including at least cybersecurity and transferability risks, plus any additional risks identified by cima, must be disclosed, and the offering document must explain how those risks are addressed or mitigated for investors.
• cima power to set token characteristics. cima may impose specific restrictions on the characteristics of the digital tokens representing fund interests, and the fund must ensure compliance with any such restrictions.
• periodic reporting. tokenised funds must comply with any periodic reporting requirements that cima specifies under the acts.
• supervisory reach (technology and transactions). cima’s supervision is expressly extended to inspections of the underlying technology and token transactions for tokenised funds, in addition to its existing powers.

[1] reference is to the mutual funds (amendment) bill, 2026, the private funds (amendment) bill, 2026 and the virtual asset (service providers) (amendment) bill, 2026

will tokenising funds really enhance liquidity?

one of the major benefits often touted in discussion of tokenised funds is that the ability to transfer or redeem tokens at any time, on-chain, will allow for instant liquidity pools. this can absolutely be true to a certain extent; however, it is not an absolute.

in a fund operating a highly liquid strategy anyway (for example, money market funds (mmf) which have been one of the most prominent strategies managers have sought to tokenise to date), then it is true that the distributed ledger technology on which tokens are held and transferred can allow more constant liquidity. for example, an investor could redeem interests in a tokenised mmf for equal value of, for example, usdc over weekends and evenings through operation of smart contracts. in reality though, this 24/7 liquidity is only possible due to the liquid nature of the underlying investments.

in funds operating less liquid strategies, the enhanced liquidity would theoretically come from easier access to a secondary market, so that investors can easily transfer their fund interest to other prospective investors, thereby liquidising their interest. while the ease of transfer will be enhanced by tokenisation, all investors in a tokenised fund will be subject to the same investor suitability and “know your customer” requirements as those in a traditional fund. in practice, this means that for investor a to transfer to investor b, investor b would also need to be known to the fund in advance and have demonstrated that they meet all requirements and have provided all kyc information. this premise is embedded in the cayman framework for tokenised funds, in the requirement for the fund to approve all transfers.

the typical approach is for tokenised funds to maintain a “whitelist” of approved investors so that transfers to those already pre-approved as investors (and certainly to other existing investors) can be made without delay or additional steps. this may therefore allow for some increased liquidity, however the extent of this will very much be dependent on the whitelisted pool of investors who have already completed kyc screenings and satisfy investor suitability requirements.

what about other benefits?

there are a number of other potential benefits of tokenising funds often discussed, including:

• broadening access to high-value asset classes (such as real estate).
• increased transparency and ease of audit – a benefit not unique to tokenising funds, blockchain technology offers transfer/transaction history in live time and with reduced risk of fraud.
• operational efficiencies through automated onboarding, transfer and redemption processes.

tokenising the future

while certain aspects of the potential benefits are very much tangible now, others will become more apparent as the infrastructure needed to support these structures grows, better achieving the efficiencies promised by this sector evolution for the benefit of managers and investors alike.

in bringing in much needed regulatory clarity, the cayman islands’ government has ensured that cayman will continue to lead the way as the funds market evolves to realise the benefits promised and be the jurisdiction at the forefront of the tokenised fund movement.

in this episode of the funds download, head of our luxembourg funds & asset management team vanessa molloy and counsel pierre luc-wolff discuss luxembourg’s new carried interest tax regime. they explain the two categories now available, contractual carry and participation carry, and explore who can benefit, including employees, partners, directors, and advisors.

click here to subscribe to the funds download podcast. choose your preferred platform from the list presented and click subscribe or follow once logged in.

visit the funds download podcast page to catch up on all the funds download episodes.

if you’re considering establishing a fund in the cayman islands, luxembourg, or the british virgin islands, visit our funds hub for guidance.

in this first episode of our new podcast series, our global head of financial services, maggie kwok, and partner stéphane karolczuk explore why managers targeting european investors avoid relying on reverse solicitation and instead turn to national private placement regimes (npprs) where available, or choose to establish an aifmd compliant luxembourg fund alongside their cayman structure. for managers with a european background, or those with growing european ambitions, setting up a luxembourg fund managed by a third‑party aifm allows them to enjoy the best of both worlds: namely, (i) access to the aifmd marketing passport for eu investors, and (ii) the ability to maintain their traditional cayman fund for non‑eu investors without disrupting existing structures. this parallel luxembourg–cayman approach offers flexibility, regulatory certainty, and an efficient distribution strategy across jurisdictions.

stay tuned for our next episode, where we will take a deeper dive into selecting and appointing a third‑party aifm for your luxembourg fund and discuss the distribution, compliance, and marketing support they can provide.

click here to subscribe to the funds download podcast. choose your preferred platform from the list presented and click subscribe or follow once logged in.

visit the funds download podcast page to catch up on all the funds download episodes.

if you’re considering establishing a fund in the cayman islands, luxembourg, or the british virgin islands, visit our funds hub for guidance.

a comparison of investment fund options across three jurisdictions

the following table shows the similarities and differences between the bvi, cayman and luxembourg investment funds across 27 different areas.

please reach out to the authors to find out more.

^[1] undertakings for collective investment in transferable securities (ucits).

^[2] refers to undertakings for collective investment (alternative investment funds or aifs) under the alternative investment fund managers directive dated 8 june 2011 (aifmd), which raise capital from a number of investors with a view to investing it in accordance with a defined investment strategy for the benefit of those investors, and which do no not qualify as ucits.

^[3] set up under part ii of the luxembourg law of 17 december 2010 on undertakings for collective investment.

^[4] set up as a specialised investment fund (sif).

^[5] investing in risk capital (société d'investissement en capital à risque or sicar).

^[6] set up as a reserved alternative investment fund (raif).

^[7] set up and subject to the european long-term investment funds regulation (eltif) regulation which covers funds that focus on investing in various types of alternative asset classes such as infrastructure, small and medium sized enterprises and real assets.

^[8] a fund set up subject to the european venture capital funds regulation covers a sub-category of alternative investment scheme that focuses on start-ups and early stage companies.

^[9] a fund set up subject to the european social entrepreneurship funds regulation which covers alternative investment schemes that focus on social enterprises.

^[10] a limited partnership agreement (lpa).

^[11] a) aifms managing aifs which are not leveraged and without redemption rights for a period of five years, and with aggregate assets under management below €500 million; b) aifms managing aifs whose assets under management, including any assets acquired through the use of leverage, do not exceed €100 million.
these aifms must register with the cssf and provide an annual report but no further obligations under the aifmd. however, they do not benefit from the aifmd pre-marketing and marketing passport.

^[12] the law on the financial sector.

^[13] cssf faq “persons involved in aml/cft for a luxembourg investment fund or ifm supervised by the cssf for aml/cft purposes” dated 25 november 2019 and cssf faq “aml/cft rc report” dated 1 march 2022.

^[14] regulation (eu) 2019/2088 of the european parliament and of the council of 27 november 2019 on sustainability‐related disclosures in the financial services sector (the sfdr).

^[15] the time frame will vary for closed-ended funds listing under the eu prospectus directive.

^[16] directive (eu) 2019/1160 of 20 june 2019 (cbfd directive).

emerging fund managers in the middle east—particularly those targeting sub-us$50 million in assets under management (aum)—face critical decisions when launching their first fund. while the region's domestic markets are maturing, and offer a compelling alternative in certain circumstances, for first time managers selecting an offshore jurisdiction may be the better choice. the cayman islands and the british virgin islands (bvi) offer cost-effective, internationally respected platforms that simplify fund formation, enhance credibility with global investors, and provide a neutral, well-understood legal framework. this article outlines the key advantages of these two jurisdictions and explains how their structures can align with the strategic needs of new managers in the region.

why emerging managers look offshore

while distinct in their offerings, the cayman islands and bvi share several foundational features that make them attractive to first-time fund managers. these jurisdictions provide a stable, tax-neutral environment, which is crucial for pooling capital from diverse international sources without adding layers of tax complexity. this, combined with their regulatory efficiency, creates a powerful value proposition:

• global recognition and investor confidence – both are leading international finance centres recognised by institutional investors, regulators, and counterparties worldwide. this global standing enhances a new fund's credibility and significantly simplifies the investor onboarding and due diligence process.
• strong legal foundations – based on english common law, both jurisdictions offer clear, predictable, and commercially-minded legal frameworks. this provides certainty on matters such as shareholder rights, director duties, and creditor protections, which is highly valued by sophisticated investors.
• political and economic stability – as british overseas territories, they benefit from long-term constitutional stability and a reliable court system, with an ultimate right of appeal to the privy council in london. this insulates fund structures from local political and economic volatility.
• cost efficiency – for emerging managers, budget is paramount. startup fees, annual government fees, and professional service costs in these jurisdictions are often substantially lower than in major onshore financial centres, making them ideal for lean, entrepreneurial teams.
• speed to market – both jurisdictions feature streamlined and efficient regulatory registration or approval processes. this allows managers to launch their funds quickly and predictably, enabling them to capitalise on fundraising opportunities without being delayed by bureaucratic hurdles.

cayman islands: global standard-setter

the cayman islands is the world's leading offshore fund domicile, with tens of thousands of funds registered with the cayman islands monetary authority (cima). this depth of experience has created a sophisticated ecosystem of world-class service providers. the jurisdiction offers two primary fund structures relevant to emerging managers:

• mutual funds – ideal for open-ended strategies with liquid assets (eg hedge funds) where investors can subscribe and redeem on an ongoing basis. these funds are regulated by cima and must appoint a cayman-based auditor and a licensed fund administrator, ensuring robust governance and independent oversight.
• private funds – designed for closed-ended strategies with illiquid assets (eg private equity, venture capital, real estate) where investors commit capital for the life of the fund. while still required to register with cima and appoint appropriate service providers for cash monitoring, valuation, and safekeeping of assets, the overall regime is more flexible than for mutual funds.

cayman remains the default choice for many institutional investors due to its regulatory maturity and deep investor familiarity. however, the mandatory appointment of full-service administrators and auditors, while a mark of quality, can drive up setup and maintenance costs, sometimes making it less practical for truly first-time or budget-constrained managers launching smaller funds.

british virgin islands: leaner alternatives

the bvi has carved out a niche by championing regulatory proportionality and innovation, offering simpler, faster, and more cost-effective solutions while maintaining international credibility. this approach is ideal for start-up managers or those testing new strategies with smaller funds. three standout options for emerging managers include:

• incubator funds – designed for new managers testing a proof-of-concept strategy. it allows for up to 20 sophisticated investors and a maximum aum of us$20 million. crucially, it does not require an appointed manager, administrator, or auditor. it operates under a light-touch regulatory regime for an initial period of two years (with an option to extend for a third), giving managers a grace period to build a track record before converting to a more robust structure like an approved or private fund.
• approved funds – a popular choice for slightly larger or more established friends-and-family funds. it permits up to 20 investors at any one time and a higher aum cap of us$100 million. it requires the appointment of a fund administrator but does not mandate an audit, striking a balance between cost-efficiency and third-party oversight. its launch process is exceptionally fast, and it can easily be scaled or converted to a professional or private fund as aum grows.
• single asset funds – another advantage of the bvi funds framework is its suitability for single-asset vehicles. when structured to hold only one underlying investment, these entities are typically not considered private investment funds under bvi law and are therefore exempt from registration. this offers a highly streamlined and cost-effective solution for specific strategies.

all three of these funds can typically be established and launched within one to two months. their lower setup and ongoing compliance costs present a significant advantage over comparable structures in cayman or major onshore jurisdictions, allowing managers to allocate more capital toward their investment strategy.

managing the fund: the approved manager regime

alongside fund formation, managers must consider how the investment strategy will be implemented. while some bvi funds can be self-managed by their directors, most new managers opt to establish a standalone investment management entity to provide advisory or discretionary management services to the fund. this creates a cleaner corporate structure and is often expected by investors. the bvi's approved manager regime is a simple, cost-effective, and highly efficient licensing pathway for this purpose, offering:

• a fast-track registration process
• a simplified regulatory burden (including simplified economic substance obligations), with no requirement for a local bvi office or staff
• significantly lower ongoing compliance costs compared to a full investment business license, making it ideal for managers with aum under us$400 million (for open-ended funds) or committed capital under us$1 billion (for closed-ended funds)

it’s often established concurrently with the fund, allowing for a seamless setup.

next steps for emerging fund managers

selecting the right jurisdiction and fund structure is a foundational decision that directly impacts a fund's operational efficiency, cost base, and ability to attract capital. for emerging managers in the middle east looking to tap into a global investor pool, both the cayman islands and bvi offer efficient, respected, and scalable offshore solutions. the optimal choice depends on a careful evaluation of several key factors, including:

• target investor base
• strategy type (open vs closed-ended)
• budget and compliance appetite

engaging offshore legal counsel early ensures the right jurisdiction, structure, and manager licensing are selected—saving both time and cost down the line.

at harneys, we help emerging managers build flexible, cost-effective fund platforms that grow with them.

if you’re considering your first fund launch—or your first offshore structure—we’d be happy to guide you through your options.

the cayman islands data protection act (the dp act) governs how a data controller may process, use and retain personal data. anyone who falls within the definition of a “data controller” (such as a cayman islands investment fund) must now comply with eight data protection principles in relation to any personal data processed by the data controller. where a data controller engages a third party (such as an administrator or investment manager) to process personal data on its behalf, the data controller must ensure the third party complies with the eight data protection principles.

in addition to governing how a data controller processes, uses and retains personal data, the dp act also sets out the rights of individuals to control their personal data and implements a system to protect against the misuse of personal data. the dp act is similar to the general data protection regulation (gdpr) of the european union with which many clients will be familiar.

for a general overview of the cayman islands dp act please see our guide to data protection in the cayman islands.

application of dp act to investment funds

in order for investors to invest in an investment fund they must provide certain personal identifying information to the investment fund. even where the investor is an entity, personal identifying information of contact persons, beneficial owners, directors, employees, partners or members of that entity will be provided to the investment fund. this personal information will be considered personal data under the dp act.

the individual to which the personal data relates does not need to be in the cayman islands or a citizen of the cayman islands in order for the dp act to apply.

any investment fund structured as a cayman islands company or partnership, or any foreign company registered in the cayman islands that acts as a general partner of an investment fund will be subject to the dp act and will be a data controller.

what must an investment fund do to comply with the dp act?

as a data controller, an investment fund must ensure that it complies with the eight data protection principles when it processes any personal data. it must also ensure that any third party that processes personal data on its behalf also complies with the eight data protection principles.

cayman islands investment funds must:

• send a privacy notice to existing investors
• update their subscription documents to include a privacy notice for new investors as well as obtain certain acknowledgements, representations and warranties
• update offering documents to reflect the requirements under the dp act
• update agreements with any third parties that process personal data on behalf of the investment fund to ensure such processing is undertaken in compliance with the dp act especially where there is transfer of data outside of the cayman islands

privacy notices

if the investment fund is already subject to gdpr then the investment fund may have already adopted a gdpr compliant privacy notice. if that is the case, then a few minor amendments to the privacy notice to reflect the dp act are all that are needed.

if the investment fund has not yet adopted a privacy notice then it should prepare one in order to communicate the required information to its investors.

in either case the privacy notice should be sent to existing investors and/or made available on an investor or fund administration portal.

subscription documents

the subscription agreement of the investment fund will also need to be updated to include the privacy notice and certain acknowledgements from the investor. it should also contain representations and warranties from entity investors that they have provided the privacy notice to any person whose data is given to the investment fund (eg beneficial owners, directors etc) and may need to also contain consent provisions for specific activities prescribed under the dp act, such as the processing of sensitive personal data if applicable.

offering documents

offering documents should be updated to include a brief disclosure and overview of the dp act. if no update to the offering documents is scheduled or the investment fund is closed then an investor circular with the privacy notice should be prepared and sent to investors or made available on an investor or fund administration portal.

third party agreements

it is important for the investment fund to update each of their service agreements with third parties who process personal data at the request and under the instructions of the investment fund. the investment fund, as a data controller, must ensure that those third parties process the personal data according to the data protection principles, even if the third party is outside of the cayman islands.

service agreements with the fund administrator and the investment manager will be of key importance to update. depending on the structure and operations of the investment fund, if there are other service providers, such as distributors, then those agreements will also need to be updated.

assistance with the necessary updates

your usual harneys contact is able to assist the investment fund with these necessary updates and provide advice on compliance with the dp act.

the office of the ombudsman has issued a guide for data controllers to explain how the office of the ombudsman will likely interpret various provisions of the dp act. the guide is largely based on the united kingdom’s information commissioner’s office’s guide to the gdpr and is a very useful starting point for information.

the cayman islands is the leading jurisdiction for the offshore investment funds industry due to its combination of flexible and appropriate regulation, an approachable and effective regulator, professional service provider expertise, high reputation among investors and a tax neutral fiscal regime.

investment funds established in the cayman islands fall into two broad categories: open-ended funds and closed-ended funds.

open-ended funds provide investors with voluntary redemption or repurchase rights and closed-ended funds do not provide investors with those rights. typically, open-ended funds will invest in liquid assets which can be readily realised to fund redemptions (eg listed, liquid, tradable securities) and closed-ended funds will invest in non-liquid assets requiring time to liquidate/realise value (eg real estate, unlisted companies).

this guide sets a summary of the regulatory regime of open-ended investment funds, which is supervised by the cayman islands monetary authority (cima).

for an overview of the regulatory regime that governs private funds please see guide to private funds in the cayman islands.

fund vehicle options

companies

exempted companies limited by shares are the most common form of entity used for the establishment of open-ended investment funds, with an investor’s liability being limited to the amount paid or agreed to be paid in respect of their shares. please see our guide to exempted companies for more details.

segregated portfolio companies

an exempted company may register as a segregated portfolio company (spc), which is similar to a segregated cell company in many other jurisdictions.

an spc may establish any number of segregated portfolios. assets and liabilities attributed to a particular segregated portfolio are legally separated from the assets and liabilities attributed to any other segregated portfolio. a creditor who is party to a contract involving a particular segregated portfolio will have restricted recourse and will be entitled to recover only against assets attributed and credited to the specific segregated portfolio to which the contract is also attributed.

spcs can be useful as multi-strategy vehicles and platform vehicles. savings by using multi-strategy spcs are often not as great as anticipated however and spcs with multiple segregated portfolios do require a greater degree of care to ensure assets are properly segregated, contracts are entered into on behalf of the correct segregated portfolio and inadvertent cross-collateralisation does not occur. please see our guide to segregated portfolio companies for more details.

limited liability companies

limited liability companies (llcs) can be incorporated in the cayman islands in a form closely aligned to the delaware llc. llcs may be used in investment fund structures where a flexible structure similar to a limited partnership is required, but where the vehicle needs to be established as a body corporate distinct from its members. llcs are regulated by their llc agreement and the limited liability companies act. please see our guide to llcs for more details.

exempted limited partnerships

while an exempted limited partnership (elp) is the most common vehicle for closed-ended funds including private equity, venture capital and real estate funds, they are also used for open-ended funds. an elp has many similarities to its delaware equivalent vehicle but an elp is not a separate legal person and for this reason, it is popular with managers and investors in a number of jurisdictions. an elp is managed by its general partner. please see our guide to elps for more details.

unit trusts

cayman islands unit trusts are established under and governed by the cayman islands trusts act and, save as modified under that law, generally applicable principles of english trust law. with a unit trust, investors contribute funds to a trustee which holds those funds on trust for the investors and each investor is directly entitled to a pro rata share in the trust’s assets, its unit. unit trusts are constituted under a trust deed that provides the terms on which the trustee holds the trust’s assets for unit holders. the use of cayman islands unit trusts is particularly popular in japan for domestic tax purposes.

general

establishment

all of the above vehicles can be established on an express basis and no cayman islands governmental or regulatory approvals are required to establish such vehicles.

taxation of vehicles

all of the above vehicles are exempted from any cayman islands income or gains taxes and can obtain a tax undertaking certificate from the cayman islands government guaranteeing no change in their tax status for 20 years or more.

liability of investors

all of the above vehicles issue equity interests which typically limit investor liability to the amount paid or agreed to be paid in respect of their investment.

management of vehicles

an exempted company’s or spc’s management rests with its board of directors, a unit trust’s with its trustee, an llc’s with its members or a separate manager or managers and an elp’s with its general partner, and these are all referred to as ‘operators’. typically, investment management authority is delegated to an investment manager or adviser although the relevant operator will always be required under generally applicable law to maintain oversight of the investment manager’s functions.

cima has provided guidance on best practice for fund governance which should be followed by operators of all funds. see our guide to duties and obligations of a director of a cayman islands fund for further details.

mutual fund and securities regulation

the mutual funds act (mf act) is the main legislation regulating open-ended investment funds in the cayman islands. investment managers, broker dealers and others carrying on securities investment business from the cayman islands must comply with the securities investment business act (sib act). all investment funds, investment managers and their service providers must comply with anti-money laundering and automatic exchange of information laws and regulations.

what is a ‘mutual fund’?

• to be categorised as a mutual fund under the mf act:
• the fund must be issuing equity and not debt or contractual interests, in other words, shares, limited partnership interests, llc interests or trust units
• the fund must be a collective investment vehicle effecting the pooling of investor funds
• the fund must issue equity interests which are redeemable or repurchasable at the option of the investors, so those funds where the fund operators have discretion to consent to redemptions or repurchases are exempt. however, funds with an initial but limited no redemption lock-up period (usually from six months to three years) are considered mutual funds for the purposes of the mf act
• the fund must be established in the cayman islands or be a foreign fund and seek to make an offer or invitation to the public in the cayman islands to subscribe for its equity interests

exclusions or exemptions from regulation for funds?

some funds are not considered mutual funds under the mf act and therefore are not required to be registered with, or licensed by, cima under that act:

• single investor funds (which are not master funds) are not mutual funds, as there is no ‘pooling’ of investor funds
• closed-ended funds which do not permit the redemption or repurchase of investor equity, for example private equity funds, are not mutual funds (however please see our private funds guide referred to above as a private fund may need to be registered with cima under the private funds act)
• listed or otherwise regulated funds which are not incorporated or established in the cayman islands and which make invitations to the public in the cayman islands to subscribe for the fund’s equity interests through a person licensed under the sib act, provided that the fund in question must be either:
  • listed on a stock exchange recognised for the purpose by cima
  • regulated in a category and by a regulator recognised for the purpose by cima

regulated mutual funds

there are four categories of regulated mutual funds:

• registered funds (which includes master funds required to register)
• limited investor funds
• administered funds
• licensed funds

registered funds

this is the most common category of regulation under the mf act, with approximately 68 per cent of cayman islands mutual funds registered with cima coming under this category as at the end of q4 2024. to qualify for registration as a registered fund, a mutual fund must have either:

• a minimum initial subscription amount of us$100,000, or its equivalent in any other currency (by far the most common), or
• its equity interests listed on a recognised stock exchange approved by cima

master funds

master funds are a sub-category of registered funds. approximately 25 per cent of cayman islands mutual funds registered with cima are master funds as at the end of q4 2024.

a master fund is a vehicle that facilitates the investment by feeder funds located in the cayman islands or elsewhere. typically a master fund is used when different types of investor are going to be investing in a similar investment strategy but they cannot be commingled in one vehicle.

a cayman islands entity into which a cima regulated feeder fund (which is a mutual fund regulated by cima that conducts more than 51 per cent of its investing through a master fund) invests is classified as a ‘master fund’ under the mf act. a master fund does not benefit from the single investor exemption or fall within the limited investor fund classification (15 or fewer investors).

for example, a typical master/feeder structure may involve a cayman islands feeder fund and a us feeder fund being set up to invest in a cayman islands master fund. if the cayman islands feeder fund were registered or licenced by cima then the master fund would have to register. however, if the cayman islands feeder fund is not required to register with cima (for example, because it is a single investor fund) and the only other investor is the us feeder fund, the master fund would instead be classified as a standard mutual fund and would likely register as a registered mutual fund with cima.

limited investor funds

limited investor funds are those mutual funds of which the equity interests are held by not more than 15 investors, a majority of whom (in number and without reference to the number of shares or other equity interests held by each investor) are capable of appointing or removing the operator of the fund. the limited investor fund classification excludes master funds.

this category of fund was previously known as a “section 4(4) fund” or “exempt fund” because it was not required to be registered with cima. however changes to the mutual funds registration regime in 2020 mean that all such funds are to be registered with cima.

as at the end of q4 2024, approximately 5 per cent of mutual funds are registered as limited investor funds. this is mainly down to the fact that a limited investor fund and a registered mutual fund are subject to identical regulatory oversight so there are now no benefits to being a limited investor fund in the cayman islands.

administered funds

administered funds make up approximately 2 per cent of mutual funds that are registered with cima as at the end of q4 2024.

administered funds will generally be used if the promoter does not want to have a minimum initial investment amount for its investors. the mutual fund must designate a principal office in the cayman islands at the office of a cayman islands based licensed mutual fund administrator. the key difference to registered funds is that responsibility for regulatory oversight for administered funds is largely delegated to the licensed mutual fund administrator and therefore the administrator providing the fund's principal office must be satisfied that:

• each promoter of the fund is of sound reputation
• the fund's administration will be undertaken by persons with sufficient expertise to administer the mutual fund and who are of sound reputation
• the fund's business and any offering of its equity interests will be carried out in a proper way

on an ongoing basis, the licensed fund administrator must notify cima if it has reason to believe that a fund for which it provides the principal office is acting in breach of the mf act, is insolvent or is otherwise acting in a manner that is prejudicial to its creditors or investors. there are also specific on-going obligations applicable to licensed mutual fund administrators.

licensed funds

this is the rarest category of cayman islands funds with fewer than 1 per cent of regulated mutual funds falling under this category of regulation as at the end of q4 2024.

unless a mutual fund falls within one of the other categories described above, it must obtain a mutual fund licence. a fund promoter manager would usually choose to licence a fund under the mf act if the fund is intended to be a retail fund offered generally to the public outside the cayman islands, with its administrator and/or manager and other key service providers located outside the cayman islands.

licensed funds are rarely encountered in practice as retail investment funds are normally set up as onshore funds in accordance with the regulatory requirements of their relevant home jurisdiction. however, one of the main exceptions to this practice has been in japan, where the use of licensed funds structured as cayman islands exempted unit trusts has been popular. this type of category is usually only chosen by well-known financial institutions.

eu connected funds

the cayman islands government passed legislation which introduces the concept of ‘eu connected funds’ to enable cayman islands funds to take advantage of the passport regime under the european union’s alternative investment fund managers directive as and when it becomes available to cayman islands investment funds. further secondary legislation sets out in detail how eu connected funds will be regulated. the eu connected fund regime under the mf act will allow both open-ended and closed-ended funds to apply to be registered or licensed with cima as eu connected funds and therefore enable them to benefit from the eu passport regime.

service providers

auditor

all regulated mutual funds must appoint an auditor from a list of firms approved by cima (and the local cayman office of that audit firm will need to sign off on the audited financial statements).

administrator

although not a mf act requirement, in practice regulated mutual funds will generally appoint an independent administrator whose function will be to handle all of the day to day fund accounting, net asset value calculations and investor due diligence and reporting.

investment manager

there is no restriction on the location or regulation of the investment manager of a regulated mutual fund and managers may wish to set up a cayman islands vehicle as the investment manager or adviser to the fund.

the sib act regulates the advisory and management services of investment managers and investment advisers incorporated, registered or with a place of business in the cayman islands.

further details on investment managers and advisors and the sib act can be found in our guide to securities investment business.

location of service providers

save for administered funds and the local auditor sign-off requirement, there is no requirement that a mutual fund’s service providers be based in the cayman islands or in any prescribed jurisdiction.

registration

to register a registered fund with cima, the following documents must be filed via cima’s online registration system:

• the online application form including details of the fund, its service providers and its anti-money laundering and compliance officers
• the fund’s offering document
• consent letters from the fund’s administrator and auditor (confirming that they act as such on behalf of the fund)
• the fund’s certificate of incorporation, registration or trust deed
• the electronic transactions act affidavit or declaration
• payment of the relevant application fee

general provisions affecting ongoing operation of cayman islands funds

the cayman islands open-ended fund model requires transparency and full disclosure in the offering document, an audit firm that has been vetted and approved by cima and regular reporting. it is a model that emphasises disclosure over arbitrary prescription and so there are no requirements as to leverage or asset allocation or investment strategies. the model has proved popular and has changed little over the years, giving investors and managers a certain platform for their agreements.

the following sets out the key continuing obligations for a registered fund, and for further details see our guide to continuing obligations of a cayman islands registered mutual fund.

mf act requirements

all regulated mutual funds (other than master funds) must have a current offering document which describes the equity interests in all material respects and contains such other information as is necessary to enable a prospective investor in the mutual fund to make an informed decision as to whether or not to subscribe for or purchase the equity interests.

all regulated mutual funds (other than a master fund which has no offering document) must file their offering document with cima on registration or licensing together with certain prescribed particulars.

all regulated mutual funds, as long as there is a continuing offering of equity, must inform cima of any change that materially affects any information in the offering document (or prescribed details of a master fund, where applicable) and must file with cima an amended offering document and the relevant cima form incorporating such changes within 21 days.

all regulated mutual funds must submit audited financial statements to cima within six months of the end of the fund’s financial year, in electronic format together with a fund annual return form.

all regulated mutual funds must pay the applicable annual cima fee (currently us$4,482 and us$3,202 for master funds) by 15 january of each year. if the annual fee is not paid by 15 january of each year, a penalty of 1/12 of the annual fee will be payable for each month or part of a month during which the annual fee and any penalty remains unpaid.

director registration

under the director registration and licensing act (drl act), all directors and managers of llcs, whether natural persons or corporate directors and whether resident in the cayman islands or elsewhere, who act as directors of regulated mutual funds (or manager where the regulated mutual fund is an llc) must also be registered with, or in certain circumstances be licensed by, cima. an application fee is payable to cima together with annual fees, which must be paid by 15 january of each year. there are heavy penalties for non-compliance with the drl act, including significant fines and imprisonment.

registered office

all cayman islands exempted companies, exempted limited partnerships, llcs and exempted unit trusts must have a registered office in the cayman islands provided by a person licensed under the companies management act or the banks and trust companies act.

aml compliance

cayman islands investment funds, including mutual funds, are obliged to comply with cayman islands anti-money laundering, proliferation financing and terrorist financing (aml) legislation, including assessing and applying a risk-based approach to money laundering, proliferation financing and terrorist financing risks and compliance. funds must designate natural persons to the roles of aml compliance officer, money laundering reporting officer and deputy money laundering reporting officer, after which performance of these functions can be delegated or outsourced.

typically funds delegate performance of certain aml functions by appointing an administrator based a jurisdiction that is not considered a high-risk jurisdiction for aml purposes to undertake its aml compliance function (eg cayman islands, us, ireland or bermuda). ultimate responsibility for maintaining and implementing satisfactory aml procedures remains with the fund and its operators. typically the fund administrator will need to agree to undertake the aml work for the fund in accordance with cayman islands rules. if they do not, then the fund’s operators will need to undertake a gap analysis and ensure that any differences are addressed.

under the guidance notes on the prevention and detection of money laundering and terrorist financing in the cayman islands issued by cima such outsourcing by the fund to its administrator is acceptable if:

• details of the administration agreement and written evidence of the suitability of the administrator (or its employees) to perform the relevant functions on behalf of the mutual fund are available to cima on request
• there is a clear understanding between the administrator and the mutual fund of the functions to be performed by the administrator and documentation of the reliance by the fund on the administrator to perform such functions
• the relevant customer information is readily available to cima on request and to the financial reporting unit and other law enforcement authorities

as a result it is crucial for the relevant administration agreement to contain provisions to this effect. cima’s statement of guidance on outsourcing also provides guidance to regulated mutual funds on the establishment of outsourcing arrangements and the outsourcing of material functions or activities, including aml compliance functions.

automatic exchange of information obligations

cayman islands funds are not directly subject to the us foreign account tax compliance act (fatca), however the cayman islands has introduced legislation implementing fatca requirements for ‘financial institutions’ to identify and report certain us accounts to the cayman islands tax information authority (tia) on an annual basis.

the cayman islands has also enacted regulations (crs regulations) to implement the oecd common reporting standard on automatic exchange of information (crs) into cayman islands law. under the crs regulations, cayman islands ‘reporting financial institutions’ have to report information on the holders of ‘reportable accounts’ which are tax resident in ‘reportable jurisdictions’.

cayman islands mutual funds will typically fall within the definition of an ‘investment entity’ and are generally classed as a ‘financial institution’ for fatca and crs purposes. funds therefore have information gathering and reporting obligations to report the relevant information to the tia on an annual basis and that information will then be sent automatically to the relevant home tax jurisdiction of the relevant account holders.

for further details of applicable fatca and crs requirements, please contact your usual harneys representative or see our guide to automatic exchange of information obligations for cayman islands investment funds.

supervision and enforcement

cima can require a special audit of a regulated mutual fund. regulated mutual funds must also provide cima with such information and access to such records as cima requires from time to time.

cima may apply to court to preserve the assets of a regulated mutual fund.

cima has the power in relation to a regulated mutual fund to revoke its registration, impose conditions upon it, require the substitution of a promoter or management, appoint advisers or persons to assume control of the affairs of the mutual fund or require the reorganisation or winding up of the mutual fund.

the auditor of a regulated mutual fund must immediately give written notice to cima if the mutual fund is, or is likely to become, unable to meet its obligations as they fall due, is carrying on or attempting to carry on business in a manner prejudicial to investors or creditors or is maintaining insufficient accounting records to allow its accounts to be properly audited.

cima also has the power under the monetary authority act to impose significant administrative fines of up to ci$1 million (us$1.2 million) for each breach of certain provisions of the anti-money laundering regulations and other cayman regulatory laws and regulations, including the mf act and sib act. the level of an administrative fine will depend on various factors including whether the breach is committed by an individual or a body corporate and if the breach is classified as minor, serious or very serious.

beneficial ownership

under the beneficial ownership transparency act, exempted companies, llcs and elps must maintain a beneficial ownership register unless an alternative route to compliance applies. mutual funds are able to rely on an alternative route to compliance by providing details of an authorised “contact person” to the competent authority in the cayman islands instead of having to maintain a full beneficial ownership register. see our guide to the cayman islands beneficial ownership regime for more details.

the cayman islands is the leading jurisdiction for the offshore investment funds industry due to its combination of flexible and appropriate regulation, an approachable and effective regulator, professional service provider expertise, high reputation among investors and a tax neutral regime.

investment funds established in the cayman islands fall into two broad categories: open-ended funds and closed-ended funds.

open-ended funds provide investors with voluntary redemption or repurchase rights and closed-ended funds do not provide investors with those rights. typically, open-ended funds will invest in liquid assets which can be readily realised to satisfy redemptions (eg listed, liquid, tradable securities) and closed-ended funds will invest in non-liquid assets requiring time to liquidate/realise value (eg real estate, unlisted companies).

this guide sets out a summary of the regulatory regime that governs closed-ended investment funds, known as private funds, which is supervised by the cayman islands monetary authority (cima).

for an overview of the regulatory regime that governs open-ended investment funds please see our guide to mutual funds in the cayman islands.

fund vehicle options

exempted limited partnerships

an exempted limited partnership (elp) is the most common vehicle for closed-ended funds including private equity, venture capital and real estate funds. an elp has many similarities to its delaware equivalent vehicle but an elp is not a separate legal person and for this reason, it is popular with managers and investors in a number of jurisdictions. an elp is operated and managed by its general partner. please see our guide to elps for more details.

limited liability companies

limited liability companies (llcs) can be incorporated in the cayman islands in a form closely aligned to the delaware llc. llcs may be used in investment fund structures where a flexible structure similar to a limited partnership is required, but where the vehicle needs to be established as a body corporate distinct from its members. llcs are regulated by their llc agreement and the limited liability companies act. please see our guide to llcs for more details.

companies

exempted companies limited by shares are also used for the establishment of closed-ended investment funds, with an investor’s liability being limited to the amount paid or agreed to be paid in respect of their shares. please see our guide to exempted companies for more details.

segregated portfolio companies

an exempted company may register as a segregated portfolio company (spc), which is similar to a segregated cell company in many other jurisdictions.

an spc may establish any number of segregated portfolios. assets and liabilities attributed to a particular segregated portfolio are legally separated from the assets and liabilities attributed to any other segregated portfolio. a creditor who is party to a contract involving a particular segregated portfolio will have restricted recourse and will be entitled to recover only against assets attributed and credited to the specific segregated portfolio to which the contract is also attributed.

spcs can be useful as multi-strategy vehicles and platform vehicles. savings by using multi-strategy spcs are often not as great as anticipated however and spcs with multiple segregated portfolios do require a greater degree of care to ensure assets are properly segregated, contracts are entered into on behalf of the correct segregated portfolio and inadvertent cross-collateralisation does not occur. please see our guide to segregated portfolio companies for more details.

unit trusts

cayman islands unit trusts are established under and governed by the cayman islands trusts act and, save as modified under that law, generally applicable principles of english trust law. with a unit trust, investors contribute funds to a trustee which holds those funds on trust for the investors and each investor is directly entitled to a pro rata share in the trust’s assets, its unit. unit trusts are constituted under a trust deed that provides the terms on which the trustee holds the trust’s assets for unit holders. the use of cayman islands unit trusts is particularly popular in japan for domestic tax purposes.

general

establishment

all of the above vehicles can be established on an express basis and no cayman islands governmental or regulatory approvals are required to establish such vehicles.

taxation of vehicles

all of the above vehicles are exempted from any cayman islands income or gains taxes and can obtain a tax undertaking certificate from the cayman islands government guaranteeing no change in their tax status for 20 years for exempted companies and 50 years for elps and llcs.

liability of investors

all of these vehicles issue equity interests which typically limit investor liability to the amount paid or agreed to be paid in respect of their investment.

management of vehicles

an exempted company’s management rests with its board of directors, an elp’s with its general partner (typically a cayman islands exempted company and so ultimately with that entity’s board), an llc’s with its manager, and a unit trust’s with its trustee and these are all referred to as ‘operators’. typically investment management authority is delegated to an investment manager or adviser although the relevant operator will always be required under generally applicable law to maintain oversight of the investment manager’s functions.

cima has provided guidance on best practice for fund governance which should be followed by operators of all funds. see our guide to duties and obligations of a director of a cayman islands fund for further details.

private fund and securities regulation

the private funds act (pf act) is the main legislation regulating closed-ended investment funds in the cayman islands. investment managers, broker dealers and others carrying on securities investment business from the cayman islands must comply with the securities investment business act (sib act). all investment funds, investment managers and their service providers must comply with anti-money laundering and automatic exchange of information laws and regulations.

what is a ‘private fund’?

to be categorised as a private fund under the pf act:

• the fund must be offering, issuing or have issued, investment interests and not debt or contractual interests, in other words, shares, limited partnership interests, llc interests or trust units
• the investment interests cannot be redeemable at the option of the investor
• the fund must be a collective investment vehicle effecting the pooling of investor funds
• the holders of investment interests must not have day-to-day control over the acquisition, holding, management or disposal of the investments
• the investments are managed as a whole by or on behalf of the operator of the private fund, directly or indirectly
• the fund must be established in the cayman islands or be a foreign fund and seek to make an offer or invitation to the public in the cayman islands to subscribe for its investment interests

exclusions or exemptions from regulation for certain funds?

certain ‘non-fund arrangements’ are deemed not to be private funds, such as a single family office, pension fund, securitisation special purpose vehicle, sovereign wealth fund and any fund whose investment interests are listed on a recognised stock exchange. accordingly, these vehicles are not required to register with cima under the pf act.

single investor funds are not private funds, as there is no ‘pooling’ of investor funds and open-ended funds which permit the redemption or repurchase of investor equity are not private funds.

a private fund that is not incorporated or established in the cayman islands and which makes an invitation to the public in the cayman islands to subscribe for the fund’s investment interests through a person licensed under sib act, and those interests are either listed on a stock exchange specified by cima, or the private fund is regulated by a regulator approved by cima, is not required to register with cima.

valuation and cash monitoring

all private funds will need to conduct an asset valuation. the valuation must be done on an appropriate and consistent basis, which must be at least annually, and in accordance with cima’s rules on the calculation of net asset values for private funds.

all private funds must monitor cash flows, cash account receipts and payments to investors.

custody and title verification

a private fund must appoint a custodian:

• to hold assets which are capable of physical delivery or capable of registration in a custodial account (except where that is neither practical nor proportionate given the nature of the private fund and the type of asset held)
• to verify title to, and maintain records of, assets

the custodian must be authorised in an approved jurisdiction to provide custody services and not have a control relationship with the manager or operator of the private fund.

where it is not practical nor proportionate to appoint a custodian the private fund must still ensure that title verification is performed.

valuation, custody and cash monitoring service providers

for each of valuation, title verification (where custody is not practical nor proportionate for the relevant private fund) and cash monitoring, these functions must be performed by an independent provider, administrator, or the manager or operator of the private fund. where the manager or operator is appointed for a function, there must be appropriate operational independence (the same people at the investment manager cannot perform portfolio management and valuation tasks, for example) and potential conflicts of interest must be identified, monitored and disclosed to investors.

an administrator must be established in an approved jurisdiction and authorised or otherwise permitted to provide administration services and not have a control relationship with the manager or operator of the private fund. where there is a control relationship there must be appropriate operational independence and disclosure, management and monitoring of the potential conflicts of interest to investors.

where the asset valuation, custody or cash monitoring is not performed by an independent provider cima has the power to require that the valuations be verified by an auditor or independent third party.

identification of securities

for those private funds that regularly trade securities or hold them on a consistent basis, they must maintain records of the identification codes (eg isin or lei) of the relevant securities.

auditor

all private funds must appoint an auditor from a list of firms approved by cima (and the local cayman office will need to sign off on audits).

investment manager

there is no restriction on the location of the investment manager of a private fund if the investment management is not carried out by its general partner (for an exempted limited partnership) and many managers decide to set up a cayman islands vehicle as the investment manager or adviser to the fund.

sib act regulates the advisory and management services of investment managers and investment advisers incorporated, registered or with a place of business in the cayman islands.

further details on investment managers and advisers and sib act can be found in our guide to securities investment business.

location of service providers

save for the local auditor sign off requirement, there is no requirement that a fund’s service providers be based in the cayman islands or in any prescribed jurisdiction.

alternative investment vehicles

the pf act creates a category of private fund known as an “alternative investment vehicle” (aiv), which is a company, unit trust, partnership or other similar vehicle that:

• is formed in accordance with the constitutional documents of a private fund for the purposes of making, holding and disposing of one or more investments wholly or mainly related to the business of that private fund
• only has as its members, partners or trust beneficiaries, persons that are members, partners or trust beneficiaries of the private fund

an aiv needs to register with cima.

where gaap of an approved jurisdiction or ifrs permits consolidated or combined financial account reporting and a private fund chooses to report consolidated or combined financial statements with its aiv then the aiv is not required to appoint a custodian or an auditor, conduct asset valuation, monitor cash flows or identify securities.

registration

to register a private fund with cima, the following documents must be filed via cima’s online registration system:

• the online application form including details of the fund, its operator(s), its service providers and its anti-money laundering and compliance officers
• the fund’s offering document, summary of terms or marketing material which must contain the disclosures required pursuant to cima’s rule on the contents of marketing materials for private funds
• consent letters from the fund’s administrator (if applicable) and auditor (confirming that they act as such on behalf of the fund)
• the fund’s certificate of incorporation, registration or trust deed
• structure chart
• the electronic transactions act affidavit
• payment of the relevant application fee

prior to the filing of a registration application with cima, a private fund, or any person authorised to act on behalf of a private fund, may engage in oral or written communications and enter into any agreements with high net worth persons or sophisticated persons who may have an interest in subscribing for or purchasing investment interests in the private fund. however, a private fund must not accept capital contributions from investors, in respect of investments, until it is registered with cima.

general provisions affecting ongoing operation of cayman islands private funds

the following sets out the key continuing obligations for a private fund, for further details see our guide to continuing obligations of a cayman islands private fund.

pf act requirements

as set out above all private funds must conduct asset valuations at least annually and ensure the custody/title verification requirements are being fulfilled. they must also ensure that cash monitoring is being satisfactorily conducted and that all securities are being identified (where applicable).

all private funds must, within 21 days, file details with cima of any change that materially affects any information previously filed with cima, including a change of registered office.

all private funds must submit audited financial statements to cima within six months of the end of the fund’s financial year, in electronic format together with a fund annual return form.

all private funds must pay the applicable annual cima fee (currently us$4,268) by 15 january of each year. if the annual fee is not paid by 15 january of each year, a penalty of 1/12 of the annual fee will be payable for each month or part of a month during which the annual fee and any penalty remains unpaid.

a fee of us$300 is payable each year in respect of each aiv, up to a maximum of 25 vehicles.

no cima director registration

the directors (or managers of llcs) of private funds (or directors of the general partner of a private fund) are not required to be registered with cima under the director registration and licensing act.

registered office

all cayman islands exempted companies, exempted limited partnerships, llcs and exempted unit trusts must have a registered office in the cayman islands provided by a person licensed under the companies management act or the banks and trust companies act.

aml compliance

cayman islands investment funds, including private funds, are obliged to comply with cayman islands anti-money laundering, proliferation financing and terrorist financing (aml) legislation, including assessing and applying a risk-based approach to money laundering, proliferation financing and terrorist financing risks and compliance. funds must designate natural persons to the roles of aml compliance officer, money laundering reporting officer and deputy money laundering reporting officer, after which performance of these functions can be delegated or outsourced.

typically funds delegate performance of certain aml functions by appointing an administrator to undertake its aml compliance function. ultimate responsibility for maintaining and implementing satisfactory aml procedures remains with the fund however. it should be noted that many us based administrators, although located in an approved jurisdiction, will not be subject to us aml regulations. as such, specific provisions will need to be included in agreements with us based administrators.

under the guidance notes on the prevention and detection of money laundering and terrorist financing in the cayman islands such outsourcing by the fund to its administrator is acceptable if:

• details of the administration agreement and written evidence of the suitability of the administrator (or its employees) to perform the relevant functions on behalf of the private fund are available to cima on request
• there is a clear understanding between the administrator and the private fund of the functions to be performed by the administrator and documentation of the reliance by the fund on the administrator to perform such functions
• the relevant customer information is readily available to cima on request and to the financial reporting unit and other law enforcement authorities

as a result it is crucial for the relevant administration agreement to contain provisions to this effect. cima’s statement of guidance on outsourcing issued in 2023 also provides guidance to funds on the establishment of outsourcing arrangements and the outsourcing of material functions or activities, including aml compliance functions. cima’s notice in april 2018 also includes guidance for funds where reliance is placed on others to perform aml functions.

automatic exchange of information

cayman islands funds are not directly subject to the us foreign account tax compliance act (fatca), however the cayman islands has introduced legislation implementing fatca requirements for ‘financial institutions’ to identify and report certain us accounts to the cayman islands tax information authority (tia) on an annual basis.

the cayman islands has also enacted regulations (crs regulations) to implement the oecd common reporting standard on automatic exchange of information (crs) into cayman islands law. under the crs regulations, cayman islands ‘reporting financial institutions’ have to report information on the holders of ‘reportable accounts’ which are tax resident in ‘reportable jurisdictions’ and all cayman islands ‘financial institutions’ have to register with the tia via its automatic exchange of information portal.

the majority of cayman islands funds fall within the definition of an ‘investment entity’ and are generally classed as a ‘financial institution’ for fatca and crs purposes. as a result, these funds have information gathering, due diligence and reporting obligations. ongoing obligations include the requirement to report the relevant information to the tia on an annual basis. reported information will then be sent automatically to the relevant home tax jurisdiction of the relevant account holders.

for further details of applicable fatca and crs requirements, please see our guide to automatic exchange of information obligations for cayman islands investment funds or contact your usual harneys representative.

supervision and enforcement

cima can require a special audit of a private fund. private funds must also provide cima with such information and access to such records as cima requires.

cima may apply to court to preserve the assets of a private fund.

cima has the power in relation to a private fund to revoke its registration, impose conditions upon it, require the substitution of a promoter or management, appoint advisers or persons to assume control of the affairs of the private fund or require the reorganisation or winding up of the private fund.

the auditor of a private fund must immediately give written notice to cima if the private fund is, or is likely to become, unable to meet its obligations as they fall due, is carrying on or attempting to carry on business in a manner prejudicial to investors or creditors or is maintaining insufficient accounting records to allow its accounts to be properly audited.

cima also has the power under the monetary authority act to impose significant administrative fines of up to ci$1 million (us$1.2 million) for each breach of certain provisions of the anti-money laundering regulations and other cayman regulatory laws and regulations, including the pf act and sib act. the level of an administrative fine will depend on various factors including whether the breach is committed by an individual or a body corporate and if the breach is classified as minor, serious or very serious.

beneficial ownership

under the beneficial ownership transparency act, exempted companies, llcs and elps must maintain a beneficial ownership register unless an alternative route to compliance applies. private funds are able to rely on an alternative route to compliance by providing details of an authorised “contact person” to the competent authority in the cayman islands instead of having to maintain a full beneficial ownership register. see our guide to the cayman islands beneficial ownership regime for more details.

this guide looks at the roles and responsibilities of the nominated officers of financial service providers whose job it is to look out for and report suspicious activity and who oversee the compliance function and ensure that adequate systems and controls are in place to comply with the anti-money laundering regulations (revised).

money laundering is the process by which the proceeds of crime are channelled through the economy/financial system in a way which is intended to conceal the true origin and ownership of the proceeds of criminal activity. the proceeds of crime act (the pc act), the terrorism act and the supporting anti-money laundering regulations (revised) (the regulations) are the main pieces of legislation in the cayman islands aimed at combating money laundering, proliferation financing and terrorist financing. under these laws, those persons carrying out "relevant financial business" (referred to as financial service providers or fsps) must apply a risk based approach to anti-money laundering, proliferation financing and terrorist financing (together, aml) compliance.

nominated officers – money laundering reporting officer and deputy

the pc act requires that fsps have a "nominated officer" in place for the purpose of receiving reports relating to criminal conduct, with the regulations creating the roles of the money laundering reporting officer (mlro), deputy money laundering officer (dmlro) and aml compliance officer (amlco). accordingly, natural persons must be appointed as the mlro, dmlro and amlco for all fsps, including investment funds.

the regulations and guidance notes on the prevention and detection of money laundering and terrorist financing in the cayman islands (and amendments) (guidance notes) published by the cayman islands monetary authority (cima) set out more details on each of these roles and functions.

who can be appointed as mlro?

under the regulations each person carrying out relevant financial business must designate a person at management level as their mlro, to whom suspicious activity reports (sars) must be made. the mlro should be someone who is well versed in the business of the fsp which may give rise to opportunities for money laundering, proliferation financing or terrorist financing. a dmlro must also be appointed to perform the mlro’s functions in their absence. the dmlro should be a staff member of similar status and experience as the mlro.

the guidance notes provide that the mlro should:

• be a natural person
• be autonomous, meaning the mlro is the final decision maker as to whether to file a sar
• be independent, meaning no vested interest in the underlying activity
• have access to all relevant material in order to make an assessment as to whether an activity is or is not suspicious

what is the role of the mlro?

the primary duties of the mrlo (or the dmlro in their absence) are to:

• receive reports of any information or other matter which comes to the attention of a person carrying out relevant financial business, which gives rise to an actual knowledge or suspicion of money laundering, proliferation financing or terrorist financing
• consider and investigate such reports in light of all other relevant information to determine if the information or other matter gives rise to such knowledge or suspicion
• have access to other information which may assist in considering such report
• make prompt disclosures to the financial reporting authority (fra) in the standard sar form if after considering a report there is knowledge or a suspicion of money laundering, proliferation financing or terrorist financing
• establish and maintain a register of money laundering, proliferation financing or terrorist financing reports made by staff
• maintain a register of reports to the fra

how do we identify unusual or suspicious transactions?

as the types of transactions which may be used by money launderers are unlimited it is difficult to define a suspicious transaction. the guidance notes are instructive in that they differentiate between "unusual" and "suspicious" transactions, as set out below.

"unusual"

where a transaction is inconsistent in amount, origin, destination, or type with a customer's known, legitimate business or personal activities, the transaction must be considered "unusual", and the staff member put on enquiry.

"suspicious"

where the staff member conducts enquiries and obtains what they consider to be a satisfactory explanation of the complex or unusual large transaction, or unusual pattern of transactions, they may conclude that there are no grounds for suspicion, and therefore take no further action as they are satisfied with matters. however, where the staff member’s enquiries do not provide a satisfactory explanation of the activity, they may conclude that there are grounds for "suspicion" requiring disclosure and escalate the matter to the mlro/dmlro.

what is the liability of the mlro?

the pc act includes an offence directed solely at the failure by the mlro/dmlro to disclose to the fra that they suspect or know that another person is engaged in criminal conduct. the penalty for this offence is a fine and/or imprisonment for up to five years. mrlos should be aware that the pc act protects whistleblowers and that reporting suspicious activity to the fra will not give rise to any civil liability (legal, administrative or employment-related) and it does not constitute a breach of the duty of confidentially under cayman islands law.

who can be the amlco and what is their role?

the pc act, regulations and guidance notes expand the degree of compliance management expected from fsps. to manage these expectations effectively, the regulations require fsps to designate a natural person at managerial level as the amlco. the amlco’s duties are to ensure that measures are adopted by the fsp to comply with the regulations, to oversee the compliance function and to be the point of contact with the cayman islands regulatory authorities under the regulations. the guidance notes confirm that the amlco can also act as the mlro, provided they are competent and have sufficient time to perform both roles efficiently.

the amlco should:

• have sufficient skills and experience
• report directly to the fsp's board of directors or equivalent (board) and have sufficient seniority and authority so that the board reacts to and acts upon any recommendations
• have regular contact with the board so that the board is able to satisfy itself that its statutory obligations are being met and that sufficiently robust measures are being taken to protect itself against money laundering, proliferation financing and terrorist financing risks 
• have sufficient resources, time and support to carry out the role, as well as unfettered access to all business lines and information necessary to perform the function
• develop and maintain internal aml systems and controls in line with evolving requirements
• ensure regular audits of the internal aml programme
• maintain logs required, including of declined business, politically exposed persons and requests from competent authorities
• advise the board on compliance issues and report periodically to the board on the fsp’s systems and controls
• respond promptly to requests from relevant authorities

can we delegate performance of our aml obligations?

the guidance notes do permit the specific delegation or outsourcing of the performance of certain aml obligations, such as client due diligence, provided that:

• suitable natural persons have first been appointed to the roles of amlco, mlro and dmlro
• before entering into an outsourcing arrangement, the fsp assesses associated risks, including country risk, and concludes that those risks can be effectively managed and mitigated. the fsp should also have a contingency plan if the service provider fails to perform the outsourced activities
• the fsp conducts due diligence on the proposed service provider and ensures that it is fit and proper to perform the outsourced activities
• the outsourcing agreement clearly sets out the obligations of both parties and includes an obligation on the service provider to file a sar with the fra if suspicious activity occurs
• if the service provider operates from a jurisdiction outside the cayman islands in which any aspect of aml standards are lower than those of the cayman islands, the service provider should adopt cayman aml standards in that regard he fsp has access to all the relevant information or documents maintained by the service provider and all books and records on the outsourced activity are readily accessible to cima
• the amlco receives regular aml reports and reports on downstream investment activity from the relevant service provider

regular audits of the aml controls

the guidance notes require the amlco to ensure that regular audits of the aml program are conducted. the frequency of such audits will depend on the fsp’s nature, size, complexity and risks identified. audits should test the overall integrity and effectiveness of the systems and controls in place, including audits to:

• assess the adequacy of internal policies and procedures, including client due diligence, record keeping, transaction monitoring and third party relationships
• test compliance with the aml laws and regulations
• test transactions, with an emphasis on high-risk areas, products and services
• assess employees' knowledge of laws and internal policies and procedures and the adequacy of relevant training programmes
• assess the fsp’s process of identifying suspicious activity

staff awareness and training

if the fsp has staff, the key to effective compliance management is ensuring that staff are fully aware of their aml obligations, can recognise suspicious activity and act on it in the proper manner. the guidance notes recommend the following:

• staff screening, the scope of the screening should be proportionate to the potential risk associated with money laundering, proliferation financing or terrorist financing for the fsp’s business and the risks associated with individual positions
• initial and at least annual refresher training of staff on how to recognise suspicious activity, the results of the fsp’s risk assessments, the systems, policies and programmes they need to follow and the criminal offences that will be committed if they breach the legislation
• general aml training for all new staff as part of their introduction to the fsp
• tailored training for operations staff, supervisors and managers
• ongoing in-depth training for the mlro, dmlro and amlco on all aspects of the aml laws and internal policies

what enforcement powers does cima have?

although the guidance notes support the regulations, they are regarded as mandatory, as cima must take into account any applicable supervisory or regulatory guidance if they exercise any of their enforcement powers for breach of the regulations. it is therefore prudent to approach the guidance notes as if they have the force of law.

under the monetary authority act, cima has the power to impose administrative fines up to ci$1 million (us$1,219,500) for each breach of the regulations, depending on whether the breach is classed as being minor, serious or very serious.

summary

fsps, their amlco, mlro and dmlro need to be fully aware of their responsibilities, obligations and potential liability under the cayman islands aml regime. failing to report knowledge or suspicion of money laundering, proliferation financing or terrorist financing, and failing to have suitable procedures in place for internal control and communication, are serious criminal offences and breach of the regulations can also be penalised by substantial fines imposed by cima.

this guide provides an overview of the powers, duties and obligations of a director of an exempted company incorporated under the companies act of the cayman islands (companies act) which is registered with the cayman islands monetary authority (cima) as a fund (fund).

this guide is limited to those funds registered with cima under section 4(3) or 4(4)(a) of the mutual funds act (a mutual fund) and those funds registered with cima under the private funds act (a private fund) as well as the law and practice of the cayman islands. other duties, obligations and potential liabilities may also arise under the laws of other jurisdictions.

who are the directors of a fund?

there is no precise definition of a ‘director’ under cayman islands law. the directors of a fund may be individuals or corporate bodies and they are the persons with ultimate responsibility for the management and conduct of the fund's affairs.

the first directors of a fund (whether described as ‘executive’ or ‘non-executive’) are typically appointed by the initial subscribers to the fund or otherwise in accordance with the articles of association of the fund (articles). the register of directors maintained by the fund will be prima facie evidence of the identity of the directors from time to time.

a person undertaking the activities of a director without being formally appointed may be found to be acting as a ‘de facto director’. also, if the duly appointed directors of a fund are found to be acting in accordance with the directions or instructions of another person then that person may be found to be acting as a ‘shadow director’. a person is not deemed to be a shadow director however by reason only that the directors act on advice given by such person in a professional capacity, so that an investment adviser of a fund making recommendations to the directors as to the purchase or sale of investments should not usually constitute a shadow director.

executive directors, non-executive directors, shadow directors and de facto directors are all subject to the duties and obligations set out in this guide.

should i agree to act as a director of a fund?

when deciding whether or not to act as a director of a fund, the following points should be considered:

• who will be the other directors of the fund? will your fellow directors have the ability to work with you to properly coordinate the proper oversight and management of the fund?
• any other interests you may have in the overall structure of the fund and its advisers or service providers. if you are a connected person (for example, a principal of the fund's investment manager) you may want to consider either not sitting on the board of the fund or making sure that you are in a minority position. these measures will reduce the potential for conflicts of interest to arise which could increase the risk of your actions later being challenged by the investors of the fund as not being in accordance with your duties to the fund.
• the expectations of the fund's key investors. they may be comfortable with a board of directors comprised of connected persons or they may require the fund to have one or more directors independent of the fund's investment manager. this is something that you may wish to discuss further with the fund’s representatives and the fund’s current or proposed key investors before agreeing to accept any appointment as a director.
• you need to have sufficient and relevant knowledge and experience to discharge your duties as a director. it is up to you to acquire and maintain sufficient knowledge to enable you to carry out your role. you should use the fund's professional advisers to provide advice on any areas or transactions of which you are unsure. in particular, you should ensure that you are able to properly read and understand the financial information relating to the fund, including its financial statements. if there is anything that you do not understand, then you should promptly obtain professional advice.
• whether the fund has in place, or will be obtaining, any directors and officers insurance policy that would provide appropriate coverage for you.
• you need to have sufficient time to carry out your duties and this should be reflected in your remuneration.
• even if you are also an employee or principal of the investment manager or any other connected party, your duties as a director of the fund remain the same as an independent director. you should ensure that you are wearing the right ‘hat’ when turning your mind to the affairs of the fund and be aware of actual and potential conflicts of interest. any actual and potential conflicts of interest should then be disclosed in any prospectus, offering document or private placement memorandum issued by the fund (offering document).

please note that it is not mandatory under either the mutual funds act or the private funds act for a section 4(4)(a) fund or a private fund to issue an offering document, and references in this guide to an offering document are only applicable to a section 4(4)(a) fund or a private fund if it has issued a prospectus, offering document or private placement memorandum.

what are the powers and authority of the directors of a fund?

the powers and authority of a director are derived from, and constrained by, the fund’s memorandum of association (memorandum) and the articles. the memorandum sets out the capacity and powers of the fund and the articles set out the manner in which the fund is to be operated.

the directors will need to ensure that the fund is operated in accordance with the terms of any offering document issued by the fund to its investors from time to time. whilst the terms of the offering document do not fetter the powers of the directors of the fund, the offering document forms a collateral contract between the fund and its shareholders and so the directors should ensure that they regularly review, and are familiar with, the contents of the offering document.

in practice, the articles will almost certainly allow the directors to delegate their powers to service providers. the directors of a mutual fund must appoint an auditor and will typically appoint an investment manager, an administrator and a custodian/prime broker, amongst other service providers. the directors of a private fund must appoint an auditor and a custodian (unless exempt) and may also appoint an independent third party or administrator to perform certain functions set out in the private funds act.

in deciding to appoint a service provider the directors will need to be diligent and careful in their selection, forming the reasonable opinion that the service provider is competent to carry out the relevant function(s) on behalf of the fund.

once service providers have been appointed, the directors are entitled to trust (to a reasonable extent) the competence and integrity of the service provider in discharging its functions. the directors remain subject, however, to a continuing duty to supervise and monitor the activities of the service provider on a high-level basis. if a director is found to be in breach of this duty, they may be found guilty of wilful neglect or default, thereby potentially voiding the indemnity provisions in the articles and also the terms of any directors and officers insurance policy that the director may have in place – meaning that the director could potentially become personally liable for the breach.

what are a fund director’s duties?

the duties of a director of a fund arise as a consequence of the fiduciary relationship between the director and the fund and are based on a combination of english and commonwealth common law, as applied in the courts of the cayman islands, statute and regulatory guidance. there is, however, no statutory codification in the cayman islands of the general directors’ duties, obligations and liabilities (although, see below on regulatory guidance under the section cima statement of guidance).

directors’ duties will ordinarily be owed to the fund but can, in particular circumstances, be owed to creditors or individual shareholders.

in the ordinary course of business, the interests of the fund mean acting in the best interests of the fund's shareholders as a whole. however, if the fund becomes financially distressed then the directors’ fiduciary duty to the fund to act in its interests is modified to include a duty to act in the interests of creditors as a whole.

directors are also obliged to comply with various statutory obligations regarding the management and operation of the fund. the principal obligations applicable to the fund and to the directors arise under the companies act, the mutual funds act (for mutual funds), the private funds act (for private funds) and the proceeds of crime act.

directors’ key duties can be summarised as follows:

fiduciary duties

• to act bona fide in what the director considers to be the best interests of the fund
• to exercise their powers under the articles for the purposes for which they are conferred
• to avoid conflict between the interests of the fund and the director’s personal interests and duties or (where such conflicts are permitted by the articles, as is common) making sure that any such conflicts are properly disclosed
• to exercise the director’s powers as a director independently, without subordinating their powers to the will of others (except to the extent that such powers have been properly delegated) not to make secret profits from acting as a director of the fund

duties of skill and care

• to acquire and maintain a sufficient knowledge of the business of the fund on a continuing basis
• to supervise the discharge of functions which have been delegated to advisers and service providers (see “what are the powers and authority of the directors of a fund?” above)

directors are obliged to undertake these duties with care, diligence and skill. directors are subject to a minimum objective standard as a director of the fund, but the expected standard will be raised if a particular director has more knowledge, skill or experience than would ordinarily be expected of a director in their position. directors will also have the relevant contractual duties and obligations set out under any service agreements that they may enter into with the fund.

statutory obligations

• directors of a fund are obliged under cayman islands legislation:
• to maintain the fund’s register of members, the register of directors and officers and the register of mortgages and charges
• funds are likely to be able to rely on an alternative route to compliance by providing details of an authorised contact person to the competent authority in the cayman islands instead of having to maintain a full beneficial ownership register. (see our guide to the cayman islands beneficial ownership regime for more details on beneficial ownership registers and alternative routes to compliance that can apply)
• to maintain proper books of account for the fund
• to maintain a registered office in the cayman islands for the fund
• to comply with the anti-money laundering regulations (aml regulations) issued under the proceeds of crime act
• to ensure that the offering document issued by the fund describes the shares in all material respects, and contains such other information as is necessary to enable a prospective investor in the fund to make an informed decision whether or not to invest
• to update the offering document to take account of any material changes
• to file any material changes to the information previously filed with cima, including an amended offering document, within 21 days of the change
• to ensure that the fund is audited on an annual basis
• to comply with reporting obligations including, without limitation, notifying the registrar of companies (registrar) of any changes in the directors, officers or registered office of the fund, arranging for the filing of the fund's annual return and exempted company declaration with the registrar and filing the offering document and annual audited financial statements with cima
• to comply with the requirements of the director registration and licensing act (see “directors registration and licensing” below)

offering document obligations

cima has issued a rule for the contents of offering documents for mutual funds and a rule for the contents of marketing materials for private funds, which set out the specific content to be included in offering documents for each type of fund.

where one is prepared or is required, as well as the requirements set out in the applicable rule, cima expects a market standard offering document which properly and adequately describes the main features of the fund (including investment structure and strategy, role and functions of service providers, disclosure of interests, risk factors, and fee information) and provides all of the information that would reasonably be considered material to investors to make an informed investment decision.

automatic exchange of information and aml obligations

a fund also has reporting obligations under cayman islands legislation which implements the us foreign account tax compliance act (fatca) and the oecd’s common reporting standard (crs, and together with fatca, aeoi legislation).

full details of the ongoing reporting obligations of mutual funds and private funds can be found in our guide to continuing obligations of mutual funds and our guide to continuing obligations of private funds respectively.

in practice, the maintenance of statutory registers, the establishment of policies and procedures in accordance with the aml regulations, reporting under aeoi legislation and compliance with statutory filing obligations will be delegated by the directors to the registered office provider and/or administrator or another service provider of the fund. however, whilst the directors may be entitled to delegate these functions, the directors are still obliged to supervise the appointed service providers’ discharge of them.

segregated portfolio company funds

if the fund is a segregated portfolio company (spc), the directors will also have additional duties under the companies act. these include:

• the duty to establish and maintain the segregation of the assets and liabilities attributable to each segregated portfolio from the assets and liabilities attributable to each other segregated portfolio and the general assets and liabilities of the fund
• the duty to ensure that the fund states the capacity in which it is contracting (ie which segregated portfolio it is acting for) when entering into contractual documentation

in particular, proper oversight by a director of the proper maintenance of the segregation of assets and liabilities between the segregated portfolios in an spc is important to demonstrate the proper discharge of the director’s duties in respect of that spc under the companies act. such oversight should minimise the prospect of any potential cross-contamination of liabilities within the segregated portfolios of the spc. please see our guide to cayman islands segregated portfolio companies for further details.

cima rule and statement of guidance on corporate governance for funds

in 2023, cima published a rule and statement of guidance (sog) on corporate governance which applies to mutual funds and private funds. the rule and sog set out best practices and establish certain minimum corporate governance standards for governing bodies of funds.

rule

the rule requires a fund to establish, implement, and maintain a corporate governance framework which provides for sound and prudent management oversight of the fund’s business and protects the legitimate interests of relevant stakeholders. under the rule, the governing body of the fund is responsible for implementing a corporate governance framework that addresses, at a minimum:

• objectives and strategies of the fund
• structure of the governance of the governing body
• appropriate allocation of oversight and management responsibilities
• independence and objectivity
• collective duties of the governing body
• duties of individual directors of the governing body
• appointments and delegation of functions and responsibilities
• risk management and internal control systems
• conflicts of interest and code of conduct
• remuneration policy and practices
• reliable and transparent financial reporting
• transparency and communications
• duties of senior management relations with cima

sog

the sog does not impose a strict or all-encompassing code of conduct on governing bodies or operators of funds but expects the oversight, direction and management of a fund to be conducted in a fit and proper manner. the sog establishes an overall framework for good corporate governance within which funds should operate. the sog does not contain specific restrictions on investments, risks or strategies, nor does it attempt to direct, prescribe or constrain the management or business activities of funds.

the sog includes the following:

structure

directors should make sure that the governance structure of the fund is appropriate and suitable for effective oversight of the fund, looking at the fund’s size, complexity, structure, nature of business and risk profile of its operations including the level of assets under management, number of investors and nature of its investment strategy. directors should make sure that the fund’s constitutional documents and offering document comply with cayman islands law.

oversight and compliance function

the directors of a fund are ultimately responsible for overseeing and supervising the activities of the fund. they should regularly monitor and take steps to ensure that the fund and its service providers are conducting the affairs of the fund in compliance with the fund's defined investment criteria, investment strategy and restrictions as well as with all applicable laws, regulations and other rules. directors should receive regular reporting from the investment manager, administrator and other service providers to ensure they are able to make informed decisions and to adequately oversee and supervise the fund.

the directors should regularly ask for confirmation from the service providers that they are acting in accordance with the fund’s constitutional documents and offering document, including regularly monitoring whether the investment manager is acting in accordance with the fund’s investment criteria, strategy and restrictions. what constitutes ‘regular’ in this context will very much come down to the nature of the particular fund structure, strategy and service provider relationships and therefore must be looked at on a case by case basis. as part of this function, directors should also be mindful of cima’s outsourcing sog as described below.

the directors should act in a transparent and honest manner with cima, always disclosing any matter which would materially and adversely affect the fund’s financial soundness and any non-compliance with applicable laws. if in doubt, professional legal advice should be obtained prior to making any disclosure to cima.

this is particularly important for private funds that have engaged service providers to undertake the core requirements of valuation, custody and cash monitoring set out in the private funds act.

conflicts of interest and risk

directors of funds must ensure that the fund's offering document adequately and accurately discloses conflicts of interest and ensure that the fund has adequate measures in place to identify, disclose, monitor and manage any conflicts of interest. directors should ensure that they provide suitable risk management oversight and that risks are appropriately managed and mitigated.

this is particularly important for private funds where valuation, title verification or cash monitoring is being performed by a related party.

meetings

the board of directors of a fund should meet at least once a year, in person or by telephone or video conference call, and more often depending upon the circumstances or size, nature and complexity of the fund. service providers should also attend and provide reports to board meetings. full, accurate and clear written records must be kept of such meetings and all resolutions passed at such meetings, including agenda items, circulated documents, a list of attendees and if they were present physically or by telephone or video conference, all matters considered and decisions made and information requested from and provided by service providers and advisers.

duties

directors of funds:

• are responsible for the appointment, removal, monitoring and supervision as well as the contractual terms of service providers including notifying investors and cima of any changes to the fund’s service providers and making appropriate updates to the fund’s offering document.
• should communicate adequate information to the fund's investors, including where enhanced disclosure to investors is appropriate, making relevant enquiries when issues are raised and be satisfied that appropriate action is being taken.
• must have sufficient capacity to apply their minds to overseeing and supervising each fund in accordance with relevant laws, regulations, rules, statements of principles and the provisions of the sog and other relevant statements of guidance issued by cima. no specific limits are set on the number of directorships that can be accepted by an individual or corporate director, although under the directors registration and licensing act if the number of directorships exceeds 20 or more covered entities (as defined below), then the professional director licensing requirement will apply, see “directors registration and licensing” below.
• should ensure that the offering document contains such information as is necessary to enable a prospective investor to make an informed investment decision, including clear descriptions of the investment strategy and conflicts of interest policy.
• should exercise independent judgment, act in the best interests of the fund, take into account the interests of investors as a whole, and should operate with due skill, care and diligence and act honestly and in good faith at all times, making sure they have sufficient and relevant knowledge and experience to carry out their duties.
• must exercise the care, skill and diligence of a reasonably diligent person with such general knowledge, skill and experience.
• should at all times be fully aware of the fund’s investment activities, performance and financial position and review and approve the fund’s financial statements.
• should also regularly monitor the fund’s net asset valuation policy and that the fund’s net asset value is being calculated in accordance with the policy at the relevant intervals.

internal controls

in 2023, cima published a rule and statement of guidance on internal controls which applies to mutual funds and private funds. they are intended to ensure that the fund: (a) is able to carry on its business in an orderly and efficient manner, (b) safeguards its assets, (c) maintains proper records and produces reliable financial, operational and regulatory reports and (d) complies with applicable law and regulation.

the new internal controls requirements entail:

• a robust control environment
• a dynamic and iterative risk identification and assessment process
• control activities which are documented in policies and procedures
• segregation of duties commensurate with the size, complexity, structure, nature of business and risk profile of the fund's operations and where segregation of duties is not reasonably practical, establishing and implementing appropriate alternative control activities
• systems that provide information across the operation of the fund that are relevant, reliable, timely, accessible, and provided in a consistent format
• continuous monitoring and evaluation of internal control systems considering changing internal and external conditions
• effective and comprehensive audits of the internal control system carried out by operationally independent, appropriately trained, and competent staff
• reporting internal control deficiencies in a timely manner to the appropriate parties for corrective action

outsourcing arrangements

in terms of outsourcing arrangements to service providers, directors should also be mindful of cima’s policy in its statement of guidance on outsourcing regulated entities issued in 2023 (the outsourcing sog) that provides guidance to regulated entities on the establishment of outsourcing arrangements (including sub-outsourcing) and the outsourcing of material functions or activities. the outsourcing sog is not intended to be prescriptive or exhaustive, rather it sets out cima’s minimum expectations on the outsourcing of material functions or activities and outsourcing arrangements.

the outsourcing sog provides guidance to regulated entities (including sub-contractors where applicable) on the following matters:

• appropriate due diligence of service providers
• contents of outsourcing agreements
• materiality assessments of outsourcing arrangements (ie impact of outsourcing arrangements on the entity and its finances, reputation and operations)
• confidentiality and disclosure of information
• what boards of directors of regulated entities are expected to do with respect to the outsourcing of material functions or activities
• termination and exit strategies
• expectations with respect to a regulated entity’s relations with cima regarding the outsourcing of material functions or activities

the guidance notes on the prevention and detection of money laundering and terrorist financing issued by cima also detail how funds may outsource or delegate aml compliance, provided the fund has designated natural persons as their aml compliance officer, money laundering reporting officer and deputy money laundering reporting officer.

directors registration and licensing

the directors registration and licensing act (drl act) imposes obligations on directors of mutual funds and certain securities investment businesses (covered entities) to register with cima prior to being appointed as a director of a covered entity.

directors of private funds are not subject to the drl act.

the definition of “director” also includes managers of covered entities which are formed as limited liability companies in the cayman islands under the limited liability companies act. the registration fee is currently us$854 per director which is a natural person who acts as a director for less than 20 covered entities. licences are required for ‘professional directors’, being natural persons appointed to the boards of 20 or more covered entities and for corporate directors of covered entities. licence fees for professional and corporate directors are currently us$3,659 and us$9,756, respectively. annual fees of the same amount are also payable to cima by 15 january each calendar year to maintain registration/licensing.

please see our guide to the cayman islands directors registration and licensing act for further details.

what practical considerations should be taken into account during the life of a fund?

the grand court of the cayman islands provided a detailed analysis of the scope of an independent director's duties toward an offshore fund in its first instance decision in weavering macro fixed income fund (in liquidation) v peterson [2011] 2 cilr 203. although that decision with respect to liability was over-turned by the cayman islands court of appeal in [2015] 1 cilr 45, the first instance judge’s division of the life of a fund into three distinct phases provides helpful commentary when considering the performance of the directors: (1) establishment, (2) ordinary course of business and (3) financial crisis. much of the commentary from the first instance decision in the weavering case was subsequently reflected in the sog by cima.

establishment

before the launch of a fund the directors will need to make sure that they review and approve the fund’s documents, in particular the offering document. this will include being satisfied that the overall structure of the fund and service providers is reasonable and consistent with industry standards, confirming the investment strategy and restrictions, confirming the valuation, custody and cash monitoring functions of a private fund are being satisfactorily handled, making sure that statements can be verified, risk factors are appropriate and conflicts of interest are fully disclosed, in particular where the valuation, custody and cash monitoring functions of a private fund are being performed by a related party.

as a practical matter, if a director’s role is limited to that of an independent director then the director will not be expected to be involved in detailed negotiations with service providers. however, when taking on a role as independent director it is sensible to ask that before any agreements are signed, the investment manager or whoever is negotiating them lets the counterparties know that the directors will want to review them and approve them and that they may have comments or questions following their review.

launch board minutes or resolutions of the fund should also include approval of delegation of agreed functions to the various service providers and the directors should make sure that the appointments actually happen on terms that are consistent with industry practice, among other launch matters. at the establishment stage, directors should be thinking about potential investors when considering their duties to act in the best interests of the fund.

ordinary course of business

after launch of a fund, cima expects the oversight, direction and management of a fund to be conducted in a fit and proper manner, in line with the principles set out in the sog, as described above. during the ordinary course of business of a fund, the directors should properly minute board meetings, maintain records of board resolutions and keep evidence of enquiries made to service providers, such as emails or records of telephone conversations that take place outside of board meetings. as a fund has six months from its financial year end to finalise its audited financial statements and to file them with cima, directors should ensure that they are provided with the draft financial statements in plenty of time to review them and ask any relevant questions. for a fund of funds, for example, this is particularly important because it might not be possible to finalise the audit until very late in the six month period.

if there are changes to arrangements with service providers, then the approval of these changes should be properly minuted, with directors reviewing and approving any relevant amendments to contractual documentation with existing service providers or new contractual documentation with new service providers.

if the fund is a party to side letters undertaking to carry out certain actions, the directors should review them and be comfortable with their commercial terms. for example, if the side letter imposes extra investment restrictions, can these be carried out, and does agreeing to these impact on the rest of the fund's strategy as reported to investors? it is not enough simply to know that legally they can be entered into by the fund. if the investment manager has been given delegated authority to negotiate and execute side letters on behalf of the fund, this should form part of the regular reporting to the board and the scope of such authority should be agreed – including ensuring that the investment manager obtains prior board approval if necessary. other common provisions in side letters include additional information rights, statements of general intent as to exercise of powers, the ability to transfer shares, the ability to disclose information received from the fund (whether to satisfy public disclosure or other legal requirements or to upstream investors in a fund of funds), and provisions that relate to the tax, legal or regulatory status of an investor. we would generally recommend that professional legal advice be obtained prior to entering into any side letter arrangements as they are a potential liability minefield for directors and as they can increase the prospect of an inadvertent breach of a director’s duty. any side letter provisions that would seek to impose an obligation upon a fund to treat an individual investor preferentially and which would adversely affect the other investors (such as changes in cost sharing or indemnity arrangements) would usually be unacceptable.

ongoing monitoring and crisis management

throughout the life of a fund, directors should be pro-active in ensuring that the investment manager is required to provide information on an ad hoc basis which might require urgent action by the board. in addition to standard regular reporting requirements, directors should be asking the investment manager and any other relevant service providers whether there is anything that should be brought to the attention of the board. a non-exhaustive list of the issues that would fall under this heading are:

• is there any actual, pending or threatened litigation against the fund?
• are there any disputes with investors or counterparties that will fall short of actual litigation?
• will outstanding redemption requests have a significant impact on aum at the next dealing day; if so, could such redemptions de-stabilise the fund or adversely affect the liquidity of the fund?
• will accepting subscriptions in respect of erisa/pension assets have an impact on existing investors? are market or other conditions having or likely to have a material impact on the trading strategies of the fund?
• is there any significant counterparty risk for ‘over the counter’ transactions to which the fund is a party?
• has there been any change to or movement away from the investment strategy, policy or restrictions set out in the offering document?
• has there been any reduction in the investment manager's holding in the fund?
• have there been or are there likely to be any material changes of staff at the investment manager (for example, triggering ‘key-man’ events) or at any other service provider?
• has the valuation function been suitably performed in accordance with the fund’s policies and the law?
• are there any issues with title verification or cash monitoring in a private fund?

if the fund does find itself in difficulties, directors cannot sit back and assume that other service providers, and in particular the investment manager, will rescue the fund without significant oversight from the directors of the fund.

the directors are entitled to rely on the advice of suitably qualified third-parties and, in respect of areas where they do not have expertise, may be considered negligent if they make a decision without obtaining expert advice on behalf of the fund.

it is essential that directors seek advice from the fund's legal advisers as soon as they become aware of any circumstances that could have a material adverse effect on the management and operations of the fund or the interests of the fund's investors.

what are the consequences of a director not discharging its duties?

breach of statutory obligations

the companies act, the mutual funds act, the private funds act and the proceeds of crime act (among others) impose certain obligations on directors of a fund. some of these obligations are sanctioned by criminal penalties and, on conviction, are punishable by a potentially substantial fine and (in relation to certain offences) a custodial sentence. it is also important to note that if a fund is in breach of a statutory obligation, the relevant legislation may also impose penalties on any ‘operator’ or ‘officer’ of the fund (which includes a director) who is ‘in default’. for these purposes, directors will be ‘in default’ if they knowingly and willingly authorise or permit the default, refusal or contravention that constitutes the breach.

cima also has the power under the monetary authority act to impose significant administrative fines of up to ci$1 million (us$1.2 million) for each breach of certain provisions of the aml regulations and other cayman regulatory laws and regulations, including the mutual funds act, the private funds act, securities investment business act and the drl act. the level of an administrative fine will depend on various factors including whether the breach is committed by an individual or a body corporate and if the breach is classified as minor, serious or very serious.

breach of fiduciary duty

if directors breach their fiduciary duties to the fund they may be found personally liable to the fund in damages.

negligent mis-statement

in circumstances where a director has been negligent in making a statement, for example in the offering document, such director may be liable for a claim in damages brought by a person who has suffered loss in reliance on that statement.

deceit

if a director is fraudulent in misrepresenting facts by making a statement in the knowledge that it is false, or by being reckless as to whether or not the statement is true or false, for example in the offering document, the director could be found liable in damages to an investor or purchaser who is deceived by the statement.

the penal code

if a director publishes (or concurs in publishing) a written statement or account which to its knowledge is or may be misleading, false or deceptive in any material particular with intent to deceive shareholders or creditors of the fund then the director will be guilty of an offence, punishable on conviction by up to seven years imprisonment.

recent changes to the penal code also now require reporting of suspicion of overseas tax evasion as part of the aml framework in the cayman islands. this offence, together with obligations under the mutual funds act, the private funds act, and the liabilities described at paragraphs ‘negligent mis-statement’ and ‘deceit’ above, are of particular relevance to statements made in the offering document.

contempt of court

if a director is aware that the fund has been ordered by any court of competent jurisdiction either to do or refrain from doing something, or that the fund has given an undertaking to the court to do or refrain from doing something, then the director is under a duty to take reasonable steps to ensure that the order or undertaking is complied with. if a director wilfully fails to do so, with the result that the order or undertaking is breached, the director can be punished for contempt of court. turning a 'blind eye' to the breach may still result in liability for contempt, even if the director does not actively participate in the breach.

fraud on, or prior to, winding-up

the companies act provides for a range of statutory offences relating to the actions of the directors prior to, or in connection with, a winding-up of the fund.

ultra vires

the memorandum sets out the capacity and powers of the fund and the articles prescribe the manner in which the fund is to be operated.

if the directors of the fund purport to enter into any transaction that is outside the objects set out in the memorandum, the transaction will be ultra vires and the fund will be without capacity to enter into the transaction. similarly, if the directors enter into a transaction on behalf of the fund that is ultra vires their powers under the articles, the directors are without capacity to bind the fund.

in either circumstance, the companies act steps in to ensure that any such transaction with a third party is not invalid by such lack of capacity. the fund may however bring a claim against the directors for any loss caused or damage suffered as a consequence of the ultra vires act.

note that actions taken by the directors that are ultra vires their powers under the articles may be capable of ratification by the shareholders. actions taken by the directors that are ultra vires the objects in the memorandum are not capable of ratification however. this is often not an issue in practice as funds typically have very broad general objects clauses in the memorandum.

indemnification

the articles may provide for the indemnification of a director or an officer for breach of duty, save in limited circumstances such as where the director has been fraudulent or dishonest or where there has been wilful neglect or wilful default in the fulfilment of fiduciary duties. re city equitable fire insurance [1925] ch 407 defined what is meant by wilful neglect or default as:

[a]n act, or an omission to do an act, is wilful where the person of whom we are speaking knows what he is doing and intends to do what he is doing. but if that act or omission amounts to a breach of his duty, and therefore to negligence, is the person guilty of wilful negligence? in my opinion that question must be answered in the negative unless he knows that he is committing, and intends to commit, a breach of his duty, or is recklessly careless in the sense of not caring whether his act or omission is or is not a breach of duty.

the cayman islands court of appeal adopted the re city equitable definition in peterson v weavering macro fixed income fund ltd (in liquidation) [2015] 1 cilr 45 (cica). whether a director is guilty of wilful neglect or default, so that they would be unable to rely on an indemnification provision in the articles, depends on the facts and evidence in any specific case.

funds may also obtain directors and officers insurance.

this guide provides a high level summary of the main obligations for bvi investment funds under bvi automatic exchange of information (aeoi) legislation.

the legislative framework

the bvi government is a signatory to:

• a model 1b intergovernmental agreement with the united states (the iga) which provides the framework for the implementation of the us foreign account tax compliance act (fatca) in the bvi
• the oecd sponsored multi competent authority agreement regarding the new common l reporting standard on automatic exchange of information (crs, together with the iga, the aeoi agreements).

as bvi entities are not directly subject to the aeoi agreements, the key bvi statute in relation to tax information exchange is the mutual legal assistance (tax matters) act 2003 (mlat) and the orders made under mlat (together, the aeoi legislation).

the bvi international tax authority (ita) is the designated competent authority under mlat and is responsible for matters concerning tax information exchange. the ita has issued guidance notes (the guidance notes) in relation to the us and uk igas which can be found here and in relation to crs which can be found here.

funds as investment entities and therefore financial institutions

there are differences between all three of the aeoi agreements which have been replicated in the aeoi legislation in terms of the definitions and application to the business of any bvi fund.

in practice, despite the differences, the majority of bvi investment funds fall within the definition of investment entity, under each of the regimes. there will be some very rare exceptions to this rule. investment entities are one of the types of financial institution under the aeoi legislation. under fatca, the term foreign financial institution is used, but for the purposes of this guide we will refer to fis or financial institutions. the majority of bvi funds will, subject to some very limited exceptions, be reporting fis.

reporting financial institutions

reporting fis are required to comply with registration and reporting obligations imposed under the aeoi legislation. the most notable obligations are:

• to register with the internal revenue service of the united states (irs) to obtain a global intermediary identification number (giin) (even if the reporting fi has no us reportable accounts) either through the irs fatca portal or through a paper submission. registered deemed compliant fis are also obliged to register with the irs.
• to register with the ita through its online portal, the bvi financial account reporting system (the bvi fars)
• to identify reportable accounts in accordance with the due diligence requirements set out in the aeoi agreements, the relevant aeoi legislation and the guidance notes
• to report annually to the ita certain specified information with respect to any reportable accounts.

registration with the irs

a bvi fund which is a reporting fi is required by fatca to register with the irs within 30 days of ‘starting business’. while a fund is not technically operating until it starts to accept subscription payments from investors, in reality, all funds will have to provide their giin numbers to banking and other counterparties at a very early stage of their creation in order to open accounts. it is therefore important to get this registration done as soon as possible after the vehicle has been formed.

when registering for a giin, the irs portal requires the name of a natural person to be listed as the fi’s responsible officer (ro), despite the fact that under the us iga this role is not mentioned. the application requires the ro to certify that the information provided is accurate and that the bvi fund will comply with its fatca obligations. the ro should be someone with authority under bvi law to provide the confirmations and submit the information required by the application. a director or general partner of the fund would have this authority under bvi law and may delegate it to a third party such as the compliance officer or the investment manager or another person providing giin registration and ro services.

registration with fars and the principal point of contact

all reporting fis are required to appoint a principal point of contact (the ppoc) and register with the bvi fars by 30 april in the first calendar year in which it is required to ‘comply with reporting obligations’. in theory, this means that if the fund is formed in september 2017, it is not required to register until 30 april 2018. however, we recommend that clients register with the bvi fars at the same time as the giin application is made.

the principal point of contact must be appointed by the reporting fi and a pdf document or letter must be signed by a senior official or director of the reporting fi confirming that the ppoc has been authorised to be the ppoc on behalf of the reporting fi.

identification of reportable accounts

the directors, general partner or trustee(s) (each an operator) of the reporting fi must ensure that they have a compliance and diligence program in place to allow the reporting fi to identify and report reportable accounts.

us and united kingdom reportable accounts

in respect of facta and the uk iga, a reportable account is any financial account maintained by the fi and held by one or more specified us or united kingdom persons or by a non us or united kingdom entity with one or more controlling persons that is a specified us or united kingdom person.

reportable accounts under crs

in respect of the crs regulations, a reportable account is any financial account maintained by the fi and held by one or more reportable persons.

financial account

in the funds context, a financial account is “an equity or debt interest in the investment entity other than interests which are regularly traded on established securities markets”. as the majority of bvi funds do not issue debt or have their equity interests listed on an exchange, the classification of what the financial accounts are is relatively straightforward. for example, for a standard bvi corporate hedge fund, the financial account will be the shares held by the investor and the value will be the net asset value as reported from time to time.

specified persons or reportable persons

the aeoi agreements and the aeoi legislation set out in detail the scope of specified persons (both us and uk) and reportable persons under crs can be found in the relevant legislation. a detailed analysis is beyond the scope of this guide.

reporting to the tax information authority

subject to certain transitional arrangements that will expire before 1 january 2018, reporting to the ita must be done by 31 may in each year. the information which must be provided will eventually include the name, address, taxpayer identification number (tin), date of birth (where applicable), account number and account balance or value as at the period end. if the account holder is a passive non-financial entity. the full definitions of ‘passive nffe’ or ‘passive nfe’ are beyond the scope of this guide but can be found in the guidance notes and the self-certification forms listed below under the review of fund documentation section.

fatca and non-participating fis

reporting fis are not subject to withholding tax unless they are designated as non participating fis. the irs may classify a bvi reporting fi as a non participating fi following the conclusion of the procedures set out in the us iga. the irs may determine that a reporting fi is in “significant non compliance” with the fatca obligations. it may then notify the ita and require it to compel the reporting fi to obtain and report the required information. failure to do so within 18 months of the first notification permits the irs to deem the reporting fi to be a non participating fi and the bvi entity will be subject to withholding tax.

review of fund documentation

to address the issues arising under aeoi legislation, investment managers are well advised to review their existing documentation to ensure that:

• there is sufficient disclosure regarding the various aeoi regimes
• the fund has the ability to obtain self-certification documentation at subscription or on a regular basis
• that there is a power for the fund to take broad steps to deal with investors who do not provide information or updated information and to allocate costs to those investors
• there are exculpation provisions for the operators of the fund from liability arising from aeoi compliance.

subscription documents require special attention and should include:

an obligation on the investor to provide information and comply with due diligence requests which may require the provision of nationality, permanent residency information and tax residency representations. this can be in the form of a self-certification form. links to entity and individual self-certification forms issued by the ita cand be found here and here respectively

an acknowledgement that the fund will disclose information to the ita, which in turn will provide that information to the tax authorities globally

a general waiver of any legal restrictions which might otherwise prevent disclosure of information by the fund (although it should be noted that the aeoi legislation makes it clear that compliance with the disclosure obligations under the aeoi legislation will not amount to a breach under bvi laws); and

an agreement that the investor shall not have any claim against the fund for any damages or liability arising as a result of actions taken by the fund or remedies pursued by the fund in order to comply with any existing or future obligations imposed by any existing or future aeoi agreements or any enabling legislation enacted in the bvi.

these extremely popular and flexible funds are governed by the securities and investment business (incubator and approved funds) regulations 2015, as amended (the regulations) and the incubator and approved funds guidelines. the bvi has often been described as the “home” of the emerging manager and these two fund products further reinforce that message.

the incubator fund is aimed at start-up managers looking to establish a track record and test a strategy in the most cost- efficient manner. the approved fund is aimed at managers looking to establish a fund for a small, private and longer-term offering in a tested and respected funds jurisdiction.

in order to qualify as an incubator or approved fund, a fund must fall within the requisite thresholds regarding (i) the number of investors, (ii) the maximum value of its net assets and (iii) the minimum initial contributions by each investor (incubator funds only). an approved fund is also required to appoint an administrator to ensure suitable oversight of its operations.

the key features of incubator & approved funds

• rapid approval times by the financial services commission (the commission) ensuring that the fund can be launched within a timescale that meets the manager’s requirements
• light regulation and minimal ongoing regulatory obligations
• limited mandatory information to be contained in an offering document means that the fund can operate using a short-form term sheet, keeping legal costs and time associated with set-up to a minimum
• stripped back requirements for mandatory functionaries to be appointed (other than the appointment of an administrator for an approved fund). the manager can therefore elect to only appoint functionaries they believe the fund requires from the outset
• no requirement to conduct an audit or file audited financial statements
• the incubator fund has a two-year validity period (with the possibility to extend this by a maximum of 12 months on application to the commission), which gives the manager time to test their strategy and determine whether the fund is viable before committing to operate as a private, professional or approved fund
• option to convert to a private or professional fund at a later date, should the fund outgrow the applicable restrictions
• ability to commence business within two business days of lodging a complete application for approval with the commission

criteria for the incubator & approved funds

• number of investors: incubator and approved funds must have no more than 20 investors. once this limit is met, the regulations allow a reasonable time to upgrade the fund to the next level, ensuring a smooth continuity of operation
• minimum investment: for incubator funds only, each investor must be a “sophisticated private investor”, which simply means that they were invited to invest in the fund and must make a minimum initial investment of us$20,000. there is no prescribed minimum investment amount for approved funds
• total assets: the net assets of an incubator fund must not at any time exceed us$20 million. the net assets of an approved fund must not at any time exceed us$100 million
• valuation policy: the fund is required to maintain a clear and comprehensive policy for the valuation of its assets (fund property) with procedures that are sufficient to ensure that the valuation policy is effectively implemented. the valuation policy shall:
  • be appropriate for the nature, size, complexity, structure and diversity of the fund and the fund property
  • be consistent with the provisions concerning valuation in its constitutional documents and term sheet/offering document
  • require valuations to be undertaken at least on an annual basis
  • include procedures for preparing reports on the valuation of the fund property
  • specify the mechanisms in place for disseminating valuation information and reports to investors
• minimum investor disclosures: each investor must be provided with a written warning (either in a prominent place in the offering document or in a separate document) that:
  • the fund is an incubator or approved fund, as applicable
  • the total number of investors in the fund is limited to a maximum of 20
  • the fund is suitable for sophisticated private investors (incubator funds only)
  • the fund is limited to the value of its net assets not exceeding us$20 million or us$100 million, as applicable
  • the fund is not subject to supervision by the commission and that the requirements considered necessary for the protection of investors that apply to public funds do not apply to an incubator or approved fund, as applicable
  • an investor is solely responsible for determining whether the fund is suitable for his or her investment needs
  • investment in an incubator or approved fund may present a greater risk to an investor than investment in a public fund
  • the incubator fund is limited to an initial period of two years and may, thereafter, unless it decides to terminate its business, apply to the commission to be recognised as a private or professional fund or approved as an approved fund

application process

the applicant must submit an application in the approved form to the commission and provide the following:

• a copy of the applicant’s constitutional documents which must state that the applicant is an approved or incubator fund
• a copy of the applicant’s offering document which must include the investment warning and a description of the applicant’s investment strategy. where there is no offering document, the investor warning and description of the applicant’s strategy must be provided separately
• a copy of the applicant’s subscription agreement
• details of the money laundering reporting officer of the applicant
• a resume or curriculum vitae for each director of the applicant or of the applicant’s general partner (as appropriate) as well as for the money laundering reporting officer
• a copy of the applicant’s valuation policy
• a copy of the applicant’s anti-money laundering and countering the financing of terrorism policies and procedures
• the application fee of us$2,000 (including the fee for obtaining an original certificate of recognition from the commission)

the applicant is deemed to be an incubator or approved fund upon submission of a complete application and may commence business two business days after receipt by the commission of the application.

if the commission considers the application to be incomplete, it will advise the applicant within two business days of receipt of the application and will outline any further requirements. the applicant will then have seven days (subject to any extension being granted by the commission) to provide the further information, after which time the application will be considered abandoned.

regulatory considerations

incubator and approved funds also have the following regulatory obligations under bvi law:

• mlro: appoint a single money laundering reporting officer in accordance with the fund’s obligations under the british virgin islands anti-money laundering regulations 2008 and the british virgin islands anti-money laundering and terrorist financing code of practice 2008 (as amended). this person is often one of the directors or a representative of the administrator who is conducting the onboarding of investors on behalf of the fund.
• fatca & crs: register with and report to the bvi international tax authority (ita) to meet the fund’s automatic exchange of information obligations under fatca and crs.
• investor aml: for incubator funds, put in place procedures for investor on-boarding which address typical investor identification requirements and the reporting of suspicious activities to the bvi financial investigations agency, and documenting how the fund complies with bvi anti-money laundering procedures. for approved funds this will typically be done by the administrator.

conversion of an incubator or approved fund

an incubator or approved fund may continue as such for so long as it remains within the relevant thresholds under the regulations. an incubator fund is subject to a validity period of two years, unless extended with approval from the commission by a maximum of 12 months.

if an incubator or approved fund exceeds the restrictions in relation to the value of its net assets or the number of investors for two consecutive months, within seven days of the end of the second month (unless at the time of notification it no longer exceeds the threshold), the fund must choose whether to:

• apply for recognition as a private or professional fund
• in the case of an incubator fund, apply for approval as an approved fund
• take steps to amend its constitutional documents to remove its redemption provisions and references to being an incubator or approved fund and cease to operate as a mutual fund
• commence the process of liquidating the fund

an application for recognition as a private or professional fund must be accompanied by an audit of the fund’s current financial position and its compliance with the regulations.

if any of the restrictions in relation to the value of its net assets or the number of investors are exceeded by the fund in contravention of the provisions of the regulations (ie proper notice is not provided to the commission and/or the fund does not voluntarily take the steps outlined above), the commission may require the fund to take one of the steps outlined above.

ongoing obligations

incubator and approved funds must:

• have an authorised representative in the bvi at all times
• have at least two directors (one of whom must be an individual) at all times
• in the case of an approved fund, have an administrator at all times
• pay an annual fee of us$1,200 to the commission for renewal of its approval as an incubator or approved fund
• submit financial statements (which do not need to be audited), approved and signed by a director or the general partner of the fund (as relevant), to the commission within six months of the end of the financial year to which they relate
• submit to the commission, no later than 31 january in each year, a statement that it is not in breach of the requirements of the regulations that allow it to continue as an incubator or approved fund
• incubator funds must submit to the commission a semi-annual return no later than 31 january and 31 july in each year for the periods ending 31 december and 30 june respectively, containing the following information:
  • the number of investors in the fund o the total investments in the fund
  • the aggregate subscriptions to the fund
  • the aggregate redemptions paid to investors
  • the net asset value of the fund
  • any significant investor complaint received by the fund and how the complaint was dealt with

approved funds are required to submit the same information to the commission, but on an annual basis only, by 31 january for the previous calendar year.

• notify the commission:
  • immediately if the authorised representative ceases to represent the fund and take necessary steps to replace the authorised representative within 21 days of the date that the authorised representative ceased to act for the fund
  • immediately if the number of directors falls below two and take necessary steps to bring the number of directors to two within 21 days from the date that the requirement was not complied with
  • of any change to the information provided to the commission with its application, including a written declaration stating whether the change complies with the requirements of the regulations, within 14 days of any such change occurring
  • of any matter related to the conduct of the business activities or affairs of the fund which may have a material impact on the fund (for example, a suspension of redemptions or the fund becoming subject to any legal or regulatory proceedings)

the virgin islands data protection act 2021 (the act) is now in force. the act imposes a number of obligations upon investment funds in relation to the processing of personal data that they will inevitably collect as part of the investor onboarding procedure.

in order to ensure compliance with the act, investment funds should:

• provide investors with a privacy notice
• update their offering and subscription documentation
• revisit service agreements with third parties, most importantly, the fund administrator

overview

the act governs how a data controller may process, use and retain personal data. anyone who falls within the definition of a “data controller” (of which an investment fund domiciled in the bvi clearly does) must now comply with the seven principles in the act in relation to any personal data processed by the fund. where a data controller engages a third party (such as an administrator or investment manager) to process personal data on its behalf (defined in the act as a “data processor”), the data controller must ensure the data processor has appropriate safeguards in place in respect of the personal data.

in addition to governing how a data controller processes, uses and retains personal data, the act also sets out the rights of individuals to control their personal data and implements a series of offences and enforcement measures designed to ensure compliance. the act is broadly designed to reflect the general data protection regulation (gdpr) and the cayman islands data protection act (both of with which many clients will already be familiar), however there are a number of differences that you should be aware of.

application of the act to investment funds

any investment fund structured as a bvi company or partnership, or any foreign company registered in the bvi that acts as a general partner of an investment fund will be subject to the act and will be a data controller.

investors in a bvi investment fund will routinely provide certain personal identifying information to the investment fund such as their name, address, date of birth, bank details etc and this is to be regarded as “personal data”.

although the persons whose data is gathered under the act (“data subjects”) have to be natural individuals, the act will still apply in connection with corporate investors who provide personal data for their beneficial owners, directors, employees and members.

the individual to which the personal data relates does not need to be in the bvi or a citizen of the bvi in order for the act to apply.

what must an investment fund do to comply with the act?

as a data controller, an investment fund must ensure that it complies with the seven data protection principles contained in the act. see our guide bvi introduces data protection regime for further information.

in practical terms, an investment fund can demonstrate compliance with the data protection principles by taking the following actions:

• send a privacy notice to existing investors, whether as a separate document or part of an update to the offering document
• update subscription documents to include a privacy notice for new investors as well as obtain certain acknowledgements, representations and warranties
• update offering documents
• update agreements with any third parties that would be regarded as a data processor on the basis that they process personal data on behalf of the data controller

privacy notices

if the investment fund is already subject to gdpr then it may have already adopted a gdpr compliant privacy notice. if that is the case, then a few amendments to the privacy notice to reflect the act are all that are needed.

if the investment fund has not yet adopted a privacy notice, then it should prepare one in order to communicate the required information to its investors and we would be happy to assist with this drafting where required.

in either case, the privacy notice should be sent to existing investors and/or made available on an investor or fund administration portal.

subscription documents

the subscription agreement of the investment fund will also need to be updated to include the privacy notice and certain acknowledgements from the investor. it should also contain representations and warranties from investors that they have been provided with the privacy notice and they in turn have given it to any person whose data has been supplied. you should also consider whether your documents need consent provisions for specific activities prescribed under the act, such as the processing of sensitive personal data if applicable.

importantly, the act places significant weight on the concept of the data subject’s “express consent” to the processing of their personal data, and subscription documents should be worded accordingly. funds familiar with the gdpr and/or the cayman islands data protection act should note that the act does not provide a "legitimate interest" basis for processing personal data, and therefore the express consent of the data subject will be required for certain back or middle office functions which involve the processing of personal data.

offering documents

offering documents should be updated to include a brief disclosure and overview of the act. if no update to the offering documents is scheduled or the investment fund is currently closed to new investment, then an investor circular with the privacy notice should be prepared and sent to investors or made available on an investor or fund administration portal.

third party agreements

an investment fund’s service providers (such as administrators and investment managers) will usually fall into the act’s regulatory orbit as data processors. there is a duty on the investment fund, as data controller, to ensure that such third parties:

• provide sufficient guarantees in respect of the technical and organisational security measures governing the processing to be carried out
• take reasonable steps to ensure compliance with those measures

this duty applies regardless of whether the third party provider is outside of the bvi.

service agreements with the relevant third parties should therefore be updated to ensure that appropriate obligations are imposed on the providers.

assistance with the necessary updates

although the act is in force, the bvi supervisory authority (the information commissioner) has not yet been appointed and no formal guidance has been issued. we expect that monitoring and enforcement of the act will increase over the coming months, and it is therefore important that funds put the relevant documentary framework in place as soon as possible.

this guide provides an overview of the british virgin islands’ approved manager regime. the regime came into effect on 10 december 2012 with the investment business (approved managers) regulations 2012 (the regulations) and the approved investment managers guidelines (the guidelines). it introduces a less onerous regulatory regime for bvi domiciled investment managers and investment advisers and compliments the more heavily regulated investment business licensing regime under part i of the securities and investment business act 2010 (siba).

the key features of the new regime are:

• for eligible managers and advisors, an alternative to licensing under part i of siba
• the applicant must be a bvi company or limited partnership
• application form provides for self-certification of “fit and proper” status of the applicant
• the approved manager can commence business seven days after filing a short and simple application with the financial services commission (the commission) pending formal approval
• the approved manager can act as manager or advisor to any number of incubator, approved, private or professional funds recognised under siba, as well as funds domiciled outside of the bvi in a recognised jurisdiction (as defined below) and closed ended funds domiciled in the bvi or in a recognised jurisdiction, if they have the key characteristics of a private or professional fund
• the approved manager is subject to caps of (i) aggregate assets under management of us$400 million for open ended funds and (ii) aggregate capital commitments of us$1 billion for closed ended funds
• annual return and unaudited financial statements to be filed with the commission
• no capital adequacy or professional indemnity insurance requirements and no requirement to appoint a compliance officer. the regulatory code does not apply

at this point in time, a recognised jurisdiction for these purposes means:

argentina, australia, bahamas, bermuda, belgium, brazil, canada, cayman islands, chile, china, curacao, denmark, finland, france, germany, gibraltar, greece, guernsey, hong kong, ireland, isle of man, italy, japan, jersey, luxembourg, malta, mexico, netherlands, new zealand, norway, panama, portugal, singapore, spain, south africa, sweden, switzerland, united kingdom and the united states of america.

criteria for approved managers

an approved manager may carry on business (defined as “relevant business” in the regulations) as an investment manager or investment adviser to:

1. one or more incubator, approved, private or professional funds recognised under siba (or funds domiciled outside the bvi but in a recognised jurisdiction)
2. one or more closed ended funds which are domiciled in the bvi and have certain key characteristics of a private or professional fund
3. one or more open ended or closed ended funds which are domiciled in a recognised jurisdiction and have certain characteristics of a private or professional fund
4. one or more non-bvi funds (open ended or closed ended) investing a substantial part of its assets in a fund described in (a), (b) or (c) above
5. one or more persons who are affiliated (as defined in the guidelines) to a fund described in (a) or (b) above
6. such other person(s) as the commission may approve on a case by case basis (the most common application under this section being for the purposes of providing some form of management advice to “managed accounts”)

application process – timeframe

an applicant must submit its application in the prescribed form to the commission at least seven days prior to the intended date of commencement of the “relevant business”. after the expiry of the seven day period (or such shorter period as the commission may approve), the applicant may commence and carry on “relevant business” for a period of up to 30 days (such period being extendable for a further period of 30 days by the commission). during this 30 day (or extended) period, the applicant will be deemed to have been approved under the regulations.

should the commission not grant approval to an applicant or reject the application, the applicant is required to cease carrying on the “relevant business”.

application process – documentation

the applicant must submit an application to the commission using the prescribed form and provide the following:

1. a copy of the applicant’s constitutional documents
2. brief details of each director or general partner and senior officer of, and each person who owns or holds an interest in, the applicant
3. a written declaration by the applicant that each director or general partner and senior officer and each person who owns or holds a “significant interest” in the applicant is “fit and proper” in accordance with schedule 1a of the regulatory code (for these purposes “significant interest” shall have the meaning ascribed to it in siba – broadly speaking a ten per cent or greater interest)
4. details of the funds that the applicant intends to act for upon commencement of “relevant business” (including total assets or, for new funds, target size) and a copy of the investment management or advisory agreement to be entered into between the applicant and the relevant fund(s)
5. details of the individuals who will carry out the day-to-day investment business functions of the applicant
6. details of any person to whom the applicant proposes to delegate any of its investment business functions together with details of any individuals within the delegate’s organisation who will be carrying out the delegated function
7. details of the money laundering reporting officer of the applicant
8. a resume or curriculum vitae for each director and senior officer of the applicant as well as each individual mentioned in paragraphs (e), (f) and (g) above
9. a copy of the applicant’s anti-money laundering and countering the financing of terrorism policies and procedures
10. a written declaration by the applicant’s authorised representative or legal practitioner that the application for approval as an approved manager is complete

the application must also include the application fee of us$1,200.

limits on assets under management of approved managers

a key feature of the approved manager regime is that the approved manager is subject to a limit on the size of the funds which it manages or advises. open ended funds cannot exceed an aggregate of us$400 million assets under management and closed ended funds cannot exceed us$1 billion of capital commitments. if the limits are exceeded, the approved manager must inform the commission within seven days.

within three months of the limit being breached, the approved manager must either have submitted an application for a licence under part i of siba or the funds which it manages or advises must have decreased back below the limits. otherwise, the approved manager must immediately cease carrying on relevant business on the expiry of the three month period.

ongoing obligations of an approved manager

an approved manager must:

• have an authorised representative (certified under section 64 of siba) and at least two directors (one of whom is an individual) at all times
• notify the commission of any change to the information provided by the approved manager in connection with its application within 14 days of such change occurring
• submit financial statements (which do not need to be audited), a director’s certificate and a report on the affairs of the approved manager to the commission within six months of the end of each financial year
• submit an annual return to the commission by 31 january each year. the information to be provided in the annual return must include:
  • a statement that the approved manager is not in breach of the regulations
  • confirmation that each director, general partner and senior officer of, and shareholder with a significant interest in, the approved manager is fit and proper
  • details, as 31 december of the preceding year, of the assets under management of each fund for which it acts, the number of investors in each fund; and any “significant complaints” received by the approved manager

pay an annual fee of us$1,800 to the commission for renewal of its approval as an approved manager.

are you thinking of setting up a closed-ended investment fund in the bvi? this document provides an overview of the closed-ended funds industry in the bvi and why the bvi is such an attractive jurisdiction for private equity, venture capital and other closed-ended fund managers. we explain the regulatory regime in the bvi, the fund structures available and how we can support you from the initial structuring and planning conversations, all the way through to the launch and ongoing support.

closed-ended funds in the bvi are regulated by the financial services commission (the commission). the primary legislation which governs the industry is the securities and investment business act 2010, as amended (siba), and the private investment funds regulations 2019 (the pif regulations).

this guide focuses on the closed-ended fund industry, but it should be highlighted that the bvi does have a separate regulatory regime for hedge funds and other open-ended funds – these are discussed in a separate legal guide. do let us know if you would like further details.

what factors determine whether a closed-ended fund must be regulated in the bvi?

generally, an entity will be considered to be a closed-ended fund and will be subject to regulation as a private investment fund (or pif) if it falls within the following definition of a “private investment fund”:

• it collects and pools investor funds for the purpose of collective investment and diversification of portfolio risk, and
• the equity interests that it issues entitle the holder to receive an amount calculated by reference to the value of a proportionate interest in the whole or a part of the net assets of the fund

the bvi private investment fund regime

bvi closed-ended funds falling within the definition of a “private investment fund” are generally required to be regulated by the commission as a pif. however certain entities, including but not limited to single investor funds, single asset funds, joint venture companies and special purpose acquisition companies do not require regulation as a pif. the pif is a flexible, cost-effective and lightly-regulated fund product which is suited for everyone from the start-up manager to established institutional private equity houses with billions under management. the characteristics of the pif are set out below.

private investment fund

interests in a pif may be distributed on either a ‘private’ or a ‘professional’ basis. there is no minimum investment amount for a pif distributed on a private basis. if distributing on a ‘private’ basis the pif is restricted to either:

• having no more than 50 investors, or
• making an invitation to subscribe for or purchase fund interests on a private basis only

if the pif interests are being distributed on a ‘professional’ basis, they may only be made available to “professional investors” and the minimum initial investment by each professional investor must not be less than us$100,000 (or other currency equivalent), unless the investor is an “exempted investor” in which case there is no minimum initial investment.

a “professional investor” is a person:

• whose ordinary business involves, whether for that person’s own account or the account of others, the acquisition or disposal of property of the same kind as the property, or a substantial part of the property, of the fund; or
• who, whether individually or jointly with their spouse, has a net worth in excess of us$1,000,000 (or other currency equivalent) which does include the primary residence

an “exempted investor” means:

• the manager, administrator, promoter or underwriter of the fund, or
• any employee of the manager of the fund

a pif is required to issue an offering document or term sheet (although in certain circumstances the commission can provide an exemption from this requirement).

a pif is required to maintain a clear and comprehensive policy for the valuation of its assets (fund property) with procedures that are sufficient to ensure that the valuation policy is effectively implemented. the valuation policy shall:

• be appropriate for the nature, size, complexity, structure and diversity of the fund and fund property
• be consistent with the provisions concerning valuation in its constitutional documents and term sheet/offering document
• require valuations to be undertaken at least on an annual basis
• include procedures for preparing reports on the valuation of fund property, and
• specify the mechanisms in place for disseminating valuation information and reports to investors

a pif is also required to provide information to the commission on its arrangements for safekeeping of the fund property.

a pif may carry on its business or manage or administer its affairs for a period of up to 21 days without being recognised under siba.

what fund structure should i use?

the majority of bvi pifs are established as limited partnerships under the bvi limited partnership act 2017 and we would generally recommend using this structure. companies limited by shares under the bvi business companies act 2004 (bca) are also quite common. although permitted, we rarely see unit trusts used for closed-ended fund structures, but we would of course be happy to discuss them with you.

limited partnerships

a bvi limited partnership is formed by a general partner and at least one limited partner executing a limited partnership agreement (or adopting a statutory model form agreement) and the registered agent submitting a registration statement and registered agent consent to act to the bvi registrar of limited partnerships. the partnership agreement forms the internal governing document of the limited partnership, dealing with issues such as partnership contributions, distribution waterfalls and the day-to-day running of the limited partnership and does not have to be filed with the bvi registrar.

a bvi limited partnership can elect whether to have a separate legal personality distinct from its partners. the general partner of a bvi limited partnership is ultimately liable for the debts and obligations relating to the limited partnership. as a matter of bvi law, a limited partner of a bvi limited partnership is not liable for the debts and obligations of the limited partnership (save for the amount contributed and any unpaid commitment).

the general partner of a bvi limited partnership is typically a company or llc and does not need to be a bvi entity. there is no requirement for the general partner to appoint a bvi resident director or for the directors to register with the commission.

bvi business companies

a bvi business company is a separate legal entity from its investing shareholders (whose liability is limited by statute). the shareholders of a bvi business company have no direct legal or beneficial interest in any of the assets of the company which are instead legally and beneficially owned by the company itself.

the bca is very flexible for structuring funds. for example, there is no concept of “authorised capital” or “share capital” under bvi law, and shares do not need to have any par value or capital attributed to them. the directors may also designate different series of shares within each class of shares without the need to amend the constitutional documents of the fund. there is no requirement for a pif to appoint a bvi resident director or for the directors to register with the commission.

what service providers or appointed persons will i need to get started?

pifs are not required to appoint a manager, administrator or custodian. however pifs are required to work with “appointed persons” who will take responsibility for the following functions:

• management of fund property
• valuation of fund property
• safekeeping of fund property

the pif regulations provide that an “appointed person” may be a person licensed by the commission or a regulatory authority in a recognised jurisdiction, an independent third party with experience in performing the specified functions or a director, partner or trustee of the pif. an “appointed person” can be a corporate entity and does not need to be a natural person, or a bvi resident.

the pif regulations also provide that the appointed person with responsibility for the fund’s management function must be independent from the appointed person with responsibility for the valuation process. if the pif determines that these must be the same person, the pif is required to identify, manage and monitor any potential conflicts of interest that arise.

a pif is also required to appoint the following:

• an auditor (which need not be located in bvi), although there are exemptions available depending on the circumstances of the fund
• an authorised representative in the bvi to liaise between the fund and the commission. this is a service offered by our associated services business, craigmuir authorised representative limited

while a pif is not required to appoint an administrator, many choose to do so, particularly to avail of an administrator’s expertise in verifying the identity of investors, complying with relevant anti-money laundering regulations and assisting with registration and reporting obligations under fatca and crs.

i have existing relationships with some service providers but they are not based in the bvi. can i appoint them to my bvi fund?

it is very likely that you will be able to use the providers you are already familiar with. the commission requires (in accordance with siba and policy guidelines) that a functionary of a pif (ie any manager, investment advisor, administrator or custodian) must satisfy the commission’s fit and proper criteria. but to fast-track this process, the commission will generally automatically accept a functionary that is located and appropriately regulated in a “recognised jurisdiction”.

the following countries have been designated by the commission as recognised jurisdictions:

argentina, australia, bahamas, bermuda, belgium, brazil, canada, cayman islands, chile, china, curacao, denmark, finland, france, germany, gibraltar, greece, guernsey, hong kong, ireland, isle of man, italy, japan, jersey, luxembourg, malta, mexico, netherlands, new zealand, norway, panama, portugal, singapore, spain, south africa, sweden, switzerland, united kingdom, and the united states of america.

accordingly, an application for recognition of a pif whose functionaries are domiciled in a recognised jurisdiction and hold the appropriate regulatory status in that jurisdiction will generally be processed without further assessment of the fit and proper status of such functionaries.

the commission may also accept a functionary domiciled in another jurisdiction if the applicant can satisfy the commission that the jurisdiction has a system for the effective regulation of investment business, including funds business.

i am also going to need to set up a new investment management vehicle to manage my bvi fund. can you assist with that?

absolutely, although it should be pointed out again that the investment management vehicle can be based in any of the recognised jurisdictions listed above if required.

but if you would like to establish an investment manager in the bvi (and our clients commonly do), the two basic regulatory options are (i) the full investment management license under part i of siba; or (ii) the approved manager regime.

the application for a siba licence is substantial and involves the submission of a wide variety of documents to the commission. whilst a number of our clients do hold the full siba license, the approved manager product has proved hugely attractive as it provides eligible fund managers and advisers with a less onerous regulatory regime. those eligible for approved manager status may submit a simple application to the commission and commence business seven days later without waiting for formal approval.

the key restriction for an approved manager is that aggregate capital commitments of all closed-end funds under management cannot exceed us$1 billion, and for open ended funds under the management of the approved manager assets under management cannot exceed us$400 million.

please contact us if you would like further information on either of these options.

regulatory considerations

a pif must also comply with the following regulatory obligations under bvi law:

• appoint a money laundering reporting officer (in accordance with the fund’s obligations under the bvi anti-money laundering regulations 2008 and the bvi anti-money laundering and terrorist financing code of practice 2008 (as amended)). this person is often one of the directors or a representative of the administrator who is conducting the onboarding of investors on behalf of the fund
• put in place procedures for investor on-boarding which address typical investor identification requirements and the reporting of suspicious activities to the bvi financial investigations agency, and documenting how the fund complies with bvi anti-money laundering procedures (if an administrator is not appointed given they would naturally perform this function)
• register and report with the bvi international tax authority (ita) to meet the fund’s automatic exchange of information obligations under the united states foreign account tax compliance act (fatca) and the oecd common reporting standard (crs) as implemented in the bvi

harneys would be pleased to advise on compliance with the above obligations.

what fees are payable to the commission?

fees payable by a pif to the commission are competitive and lower than in most other offshore and onshore jurisdictions. fees are payable on application and annually and are set out in the table below.

*this one-off fee is halved where an application is made after 30 june.

how long will it take to set up my fund?

the time taken to set up your pif will depend largely on how long it takes to agree terms with any service providers and finalise your strategy and offering documents. however, a rough guide is set out below.

*we must obtain “know your client” information and a retainer before we can submit the formation/incorporation request to the registry.

in assisting you with the formation of a new pif, our services are likely to include the following, although we will always tailor our provision to meet your specific needs:

• advising on the structure of the fund
• preparing constitutional and organisational documents, including a bespoke limited partnership agreement for a limited partnership or articles of association for a bvi business company limited by shares
• drafting or reviewing from a bvi perspective the private placement memorandum and subscription agreement for the fund
• drafting or reviewing from a bvi perspective the investment management agreement between the fund and the manager (if applicable)
• reviewing and commenting, from a bvi perspective, on the administration agreement (if applicable)
• reviewing the fund’s valuation policy
• advising on the fund’s safekeeping arrangements
• preparing general partner/directors’ resolutions for the launch of the fund
• advising on the regulatory requirements in the bvi and preparing and making an application for recognition of the fund with the commission
• making all necessary filings in respect of the fund
• liaising with harneys corporate services limited and craigmuir authorised representative limited in relation to the provision of registered office/registered agent/authorised representative and related corporate services for the fund
• providing you with a summary of the continuing obligations of your fund

in addition, we have excellent relationships and work closely with a variety of other service providers including administrators, custodians, brokers, auditors and independent directors and would be very happy to make introductions to you should you wish to engage external service providers.

are you thinking of setting up an investment fund in the bvi? this document provides an overview of the hedge funds industry in the bvi and why it is such an attractive jurisdiction for hedge funds. we explain the regulatory regime in the bvi, the fund structures and fund products available and how we can support you from the initial structuring and planning conversations, all the way through to the launch and ongoing support.

the investment funds industry in the bvi is regulated by the financial services commission (the commission) and the primary legislation which governs the industry is the securities and investment business act 2010, as amended (siba).

this guide focuses on the open-ended hedge fund industry, but it should be highlighted that the bvi has a separate regulatory regime for private equity and other closed-ended funds (known as private investment funds or pifs) – these are discussed in a separate legal guide. do let us know if you would like further details.

what factors determine whether a hedge fund must be regulated in the bvi?

generally, an entity will be considered to be a ‘mutual fund’ and will be subject to regulation under siba if:

• it collects and pools investor funds for the purpose of collective investment
• it is open ended (ie its equity interests are redeemable at the option of its investors)
• the equity interests that it issues and that are redeemable entitle the holder to receive an amount calculated by reference to the value of a proportionate interest in the whole or a part of the net assets of the fund

which hedge fund product is right for me?

the bvi benefits from a diverse offering of hedge fund products suited to everyone from the start-up manager setting up an incubator fund to established institutional fund managers with billions under management. its pragmatic flexibility over the twenty-five years of prudent regulation has actually been a large driver for the popularity it has generated amongst the global investment funds community.

the characteristics of the products available are set out below. if you need help choosing the most suitable product for your fund, please contact us.

incubator fund

the incubator fund is aimed at emerging managers and allows them a two year incubation or “validity” period (with an extension of up to 12 months available with permission from the commission) to establish a track record and test its viability. during that period, the fund can operate with light regulation, very limited mandatory service providers and without having to carry out an audit.

an incubator fund must remain within the following thresholds:

• having no more than 20 investors
• each investor, having been invited to invest, must make a minimum initial investment of us$20,000
• the net assets of an incubator fund must not at any time exceed us$20 million

before the end of the validity period (or, if earlier, when it exceeds the relevant thresholds for two consecutive months) an incubator fund is required to convert to a private, professional or approved fund. if the fund determines that it is not viable to continue, it is required to wind up its operations. the incubator fund is required to conduct an audit as part of its conversion to a private or professional fund.

an incubator fund benefits from a fast track approval process, enabling it to commence business as an incubator fund two business days after submitting a complete application to the commission.

approved fund

the approved fund is aimed at managers looking to establish a fund with a private offering to a small group of investors on a longer term basis. an approved fund is restricted to:

• having no more than 20 investors
• having net assets which do not at any time exceed us$100 million

the approved fund has similar characteristics to the private fund recognised under siba, including no minimum initial investment for investors. unlike the private fund, the approved fund is not required to appoint an auditor. it is also not required to appoint a manager or a custodian, unless it is set up as an spc (please see below for more details). it is required to appoint an administrator to ensure there is some suitable oversight of its operations.

like the incubator fund, the approved fund benefits from the fast track approval process, enabling it to commence business as an approved fund two business days after submitting a complete application to the commission.

private fund

private funds do not have a minimum initial investment amount for each investor or any “professional” or “sophistication” test for investors. this has made them popular with start-up managers, allowing a friends and family offering.

a private fund is restricted to either:

• having no more than 50 investors, or
• only making an invitation to subscribe for or purchase fund interests on a private basis

private funds must be recognised by the commission before they carry on business. historical policy guidelines issued by the commission under the previous mutual funds regime suggested that a fund will be regarded as having commenced its business when a prospectus, or other document the purpose of which is to make an invitation to purchase or subscribe for shares of the fund, is published.

professional fund

professional funds are the most popular category of regulated fund and make up approximately 65 per cent of all regulated funds in the bvi. the interests in a professional fund may only be made available to “professional investors” and the minimum initial investment by each professional investor must not be less than us$100,000 (or other currency equivalent), unless the investor is an “exempted investor” in which case there is no minimum initial investment.

a “professional investor” is a person:

• whose ordinary business involves, whether for that person’s own account or the account of others, the acquisition or disposal of property of the same kind as the property, or a substantial part of the property, of the fund; or
• who, whether individually or jointly with their spouse, has a net worth in excess of us$1,000,000 (or other currency equivalent) which does include the primary residence

an “exempted investor” means:

• the manager, administrator, promoter or underwriter of the fund; or
• any employee of the manager of the fund

a professional fund may carry on its business or manage or administer its affairs for a period of up to 21 days without being recognised under siba.

public fund

a public fund is generally viewed as a retail product. accordingly, the regulatory burden placed on a public fund is considerably higher than that of a private or professional fund.

public funds must be registered by the commission before they carry on business. a public fund is not subject to any bvi restrictions on the categories or number of investors it may invite to invest in the fund.

registered public funds may not make an invitation to the public or any section of the public to purchase shares unless prior to such invitation they publish a prospectus which complies with siba and the public funds code, which is approved by and signed on behalf of the fund’s directors and which is registered by the commission. investment funds in the bvi are subject to various ongoing statutory requirements under siba and other secondary legislation. incubator and approved funds are subject to lighter regulatory requirements, whereas the burden is higher for public funds.

please contact us for our separate guides on continuing obligations for all of these types of funds.

what hedge fund structure should i use?

the vast majority of bvi hedge funds are established as companies limited by shares under the bvi business companies act 2004 (bca) and we would generally recommend using this structure. limited partnerships are also quite common. although permitted, we rarely see unit trusts but we would of course be happy to discuss them with you.

bvi business companies

a bvi business company is a separate legal entity from its investing shareholders (whose liability is limited by statute). the shareholders of a bvi business company have no direct legal or beneficial interest in any of the assets of the company which are instead legally and beneficially owned by the company itself.

the bca is very flexible for structuring funds. for example, there is no concept of “authorised capital” or “share capital” under bvi law, and shares do not need to have any par value or capital attributed to them. the directors may also designate different series of shares within each class of shares without the need to amend the constitutional documents of the fund, giving flexibility to funds wishing to use series accounting techniques to achieve equalisation of performance fee allocations among shareholders.

the bca also allows private, professional, public, incubator and approved funds to be structured as spcs. an spc is a single company with the benefit of statutory segregation of assets and liabilities between segregated portfolios established within the company. the assets and liabilities of each segregated portfolio are legally segregated from both the assets and liabilities of each other segregated portfolio and the general assets of the company (ie those assets not held within one or on behalf of any segregated portfolio). spcs are popular for multi class or umbrella funds in which two or more segregated portfolios use different investment strategies.

limited partnerships

a bvi limited partnership is formed by a general partner and at least one limited partner executing a limited partnership agreement (or adopting a statutory model form agreement) and the registered agent submitting a registration statement and registered agent consent to act to the bvi registrar of limited partnerships. the partnership agreement forms the internal governing document of the limited partnership, dealing with issues such as partnership contributions and withdrawals and the day-to-day running of the limited partnership and does not have to be filed with the bvi registrar.

a bvi limited partnership can elect whether to have a separate legal personality distinct from its partners. the general partner of a bvi limited partnership is ultimately liable for the debts and obligations relating to the limited partnership. as a matter of bvi law, a limited partner bvi limited partnership is not liable for the debts and obligations of the limited partnership (save for the amount contributed and any unpaid commitment).

the general partner of a bvi limited partnership is typically a company or llc and does not need to be a bvi entity. there is no requirement for the general partner to appoint a bvi resident director or for the directors to register with the commission.

what service providers will i need to get started?

siba requires bvi hedge funds to appoint the following service providers:

*incubator and approved funds do not have to appoint these service providers unless they are set up as spcs. if they are set up as spcs, the incubator or approved spc fund can apply to the commission for an exemption from the requirement to appoint an investment manager and/or custodian, but must appoint an administrator.

every bvi hedge fund is required to appoint an authorised representative in the bvi to liaise between the fund and the commission. this is a service offered by harneys corporate services limited’s associated services business, craigmuir authorised representative limited.

i have existing relationships with some service providers but they are not based in
the bvi. can i appoint them to my bvi fund?

a bvi hedge fund is not required to appoint bvi service providers and so you are likely to be able to use the providers you are already familiar with. the commission requires (in accordance with siba and policy guidelines) that a functionary of a bvi hedge fund (ie the manager, investment advisor, administrator or custodian) must satisfy the commission’s fit and proper criteria. but to fast-track this process, the commission will generally automatically accept a functionary that is located and appropriately regulated in a “recognised jurisdiction”.

the following countries have been designated by the commission as recognised jurisdictions:

argentina, australia, bahamas, bermuda, belgium, brazil, canada, cayman islands, chile, china, curacao, denmark, finland, france, germany, gibraltar, greece, guernsey, hong kong, ireland, isle of man, italy, japan, jersey, luxembourg, malta, mexico, netherlands, new zealand, norway, panama, portugal, singapore, spain, south africa, sweden, switzerland, united kingdom, and the united states of america.

accordingly, an application for approval, recognition or registration of a fund whose functionaries are domiciled in a recognised jurisdiction and hold the appropriate regulatory status in that jurisdiction will generally be processed without further assessment of the fit and proper status of such functionaries.

the commission may also accept a functionary domiciled in another jurisdiction if the applicant can satisfy the commission that the jurisdiction has a system for the effective regulation of investment business, including funds business.

whilst not deemed to be functionaries in accordance with siba, clearly directors and auditors are two other key service providers to a fund. again, and unlike other fund jurisdictions, there is no requirement for a director or the auditors of a bvi hedge fund to be based in the bvi. the auditor of a public fund (but not any other category of bvi hedge fund) must be approved by the commission.

i am also going to need to set up a new investment management vehicle to manage
my bvi fund. can you assist with that?

absolutely, although it should be pointed out again that the investment management vehicle can be based in any of the recognised jurisdictions listed above if required.

but if you would like to establish an investment manager in the bvi (and our clients commonly do), the two basic regulatory options are (i) the full investment management license under part i of siba; or (ii) the approved manager regime.

the application for a siba licence is substantial and involves the submission of a wide variety of documents to the commission. whilst a number of our clients do hold the full siba license, the approved manager product has proved hugely attractive as it provides eligible fund managers and advisers with a less onerous regulatory regime. those eligible for approved manager status may submit a simple application to the commission and commence business seven days later without waiting for formal approval.

the key restriction for an approved manager is that aggregate assets under management of all open ended funds under the management of the approved manager cannot exceed us$400 million and capital commitments of all closed end funds under management cannot exceed us$1 billion.

please contact us if you would like further information on either of these options.

any other regulatory obligations i should be thinking about?

a bvi hedge fund also has the following regulatory obligations under bvi law:

• appoint a money laundering reporting officer (in accordance with the fund’s obligations under the bvi anti-money laundering regulations 2008 and the bvi anti-money laundering and terrorist financing code of practice 2008 (as amended)). this person is often one of the directors or a representative of the administrator who is conducting the onboarding of investors on behalf of the fund
• put in place procedures for investor on-boarding which address typical investor identification requirements and the reporting of suspicious activities to the bvi financial investigations agency, and documenting how the fund complies with bvi anti-money laundering procedures (if an administrator is not appointed given they would naturally perform this function)
• register and report with the bvi international tax authority (ita) to meet the fund’s automatic exchange of information obligations under the united states foreign account tax compliance act (fatca) and the oecd common reporting standard (crs) as implemented in the bvi.

harneys would be pleased to advise on compliance with the above obligations.

what fees are payable to the commission?

fees payable by bvi funds to the commission are competitive and lower than in most other offshore and onshore jurisdictions. fees are payable on application and annually and are set out in the table below.

*this fee is inclusive of the $200 fee for obtaining an original certificate of recognition from the commission

**this fee is halved for the first year where an application is made after 30 june

how long will it take to set up my hedge fund?

the time taken to set up your fund will depend largely on how long it takes to agree terms with service providers and finalise your strategy and offering documents. however, a rough guide to the time frame for establishing each type of fund is set out below:

* we must obtain “know your client” information and a retainer before we can submit the formation/incorporation request to the registry.

in assisting you with the formation of a new fund, our services are likely to include the following, although we will always tailor our provision to meet your specific needs:

• advising on the structure of the fund
• preparing constitutional and organisational documents, including bespoke articles of association for a bvi business company limited by shares or limited partnership agreement for a limited partnership
• drafting or reviewing from a bvi perspective the private placement memorandum and subscription agreement
• drafting or reviewing from a bvi perspective the investment management agreement between the fund and the manager
• reviewing and commenting, from a bvi perspective, on the administration agreement
• reviewing the fund’s valuation policy
• preparing resolutions for the launch of the fund
• advising on the regulatory requirements in the bvi and preparing and making an application for approval/recognition or registration of the fund with the commission
• making all necessary filings in respect of the fund
• liaising with harneys corporate services limited and craigmuir authorised representative limited in relation to the provision of registered office/registered agent/authorised representative and related corporate services for the fund
• providing you with a summary of the continuing obligations of your fund

in addition, we have excellent relationships and work closely with a variety of other service providers including administrators, custodians, brokers, auditors and independent directors and would be very happy to make introductions to you if you have not already identified the service providers you intend to use.

the investment business (approved managers) regulations 2012 (the regulations) and approved investment managers guidelines (the guidelines) establish a regime that allows eligible investment managers and advisers to be regulated under a simple approval process and avoid the licensing regime under part i of the securities and investment business act 2010 (siba).

we outline below some of the ongoing obligations of approved investment managers and advisors (each referred to as an approved manager) under the regulations and the guidelines.

as a recognised fund, your professional or private fund is regulated by the bvi financial services commission (the fsc). this note provides a quick reference to your professional or private fund’s ongoing bvi obligations.

professional and private funds are recognised under the securities and investment business act 2010 and are subject to the mutual funds regulations 2010.

the board and officers

a professional or private fund must:

• at all times have at least two directors, at least one of whom must be an individual
• appoint an officer of the fund or another individual as money laundering reporting officer (mlro) for the fund who may, in practice, be a director of the fund itself or a person provided by one of the functionaries to the fund (see below for more detail on anti-money laundering obligations)
• appoint a foreign account tax compliance act (fatca) responsible officer and a principal point of contact for the bvi international tax authority (ita) (see below for more detail on obligations under fatca and crs)

functionaries and other service providers

a private or professional fund is required to have the following functionaries and other service providers:

notice requirements

on the happening of certain events, a professional or private fund is required to notify the fsc. the table below summarises these notification requirements and the timeframe for providing notice.

annual regulatory and government requirements

there are various reporting and payment deadlines for a professional or private fund throughout the year.

*us$550 for companies authorised to issue up to 50,000 shares and us$1,350 for companies authorised to issue more than 50,000 shares.

maintenance of records and financial statements

a private or professional fund must maintain records that are sufficient to show and explain its transactions, to enable its financial position to be determined with reasonable accuracy at any time, to enable it to prepare financial statements and make returns and, if applicable, to enable its financial statements to be audited.

a private or professional fund must prepare financial statements for each financial year that comply with:

• the international financial reporting standards, promulgated by the international accounting standards board
• uk gaap
• us gaap
• canadian gaap; or
• internationally recognised and generally accepted accounting standards equivalent to the accounting standards referred to above

fund policies and arrangements

the fund is required to maintain a valuation policy setting out the applicable procedures for the valuation of fund property, the preparation of reports on the valuation and setting out the mechanisms for sharing valuation information with investors (valuation policy). on an annual basis, the fund should review its valuation policy to ensure compliance with bvi legislation.

anti-money laundering obligations

the bvi anti-money laundering (aml) regime applies to all funds as they are classified as “relevant persons” under the anti-money laundering regulations 2008. in addition to appointing an officer to the fund or another individual as mlro (as mentioned above), a fund will be required to:

• put in place investor on-boarding procedures which address typical “know your client” requirements
• report suspicious transactions to the financial investigation agency (fia) in the bvi
• report the identity of its appointed mlro to the fia
• put in place and maintain a written and effective system of internal controls which provides appropriate policies, processes and procedures for forestalling and preventing money laundering and countering the financing of terrorism (the manual). the manual should be reviewed annually to ensure compliance with aml regime in the bvi.

the bvi rules do provide for funds to outsource all and any of these obligations to functionaries based outside of the bvi, such as an administrator or investment manager. any outsourcing must, however, be documented in writing.

obligations under fatca and crs?

private and professional funds are required to register for a global intermediary identification number (giin) with the us internal revenue service. funds are also required to enrol with the ita. enrolment for fatca reporting is made through the ita’s online portal, called bvi financial account reporting system, and for crs is made by email to bvifars@gov.vg.

private and professional funds will need to identify reportable accounts and start to report the necessary information to the ita. the reporting deadline for us fatca, uk fatca and crs is 31 may.

the information that must be reported under us and uk fatca and crs is broadly similar and includes: the name, date of birth, tax identification number (tin) (for specified us persons where available); national insurance number (for specified uk persons, where available); jurisdiction of residence (for reportable persons under crs only); the account number; name and giin of the reporting financial institution; and the account balance (some minimums apply under fatca).

as a recognised fund, your private investment fund (pif) is regulated by the bvi financial services commission (the fsc). this note provides a quick reference to your pif’s ongoing bvi obligations.

pifs are recognised under the securities and investment business act 2010 and are subject to the private investment fund regulations 2019.

the board and officers

a pif must:

• at all times have at least two directors, at least one of whom must be an individual
• appoint an officer of the fund or another individual as money laundering reporting officer (mlro) for the fund who may, in practice, be a director of the fund itself or a person provided by one of the appointed persons of the fund (see below for more detail on anti-money laundering obligations), or otherwise outsourced
• appoint a foreign account tax compliance act (fatca) responsible officer and a principal point of contact for the bvi international tax authority (ita) (see below for more detail on obligations under fatca and crs)
• have an “appointed person” designated as having responsibility for undertaking each of (i) the management of fund property; (ii) the valuation of fund property; and (iii) the safekeeping of fund property (including the segregation of fund property)

notice requirements

on the happening of certain events, a pif is required to notify the fsc. the table below summarises these notification requirements and the timeframe for providing notice.

annual regulatory and government requirements

there are various reporting and payment deadlines for a pif throughout the year.

*us$550 for companies authorised to issue up to 50,000 shares and us$1,350 for companies authorised to issue more than 50,000 shares.

fund policies and arrangements

a pif is required to maintain a valuation policy setting out the applicable procedures for the valuation of fund property, the preparation of reports on the valuation and setting out the mechanisms for sharing valuation information with investors (valuation policy). a pif must ensure that the person appointed as its valuation “appointed person” values fund property in accordance with the valuation policy.

a pif should also have a safekeeping policy and adequate arrangements in place for the safekeeping of fund property (safekeeping policy).

on an annual basis, a pif should review its valuation policy and safekeeping policy to ensure compliance with bvi legislation.

maintenance of records and financial statements

a pif must maintain records that are sufficient to show and explain its transactions, to enable its financial position to be determined with reasonable accuracy at any time, to enable it to prepare financial statements and make returns and, if applicable, to enable its financial statements to be audited.

a pif must prepare financial statements for each financial year that comply with:

• the international financial reporting standards, promulgated by the international accounting standards board
• uk gaap
• us gaap
• canadian gaap; or
• internationally recognised and generally accepted accounting standards equivalent to the accounting standards referred to above

anti-money laundering obligations

the bvi anti-money laundering (aml) regime applies to all funds as they are classified as “relevant persons” under the anti-money laundering regulations 2008. in addition to appointing an officer to the fund or another individual as mlro (as mentioned above), a fund will be required to:

• put in place investor on-boarding procedures which address typical “know your client” requirements.
• put in place and maintain a written and effective system of internal controls which provides appropriate policies, processes and procedures for forestalling and preventing money laundering and countering the financing of terrorism (the manual). the manual should be reviewed annually to ensure compliance with aml regime in the british virgin islands.
• report suspicious transactions to the financial investigation agency (fia) in the bvi
• report the identity of its appointed mlro to the fia

the bvi rules do provide for funds to outsource all and any of these obligations to functionaries based outside of the bvi, such as an administrator or investment manager. any outsourcing must, however, be documented in writing.

obligations under fatca and crs?

pifs are required to register for a global intermediary identification number (giin) with the us internal revenue service. funds are also required to enrol with the ita. enrolment for fatca reporting is made through the ita’s online portal, called bvi financial account reporting system, and for crs is made by email to bvifars@gov.vg.

pifs will need to identify reportable accounts and start to report the necessary information to the ita. the reporting deadline for us fatca, uk fatca and crs is 31 may.

the information that must be reported under us and uk fatca and crs is broadly similar and includes: the name, date of birth, tax identification number (tin) (for specified us persons where available); national insurance number (for specified uk persons, where available); jurisdiction of residence (for reportable persons under crs only); the account number; name and giin of the reporting financial institution; and the account balance (some minimums apply under fatca).

as a mutual fund, your incubator fund is regulated by the bvi financial services commission (the fsc). this note provides a quick reference to your incubator fund’s ongoing bvi obligations.

incubator funds are governed by the securities and investment business (incubator and approved funds) regulations 2015 (the regulations) and the incubator and approved funds guidelines.

the board and officers

an incubator fund must:

• at all times have at least two directors, at least one of whom must be an individual
• appoint an officer of the fund or another individual as money laundering reporting officer (mlro) for the fund who may, in practice, be a director of the fund (see below for more detail on anti-money laundering obligations)
• appoint a foreign account tax compliance act (fatca) responsible officer and a principal point of contact for the bvi international tax authority (ita) (see below for more detail on obligations under fatca and crs)

functionaries and other service providers

an incubator fund is required to have a bvi authorised representative at all times to act as a point of contact between the fund and the fsc.

this is a service offered by our associated services business, craigmuir authorised representative limited.

it is not required to have any other functionaries or service providers, although it is free to appoint them should it wish to.

notice requirements

on the happening of certain events, an incubator fund is required to notify the fsc. the table below summarises these notification requirements and the timeframe for providing notice.

notices in relation to an incubator fund’s validity period

the initial period of validity of an incubator fund is two years. if an incubator fund wishes to extend its period of validity for a period not exceeding 12 months, it must submit a written application to the fsc requesting the extension at least one month prior to the end of its period of validity (or such shorter period as the fsc may approve).

if an incubator fund wishes to continue to operate after the end of the validity period, it must submit to the fsc an application to convert into a private, professional or approved fund at least two months prior to the expiry of the validity period (or such shorter period as the fsc may approve).

if the incubator fund is applying to convert to a private or professional fund, it must also prepare and submit to the fsc an audit of its current financial position and compliance with the requirements of the regulations at least two months prior to the expiry of the period of validity.

annual regulatory and government requirements

there are various reporting and payment deadlines for an incubator fund throughout the year.

*us$550 for companies authorised to issue up to 50,000 shares and us$1,350 for companies authorised to issue more than 50,000 shares.

reporting and financial statements

an incubator fund is required to prepare and submit the following to the fsc:

• financial statements, which do not need to be audited but are required to be approved or signed by a director or the general partner of the fund, within six months of the end of the financial year to which they relate
• a semi-annual return, no later than 31 january and 31 july containing the following information as at 31 december of and 30 june of the preceding semi-annual period:
  • the number of investors in the fund
  • the total investments in the fund
  • the aggregate subscriptions to the fund
  • the aggregate redemptions paid to investors
  • the net asset value of the fund
  • any significant investor complaint received by the fund and how the complaint was dealt with
• a statement that the fund is not in breach of the requirements of the regulations that allow it to continue as an incubator fund, no later than 31 january (such statement is included in the semi-annual return).

anti-money laundering obligations

the bvi anti-money laundering (aml) regime applies to all funds as they are classified as “relevant persons” under the anti-money laundering regulations 2008. in addition to appointing an officer to the fund or another individual as mlro (as mentioned above), a fund will be required to:

• put in place investor on-boarding procedures which address typical “know your client” requirements
• put in place and maintain a written and effective system of internal controls which provides appropriate policies, processes and procedures for forestalling and preventing money laundering and countering the financing of terrorism (the manual). the manual should be reviewed annually to ensure compliance with aml regime in the british virgin islands
• report suspicious transactions to the financial investigation agency (fia) in the bvi
• report the identity of its appointed mlro to the fia agency

the bvi rules do provide for funds to outsource all and any of these obligations to functionaries based outside of the bvi. if the incubator fund has an administrator and/or investment manager, it may consider doing this. any outsourcing must, however, be documented in writing.

fund policies and arrangements

the fund is required to maintain a valuation policy setting out the applicable procedures for the valuation of fund property, the preparation of reports on the valuation and setting out the mechanisms for sharing valuation information with investors (valuation policy). the fund is also required to have a safekeeping policy and have adequate arrangements in place for the safekeeping of fund property (safekeeping policy).

on an annual basis, the fund should review its valuation policy and safekeeping policy to ensure compliance with bvi legislation.

obligations under fatca and crs

incubator funds are required to register for a global intermediary identification number (giin) with the us internal revenue service. funds are also required to enrol with the ita. enrolment for fatca reporting is made through the ita’s online portal, called bvi financial account reporting system, and for crs is made by email to bvifars@gov.vg.

incubator funds will need to identify reportable accounts and start to report the necessary information to the ita. the reporting deadline for us fatca, uk fatca and crs is 31 may.

the information that must be reported under us and uk fatca and crs is broadly similar and includes: the name, date of birth, tax identification number (tin) (for specified us persons where available); national insurance number (for specified uk persons, where available); jurisdiction of residence (for reportable persons under crs only); the account number; name and giin of the reporting financial institution; and the account balance (some minimums apply under fatca).

as a mutual fund, your approved fund is regulated by the bvi financial services commission (the fsc). this note provides a quick reference to your approved fund’s ongoing bvi obligations.

approved funds are governed by the securities and investment business (incubator and approved funds) regulations 2015 (the regulations) and the incubator and approved funds guidelines.

the board and officers

an approved fund must:

• at all times have at least two directors, at least one of whom must be an individual
• appoint an officer of the fund or another individual as money laundering reporting officer (mlro) for the fund who may, in practice, be a director of the fund itself or a person provided the administrator to the fund (see below for more detail on anti-money laundering obligations)
• appoint a foreign account tax compliance act (fatca) responsible officer and a principal point of contact for the bvi international tax authority (ita) (see below for more detail on obligations under fatca and crs).

functionaries and other service providers

an approved fund is required to have an administrator at all times.

it is also required to have a bvi authorised representative at all times to act as a point of contact between the fund and the fsc. this is a service offered by our associated services business, craigmuir authorised representative limited.

it is not required to have any other functionaries or service providers, although it is free to appoint them should it wish to.

notice requirements

on the happening of certain events, an approved fund is required to notify the fsc. the table below summarises these notification requirements and the timeframe for providing notice.

annual regulatory and government requirements

there are various reporting and payment deadlines for an approved fund throughout the year.

*us$550 for companies authorised to issue up to 50,000 shares and us$1,350 for companies authorised to issue more than 50,000 shares.

reporting and financial statements

an approved fund is required to prepare and submit the following to the fsc:

• financial statements, which do not need to be audited but are required to be approved or signed by a director or the
  general partner of the fund, within six months of the end of the financial year to which they relate.
• an annual return, no later than 31 january containing the following information as at 31 december of the preceding
  year:
  
  • the number of investors in the fund
  • the total investments in the fund
  • the aggregate subscriptions to the fund
  • the aggregate redemptions paid to investors
  • the net asset value of the fund
  • any significant investor complaint received by the fund and how the complaint was dealt with
  • a statement that the fund is not in breach of the requirements of the regulations that allow it to continue as
    an approved fund

anti-money laundering obligations

the bvi anti-money laundering (aml) regime applies to all funds as they are classified as “relevant persons” under the anti-money laundering regulations 2008. in addition to appointing an officer to the fund or another individual as mlro (as mentioned above), a fund will be required to:

• put in place investor on-boarding procedures which address typical “know your client” requirements
• put in place and maintain a written and effective system of internal controls which provides appropriate policies, processes and procedures for forestalling and preventing money laundering and countering the financing of terrorism (the manual). the manual should be reviewed annually to ensure compliance with aml regime in the british virgin islands
• report suspicious transactions to the financial investigation agency (fia) in the bvi
• report the identity of its appointed mlro to the fia

the bvi rules do provide for funds to outsource all and any of these obligations to functionaries based outside of the bvi, such as an administrator or investment manager (if the fund has one). any outsourcing must, however, be documented in writing.

fund policies and arrangements

the fund is required to maintain a valuation policy setting out the applicable procedures for the valuation of fund property, the preparation of reports on the valuation and setting out the mechanisms for sharing valuation information with investors (valuation policy). the fund is also required to have a safekeeping policy and have adequate arrangements in place for the safekeeping of fund property (safekeeping policy).

on an annual basis, the fund should review its valuation policy and safekeeping policy to ensure compliance with bvi legislation.

obligations under fatca and crs

approved funds are required to register for a global intermediary identification number (giin) with the us internal revenue service. funds are also required to enrol with the ita. enrolment for fatca reporting is made through the ita’s online portal, called bvi financial account reporting system, and for crs is made by email to bvifars@gov.vg.

approved funds will need to identify reportable accounts and start to report the necessary information to the ita. the reporting deadline for us fatca, uk fatca and crs is 31 may.

the information that must be reported under us and uk fatca and crs is broadly similar and includes: the name, date of birth, tax identification number (tin) (for specified us persons where available); national insurance number (for specified uk persons, where available); jurisdiction of residence (for reportable persons under crs only); the account number; name and giin of the reporting financial institution; and the account balance (some minimums apply under fatca).

on 9 february 2022, the luxembourg chamber of deputies (chambre des députés), adopted the law modernising the luxembourg law of 2 march 2004 on securitisation, as amended (the new securitisation law). the new securitisation law enhances legal certainty and flexibility of the luxembourg securitisation regime, while ensuring and increasing effective protection for investors.

the new securitisation law has modernised the following main aspects.

new sources of funding

the financing of a securitisation transaction is no longer limited to the issuance of securities but is open to the issuance of any type of financial instrument.

furthermore, in addition to the issuance of any financial instruments, securitisation undertakings can have recourse, in whole or in part, to the conclusion of any type of loans, whose yield or repayable principal depends on the risks acquired (eg profit participating loans, asset-backed loans).

new legal forms

the legal forms that can be used for securitisation companies are now broadened by:

• the unlimited company (société en nom collectif)
• the common limited partnership (société en commandite simple)
• the special limited partnership (société en commandite spéciale)
• the simplified limited company (société par actions simplifiée)

new authorisation and supervision requirements

a securitisation vehicle must be subject to the authorisation and supervision of the cssf, when it issues to the public on a continuous basis.

only securitisation vehicles issuing more than three times per year (on an all compartments basis) non-private placements with a denomination below €100,000 per each unit issued to non-professional investors need to be authorised and supervised by the cssf.

new rules governing the accounting treatment of equity-financed compartments

the accounting treatment and distribution of profits and losses of equity financed compartments shall now be done on a compartment basis unless the articles of the securitisation entity provide otherwise.

where compartments are equity-financed:

• the balance sheet and the profit and loss account prepared for each compartment shall be approved only by the shareholders of that compartment, unless the articles of the securitisation entity provide otherwise
• limitations to the distribution of profits and other distributable reserves may be determined by reference to each compartment, without regard to the global situation of the securitisation entity, unless the articles of the securitisation entity provide otherwise
• the legally required reserve according to the luxembourg law of 10 august 1915 on commercial companies, as amended, shall be determined on a compartment basis without regard to the global situation of the securitisation entity, if this is provided for by the articles of the securitisation entity

holding of securitised assets

a securitisation entity can now:

• directly own the assets generating the cash flows that are securitised
• acquire such assets or risks to be securitised indirectly, either through a subsidiary or via the acquisition of an entity holding these assets or risks

security interests

a securitisation vehicle can now grant security interests over its assets to parties that are involved in a securitisation transaction but are not direct creditors of the securitisation vehicle.

active management

active management of securitised assets is now allowed for luxembourg securitisation vehicles but only where the following conditions are met:

• the pool of securitised risks is made up of debt securities, claims or debt financial instruments
• the securitisation entity is not financed by issues to the public

ranking/legal subordination

the following default waterfall of payments/order of priority in respect of debt and equity instruments issued by a securitisation vehicle is now applicable to securitisation entities unless otherwise agreed:

• the units of a securitisation fund are subordinated to the other financial instruments issued by, and loans contracted by, such securitisation fund
• the shares (actions) or corporate units (parts sociales) or partnership interests (parts d’intérêt) of a securitisation company are subordinated to other financial instruments issued by, and loans contracted by, such securitisation company
• the shares (actions), corporate units (parts sociales) or partnership interests (parts d’intérêt) of a securitisation company are subordinated to the profit shares (parts bénéficiaires) issued by such securitisation company
• the profit shares (parts bénéficiaires) issued by a securitisation company are subordinated to the debt financial instruments issued and to the loans contracted by such securitisation company
• non-fixed yield debt financial instruments issued by a securitisation vehicle are subordinated to fixed yield debt financial instruments issued by that securitisation entity

new registration requirements

it is now mandatory for securitisation funds (and their liquidation) to be registered with the luxembourg business register. existing securitisation funds must register within six months after entering into force of the new securitisation law.

for more information, see our detailed update here.

companies incorporated in the bvi are, by most measures, the most popular offshore holding structure in the world. whilst offshore vehicles are used for a wide variety of different purposes globally, there are a number of common factors which feed into the success of the bvi product. whilst the most popular bvi vehicles are companies, bvi trusts and partnerships are also increasing in popularity.

many of the bvi’s advantages are common to numerous other jurisdictions (english language, absence of currency exchange controls, us dollar as a currency, stable democracy, common law legal system with final appeal to the privy council in london). a number of other advantages are not:

taxation

bvi has no income tax, corporation tax, capital gains tax, wealth tax or similar fiscal laws. whilst trading companies will normally pay taxation in the usual way in countries where they engage in business, using a bvi company as an intermediary holding company can create tax neutral layers in the corporate holding structure.

speed

subject to satisfying relevant kyc requirements, companies can be incorporated quickly by licensed registered agents via the bvi’s online electronic interface, usually within 2 days.

names

bvi companies may be incorporated with foreign character names (eg a chinese name) in addition to their english name.

cost

bvi companies are still comparatively inexpensive compared to other premium jurisdictions such as cayman and bermuda, and most mid-shores such as hong kong or singapore. a vanilla bvi company can normally be incorporated for around us$1,750 inclusive of disbursements.

confidentiality

neither the register of directors nor the share register of a company is required to be publicly filed in the bvi. although safeguards exist to prevent abuse of corporate confidentiality in relation to money-laundering and international crime, law abiding companies can exist with the confidence of privacy.

corporate flexibility

company law in the bvi is designed to provide the maximum flexibility consistent with common law legal systems. companies are permitted to undertake any lawful act or activity, and there are no strictures relating to corporate benefit. the economic substance regime requires entities undertaking relevant activity, which are not tax resident outside the bvi in a suitable jurisdiction, to have adequate substance in the bvi.

capitalisation requirements

bvi does not impose “thin capitalisation” rules or impose any general maintenance of capital requirements. provided a company maintains cash-flow and balance sheet solvency, there are no limitations relating to its ability to distribute assets to its shareholders by way of dividend. a bvi company is expressly empowered to provide financial assistance to a third party for the acquisition of its own shares.

joint ventures

bvi companies may adopt specific provisions in their corporate constitutions to abrogate the common law duties on directors to act in the best of interests of all of the shareholders in a joint venture, and instead free them to act for the benefit of the party appointing them. this flexibility has led to a number of high profile international joint ventures being structured through bvi holding companies.

ipo ready

for successful businesses, bvi companies are widely used in international capital markets as listing vehicles. shares in bvi companies are listed in stock exchanges in london (lse and aim), new york (nasdaq and the big board), toronto, hong kong and singapore, amongst others.

debt financing

bvi has a quick and simple system relating to secured creditor registration which facilitates leveraging assets where a bvi company needs to do so in order to raise capital. the bvi also has the most developed insolvency system in the offshore world which, whilst not usually a great consideration for entrepreneurs, is normally a key factor for banks who are being asked to fund them.

“light touch” regulation

outside of certain very specific industries (mainly: investment funds, banking and insurance - but certain other areas as well) bvi companies do not need regulatory approval to conduct their affairs. bvi aims to provide “light but effective” regulation to minimise unnecessary regulatory burdens. the most common type of regulated business is investment funds, for which specific carve-outs exist to minimise the regulatory burden for low risk investment funds.

innovative trust structures

trust law has been heavily modified in the bvi to remove uncommercial common law provisions. new and innovative products, such as vista trusts and private trust companies have driven the popularity of trusts, combined with rules refining restrictions to applicable non-charitable purpose trusts and rules against remoteness of vesting.

commercial court

commercial ventures can, go wrong. the bvi commercial court is a specialist body created to deal efficiently with company and high value commercial disputes. it enjoys a sterling reputation for delivering high quality judgments within an accelerated timeframe. avoiding lengthy delays and inconsistent decisions that affect other jurisdictions without a bespoke dispute resolution centre is pivotal. the final level of appeal is to the privy council in london, made up of uk supreme court judges.

fintech and cryptocurrency

for all the reasons set out above, bvi has become an attractive jurisdiction for initial coin offerings, crypto funds and fintech transactions. bvi has launched a regulatory sandbox designed to encourage bvi companies and other undertakings to develop and utilise innovate fintech within a light touch regulatory environment.

offshore structuring will always be driven by relevant considerations of the underlying transaction or structure. no one offshore structure can be all things to all people. but the dominance of the bvi in the market suggests that bvi structures can seemingly be most things to most people.

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harney westwood & riegels international, harney westwood & riegels (bvi) lp, harney westwood & riegels (cayman) llp, harney westwood & riegels (uk) llp, harney westwood & riegels (hong kong), harney westwood & riegels singapore llp, aristodemou loizides yiolitis llc (practising as harneys), harney westwood & riegels sarl, harneys bermuda limited, and each of their subsidiaries (collectively known as harneys) is committed to the privacy of information in line with data protection principles, regulatory and legal requirements, and global best practices. by completing this form and clicking submit, you consent to receive communications from harneys and recording your personal data through our privacy statement. for more information on how your personal data is collected and managed by harneys, please see our privacy statement. jersey legal services are provided through harneys (jersey) which is an independently owned and controlled jersey law firm.

in this episode of our funds download podcast series, our host and the global head of funds and regulatory, philip graham, is joined by the head of funds and regulatory, asia, maggie kwok, to share insights from the region.

key takeaways

• there was an uptake in open-ended funds being launched in q1. this was driven by fund managers based in hong kong and japan, who were looking to take advantage of volatility in the secondary market. at the same time, we identified a drop in deal flow and closings, partially due to investors being unable to conduct on-site due diligence due to covid-19, as well as uncertainty surrounding valuations.
• during q2 and moving into q3, we have seen a solid pipeline of new fund launches, which was particularly apparent in the real estate, pharmaceutical, technology, and infrastructure sectors.
• regulatory change which has affected the offshore landscape over the last couple of years has been positively received by the asia market, providing additional assurance and transparency for investors, managers, and for harneys’ business partners alike.
• bvi and cayman offer complimentary fund products, with a versatile range of products on offer for every type of manager. with the bvi offering cost-effective and flexible solutions for start-up managers and cayman remaining the first choice for those managers wanting to attract more institutional investors.
• domestic fund vehicles in asia, such as the vcc in singapore, as well as those under the hk partnership regime, can happily co-exist with offshore vehicles, and potentially feature in the same fund structure.

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visit the funds download podcast page to catch up on all the funds download episodes.

ignoring an awful lot of the current newsreels in the us right now, there is absolutely no doubt that recent victories by the democrat candidates jon ossoff and the rev. raphael warnock in georgia have added to the political transformation we will see in 2021 and will ensure that president joe biden will certainly have an easier time enacting his agenda.

whilst there is clearly a cacophony of different issues for him to tackle, it did remind me of this excellent article in reuters back in october which was already tracking the moves being made in the investment funds industry to continue the meteoric rise of esg investment strategies.

for those that are very late to the party, esg stands for environmental, social and governance and the story of esg investing actually began back in january 2004 when former un secretary general kofi annan wrote to over 50 ceos of major financial institutions, inviting them to participate in a joint initiative under the auspices of the un global compact and with the support of the international finance corporation (ifc) and the swiss government. the goal of the initiative was to find ways to integrate esg into capital markets.

whilst the concept has become an undoubted success, getting it to this position has not been without challenges. ignoring those that thought esg might just be something of a fad, one of the more interesting issues came from institutional investors who argued that making investment decisions on the basis of these principles was actually a breach of their fiduciary duties to their shareholder base.

this has caused extensive debate, but a strong argument was being made in many circles that the pursuit of financial gains should always be the sole focus. it became litigious in a number of jurisdictions, where investment managers were challenged on both their principles and ethics, although in almost every case, it was where the financial gains had not matched the expectations of the investors.

but both the uk and the eu decided to take this out of the hands of the courts and the new disclosure requirements for investment managers and advisers with respect to their esg policies will apply in the european union from 10 march 2021 and new climate-related disclosures will apply to investment managers under a uk disclosures regime that is expected to be phased in from 2022.

we will ignore the impact of brexit for the purposes of this short article, but it does appear that all of europe is united on this front. what is interesting to watch is that the regulatory landscape in this area is undoubtedly evolving and when you add these new initiatives to the shareholder rights directive, the uk stewardship code, the principles for responsible investing and the uk corporate governance code, it is now the case that european managers will be operating within these parameters indefinitely.

figures show that assets in sustainable investment products in europe are forecast to reach €7.6 trillion over the next five years, which will then outnumber conventional funds. part of this drives comes from a critical mass of pension funds and insurers deploying capital exclusively to asset managers with esg capabilities.

whilst this level of market dominance has not yet been reached in the us, largely due to some of the scepticism highlighted above, the clearer path that the democratic party now have in the us may well see their domestic capital providers follow a very similar path, especially in a market with greater maturity that really is looking for a transformation for the better.

this article was originally published by funds europe.

one of the most common scenarios we encounter is a us-based manager who initially establishes a domestic fund to attract us taxable investors. with the performance going in the right direction, the manager begins to think about us tax-exempt investors, such as charities, pension funds and university endowments, as well as investors based outside of the us, who like the track record and want to invest.

they have probably then been made aware that they will need an offshore vehicle and now have the task of working out why, where, and how much they need to spend.

why do i need one of these?

us tax-exempt and non–us investors will want to avoid potential us tax exposure that could result from direct investment into your us vehicle and so they will want to come into an offshore “blocker” vehicle. to ensure you can take in their capital, you will need to add at least one offshore structure to form either the traditional “master-feeder” or the “mini-master”.

what is a master-feeder?

here, we will create two new offshore vehicles. your existing us fund will then contribute its assets into the offshore master fund upon the launch of the new structure. the offshore feeder vehicle will then be available to take in us non-taxable investors and the non-us investors and “feed” into the offshore master fund as well, allowing for a co-mingling of all of the invested capital in the most tax efficient manner.

sounds good, so what about the minimaster?

in a mini-master structure, a single offshore fund is established which is taxed as a corporation to benefit us tax-exempt investors and block ubti for non-us investors.

adding a single offshore vehicle saves cost and therefore has proven popular with startup and emerging managers. the offshore fund invests directly into the existing us fund, which will then act as the master fund (whilst remaining the fund into which the us taxable investors will continue to invest).

this provides an additional benefit of not requiring the ownership of the assets of the domestic fund to be transferred. this reduces the administration around the restructuring and subsequently the cost as well. while there are some tax consequences to be discussed (and some investors may not want to invest even indirectly into a us vehicle), it has proved to be appealing to those looking to keep it as simple as possible to begin with.

okay, so i need one of these structures. where do i choose to set it up?

the british virgin islands and the cayman islands are both highly suitable and well-regarded offshore fund jurisdictions that have been used for many decades and always strive to meet the requisite international standards. we have long-standing clients who elected to use one or the other for different and highly sensible reasons at the time of their first launch. but there are differences, and a number of our clients have fund vehicles in both jurisdictions to maximise the advantages that they each offer.

understood. but how do i choose the best one for my fund?

cayman is the world’s most popular offshore funds jurisdiction. we estimate that cayman has over 70 per cent of the world’s offshore funds and so is the well-trodden path. although the bvi has around 15 per cent, managers who opt to establish their funds in the bvi sometimes encounter the additional question from institutional investors of “why bvi?”. whilst there are very reasonable and logical answers, the selection of cayman removes this additional query in the ddq.

but i am also looking to minimise cost…

in terms of corporate and regulatory costs, cayman is a significantly more expensive jurisdiction than the bvi, both upon formation and for the annual maintenance of the vehicle(s). this is then compounded by the greater regulatory requirements in cayman, which result in the cost differential for the jurisdictions being substantial.

for this reason, many fund managers who are operating with a relatively low level of aum prefer to establish their offshore fund in the bvi to keep overheads down whilst they build a track record and the bvi has intentionally designed some fund products to do this very thing. the incubator fund and the approved fund in the bvi have developed quite a following since their launch in 2015 and with the ever increasing barrier to entry in the funds industry, they provide very attractive cost-saving possibilities.

is it important where my potential foreign investors are likely to be based?

absolutely, although given the strong fund industries in both domiciles, you will generally find that investors are well aware of both jurisdictions and will not particularly object to either option given the vast similarities.

that being said, careful consideration should be given to this analysis to ensure that your fund’s particular offering is well catered for; a conversation with your chosen offshore counsel will often lead to helpful guidance in this area.

one aspect that should be noted is if you are considering marketing in the eu, you will need to seek advice on the marketing restrictions within this region. while both the cayman islands and bvi vehicles continue to operate under the long-standing eu national private placement regimes, managers do need to be very careful around their eu marketing strategy, as well as thinking through the position in the uk and switzerland separately. with that in mind, we do also assist with the structuring of investments funds in luxembourg, which is the pre-eminent european funds jurisdiction and has a wide range of structuring solutions for managers looking to attract eu investors.

conclusion

while there are many other options available to a us manager, this article should give you a solid platform to begin your thought process around taking the next step. we always recommend discussing this initially with your us counsel because they are best placed to ensure that your success story continues by surrounding yourself by the right service providers.

this article was first published in hedgeweek's us hedge fund startup guide 2021, download the pdf extract here.

here is a way to start an article like no other; what a fantastic year 2020 has been. the obituary of the hedge fund industry has been written many times, but for some, it was written in indelible ink in 2008 following the financial crisis. commentators blamed the industry for its part in the global collapse, notwithstanding the fact that a huge majority of fund vehicles during that time were actually victims themselves. ignoring the huge layer of red tape that subsequently encased the industry, this wasn’t actually the largest cause for concern.

the bigger problem was that once the s&p settled down, its solid and consistent performance led to a benchmark that the industry simply couldn’t match. many funds struggled to provide the exceptional returns they were once capable of and with new products like exchange-traded funds combining performance with a lower risk profile and lower fees, the glitz and glamour of aw jones’ product had truly been eroded. however, the inflow of investment remained, and while the lack of true performance caused general resentment, a shock to the global financial system might cause the passive investment models to fail and suddenly the two and 20 would look like money well spent. so the script for 2020 couldn’t have been better written by hollywood, although probably would have had a little more dwayne johnson. the flash crash in march could have lead to the industry flourishing from that point forward.

dog funds

sadly, a record 150 funds were classed as poor performers in the "spot the dog" list compiled by wealth manager tilney bestinvest, which names and shames the worst-performing investment funds and reported a 65 per cent increase in the number of "dog" funds, up from 91 in february. interestingly, this is consistent with the tough time value investors have generally had over the last decade. buying shares in companies which appear cheap given their fundamentals became a true art form, but the markets simply haven’t played to the same rule book and one obvious explanation for this is the rise of tech firms, which are simply impossible to analyse using standard valuation tools. brand strength and user adoption models seemingly become far more important than the profit line, for example. with a pandemic forcing the entire planet to go online simultaneously, the arguably overvalued tech stocks somehow continued to grow exponentially. those companies that remained well placed to increase in value consistently if the world had continued on its "normal" course, suddenly found that the very solid foundations they were sensibly built on were destroyed from under them. hugely dependable industries were decimated in a matter of months which even the very best minds in the hedge fund industry couldn’t readjust to quickly enough. where you have such a fundamental and novel shock to the system, the largest funds will always have the biggest problem with turning their tanker around. just looking at the top 20 dogs, all but one of them is over a billion and you can see some truly institutional names. on a wider basis, the ten largest hedge funds reporting to evestment remain some 4.61 per cent in the red year-to-date, despite posting a 1.31 per cent gain in july. in contrast, hedge funds overall are now flat for the year, having registered a 3.43 per cent rise in july to successfully claw back losses suffered in h1. market neutrality achieved? being nimble and able to pivot in this type of market was always going to be advantageous.

digital rise

from our own anecdotal evidence, given we have the pleasure of working with a large number of emerging managers, we certainly have clients who are putting some very significant numbers up on the board this year. it has been especially noticeable in the digital asset slice of this market. whether you believe in the digital gold theory of bitcoin or not, there is no doubt that with so much uncertainty out there, investors are looking for interesting alternatives to find value and it is no coincidence to see another rise in real estate focused funds as well. it is entirely unfair to judge anyone in any industry on their performance this year, save for those that have craved volatility to demonstrate their worth. however, i think we have to let the year play out before making any sweeping judgements, but that makes the next spot the dog report all the more intriguing. popcorn at the ready.

this article was originally published by citywire wealth manager.

the market for us dollar (usd)-denominated funds in greater china has undergone rapid transformation. professional services providers have been grappling with the impact of a flurry of new laws and regulations, while fund managers have suddenly found themselves overwhelmed by choice. this has led some to question whether market convergence has finally led to the creation of a level playing field for all jurisdictions, or whether in fact this is the beginning of widespread divergence in the fund market industry.

this article explains how and why the market has blossomed in recent years, and considers how it may develop in future.

usd fund market outside mainland china

the usd fund market outside mainland china has flourished due to the emergence of free markets such as hong kong, in tandem with the tight capital controls maintained by china. these controls have laid the foundation for china's economic evolution in the past 40 years, which have seen the confluence of international asset allocation, pensions and endowments on the one hand, and the emergence of ultra-high-net-worth individuals, domestic insurance funds and a burgeoning asset management industry on the other.

this dichotomy of two markets — domestic and international — created a real need for offshore vehicles so that usd capital could be pooled and invested, and investment returns distributed in a tax-efficient way. this in turn smoothed the way for the widespread recognition of the cayman islands and its investment-holding and fund products, such as exempted limited partnerships for private equity funds, exempted companies as mutual funds and certain non-fund arrangement vehicles.

international standards and rule books

the coordination of international standards and rule books for the fund management market was led by the organisation for economic cooperation and development (oecd), the financial action task force (fatf) and, to a certain extent, the uk government. the financial services industry has been beset by "regulatory fatigue" since 2015, as it has got to grips with heightened scrutiny of anti-money laundering and counter-terrorist financing and proliferation measures, and with new requirements governing the exchange of tax information (automatic, spontaneous or on request). at the same time, it has had to deal with new requirements governing economic substance, data collection and transparency in beneficial ownership, as well as measures to safeguard fund assets and heightened oversight of virtual asset issuers and service providers.

the sheer volume of regulatory changes in recent years has certainly felt overwhelming, but it is also necessary to consider how the market has responded to the resurgence of neo-liberalism, and the free flow of capital and free movement of people across borders. the answer may be moot, but governments and regulators have made substantial progress toward establishing a mutual framework for information-gathering and exchange, as well as behavioral standards to which fund managers must adhere.

while this convergence has been taking place, many individual jurisdictions have quietly been re-designing their tax regimes to make them clearer, friendlier and more flexible. as just a few examples:

• hong kong has established the unified fund exemption regime and introduced a much-anticipated tax concession for carried interest.
• singapore's new variable capital companies and hong kong's partnership funds have garnered considerable interest.

investors have begun to revisit and "rediscover" alternative structures, notably those offered by the british virgin islands, which are more versatile for small to medium-sized funds and for those renminbi fund managers just dipping their toes in the water of the usd fund market for the first time.

amid all the hype, fund managers have tended to focus on how comparable, or otherwise, these new products are to conventional offshore products, rather than exploring the nuances in terms of what they are designed to do, and establishing why — while a certain product may be the perfect fit for one fund manager — it will be totally unsuitable for another. once the dust has settled, however, it will become clear that the market has evolved from being able to offer a single mature product to the point where it can now deliver a dynamic and solution-oriented range of products. there are a number of reasons for this transformation:

• tax optimisation and product strength have gradually replaced privacy absolutism, against a backdrop of greater transparency regarding the exchange of tax information, controlled foreign corporation rules and enhanced client know-your-client procedures. removal of ring-fencing and measures to prevent unfair tax treatment have blurred the boundary between onshore and offshore structures.
• a holistic approach — there has been increasing consensus about traditional offshore solutions in the context of onshore/mid-shore operation and investments and their returns.
• democratisation of the market — new fund managers are quickly acquiring in-depth knowledge and flexing their muscles, while well-established fund houses have continued to maintain strong momentum in terms of fundraising and deployment.
• unprecedented sophistication — teams of professional and specialised service providers are now able to help their clients navigate the fast-changing marketplace and identify the investment options which most closely meet their interests.

what does all this mean?

will the democratisation of the market lead to even greater demand for more tailored and versatile (and perhaps previously overlooked) products, or will the homogenisation of tax implications allow managers to be more creative and receptive to non-conventional onshore/ offshore structures or to a cayman/british virgin islands hybrid? will there be further consolidation of service providers, who will then be able to incorporate more comprehensive service offerings into their networks, or will boutique and nimble players thrive?

much remains to be seen, but the authors would not be surprised if all of these things were to happen.

the foregoing is for general information only and not intended to be relied upon for legal advice in any specific or individual situation. this article was originally published by © thomson reuters on 4 december 2020.

in our final episode of the funds download season one, our host and the global head of funds and regulatory, philip graham, is joined by partners lewis chong and matt taber and associate marc piano, our in-house crypto experts. they consider the most frequently asked questions encountered in their extensive experience with guiding emerging managers in this industry.

the crypto questions countdown

1. what kind of legal structure should i be looking at? which jurisdiction is right for me? what does an open-ended or closed-ended fund mean?
2. do i need a bank account and if so, can you get one for my offshore crypto fund?
3. if i use an offshore vehicle, i don’t need to worry about tax, right?
4. i would like to target investors all over the world. harneys have offices everywhere, can you can help me with that?
5. can i issue a transferrable token representing my fund interest?
6. the custody of the assets of my offshore crypto fund will obviously not take the approach for a more traditional investment fund. will this be an issue?
7. tune in to the podcast to find out what the number one hottest question is right now...

marc piano is no longer with harneys. he now works at horizons global, an h3 verified service provider.

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visit the funds download podcast page to catch up on all the funds download episodes.

matt taber is no longer with harneys.

in this episode of our funds download podcast series, our host and the global head of funds and regulatory, philip graham, is joined by partner matt taber and associate marc piano, to focus on how the fintech evolution continues to provide a platform for serious innovation in the industry.

key takeaways

• the tech london advocates (tla) recently released the much anticipated “blockchain: legal and regulatory guidance” which identifies best practices in the dlt, smart contracts, and cryptoassets space.
• the report gives significant and detailed consideration by very senior legal individuals to the legal and regulatory framework that underpins blockchain technology, with recognition and appreciation and understanding of the potential it holds for the future.
• we discuss a time when the inherent workings of a fund vehicle could be automated using smart contracts and analyse whether this will make the entire ecosystem more efficient.
• smart contract dispute resolution mechanics remains a relatively nascent yet fascinating area of development. litigators beware.
• matt is now out of his attic and enjoying the freedom to podcast from any room in his house.

marc piano is no longer with harneys. he now works at horizons global, an h3 verified service provider.

click here to subscribe to the funds download podcast. choose your preferred platform from the list presented and click subscribe or follow once logged in.

visit the funds download podcast page to catch up on all the funds download episodes.

matt taber is no longer with harneys.

in this episode of our funds download podcast series, our host and the global head of funds and regulatory, philip graham, is joined by partner lewis chong and associate marc piano, to discuss the hot topic of cryptocurrency; how it has evolved, its recent resurgence and the essential role offshore jurisdictions play in supporting this dynamic industry.

with this topic being such a popular and highly requested one, we had no choice but to make this a feature-length episode and we do hope you’ll take the time to listen in.

part two will follow on soon with some cutting-edge regulatory updates – stay tuned.

key takeaways

• the origination of blockchain, digital assets, and crypto-currency work at harneys took us to be the offshore leaders in this space
• a close look at how the ecosystem blossomed and why jurisdictions such as the bvi and the cayman islands were very logical domiciles to embrace and support the ascent
• the dazzling rise (and fall) of icos
• crypto winter and a maturing of the digital assets market in 2020

marc piano is no longer with harneys. he now works at horizons global, an h3 verified service provider.

click here to subscribe to the funds download podcast. choose your preferred platform from the list presented and click subscribe or follow once logged in.

visit the funds download podcast page to catch up on all the funds download episodes.

in this episode of our funds download podcast series, our host and the global head of funds, philip graham, is joined by the head of our regulatory and tax department, aki corsoni-husain, to talk us through the global regulatory framework that all aspiring fund managers and service providers should be aware of.

key takeaways

• key licensing considerations need to be taken into account when forming an investment management vehicle for the first time.
• critical differences between regulators around the world, including those based in the eu and the traditional offshore jurisdictions.
• sophisticated investors and family offices are looking to invest in fund vehicles domiciled in jurisdictions that are in full compliance with international standards, making an adherence to these crucial concepts an increasingly important factor in raising capital.

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visit the funds download podcast page to catch up on all the funds download episodes.

in this episode of our funds download podcast series, our host and the global head of funds and regulatory, philip graham, is joined by harneys fiduciary managing director of the americas, maria pia buchi, to examine market trends originating from latin america and how investment fund products are structurally so important in the plumbing of the region.

key takeaways

• market uncertainty has meant managers are considering the possibility of replacing traditional strategies with more opportunistic ones to meet the demands of (and generate alpha in) such a volatile market.
• the deadline for compliance with recently enacted private fund legislation was 1 july 2020 for the bvi and is 7 august 2020 in cayman. these deadlines were set by the eu and there is no prospect of flexibility.
• outbound investments from latin america are currently very strong, with managers seeking to achieve diversification and will classically look to set up offshore funds in which their local vehicles invest or explore the luxembourg option where there is some form of european nexus.
• family offices in latin america have always had an international focus, but recently we have noticed an uptick in private equity inquiries where families are requesting that offshore aggregator vehicles be established to allow them to access opportunities that might normally be out of reach.

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visit the funds download podcast page to catch up on all the funds download episodes.

in this episode of our funds download podcast series, our host and the global head of funds and regulatory, philip graham, is joined by the head of our luxembourg investment funds team, vanessa molloy, to take a closer look at the reasons why luxembourg is such a successful investment funds jurisdiction, and the main factors to consider if you are thinking of establishing a luxembourg structure.

key takeaways

• luxembourg is an incredibly successful investment funds jurisdiction, with a premier reputation and approximately 4,700 billion euros under management
• it is the natural choice for those wishing to access the eu market
• cssf is a pragmatic and approachable regulator and the jurisdiction, in general, is extremely commercial
• the traditional home of ucits but also a significant player in the alternative funds market
• aifms and raifs, amongst other acronyms

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visit the funds download podcast page to catch up on all the funds download episodes.

when things go horribly wrong; lehman, madoff, and the global financial crisis of 2008/2009.

in this episode of our funds download podcast our host and the global head of funds and regulatory, philip graham, is joined by the co-head of funds and regulatory in the cayman islands, matt taber, the global head of dispute resolution, phillip kite, and the head of dispute resolution in the cayman islands, nick hoffman, to share their collective insights and knowledge acquired from the crash in 2008 and its aftermath.

key takeaways

• for both emotional and practical reasons funds couldn't easily suspend redemption rights, which was the key issue that lead to so much distressed fund litigation during this period
• prior to september 2008 most funds had not remotely stress-tested their documentation and were largely unaware of the mechanics available to protect their position
• ponzi schemes remain a huge threat to the global economy, despite the lessons we all should have learnt from madoff
• independent directors on the board of the fund are an essential part of the infrastructure now and provide a huge level of experience which largely flowed out of this period
• courts will carefully examine the fund’s contractual documents and note the specific rights and obligations that are set out. fund boards should therefore follow these closely and promptly at all times, but especially during a potential crisis
• prevention is better than cure. if you are uncertain about your fund documentation, please reach out to your harneys contact for assistance or one of the key contacts listed as authors on this article

click here to subscribe to the funds download podcast. choose your preferred platform from the list presented and click subscribe or follow once logged in.

visit the funds download podcast page to catch up on all the funds download episodes.

philip kite has retired and matt taber is no longer with harneys.

in this episode of our funds download podcast, our host and the global head of funds and regulatory, philip graham, is joined by the co-head of funds and regulatory in the cayman islands, matt taber, the global head of dispute resolution, phillip kite, and the head of dispute resolution in the cayman islands, nick hoffman. they relive the events of the financial crises of 2008/2009 and examine what valuable lessons were learnt by the funds industry as a result.

key takeaways

• market volatility in march did not lead to any great rush for redemptions, nor did managers bring down suspensions.
• covid-19 is a truly global event and so we have not yet seen a true flight away from any asset class; are there actually any alternatives out there?
• vital lessons were learnt from the 2008/9 financial crises, and managers and independent directors can take sensible steps to prepare themselves for any future financial strain by sufficiently documenting their decision-making, reviewing their documentation, and taking timely action.
• internal and external communication is essential, particularly with your investor base and key service providers.
• independent professional directors are now an integral part of the way funds are governed. they are brought into a discussion much earlier on, which is particularly beneficial in a distressed situation.

click here to subscribe to the funds download podcast. choose your preferred platform from the list presented and click subscribe or follow once logged in.

visit the funds download podcast page to catch up on all the funds download episodes.

philip kite has retired, and matt taber is no longer with harneys.

introducing the funds download, our newest podcast series aims to provide insight and commentary to our clients and friends in the investment funds industry.

in each episode, we will be mixing in real-time legal updates in the bvi, the cayman islands, and luxembourg, with developing trends in our key markets of the us, latam, europe, and asia and sprinkling on top some contrasting viewpoints on the pivotal moments in the global economy.

episode one: a view from the americas

in our first episode, global head of investment funds, philip graham, and co-head of the cayman islands practice, matt taber, examine q1 2020 and make projections of the emerging issues as we step into q2.

key takeaways

• “business as usual” in january and february
• regulatory changes including the new private fund regimes
• blacklists, volatility, and distressed funds in march
• a loft is as good a place as any to record a podcast

in episode two, we will be joined by the global head of dispute resolution, phillip kite, and the head of our dispute resolution practice in the cayman islands, nick hoffman, to discuss lessons we all learnt in the last crisis back in 08/09.

click here to subscribe to the funds download podcast. choose your preferred platform from the list presented and click subscribe or follow once logged in.

visit the funds download podcast page to catch up on all the funds download episodes.

philip kite has retired, and matt taber is no longer with harneys.

this article highlights the bvi’s versatile range of fund products available for every type of manager.

as soon as an investment manager considers the establishment of an offshore fund vehicle, the british virgin islands will be part of their thought process. it has been an attractive and popular jurisdiction for hedge funds for over 30 years, and with the recent updates to the legislative framework on 1 january 2020, there are even more reasons to use a bvi vehicle as a springboard for offshore fund raising.

the bvi continues to be a significant player in the offshore hedge fund space, with approximately 1,500 hedge funds recognised by the bvi financial services commission (fsc). the bvi also offers a very popular and cost-effective regulated fund management product in the form of the ‘approved manager’. the number of approved managers has steadily grown since its introduction in 2012, with 270 currently approved by the fsc.

the bvi benefits from a diverse offering of open-ended fund products suited to everyone – from the start-up manager setting up an incubator fund, through to established institutional fund managers with billions under management. operators can choose whether to use the internationally recognised bvi business company or, indeed, the recently updated limited partnership structure, which meets all of the requirements that investors might need.

there is also the option to use a segregated portfolio company, where a manager decides that they want to take advantage of the innovative statutory segregation and ring-fencing of liabilities.

let’s take a look at the characteristics of the five fund products available in the bvi.

incubator fund

the incubator fund is a cost-effective vehicle aimed at emerging managers. it allows them a two-year incubation period (with an extension of up to 12 months) to establish a track record and test the strategy’s viability. during that period, the fund can operate with light regulation and without carrying out an audit.

an incubator fund has sensible limitations to it, which include a cap of 20 ‘sophisticated private investors’ and the net assets of the fund must not at any time exceed us$20 million. but if either of these limits are met, the regulations provide a sensible timeframe to upgrade the fund’s regulatory status to one of the other types of funds set out below, without losing the established track record.

approved fund

the approved fund is aimed at managers looking to establish a fund with a private offering to a small group of investors on a longer-term and economical basis.

this type of fund must appoint a administrator from the outset, but otherwise has a variety of options to determine which service providers it requires.

it operates in a similar manner to the incubator fund, including the benefit of the fast-track approval process and also with a cap of 20 investors. but it has an increased aum threshold of us$100 million, which provides a great deal more flexibility to maintain this fund type.

private fund

private funds do not have a minimum subscription threshold or impose any ‘professional’ or ‘sophistication’ tests for investors. instead, it focuses on the logical restriction of ensuring that either it has no more than 50 investors at any one time or that the fund interests are purely marketed on a private basis. this has made them popular for friends and family offerings in particular.

professional fund

professional funds are the most popular category of regulated fund in the bvi and make up approximately 70 per cent of all regulated funds in the jurisdiction. there is no restriction on aum or on the number of investors that can be brought into the fund.

however, the interests in a professional fund may only be issued to ‘professional investors’, and the minimum initial investment by each professional investor must not be less than us$100,000 (or other currency equivalent), unless the investor is ‘exempted’, in which case there is no minimum initial investment.

a ‘professional investor’ is a person whose ordinary business involves, whether for that person’s own account or the account of others, the acquisition or disposal of property of the same kind as the property, or a substantial part of the property, of the fund or who, whether individually or jointly with their spouse, has a net worth in excess of us$1 million (or other currency equivalent), which can include the residential home.

in order to allow a professional fund to launch quickly, it may carry on its business, or manage and administer its affairs, for a period of up to 21 days without being recognised by the fsc, which is useful when there is a time-constrained opportunity that must be met.

public fund

a public fund is generally viewed as a retail product; therefore, logically, the regulatory burden placed on it is considerably higher than that of a private or professional fund. however, it is not subject to any bvi restrictions on the categories or number of investors it may invite to invest in the fund.

registered public funds may not make an invitation to the public or any section of the public to purchase shares unless prior to such invitation they publish a prospectus that complies with the public funds code, which is approved by and signed on behalf of the fund’s directors and which is registered by the fsc.

a public fund will require a full suite of service providers, but as with every other category of fund, there is versatility to appoint service providers that are located in a jurisdiction that best suits the manager and the fund’s investors, rather than requiring any of them to be based in the bvi.

2020 legislative updates

the recent updates to the bvi investment funds legislation look to ensure that the bvi is well placed to keep up with internationally recognised parameters and best practice that should be in place around hedge funds, but also retain the jurisdiction’s agility and cost-effectiveness. they primarily deal with the introduction of provisions relating to:

• defining and identifying the property and assets of the fund
• the obligation to maintain a clear and comprehensive policy for the valuation of fund property with procedures that are sufficient to ensure that the valuation policy is effectively implemented
• the logical requirement that the fund’s administrator values fund property in accordance with the valuation policy
• ensuring that the valuation policy and procedures of the fund should:
  • be appropriate for the nature, size, complexity, structure and diversity of the fund and fund property
  • be consistent with the provisions concerning valuation contained in its constitutional documents and offering document
  • require valuations to be undertaken at least on an annual basis
  • include procedures for preparing reports on the valuation of fund property
  • specify the mechanisms in place for disseminating valuation information and reports to investors
• ensuring that the fund’s manager is independent from the fund’s administrator, or where this is not possible, ensuring that any conflicts are managed, disclosed and monitored appropriately for the protection of the investors
• ensuring that sensible and appropriate arrangements are in place for the safekeeping (and segregation where necessary) of the fund property.

there are also updates to the audit standards that are required for the financial statements of a fund, which expand the list of international standards accepted by the fsc and, again, allows the manager to select an auditor in a geographical region that best suits the fund.

we are confident that investment managers will find the updates are handled by the fsc with its usual level of professionalism and understanding of the pressures that are faced by managers in the exceptionally hard fund-raising environment. indeed, they have already issued guidelines that demonstrate a distinct acceptance that there cannot be a one-size-fits-all approach to fund vehicles, and that they will accept sensible applications on behalf of offshore vehicles where they need some flexibility around these parameters.

there is no doubt that the private sector in the bvi is excited about the year ahead. they look forward to welcoming the ever-increasing number of new managers to these shores.

this article was originally published by hfm global.

in this article, originally published by hfm, our co-global head of investment funds phil graham examines how us managers can bolster their offering by adding an offshore fund to their structure.

download the pdf to read more.

for hong kong based managers, the preferred hedge fund structure has long been a cayman islands exempted company. however, there has been a lot of talk over the last year or so about the hong kong government initiative to introduce an open-ended fund company (ofc) vehicle, and to make changes to taxation laws, with the aim of allowing for hong kong domiciled hedge funds.

but will the ofc and proposed tax changes really entice hong kong based hedge fund managers to set up funds in hong kong?

much of the talk of the “advantage” for a hong kong manager in setting up an ofc over a cayman domiciled fund relates solely to a requirement for dealing only with the securities and futures commission (sfc) and not also the cayman islands monetary authority (cima).

this seems to me a little simplistic.

as a starting point, with a hong kong manager directly managing a hong kong fund, and without any offshore manager, there will be no opportunity for any management or performance fees to be earned at the cayman level and tax-deferred.

moreover, hedge funds are cross-border by their very nature. most hedge funds have investors from a lot of different countries and have investments in a lot of different countries. accordingly, managers will already need to be considering the securities laws of various countries.

all the investors in a hedge fund will have their own local tax obligations, so as a very base condition a manager is seeking to domicile their fund somewhere with no additional taxes. however, this is not enough.

a manager also needs to domicile their fund somewhere that provides investors from a lot of different countries the relevant level of comfort to place their investments in such a vehicle. there are some very important factors that are considered by the type of sophisticated investors that invest into hedge funds in determining this comfort level. such factors that a jurisdiction must exhibit include the absolute rule of law, respect for property rights and access to a sophisticated judiciary free from political interference.

the cayman islands is a jurisdiction that fulfils these requirements and has reliably proven itself to do so over decades. as a result, over 85 per cent of the world's hedge funds are domiciled in the cayman islands.

hong kong is a jurisdiction that some might consider is rapidly being subsumed into the people’s republic of china.

even when you drill down into more of the minutiae of the ofc regime it appears that the cayman islands remains a clear leader. the level of prescription and oversight which is contemplated by the ofc regime, whilst it may be familiar to operators of hong kong retail funds, is far more than would be familiar to hedge fund managers, or than applies to private cayman funds.

• the ofc’s governing document is required to contain certain prescribed provisions, including the kinds of property in which the ofc can invest. any change to this governing document will require the sfc’s approval. there are no restrictions imposed by the cayman regime on investment strategies of cayman funds or their use of leverage. a cayman fund does not have prescribed provisions in, and cima’s approval is not required for any changes to, its memorandum and articles of association.
• the appointments of the directors of an ofc are subject to the sfc’s approval, and the sfc will require the directors to be appropriately qualified and experienced. by contrast, cima requires directors to register via a web portal but does not impose an approval process nor any requirements as to qualifications, experience or independence.
• an ofc must appoint a custodian approved by the sfc which meets the eligibility requirements set out. in practice, many hedge funds appoint one or more prime brokers, and many prime brokers may not, and may not wish to, meet these eligibility requirements. a cayman fund sold in hong kong by private placement is not required to appoint a custodian.
• the ofc regime requires that the valuation and pricing of the ofc’s property is the investment manager’s responsibility. this is inconsistent with the typical hedge fund model, where valuation and pricing is typically delegated to the fund’s administrator.
• any change of name of an ofc is subject to the sfc’s approval. no approval is required to a change of name of a cayman fund.
• transfers of ofc shares will be subject to hong kong stamp duty, in contrast to cayman funds that maintain their register of shareholders outside hong kong.

as a result of both the differences in their jurisdictional foundations, and shortcomings in the detail of the ofc regime, my personal view remains that the ofc is unlikely to tempt many hong kong hedge fund managers away from the flexible, well-tested and more globally accepted cayman structure.

i suppose time will tell.

there are a number of ways to structure your offshore fund and the best option for you will depend largely on the location of the manager, your investor base and the type of investments that the fund will make. i have set out a summary of the three most common structures to use for offshore funds in this post.

offshore standalone

an offshore standalone structure is one where only one fund vehicle is used and that fund vehicle is offshore (normally in cayman or the bvi). this structure is mainly used by managers who have no us presence. normally an offshore standalone structure is solely geared towards non-us investors but it may also be geared towards us based non-taxable investors such as pension funds, charitable organisations and endowments who want to avoid unrelated business taxable income.

master-feeder

a master-feeder structure is normally used where there is a us presence and where a single manager is seeking investment from both us and non-us or tax exempt us investors. the structure will comprise a master fund (an offshore vehicle which is either a limited partnership or a corporate vehicle which elects to be treated as a partnership for us tax purposes), which conducts the trading, and at least two feeder funds which invest all of their assets into the master fund.

one of the feeder funds will typically be a us limited partnership into which the us taxable investors will invest. using a limited partnership which is a “pass through” entity for us tax purposes means that the allocable master fund’s profits and losses are passed through to investors and taxed at investor level. there is no entity tax at the master fund level in the offshore jurisdiction (either the cayman islands or the british virgin islands), thus avoiding double taxation.

the second feeder, known as the “offshore feeder”, will normally be an offshore company known as a “blocker corporation”. it is into this offshore feeder that the non-us and us tax exempt investors will invest. investment into a blocker corporation means that any us tax liability and any requirement to fill in a us tax return arises at the master/feeder fund level and does not affect the investors themselves.

non-us investors who are not generally required to file us tax returns prefer to invest through this type of blocker corporation to avoid triggering any us tax obligations. if non-us investors invest directly into a fund structured as a partnership they are treated as being engaged in the business of the fund and, to the extent that this includes any us trade or business, will need to file a us tax return and be liable to us taxation. having a separate feeder fund, which is a corporate blocker, avoids this situation.

for similar reasons, the us tax-exempt investors invest through the offshore feeder. the tax-exempt investors are liable to income tax on any income from trade or business which is regularly carried on and not substantially related to their tax-exempt purpose. this is known as “unrelated business taxable income” (ubti). if they invest into a fund which is a partnership, they are treated as participating directly in the activities of the fund and some or all of the income derived from those activities will be liable to us tax. the blocker corporation makes use of a loophole in the legislation which, subject to certain exceptions, allows us tax-exempt investors to receive dividends from the blocker corporation without being subject to ubti.

the master-feeder structure enables the investment manager to operate a single trading entity and avoids the need to allocate trades between separate funds. it also avoids duplication of documentation with counterparties. in some cases, opportunities for leverage may be better than when operating a side-by-side structure.

side-by-side

similar to a master-feeder structure, a side-by-side structure is used where a single manager is seeking investment from both us investors and non-us or us tax exempt investors who require different tax treatment. two funds, an offshore and domestic us fund, are established and both are managed in exactly the same way.

this structure is sometimes used for fund of funds strategies but less often for other trading strategies, given the administrative burden associated with either making two identical trades at the same time or splitting trade tickets between the two funds. unlike the master-feeder structure where there is one performance result, each fund may have slightly different performance results as a consequence of having different fee levels.

the main reason for choosing the side-by-side structure over the master-feeder structure is to enable tax structuring measures to be taken by one or the other of the funds which, if used in the master-feeder structure, would have negative consequences for the other group of investors.

spc

another option for structuring a fund is to use a segregated portfolio company or “spc”. an spc is a company within which separate portfolios have statutory segregation of assets and liabilities. these are popular for umbrella funds operating various classes or portfolios with separate strategies. we will look at spcs in more detail in a future blog.

if you would like to discuss these options in more detail, please get in touch.

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.

having worked with clients in so many different parts of the world over the years, i have always found it interesting to see certain practices in some markets that are not commonly undertaken in others.

one recent example of this is the use in asia of segregated portfolio company (spc) structures to create private equity funds that allow investors to participate entirely on a deal-by-deal basis.

this is a different approach to structuring private equity funds than is typically seen in other markets, where general partners typically form limited partnership structures and investors invest on a blind pool basis. in such blind pool funds, investors do not have visibility at the time they make their investment of any of the underlying assets that the fund will ultimately acquire. rather, they are placing their trust in the ability of the fund manager to source and execute unknown deals on terms that will lead to attractive returns over time.

in addition, the more traditional approach to structuring private equity funds is to utilize a commitment-and-drawdown model, where investors do not actually invest all their capital at the time of becoming an investor in the fund. rather, they make a contractual commitment up to a certain amount, with that amount then being available for drawdown when called from time to time by the general partner or fund manager as required for completing underlying purchase transactions.

the prevalence in asia of using spc structures to allow investors to participate on a deal-by-deal basis is driven by a lower level of willingness by many investors in this region to invest on a blind pool basis. in addition, general partners or fund managers in the asia region are often less interested in a commitment-and-drawdown approach and often prefer that investors simply invest all their capital at the time of their becoming an investor.

an spc is a company able to create one or more segregated portfolios (portfolios) in order to segregate the assets and liabilities of each portfolio from the assets and liabilities of any other portfolio.

by creating a new portfolio each time that a particular underlying deal is proposed, a separate offering of shares in that particular portfolio can be undertaken, usually pursuant to a supplement to an existing private placement memorandum, and managers are able to pitch a specific underlying portfolio investment opportunity to investors.

the low cost of rolling out new portfolios make an spc a potentially preferable structure to creating entirely separate companies each time that a particular underlying deal is proposed.

obviously, catering to this investor appetite for a deal-by-deal approach creates some additional considerations or difficulties for fund managers, and these need to be managed in utilizing these types of spc structures.

firstly, with such an spc structure the fund manager will not have existing contractual commitments from investors, or “dry powder”, that can be called down at very short notice, and this can affect the ability of the manager to commit to underlying transactions in a timely manner. clearly, entering into a binding underlying purchase contract cannot be finalized until the necessary capital has been raised, as this would give rise to a risk of a breach of contract if the funding cannot ultimately be obtained.

if the fund manager is competing against another potential purchaser for an asset, and such other purchaser already has guaranteed funding in place, the vendor may prefer to deal with such other purchaser (even potentially on slightly less favorable terms) due to a perceived greater degree of certainty of closing the transaction.

if potential investors require access to key investment personnel as part of their investment decision-making process, whilst such personnel are also trying to focus on negotiating and agreeing terms on an underlying transaction (and possibly also any related debt-financing) at the same time, this constitutes an additional time burden on such personnel.

as all of the capital raised by a new portfolio will often be invested in the single underlying investment for which the portfolio has been formed, the portfolio will not have access to cash to make monthly or quarterly management fee payments. this often results in several years of management fees being charged up-front at the time of the portfolio’s launch.

notwithstanding some of these additional considerations and difficulties for fund managers in utilizing these types of deal-by-deal spc structures, managers will always seek to provide investment opportunities and structures that meet the demands of investors. for this reason, the use of deal-by-deal structures is likely to continue in the asia region for some time yet.

all bvi and cayman investment funds are now subject to aeoi (the automatic exchange of information). aeoi has been around for a while now but is still new to a lot of our clients, particularly us-based managers who are expanding their investor base and setting up an offshore structure for the first time (and also, a lot of lawyers). so what is it, what is it all about, what do you need to know and what can you leave to the experts?

what is it for?

the idea of the aeoi regimes is that they enable countries to collect information on where their tax residents (or citizens in the case of fatca) have financial assets. this then enables those countries to crack down on tax evasion and ensure that their citizens or tax residents are paying all taxes that they are liable to pay in relation to financial assets held overseas.

what is it?

in the bvi and cayman, aeoi falls within two regimes; one commonly referred to as “fatca” and the other referred to as “crs”.

fatca refers to the us foreign account tax compliance act and the inter-governmental agreements and implementing legislation which both the bvi and cayman (and numerous other countries) have entered into with the us.

crs or the common reporting standard refers to the oecd’s standard for automatic exchange of financial account information. to date, more than 100 countries have agreed to automatically exchange information under crs.

how does it work?

bvi and cayman investment funds have to report information on the investments or “accounts” of their investors who are resident in reportable jurisdictions to the local tax authority (either the bvi international tax authority (known as the ita) or the cayman tax information authority (known as the tia)).

that tax authority then reports the information to the relevant tax authority in each relevant reportable jurisdiction (or, for fatca, to the irs). for example, information in relation to an investor in a bvi fund would be reported to the ita. the ita would then report the information on the account of an investor which is tax resident in hong kong to the hong kong inland revenue department and information in relation to the account of an investor which is tax resident in the uk to hm revenue and customs.

other types of financial institutions have reporting obligations too but for the purpose of this blog we are just looking at funds. it is worth mentioning that bvi and cayman investment managers will fall within the aeoi regimes. they will have nothing to report but will need to register with the ita or tia.

lists of reportable jurisdictions are published by the ita and tia.

does it work both ways?

fatca is one-way, in that participating jurisdictions report to the irs but there is currently no reciprocal reporting. crs is different in that it is reciprocal and there is two-way reporting (although some countries have elected not to receive information).

what do we have to do?

bvi and cayman funds have to:

• appoint individuals to aeoi roles –
  • fatca responsible officer is required to register for a global intermediary identification number;
  • principal point of contact to liaise with the ita or tia, as applicable; and
  • authorising person (for cayman funds but not bvi funds);
• register with the irs and obtain a giin for fatca purposes;
• register for reporting on the online portal of the ita or tia, as applicable;
• implement aeoi policies and procedures;
• include relevant disclosures in their offering documents and self certification forms in their subscription agreements; and
• report on an annual basis.

what do we report?

funds have to report details of their investors and the value of their investments and redemptions during the reporting period.

if the investor is a financial institution (like another fund or a bank), nothing has to be reported on that investor.

things get a little more complicated where the investor is a passive entity that receives income from passive investments but is not a financial institution and has no reporting obligations itself. in those circumstances, the reporting fund will have to look through those entities and may have to report on some of their shareholders and controllers.

are there deadlines?

yes, when a fund launches, it needs to register with the irs and apply for a global intermediary identification number (often referred to as a giin). it also needs to register with the ita (for bvi funds) or tia (for cayman funds). reports or nil returns must then be completed by 31 may each year.

does this mean investors have to pay more tax?

it shouldn’t do. investors have always been obligated to pay taxes on their income and capital gains in accordance with the tax rules of the countries in which they are tax resident. the rules in each country are different and nothing about crs or fatca changes them. aeoi just means that information about the financial assets held by investors is exchanged with their countries of tax residence and so there is no hiding them.

how do we know where our investors are tax resident or what type of entity they are?

onboarding of investors has become a bit more complicated and subscription agreements are now longer. we now need to get an additional form (a self certification) from investors and combine that with a bit of due diligence. in practice, this is not much more onerous than the normal on-boarding that your administrator does for each investor.

this all sounds complicated, can someone do it for me?

absolutely! many administrators and auditors offer this service. harneys also has an expert team who can do your aeoi reporting for you. let us know if you need our help with this and we can provide a proposal.

the author of this post is no longer with harneys. for more information on this topic, please reach out to the author listed above.

the phenomenal rise in the price of bitcoin during the course of this year mirrors the extraordinary amount of enquiries (and subsequent instructions) that our team has received in relation to the formation of cryptocurrency funds and digital token launches.

as cryptocurrencies and digital tokens continue their aggressive push into the mainstream investment world, regulators and lawyers worldwide are grappling with how to fit this square peg of digital assets into the round hole of the existing legal and regulatory framework. as a result, this is one of the most exciting (and, if i am honest, slightly scary) times in my legal career and my day-to-day mindset amusingly mirrors the extraordinary fluctuation in the price of most of the cryptocurrencies this week.

one of the main issues our cayman and bvi funds teams have been focussed on is how a cryptocurrency fund or digital token issuer might satisfy its anti-money laundering and countering the financing of terrorism (aml/cft) obligations under bvi or cayman law when accepting cryptocurrency subscriptions from investors. i think regulators worldwide are particularly mindful of aml/cft when it comes to cryptocurrencies because of a widespread perception that the anonymous nature of cryptocurrencies allows criminals and terrorists to move and launder their assets (see by way of terrifying examples, the silk road and the wannacry ransomware attacks).

as many of our readers are aware, cayman and bvi funds are required, amongst other things, to verify not only the identity of their investors but also the source of funds of those investors. for funds that accept fiat subscriptions from investors, the former task typically takes more time and energy than the latter. this is because with a fiat subscription, the fund will typically receive a wire transfer from the subscriber’s bank account. the fund can take a great deal of comfort that the relevant bank, as a regulated entity and subject to stringent laws and regulations in this area, has conducted its own kyc checks on the subscriber and will confirm in the relevant wire details that subscription monies are from an account in the name of the subscriber.

with cryptocurrency subscriptions the verification of source of funds becomes a major issue. the concern with cryptocurrencies is that, while the subscriber may fill out subscription documents and provide the fund with detailed “know your client” (kyc) documentation, it is very difficult to verify that the cryptocurrency transferred to the fund’s wallet actually belonged to the subscriber. as lawyers, we often say that we are paid to think about the worst that can happen. in these circumstances, the situation we very much want our clients to avoid is a tony soprano* wannabe using his ill gotten cryptocurrency to pay for a subscription that someone without a criminal record made on his behalf.

although we don’t have a “silver bullet” solution for this problem at this stage, we think there may be a number of interesting ways to reduce the risk outlined above.

these include:

1. requiring that all cryptocurrency subscriptions be paid from a wallet maintained with a regulated provider or a regulated exchange on the basis that such entities are required by their own regulator to implement aml/kyc procedures to weed out bad actors.
2. engaging specific service providers that use proprietary software to:
   1. trace the blockchain history of cryptocurrency and provide risk ratings in relation to such cryptocurrency; and/or
   2. provide risk ratings in relation to the cryptocurrency wallet of the subscriber.
3. utilising a live video link with the subscriber to verify that the subscriber controls the wallet that is making the cryptocurrency subscription.

i should note that digital asset space is evolving at an extremely fast pace and it may well be the case that that one of the many service providers appearing in this space will come up with the “silver bullet” solution we are all looking for or, frankly, our suggestions simply won’t work in practice. in the meantime, we hope that these suggestions might help funds focussed on this new asset class to comply with laws and regulations that were not originally drafted with cryptocurrencies and digital tokens in mind.

right, i guess i better get back to swapping my btc for xrp...

* for those of you who are not familiar with outstanding noughties television, tony soprano was the head of a new jersey mafia family in david chase’s legendary show, the sopranos.

after a highly educational trip down to buenos aires at the end of last year, i couldn’t help but be encapsulated by everything that was going on in argentina. it absolutely felt like a country that was finally moving in the right direction and the tax amnesty was a large part of that. on that basis, i took the time out to interview the head of our montevideo office, horacio woycik to gauge his views on how 2017 is playing out:

thanks for taking the time to speak to me horacio. i noted that on 31 march 2017, argentina concluded one of the world’s most successful tax amnesties, something of which you must be very proud of as a native argentinian. could you tell our blog readers a little more?

thanks phil. although the argentina government was cautiously optimistic when announcing the tax amnesty on various assets^[i] a year ago, the results exceeded all expectations, with $116.8 billion assets declared in total. this is impressive, particularly compared to the $1.7 billion declared under the former government’s tax amnesty programme between 2013-2015.

that’s a truly incredible result. what do you put it down to?

some may attribute this success to investor confidence in argentina’s new government, led by mauricio macri, but in my opinion, this only partially explains the results. another deciding factor in the amnesty’s success was the unanimous consensus from local legal, tax and financial advisors that sooner rather than later, there would no longer be a safe place for undeclared assets and they actively encouraged all of their clients to participate. the amnesty was seen as a “last chance” opportunity for taxpayers to regularise assets before the unprecedented flow of financial information amongst tax authorities following the implementation of the oecd’s common reporting standard (crs) in september 2017.

that’s interesting as clearly the crs has been a huge topic of conversation down there for a while. has it made that much of an impact?

absolutely. crs, fatca and fatca’s bilateral intergovernmental agreements (igas) are reshaping the international financial system, and compliance with local tax obligations will soon be monitored by financial institutions more closely than ever before. in this context, tax amnesties are just another preliminary step in a coordinated global effort.

as a matter of fact, argentina’s amnesty programme is only one of many tax amnesty programmes taking place simultaneously worldwide. chile successfully closed its tax amnesty programme in december 2015 with $18.7 billion in assets declared. meanwhile, brazil recently extended its amnesty programme until 31 july 2017, with $54 billion in assets declared to date. additionally, countries like colombia, peru and mexico have ongoing tax amnesty programmes.

so this is absolutely going to be become the norm. what can we expect after these various tax amnesties take place?

the high adherence to the different tax amnesties will likely trigger a wave of asset restructurings by high net worth individuals, with tax efficiency as the main driver. it’s likely that there won’t be a “one size fits all” solution for the structuring needs of clients from different countries, as structuring will be very dependent on local tax legislation, and solutions will vary from country to country.

accordingly, private clients’ increased use of fund structures for tax and estate planning purposes is likely to drive growth in latam's fund industry.

that’s very interesting and i’m our funds blog readers would like to know a little more about why that is.

i can see three obvious reasons why:

• funds are a natural vehicle for asset repatriation. tax residents in latam are disclosing billions of dollars through the ongoing tax amnesty programmes, most of which are held abroad. some of those assets are likely to return to their investors’ countries of residence once the "invisible barrier" of being undeclared is lifted. it could be expected that investment funds will channel a significant portion of this inbound flow.
• funds provide flexibility and other benefits. investment funds are likely to be seen as the appropriate vehicle to hold investor assets due to the flexibility in the management of investments that the structures allow and the tax benefits that these vehicles offer investors in different jurisdictions in the region.
• funds follow wealth. all latam jurisdictions aside from venezuela are expected to grow during 2017. this includes the comeback of certain key latam economies like argentina and brazil which suffered a contraction in 2016 (click here for a detailed growth forecast and comparison to 2016 performance).

that’s perfectly logical. have there been any other side effects?

another interesting secondary effect of the drive to transparency is the shift away from the previous unfair and unjustified views of offshore structures. as tax authorities notice that resident tax payers continue to legitimately hold assets through offshore vehicles for succession and tax planning purposes, the integral role offshore vehicles play to the international finance market is once again highlighted, and misinformed perceptions about illegal behaviour are fundamentally cleared up.

i certainly agree with that point and it was very interesting from my perspective to note the level of interest in offshore vehicles from the very sophisticated community in that region. finally, i must ask you the most important question; messi or maradona?

tricky question! i simply cannot choose between them. with maradona and messi, we get to enjoy the best of the present and the best of the past - as an argentinean couldn't be prouder.

^[i] argentina’s tax amnesty programme was announced in may 2016 to establish a one-time tax payment on various assets: 10% tax on the value of disclosed financial investments (15% if disclosed after 31 december 2016); 5% tax on the value of real estate properties; 0% tax if taxpayers subscribe any of the 3 types of argentine public bonds available – with low return rate and lock up periods; 0% tax if invested in argentina funds to invest in local projects (with a 5 year lock-up period).

when i volunteered to write a guest blog (for our funds team) this month, i must admit i was slightly filled with dread when they said yes with (in my view) rather inappropriate amounts of enthusiasm. what do i know about offshore funds as a corporate and commercial lawyer, who has more recently been turning her hand to corporate restructurings in a flattish transactions market? well, the answer is in fact quite a lot about what offshore funds are being used for, particularly in the property market in the uk.

i regularly act for residential and commercial property investors and those who lend to them and i also have a (probably) slightly unhealthy interest in rightmove’s sold property prices. what better credentials do i need?

with a real estate property magnate in the white house and the increase in property investment generally, the real estate sector is ripe for international private equity fund managers to tap into.

according to the lawyer’s global 200: real estate 2017 report and data provided by private equity real estate magazine, the world’s top 50 private equity real estate funds raised a combined us$271 billion between 2011 and 2016. fundraising for global funds declined in 2016 after 5 years of year-on-year growth. pere reports that this was due in part to a lack of funds closing – 25 per cent fewer funds closed in 2016 than in 2015.

those who attended mipim in early march will have been aware of the positive view of the property sector. investment in the london commercial property market continues to be popular for high net worth individuals and family offices, as well as for larger global private equity funds. asian and middle eastern investors still look to london for their property investment and particularly in some of the more distinctive buildings which now pepper london’s skyline – from the city to canary wharf (the cheese grater, the shard et al). all good signs for onshore and offshore lawyers servicing this market.

pan european real estate funds are becoming increasingly popular, with london and germany proving preferred markets for commercial property investment. according to the lawyer’s real estate report, portfolio deals involving particular asset classes (logistics, student accommodation, build to rent and private rented and hotels) are standing out further than single asset investments. in our experience of acting for investors in these sectors, offshore fund vehicles are just the ticket for investment in real estate portfolios – and for good reason.

whether the investor is looking for a simple offshore company to hold the property assets in his own name or that of a nominee, or a more complex structure involving holding companies and an onshore, midshore or offshore funds vehicle, the legislative regimes in both the british virgin islands and in the cayman islands provide solid, predicable yet flexible frameworks for private equity investors.

in both jurisdictions, depending on the proposed exit strategy, the investment vehicle may be established as a regulated entity or as a more straightforward unregulated, closed ended funds vehicle or in conjunction with an onshore or midshore fund. exit strategies will and do vary, depending on the appetite in the market. private sales of whole property funds or some of their assets, redemptions of holdings or ipos are all options, although the first two are probably more common of late. other drivers such as tax and the domicile of the key investing parties will also be relevant.

if you act for investors or lenders who like to finance commercial property investments, and an offshore structure is under consideration, do let us know, we would be delighted to talk through the options.

sales pitch over, i leave you with a couple of quotes about property investment which i quite like.

“real estate cannot be lost or stolen, nor can it be carried away. purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.” -- franklin d. roosevelt, us president

“buy land, they’re not making it anymore.” -- mark twain, writer and humorist

the bvi and cayman are often referred to as "tax neutral" and you might have been told that, for this reason, it would be advantageous to establish your fund in either jurisdiction. what does this actually mean and what does it mean for your fund?

primarily, it means that bvi and cayman companies are not subject to corporate taxation on income, capital gains or share transfers. instead, the bvi and cayman governments raise revenue through other means such as income taxes on resident individuals (in the bvi), real estate taxes, sales and import duties and, in relation to corporate vehicles, through incorporation and licence fees. in cayman the government goes one step further and will issue a tax exemption certificate to a typical cayman fund (in return for a fee) confirming that for a period of 20 years (where the fund is a company) the fund will not be subject to certain cayman taxes irrespective of any change in law.

the fact that bvi and cayman companies have no corporate taxes can make them particularly useful in fund structures, as one or more corporate vehicles can be used to pool investor funds without adding additional layers of taxation. investors are still taxed in the jurisdictions in which they are tax resident on any income and gains generated from investment into the fund, but there is no corporate taxation at the fund level. this is subject to certain exceptions where the bvi or cayman fund may be subject to taxation in another jurisdiction as a consequence of the location of its investments and/or its investors (for example, under us fatca).

the attraction of tax neutral jurisdictions is not quite as simple as it may sound and it is not always favourable from a tax perspective for all investors for funds to be domiciled in tax neutral jurisdictions. as i set out in more detail in my previous post on fund structures, while some groups of investors would prefer to invest in an offshore, tax-neutral, fund, for others it is advantageous to invest in a domestic onshore fund. for example, u.s taxable investors prefer to invest into domestic u.s. funds structured as partnerships which are “pass through” entities for u.s. tax purposes.

and, it’s not all about tax. there are numerous reasons to use bvi and cayman funds apart from being tax-neutral. phil has touched on this before in his previous post but, as a recap, both jurisdictions have a modern corporate law, which is supported by hundreds of years of english common law, and a sophisticated court system with ultimate recourse to the privy counsel of the united kingdom. they both offer a range of fund products, suited to different uses and with appropriate regulation and competent and experienced regulators (the british virgin islands financial services commission and the cayman islands monetary authority). in addition, both jurisdictions are home to world-class service providers and cayman is the fifth-largest banking center worldwide. this makes the bvi and cayman extremely attractive jurisdictions in which to establish a fund.

if you think that you would benefit from using a bvi or cayman fund and you would like to discuss the options in more detail, please get in touch.

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.

it seems to have fallen upon me to talk about all the things that can go wrong with your fund! as it happens, suspending nav calculations, subscriptions and redemptions is not the end of the world that it was once considered. if you keep in mind a few key considerations, chances are you will survive this challenge.

suspensions: the post-2008 context

prior to september 2008, suspensions were pretty much never invoked. the general view was that to invoke a suspension would cause irreparable reputational damage to a manager. however, in the midst of the 2008 financial crisis, it was those managers that did suspend redemptions, waited for the storm to pass, limited the damage and then eventually lifted suspensions that survived. those who failed to operate suspensions and gates were left with redeemed (but unpaid) investors whose claims as creditors for their redemption proceeds ranked above the remaining investors. it is because of this that, whilst liquidity is still absolutely key for investors, there is now an expectation that a responsible and well-advised manager would invoke a suspension or gate when reasonably necessary in order to protect the investors’ interests.

navigating a suspension scenario

so, the dreaded situation arises; your fund suffers a financial blow so severe that your investors start to withdraw their funds. what should you do? firstly, call your lawyer! they will need to carefully review your fund documents to determine what you can and cannot do, and what the correct process is. getting the right strategy from the start is crucial. your lawyer should know their way around your fund documents, particularly if they drafted them, and they will know where to look for any potential pitfalls. secondly, act quickly. you will need to suspend redemptions before the next redemption date. otherwise, investors that have submitted redemption requests will become creditors of the fund and their redemption proceeds will become payable. so you called your lawyer straight away. what do you need to do next? below are six key considerations or actions you will want to take.

1. consult your board

you will need to call a board meeting, as there are various things to discuss. what has your lawyer advised and are you able to suspend redemptions? if not, are there other mechanisms that you can use such as imposing investor or fund level gates or transferring certain assets into side pockets or restructuring the fund in another way? do you need to work out a liquidation plan or do you think you can ride this storm? minutes will need to be taken at each meeting, as they may be required in future proceedings to prove that reasonable steps were agreed upon and followed by the board. make sure to document everything. whilst not pleasant, the investment manager and the board of directors will need to consider whether there are any conflicts of interest that would, for example, prevent a director who is affiliated with the investment manager from attending and voting at any meetings. if there is a likely chance of a conflict of interest arising, you will need to consider whether the investment manager and board of directors need to instruct separate legal counsel.

2. don't forget about redemptions and subscriptions

you need to make sure that as well as suspending the calculation of nav, you also suspend redemptions and subscriptions. in some circumstances, it may be possible to continue to calculate nav and you may want to suspend redemptions and subscriptions without suspending the calculation of nav. if there are investors who have submitted redemption requests and the redemption date has passed, you may also want to suspend the payment of redemption proceeds, if your fund documents permit this. you could also consider payments of redemption proceeds in kind (often referred to as “in specie”), ie by transferring assets worth the same amount as the redemption proceeds to the redeeming investor if your fund documents allow this.

3. consider the fitness of your independent directors

your independent directors may want to resign from the board before any of these resolutions are passed, as they may not feel that they have the relevant experience to deal with this type of situation. you will still be required to have two directors on the board at any time if you’re a fund that’s regulated by the cayman islands monetary authority or the bvi financial services commission (fsc) and will need to consider who to appoint in their place. there are independent directors with specific experience of acting on the board of distressed funds who can be appointed.

4. communicate your plan

you will need to make a plan for informing the fsc or cima and your investors. an investor circular will need to be prepared and your lawyer should draft a letter to the fsc or cima, depending on where the fund’s regulated. both the investors and the fsc/cima will expect regular updates throughout the process. communication is key to a successful resolution.

5. regular re-assessments

it will be important to constantly re-assess the situation to determine whether or when suspensions ought to be lifted. your fund documents are likely to permit suspensions only for so long as the circumstances giving rise to the ability to suspend persist.

6. keep your lawyers on speed dial

keep in touch with your lawyer at all stages. if a period of suspension continues for a long time, the fund may be open to claims from investors to wind up the fund on the basis of “loss of substratum”, that the fund is no longer viable. this poses a greater risk in cayman than it does in the bvi where the test is much higher and an investor would need to establish the impossibility of the fund continuing business. the drafting of your fund documents can also be a key factor in whether this is a risk for the fund. with careful management and good advice, a period of suspension does not have to damage your reputation or be the end of the fund. get in touch if you would like to discuss any specific situation.

the author of this post is no longer with harneys. for more information on this topic, please reach out to the author listed above.