1) Why Cayman Islands is the leading domicile for alternative investment funds?
There are many factors that combine to make the Cayman Islands the offshore jurisdiction of choice for hedge funds, hedge fund managers and private equity funds are readily apparent.
Estimated to account for some 75% of the offshore hedge fund market (source: Cayman Islands Monetary Authority (CIMA) Annual Report 2015/16), the Cayman Islands was the first offshore jurisdiction to regulate such investment vehicles, with the introduction of the Mutual Funds Law in 1996, some years before the term ‘hedge fund’ had been coined. Successive governments have capitalised on this, and have continued to support and help develop a vibrant funds industry. In fact, today, most of the larger institutional clients insist on their hedge fund or private equity vehicles being located in this reputable (and politically and economically stable) jurisdiction.
Today, there are over 10,000 regulated hedge funds (source: www.cima.ky), alongside many more that are exempt from CIMA regulation. Private equity funds for instance are typically set up as exempted limited partnerships (ELPs) in Cayman and as at the end of 2017 there was a total of 22,346 ELPs (source: Cayman Islands Registrar of Companies) registered in the jurisdiction.
The Cayman Islands is recognised for its compliance and co-operation on matters of anti-money laundering, tax information and financial regulation, being among the first group to implement the OECD’s Common Reporting Standard, along with the US’s Foreign Account Tax Compliance Act.
The Cayman Islands has shown it is willing to introduce new products to ensure the needs of the industry are met. An important legal development was the 2016 introduction of the limited liability company (LLC), following strong demand from US fund managers for a corporate vehicle that mirrors the Delaware LLC, providing limited liability along with the benefit of separate legal personality. With over 1,000 LLCs formed since inception (Registrar of Companies), we have seen exceptionally high take up in the private equity sector, and LLCs have been particularly useful in the context of hedge funds as an offshore feeder fund and a new alternative to the immensely popular Cayman Islands Exempted Company.
Elsewhere, significant strides have been taken to prepare an ‘opt in’ Alternative Investment Fund Managers Directive (AIFMD)-compliant framework for Cayman funds that wish to operate in the EU under the EU’s AIFMD. As legislation in this area continues to be fine-tuned and with full expectation that offshore jurisdictions like Cayman will receive the AIFMD Passport from the European Securities and Markets Association, funds with interests in Europe have continued to avail themselves of the EU’s national private placement regimes, which provide the appropriate EU market access where required.
A cornerstone of the Cayman Islands’ success as an international financial centre has been the economic and political stability derived as a UK Overseas Territory, with a sophisticated legal system, based on UK common law and ultimate recourse to the UK Privy Council. Should the need for litigation arise, the specialist Financial Services Division of the Cayman Islands Grand Court, created in 2009, is served by judges with immense practical experience in financial matters, notably resolving some of the most high-value and complex disputes arising out of the financial crisis.
The islands’ geographical proximity to the US has historically ensured their appeal to managers of alternative funds there, but with the increasing globalisation of the alternative fund industry, the islands are now the primary offshore jurisdiction for hedge funds and private equity funds worldwide.
The Cayman Islands have no direct taxes of any kind. There are no corporation, capital gains, income, profits or withholding taxes. There are no inheritance taxes or death duties. Furthermore, Cayman companies, limited partnerships, trusts and SPCs can obtain a written undertaking that they will be exempted from taxes for a minimum of 20 years (companies and SPCs) and 50 years (limited partnerships and trusts).
3) Legal System
The Cayman Islands has a sophisticated legal regime that is based on English Common Law, with the final court of appeal being the Privy Council in London. In addition, a highly efficient and respected court system upholds the jurisdiction’s framework of legislation.
Cayman Islands law maintains a legitimate right to privacy, but its confidentiality statute provides a clear gateway for tax transparency and there are no inhibitors for the effective operation of its many international cooperation agreements.
4) Fund Legal Structures
Hedge funds established in the Cayman Islands will typically take the form of a company, a limited partnership or (less commonly) a unit trust. If statutory segregation between assets and liabilities of sub- portfolios is desired, the SPC model will be attractive. Each of these vehicles can be used as a stand-alone fund, a fund of funds or as part of a master-feeder structure.
5) What law governs the regulation of Cayman Islands investment funds?
The Mutual Funds Act (2020 Revision).
6) What is an open-ended fund?
A fund will be deemed open-ended if it issues ‘equity interests’ (shares, partnership interests or units) that participate in the fund’s profits and gains, and which are redeemable (or otherwise capable of being repurchased) at the investor’s option. The reference to equity interests is important, because this excludes debt instruments (including warrants, convertibles and sukuk instruments) – funds issuing such instruments will not be required to be registered with CIMA. There is nothing to prevent a fund that is not obliged to register with CIMA from applying for and obtaining a registration if the manager wishes.
7) Under what circumstances does a fund need to be registered with CIMA?
An open-ended fund with 15 or fewer investors, the majority of whom are empowered under the fund’s constitutional documents to appoint and remove directors/general partners/trustees (as applicable), is exempt from CIMA registration. However, this exemption does not apply to master funds. Unless this exemption applies, in the case of an open-ended fund, then registration will be required. There are three means of obtaining registration:
* The fund is licensed directly by CIMA;
* an administrator licensed by CIMA provides the fund’s principal office in the islands. Both routes entail an examination of the promoter’s reputation and fitness;
* The fund either requires a minimum initial investment of US$100k (or equivalent) per investor, or has its shares listed on a stock exchange recognised by CIMA (eg, LSE, ISE) (the ‘section 4(3)’ fund.
The scope of regulation extends to Cayman Islands incorporated or established master funds, which have one or more CIMA regulated feeder funds and hold investment and conduct trading activities. All three means of registration entail an annual fee of US$4,268.29, except in the case of registered master funds, for which the fee is US$3,048.78.
8) What are the requirements for directors of Cayman investment funds?
Most Cayman funds will appoint independent directors to the board and given the knowledge and experience required acting on the board of a fund, most fund sponsors will appoint experienced independent directors with experience acting on fund boards. This is aside from any considerations for tax neutrality. CIMA has released a Statement of Guidance which establishes key principles of good governance which must be observed by each Cayman Islands regulated mutual fund. For further information, please contact us.
9) I do not currently operate a regulated investment management company. Does this preclude me from establishing my own fund?
No. The Cayman Islands enables you to create a management company under the Securities and Investment Business Act (SIBA). The benefits of this are significant as it enables you to receive payments from your fund to your Cayman management company, which is tax neutral and it also separates the risk as the investment manager is manager to the fund. The process is quick an efficient. Certain exemptions from the licensing regime are available, notably to the following:
* A Cayman Manager regulated in respect of securities investment business by a recognised overseas authority;
* A Cayman Manager carrying on securities investment business exclusively to companies within the manager’s group;
* Cayman Manager carrying on securities investment business to sophisticated persons, high net worth persons or Cayman funds the investors of which are such persons.
An exemption costs US$6,100 per year. For further information on establishing a Cayman Management Company or investment adviser, please contact us.
The zero tax position that will apply to a hedge fund registered in Cayman as an exempted entity will apply equally to a Cayman Manager that is registered as an exempted company or SPC, exempted limited partnership or exempted trust. The exemption is obtained by the Cayman Manager declaring that its business will be carried on mainly outside the Cayman Islands and an annual return to this effect must be filed.
No physical presence (office space, staff, etc) in the islands is required. Any income or capital gains realised by the non-resident Cayman Manager (and its members) from the fund will not be subject to tax in Cayman.
10) What types of fund legal structures can Bell Rock establish?
The most common fund structure for hedge funds is the Cayman Exempted Limited Company. The fund company will issue voting shares (“management shares”) to the investment manager while issuing non-voting participating shares to investors. Private equity funds typically structure their funds by creating an exempted limited partnership. We also form LLC’s and foundation companies. We can assist with the full establishment of the fund entity, investment manager and any regulatory filings required.
11) What is the time-frame to launch a Cayman investment fund?
Approximately 4-6 weeks. The fund entity can take as little as 24 hours to form but should factor in the time taken to prepare the offering memorandum and ancillary legal documents plus on-boarding with the various service providers such as fund administrators, banking and custody, auditors.
12) Are there any restrictions on the strategy or amount of leverage that my fund may use?
No. There are no restrictions imposed by the Cayman regime on investment strategies of hedge funds, or their use of leverage, shorting or other ‘alternative’ techniques. There is no concept of an ‘eligible investor’ in a Cayman-registered fund.
13) Can I list my fund on an internationally recognized stock exchange as my investors can only invest in listed securities?
Yes, the Cayman Islands Stock Exchange (CSX) is an internationally recognized stock exchange. You may list your fund on the CSX or other exchanges, as required.
14) I need to obtain an ISIN and CUSIP for my fund. How do I do this?
Please contact us and we can assist.
15) I will have investors in the US and outside of the US. Is a Cayman fund appropriate?
Yes. You will most likely want to form a master-feeder fund or mini-master. The benefits of this structure are the efficiencies. Typically, this consists of a Cayman Master fund, a Cayman Feeder fund (for non-US taxable investors) and a Delaware Feeder Fund for US taxable investors.
16) I anticipate launching multiple funds with different strategies. What would you suggest?
A Cayman segregated portfolio company (SPC), usually referred to as an “umbrella fund” is a unique structure that is comprised of one company with segregated portfolios underneath. This usually provides cost efficiencies if you expect to launch multiple funds.
17) Is there a minimum or maximum number of directors required for the board?
For a CIMA registered fund, there must be at least two (2) directors and they must be registered with CIMA under the Director Registration & Licensing Act. There is no maximum. Most regulated funds will appoint professional directors form firms such as Bell Rock, for a number of reasons such as:
1. Independence from the investment manager and avoid potential conflicts
2. Meet requirements that the fund is offshore
3. Increased focus on board composition by investors and regulators as part of teir due diligence.
4. Recent cases that have highlighted the need for robust board governance and oversight. Having experienced independent directors in seen as a effective way of protecting investors and ensuring that they are treated fairly.
5. Providing regulatory and governance updates in the region that the fund is regulated. Often managers overlook the importance of ensuring compliance with Cayman regulations, regulatory reporting requirements and any changes in regulations and compliance that the directors can update managers on throughout the year.
18) Does the regulator (CIMA) take time to approve the offering memorandum of the fund and if so, what is the time-frame for approval?
No, CIMA does not review the offering memorandum and the directors are responsible for its contents. There are certain requirements expected in an offering memorandum however. Please contact us for further information.
19) What is Registered Office Service?
Cayman Islands Company Law requires that all companies registered in Cayman have a physical presence in the Islands in the form of a Registered Office. All entities other than ordinary companies must maintain their Registered Office with a licensed service provider such as Bell Rock. Services include the following:
* Provision of a physical mailing address for the company
* Display of the company name
* Maintenance of the statutory registers of the company
* Register of Members
* Register of Directors and Officers
* Register of Mortgages and Charges
* Submission of the Annual Return to the Cayman Islands Government
* Co-ordination of all filings with the Registrar of Companies
Is wish to launch a VC or PE Fund. Can Bell Rock assist?
Yes, we routinely set up and strucutre venture capital, private equity, real estate and othert closed-ended funds. Such funds are typically strucutred as an exmepted limited partnership with a general partner. Closed-ended funds are subject to registration with CIMA under the Private Funds Act and therefore must meet certain other requirements. We can advise on all aspects so please feel free to contact us.