Cayman Private Funds Regime: Registration and Operations

Cayman Private Funds Act registration applies to closed-ended funds: vehicles that pool investor money, are managed as a whole for reward and do not let investors redeem at their option. A private fund must apply to register with the Cayman Islands Monetary Authority within 21 days after accepting capital commitments, and must then meet operating requirements on audit, valuation, custody, cash monitoring and record keeping.

Key takeaways

• The Private Funds Act applies to closed-ended companies, unit trusts, partnerships and LLCs that meet the private fund definition, subject to exclusions.
• Non-fund arrangements, certain licensed entities, regulated mutual funds and single-investor funds are out of scope.
• A private fund must apply to CIMA within 21 days after accepting capital commitments, and cannot accept capital contributions before it is registered.
• Audited financial statements signed off by a Cayman auditor must be filed with CIMA within six months of the financial year end.
• Valuation, custody or title verification, cash monitoring and identification of securities are all codified requirements.

What is a private fund under Cayman law?

Subject to certain exclusions, the Private Funds Act (As Revised) (PFA) applies to any private fund. A private fund is a company, unit trust or partnership whose principal business is offering and issuing investment interests, where the purpose or effect is pooling investor funds to spread investment risk and enable investors to receive profits or gains from the acquisition, holding, management or disposal of investments, and where:

1. the holders of investment interests do not have day-to-day control over the acquisition, holding, management or disposal of the investments; and
2. the investments are managed as a whole by or on behalf of the operator of the private fund, directly or indirectly, for reward based on the assets, profits or gains of the entity.

What is an investment interest?

An "investment interest" is a share, LLC interest, trust unit or partnership interest that carries an entitlement to participate in the profits or gains of the entity and is not redeemable or repurchasable at the option of the investor. It does not include debt or certain transferable debt instruments.

The regulation of closed-ended funds reflects the Cayman Islands' adoption of governance principles set by the EU, the OECD and other international organisations. Venture capital, private equity and real estate funds are the most common examples, as covered in our guide to setting up a Cayman venture capital fund.

Which arrangements are out of scope of the PFA?

• Certain prescribed non-fund arrangements, including structured finance, securitisation and debt issuance vehicles, joint ventures, proprietary vehicles, employee incentive schemes, holding vehicles, preferred equity financing vehicles, certain listed funds, sovereign wealth and pension funds and single family offices.
• Certain Cayman Islands licensed entities.
• Regulated Cayman Islands mutual funds.
• Single-investor funds formed without the purpose of pooling investor funds.

The single family office exclusion is explained in our guide to Cayman family office structures.

Registering a private fund with CIMA

A private fund must submit its registration application to CIMA within 21 days after accepting capital commitments from investors, and must pay an annual registration fee. Current CIMA fees are published on the CIMA website.

The PFA expressly permits a private fund to enter into binding subscription agreements with certain high net worth and sophisticated persons, as defined, before it applies to CIMA. However, capital contributions may not be accepted until the fund is registered.

The application is filed through CIMA's online portal and contains key details about the fund and its service providers. Bell Rock, as a CIMA-licensed company manager, coordinates the preparation and submission of the application with the fund's operator.

Operating requirements for private funds

The PFA codifies a number of investor protection requirements consistent with EU guidance on investment funds. In practice they will not be new to sophisticated operators in the global funds industry.

Audit

Audited financial statements signed off by a Cayman Islands auditor must be submitted to CIMA within six months of the private fund's financial year end. The PFA gives private funds broad scope to choose the accounting standards used to prepare their financial statements. Private funds must also submit an annual return to CIMA, as explained in our guide to the private fund annual return, and the audit timetable and extensions are covered in our article on Cayman fund audit requirements.

Valuation

Private funds must adopt appropriate and consistent procedures for the proper valuation of their assets, with valuations carried out at least annually. Valuations must be carried out by:

• an appropriately qualified independent third party;
• the manager or operator of the fund, provided the valuation function is independent of the management function or potential conflicts of interest are properly identified and disclosed to investors; or
• a fund administrator.

Where valuations are not carried out by an independent third party, CIMA may require the private fund to have its valuations verified by an auditor or an independent third party. The board's role in valuation is covered in our guide to fund valuation policies.

Custody

Unless it is neither practical nor proportionate to do so, having regard to the nature of the fund and its assets, a private fund must appoint a custodian to hold custodial fund assets and must verify title to other fund assets.

If a private fund notifies CIMA that it does not intend to appoint a custodian, it must appoint one of the following to perform title verification:

• an administrator or another independent third party; or
• the manager or operator of the fund, provided the function is independent of the portfolio management function or potential conflicts of interest are properly identified and disclosed to investors.

Where title verification is not carried out by a custodian, an administrator or another independent third party, CIMA may require the private fund to have its title verification verified by an appropriately qualified independent third party.

Cash monitoring

Private funds must appoint a person to monitor cash flows, ensure that cash has been booked in appropriate cash accounts and ensure that all payments made by investors have been received. The appointed person may be:

• an administrator, a custodian or another independent third party; or
• the manager or operator of the fund, provided the cash monitoring function is independent of the portfolio management function or potential conflicts of interest are properly identified and disclosed to investors.

Where cash monitoring is not performed by an administrator, custodian or another independent third party, CIMA may require it to be verified by an independent third party.

Identification of securities

Private funds that regularly trade or hold securities on a consistent basis must maintain a record of the identification codes of the securities traded or held, and must make this record available to CIMA on request.

Penalties for failing to register

Failing to register a private fund in accordance with the PFA is an offence carrying a fine on conviction. The same penalty applies to a person that holds itself out as a registered private fund when it is not registered. CIMA can also impose administrative penalties.

How Bell Rock supports private fund launches

Bell Rock, a CIMA-licensed company manager, works with investment managers around the world on Cayman closed-ended funds investing in private equity, venture capital and real estate. Through its Cayman fund formation services, Bell Rock:

• coordinates the formation of the fund entities, typically the general partner and the exempted limited partnership;
• coordinates registration of the fund with CIMA;
• provides the registered office and corporate services;
• assists with the appointment of the service providers the PFA requires, such as the fund administrator, auditor and bank account where needed;
• provides independent directors to general partners and members for investment committees through named individuals acting in their personal capacity; and
• supports ongoing regulatory and compliance filings.

Bell Rock is not the fund's investment manager, administrator, auditor, custodian or valuation agent.

Frequently asked questions

When must a Cayman private fund register with CIMA?

The registration application must be submitted within 21 days after the fund accepts capital commitments from investors. Capital contributions cannot be accepted until the fund is registered.

Does a private fund need a custodian?

Yes, unless it is neither practical nor proportionate. If the fund notifies CIMA that it will not appoint one, it must appoint an eligible person to perform title verification instead.

Can the manager value a private fund's assets?

Yes, provided the valuation function is independent of portfolio management or potential conflicts are properly identified and disclosed to investors. CIMA may require independent verification.

Related reading

• Private credit funds: structuring and governance
• Cayman investment funds: structures and regulation
• Beneficial ownership contact person for Cayman funds
• Cayman Private Fund vs Mutual Fund: Which Regime Applies?
• Cayman Exempted Limited Partnership: Formation, Registration and Ongoing Obligations

Bell Rock coordinates private fund launches through its Cayman fund formation services.