1 Legislative and regulatory framework
1.1 In broad terms, which legislative and regulatory provisions govern alternative investment funds in your jurisdiction?
The Cayman Islands has been an important jurisdiction for the establishment of offshore alternative fund structures for over three decades. Its utility is founded on a particular legal and regulatory framework which pays specific regard to the needs of institutional and sophisticated fund managers and investors.
The principal law regulating Cayman Islands open-ended funds is the Mutual Funds Law, which dates from 1993. The Mutual Funds Law requires that Cayman Islands funds (and their associated master funds) which offer redeemable equity interests, whether formed as companies, limited partnerships or unit trusts, to be regulated by the Cayman Islands Monetary Authority (CIMA) (see further question 1.2). In addition, under the newly enacted Private Funds Law, many closed-ended funds now fall to be regulated by CIMA.
The Anti-Money Laundering Regulations, the Foreign Account Tax Compliance Act (FATCA) Regulations and Common Reporting Standard (CRS) Regulations, various sanctions orders and the Data Protection Law generally apply to all funds, although their incremental impact is minimal relative to ordinary compliance processes. Directors to corporate funds regulated under the Mutual Funds Law must be registered with (or, as needs be, licensed by) CIMA under the Director Registration and Licensing Law.
1.2 Do any special regimes or provisions apply to specific types of alternative investment funds?
The Mutual Funds Law regulates open-ended funds and their associated master funds. An open-ended fund is a fund which issues redeemable shares, interests or units. There are three methods of regulation:
- Fast-track registration method: Here the minimum investment level is at least US$100,000 per investor (unless the interests are listed or there are fewer than 15 investors with power to change the directors or general partner). Registration is achieved upon filing the relevant forms, consent letters, placement memorandum and supporting documentation, and paying the relevant fees. Registration is automatic and without review or approval by CIMA. This is the typical method of registration.
- Local administrator registration method: Here regulation is achieved by appointing a local administrator as the fund's ‘principal office', filing similar documentation and paying the fees. Under this method, the local administrator assumes supervisory responsibility over the fund. This route is less common, though it has the advantage of there being no minimum investment level.
- CIMA licensing method: Here regulation can be achieved by direct licensing from CIMA. In this case, there is no minimum investment level and CIMA will conduct a substantive assessment of the fund. Given the flexibility of the fast-track method, this method is seldom used. CIMA may apply licence conditions.
The recently enacted Private Funds Law brings closed-ended funds under a registration regime with effect from 7 August 2020. An in-scope closed-ended fund must apply to register with CIMA within 21 days of accepting capital commitments from investors and must complete the registration process prior to accepting capital contributions. Registration is similar to fast-track registration under the Mutual Funds Law; however, there is no minimum investment level for investors and no need to file a full placement memorandum.
1.3 Do the legislative and regulatory provisions governing alternative investment funds have extra-territorial reach?
The Mutual Funds Law and Private Funds Law apply to open-ended and closed-ended funds carrying on or attempting to carry on business in or from the Cayman Islands, including funds incorporated or established in the Cayman Islands and foreign funds that make an offer of their equity interests to the public in the Cayman Islands. There is a carve-out for foreign funds listed or regulated overseas that effect a public offer through a local distributor licensed under the Securities Investment Business Law. A fund regulated under the Mutual Funds Law or Private Funds Law is subject to that law, and CIMA supervision, in respect of its activities anywhere in the world.
Cayman Islands law does not regulate offerings of equity interests by foreign funds outside of the Cayman Islands, irrespective of whether an offering is made to a Cayman Islands person.
1.4 Are any bilateral, multilateral or supranational instruments in effect in your jurisdiction of relevance to alternative investment funds?
The Cayman Islands has entered into 36 bilateral tax information exchange and disclosure agreements with foreign jurisdictions. Historically, such intergovernmental agreements typically related to the provision of information upon a specific request by a foreign tax authority. However, more recently, intergovernmental agreements have been entered into by the Cayman Islands which provide for the automatic collection and disclosure to foreign tax authorities of financial information relating to investors. In particular, the Cayman Islands has entered into and implemented an intergovernmental agreement with the United States (ie, FATCA), and has also entered into and implemented similar arrangements pursuant to the Organisation for Economic Co-operation and Development's Standard for Automatic Exchange of Financial Information in Tax Matters (commonly known as the CRS) with currently more than 100 jurisdictions, which provides for the collection and automatic disclosure to the tax authorities in the jurisdiction of tax residence of the investor of the investment amount of that investor in the Cayman Islands fund and distributions paid.
Please see further question 8.4 as to the practical application of FATCA and CRS to Cayman Islands funds and question 1.6 as to other intergovernmental arrangements.
1.5 Which bodies are responsible for regulating alternative investment funds in your jurisdiction? What powers do they have?
Funds regulated under the Mutual Funds Law or Private Funds Law must file annual audited accounts with CIMA, and CIMA may require a fund to provide such other information or explanation as it may reasonably request in order to carry out its duties. A regulated fund must give CIMA access on request to, or provide at any reasonable time, all records relating to the fund. CIMA may take a confidential copy of a record to which it is given access. Failure to comply with these requests may result in substantial fines or in CIMA applying to court to have the fund wound up.
CIMA is authorised to take supervisory action in a range of circumstances, including where it is satisfied that a fund registered under the Mutual Funds Law or Private Funds Law is or is likely to become unable to meet its obligations as they fall due, or is carrying on or is attempting to carry on business or is winding up its business voluntarily in a manner that is prejudicial to its investors or creditors. The powers of CIMA include the power to:
- require substitution of the operators of the fund;
- appoint a person to advise the fund on its affairs; and
- appoint a person to assume control of the fund.
Other remedies are also available to CIMA, including the ability to apply to court for approval of other actions.
Unless the fund is directly licensed by CIMA under the Mutual Funds Law, regulation of a fund under the Mutual Funds Law or Private Funds Law does not imply that CIMA has passed upon or approved the fund or the offering of its shares.
1.6 To what extent do the regulators cooperate with their counterparts in other jurisdictions?
Cooperation with regulatory counterparts is a statutory function of CIMA and it has established memoranda of understanding and other cooperation channels with foreign regulators to facilitate this function.
2 Form and structure
2.1 What types of alternative investment funds are typically found in your jurisdiction?
No statutory or regulatory restriction applies to the investment strategy, borrowing or other investment activity of Cayman Islands funds. In consequence, Cayman Islands funds are used for the full range of alternative strategies, including hedge, private equity, venture capital, infrastructure, real estate and private debt, as well as traditional long-only investing. Cayman Islands structures are also used to establish managed account arrangements, family offices, incentive compensation vehicles and co-investment structures.
2.2 How are these alternative investment funds typically structured?
A Cayman Islands fund is typically formed as an exempted company, an exempted limited partnership or a unit trust.
The exempted company broadly follows the English corporate form, with important modifications. Thus, the exempted company has separate corporate personality and is managed by its directors, who may delegate one or more functions. The corporate regime is extremely flexible – for example, there is no requirement for local resident directors, and redeemable, fractional, partly paid and treasury shares are permitted. Segregated portfolio companies may be formed, which create separate portfolios of assets and liabilities with the benefit of statutory segregation, thus ‘ring fencing' creditor claims to the relevant portfolio.
The exempted limited partnership is based on the Delaware model; although, while a legal entity, it is without separate legal personality. The general partner has control of the partnership, is liable for its debts and engages service providers as necessary. At least one general partner, who may be an individual, must be resident, formed or, if formed elsewhere, registered in the Cayman Islands.
A unit trust is an investment vehicle organised as a common law trust. As in the United Kingdom, the trustee of the trust has legal ownership and control of the trust assets, although powers may be reserved and it will typically delegate functions to service providers. The trust, as a creature of common law, provides a structure that is flexible. A unit trust will typically, for reasons relating to conflict of laws, have a licensed trustee based in the Cayman Islands.
2.3 What are the advantages and disadvantages of these different types of structures?
Given the inherent flexibility available in the constitutional documents, the choice of form and structure of the fund is invariably driven by the onshore legal, tax, regulatory and marketing requirements of the fund promoter, based on the location of the target investors or the investments. In broad terms, the commercial terms of any fund structure can be established with equal flexibility as an exempted company, an exempted limited partnership or a unit trust.
2.4 What are the most widely used alternative investment funds structures used in your jurisdiction?
Please see question 2.5. We estimate there are comparable assets under management in the private equity and hedge fund space, and thus their respective typical organisational forms of partnership and company tend to dominate. Unit trusts are less common globally, although they still have a significant market share in Asia.
2.5 Is there a preferred alternative fund structure for particular investment strategies (ie, hedge fund/private credit/private equity)?
Typically, hedge fund strategies utilise the corporate form and issue shares on a fully paid basis, whereas private equity and real estate funds tend to use limited partnership structures where interests are issued partly paid, subject to further drawdown, to match the slower rate of capital deployment.
Unit trust structures are often attractive to Japanese investors for local tax and regulatory purposes – indeed, there are uniquely specific regulations under the Mutual Funds Law, and approved under Japanese law, to enable retail marketing of Cayman Islands funds into Japan.
2.6 Are alternative investment funds required to have a local administrator appointed?
Cayman Islands funds which are regulated under the Mutual Funds Law must identify or appoint an administrator, which may be the manager or an affiliate or, in a partnership structure, the general partner. Generally, the administrator may be located anywhere in the world, however, in the case of a fund which has registered under the Mutual Funds Law pursuant to the ‘local administrator registration' method, the administrator must be licensed by the Cayman Islands Monetary Authority.
Cayman Islands funds regulated under the Private Funds Law are not required to have an administrator.
2.7 Are alternative investment funds required to appoint a local custodian to hold assets? If yes, what legal protections are in place to protect the alternative investment fund's assets?
There is currently no requirement for a Cayman Islands open-ended fund to appoint a custodian.
Closed-ended funds regulated under the Private Funds Law are required to maintain custodial, cash monitoring and valuation functions, which may be undertaken by a third party or, subject to conflict review and disclosure, by the general partner, the fund manager or an affiliate. These functions may be conducted anywhere in the world.
2.8 Is it possible for an alternative investment fund to redomicile to your jurisdiction? If yes, what considerations are required and what are the steps involved?
The Companies Law permits foreign limited liability share companies to transfer to the Cayman Islands by way of continuation (i.e., to migrate or redomicile to the Cayman Islands). The process is straightforward and essentially procedural in nature, assuming that the overseas deregistration is lawful, the purpose of the transfer is bona fide and the registrant is solvent (and not the subject of any receivership, petition or similar process), has obtained all necessary contractual consents and has or adopts suitable memorandum and articles of association. The registrant must give notice of the transfer to secured creditors within 21 days. The effect of the transfer is to continue the company to the Cayman Islands with its assets and liabilities; it does not create a new company. The Limited Liability Companies Law creates a similar regime for the redomiciliation of foreign limited liability companies into the Cayman Islands.
A partnership constituted under foreign law may apply to be registered as an exempted limited partnership under the Exempted Limited Partnerships Law of the Cayman Islands by changing its governing law to the laws of the Cayman Islands and otherwise complying with the requirements of the law. Similarly, a foreign law unit trust could be reconstituted in the Cayman Islands by changing its governing law and appointing a Cayman Islands trustee.
3.1 Must alternative investment funds be authorised or licensed in your jurisdiction?
As indicated in question 1.2, open-ended funds are required to register under the Mutual Funds Law and closed-ended funds are required to register under the Private Funds Law.
3.2 If so, what criteria must be satisfied to obtain authorisation? Do any restrictions apply in this regard?
Question 1.2 summarises the three methods of regulation for open-ended funds under the Mutual Funds Law. In addition to annual fee obligations, the obligations under the law include:
- appointing a local auditor;
- filing audited accounts (and certain specified additional information) with the Cayman Islands Monetary Authority (CIMA) annually;
- maintaining a minimum of two directors (or a corporate director) who are licensed or registered with CIMA; and
- maintaining a filed current placement memorandum with CIMA which meets the disclosure standard set out in question 7.1.
In respect of closed-ended funds registered under the Private Funds Law, in addition to annual fee obligations, the obligations under the law include:
- appointing a local auditor;
- filing audited accounts (and certain specified additional information) with CIMA annually;
- maintaining a minimum of two directors or a corporate director (though currently the directors are not required to be licensed or registered with CIMA);
- maintaining appropriate valuation procedures no less than annually;
- appointing a custodian to hold title to the fund's assets (or as appropriate, to verify title to those assets);
- appointing a service provider to monitor the fund's cash flows;
- where the fund trades securities, regularly maintaining a record of securities identification codes; and
- maintaining with CIMA up-to-date filed versions of any summary of fund terms, offering document or constitutional documents which may have been filed as part of the original application to CIMA.
The valuation, custodial and cash monitoring processes may be conducted by third parties (including by a fund administrator), though in most cases the functions may be discharged by the fund manager or general partner, subject to appropriate disclosure and conflict review.
3.3 What is the process for obtaining authorisation of alternative investment funds and how long does this usually take?
Application by an open-ended fund for regulation under the Mutual Funds Law using the ‘fast-track registration' method or the ‘local administrator registration' method takes approximately one week for approval from CIMA. Where an open-ended fund seeks direct licensing from CIMA, the process takes approximately four to six weeks.
Registration of closed-ended funds under the Private Funds Law takes approximately two days.
4 Management and advisory relationships
4.1 How are alternative investment fund managers and advisers typically structured in your jurisdiction?
There is no requirement for Cayman Islands funds to appoint a Cayman Islands based investment manager or adviser. The fund manager or adviser can be located anywhere in the world.
Where a promoter chooses to establish a Cayman Islands based fund manager or adviser, these have typically been formed as Cayman Islands exempted companies or limited liability companies, though there is no prohibition on the use of a Cayman Islands partnership. In addition, a foreign fund management or advisory company may establish a place of business in the Cayman Islands. Fund managers and advisers formed or with a place of business in the Cayman Islands are subject to the requirements of the Securities Investment Business Law – see question 4.3.
The recent International Tax Cooperation (Economic Substance) Law impacts on Cayman Islands based managers to securities funds. See question 4.6.
4.2 What are the advantages and disadvantages of these different types of structures?
Traditionally, investment managers and advisers formed in the Cayman Islands were organised as companies, as a convenient form in which to establish subsidiary or joint venture operations. Occasionally, managers and advisers were formed as partnerships based on the promoters' onshore needs. With the advent of limited liability companies (LLCs) in 2016, LLCs have become increasingly popular as the legal structure, given the ability to include joint venture or shareholder agreement provisions directly within a single constitutional operating agreement.
4.3 Must alternative investment fund managers be authorised or licensed in your jurisdiction?
The Securities Investment Business Law regulates, among other things, the activities of discretionary management of, provision of advice upon and arrangement of deals in securities by a person formed or otherwise with a place of business in the Cayman Islands. The ‘managing' and ‘advising upon' activities capture traditional asset and risk management decisions; whereas ‘arranging deals' covers private negotiation of investments and the distribution or placement of equity interests in the fund itself. ‘Securities' are defined under the Securities Investment Business Law to include a wide range of equity, debt, commodities, futures, options and similar instruments. Accordingly, the vast majority of Cayman Islands based fund managers must be registered with or licensed by the Cayman Islands Monetary Authority (CIMA).
Notably, real estate and cryptographic tokens/coins generally fall outside the definition of ‘securities'. Accordingly, a manager or adviser to these assets will not be regulated under the Securities Investment Business Law in its current form. However, such a fund manager may require licensing by CIMA under the Companies Management Law as a company manager or under the Mutual Funds Law as a mutual fund administrator, depending on the particular structure.
Question 4.6 sets out a summary of the International Tax Cooperation (Economic Substance) Law as it relates to Cayman Islands based managers to securities funds.
4.4 If so, what criteria must be satisfied to obtain authorisation? Do any restrictions apply in this regard?
Fund managers and advisers that provide services to funds comprising sophisticated persons or high-net-worth persons qualify for a simplified registration regime under the Securities Investment Business Law. A ‘sophisticated person' is a person:
- who, by virtue of knowledge and experience in financial and business matters, is reasonably to be regarded as capable of evaluating the merits of the investment and invests at least US$100,000;
- who is regulated by CIMA or a recognised overseas regulatory authority; or
- whose securities are listed on a recognised securities exchange.
A ‘high-net-worth person' is an individual whose net worth is at least US$1 million or a person with total assets of not less than US$5 million. A similar registration category is available to applicants regulated overseas or which only provide services to an affiliated group. The registration process entails an assessment by CIMA of the fitness and propriety of the owners and controllers of the applicant.
General partners, directors and certain other constitutional operators are usually exempt from the registration and licensing regime of the Securities Investment Business Law on the basis that constitutional operators are engaged in own account activity.
The licensing regime is less common, with only 36 licensees as at 31 December 2019. The assessment by CIMA will extend to the knowledge, skills and experience of the staff of the applicant.
Registrants and licensees under the Securities Investment Business Law which are formed as companies must have at least two directors or managers.
4.5 What is the process for obtaining authorisation and how long does this usually take?
The registration process takes approximately two to three weeks. The licensing process takes approximately four to six weeks.
4.6 What other requirements or restrictions apply to alternative investment fund managers and advisers in your jurisdiction?
In addition, the Anti-Money Laundering Regulations, the Foreign Account Tax Compliance Act and the Common Reporting Standard Regulations, various sanctions orders and the Data Protection Law apply to all fund managers and advisers, although their incremental impact is limited relative to ordinary compliance processes. Directors to managers or advisers regulated under the Securities Investment Business Law must be registered or licensed by CIMA under the Director Registration and Licensing Law.
Distinct from the position with regard to Cayman Islands funds and their operators and investment advisers, Cayman Islands fund managers are within the scope of the recent International Tax Cooperation (Economic Substance) Law. Cayman Islands fund managers to securities funds which managers are formed as legal persons and licensed or registered under the Securities Investment Business Law are subject to the regime. In scope fund managers must:
- conduct core income-generating activities within the Cayman Islands (e.g., asset management, risk, reserve and hedging assessment and regulatory and performance reporting);
- be appropriately directed and managed from within the Cayman Islands; and
- have adequate operating expense, physical presence and staff in the Cayman Islands.
In order to meet the economic substance requirements, we envisage that a number of managers will:
- look to add local directors and locally licensed delegate managers to assist in establishing activity in the Cayman Islands;
- narrow the roles of the manager to reduce the impact of the requirements; or
- move to restructure their business so that the manager is no longer in scope for the regime.
4.7 Can an alternative investment fund manager impose restrictions on the issue, redemption or transfer of interests in the funds under management?
The terms and restrictions applicable to the issue, redemption and transfer of interests in a fund are entirely a commercial matter to be decided by the promoters when preparing the fund's constitutional and offering documents. It is normal for an open-ended fund to include the ability to restrict (ie, gate) or suspend redemptions where there is a lack of liquidity or valuation uncertainty. Similarly, it is typical for a fund to have a restrictive transfer regime.
4.8 Are there any requirements regarding the ownership of alternative investment fund managers? If so, please provide details.
When considering a licensing or registration application under the Securities Investment Business Law, CIMA will have regard to the fitness and propriety of the owners of the applicant. This usually amounts to CIMA ensuring that the underlying beneficial owners of more than 10% of the applicant are of good repute and standing.
4.9 Can alternative investment fund managers delegate to third-party investment managers or investment advisers? If yes, please provide details of any specific requirements.
Fund managers licensed under the Securities Investment Business Law must have regard to CIMA's statement of guidance concerning prudent outsourcing. Investment managers which are registered, as opposed to licensed, under the Securities Investment Business Law are not governed by the guidance.
Under the International Tax Cooperation (Economic Substance) Law, Cayman Islands securities fund managers (as opposed to fund advisers) that are formed as legal persons and licensed or registered under the Securities Investment Business Law should seek advice before delegating activities outside of the Cayman Islands; while the economic substance regime envisages functions may be delegated, particular care should be taken in respect of delegation of certain activities.
4.10 Can alternative investment fund manager provide investment management services to clients other than alternative investment funds? If yes, do any additional requirements apply?
No particular distinction is drawn under the Securities Investment Business Law as to the client type and thus, generally speaking, a fund manager may provide portfolio management or advisory services to private clients or single managed accounts. This is subject to the requirement for registrants under the Securities Investment Business Law that clients be sophisticated or high-net-worth (or otherwise fall within the parameters summarised in question 4.4). In the case of licensees, regard should be had to any specific licence conditions imposed by CIMA.
5.1 Is the marketing of alternative investment funds subject to authorisation in your jurisdiction?
As discussed in question 1.2, open-ended funds must comply with the Mutual Funds Law prior to commencing business, which includes capital raising. In respect of closed-ended funds, registration under the Private Funds Law is required within 21 days of accepting capital commitments from investors and registration must be completed prior to accepting capital contributions. Thus, in the case of closed-ended funds, registration may be deferred until the end of a successful capital raising process.
Funds, whether open or closed ended, organised as Cayman Islands exempted companies, unless listed on the Cayman Islands Stock Exchange, and Cayman Islands exempted limited partnerships, are effectively prohibited from making an invitation to the public in the Cayman Islands to subscribe for their equity interests. The expression ‘public in the Cayman Islands' is not comprehensively defined and thus would be given its ordinary common law meaning, although it would exclude Cayman Islands exempted companies, exempted limited partnerships, foreign registered companies or partnerships and similar investment vehicles.
Cayman Islands funds organised as unit trusts are not subject to any direct prohibition on the offering of their equity interests to the public in the Cayman Islands; however, they typically exclude investment from persons resident or domiciled in the Cayman Islands (other than Cayman Islands exempted companies or non-resident companies) in order to obtain a tax exemption certificate and on wider investor suitability grounds.
See question 5.7 regarding foreign funds marketed into the Cayman Islands.
5.2 If so, what criteria must be satisfied to obtain authorisation? Do any restrictions apply in this regard?
As indicated in questions 1.2 and 5.1, the fund may fall to be regulated under the Mutual Funds Law or Private Funds Law.
A Cayman Islands exempted company wishing to make a public offering of its shares must obtain a listing on the Cayman Islands Stock Exchange. This entails compliance with the detailed listing rules of the Cayman Islands Stock Exchange, specific disclosure requirements and a formal assessment of suitability by the exchange. The listing process takes approximately six weeks.
5.3 What is the process for obtaining authorisation and how long does this usually take?
Please see question 5.2.
5.4 To whom can alternative investment funds be marketed?
An open-ended fund registered under the ‘fast-track registration' method of the Mutual Funds Law should observe a minimum investment level of US$100,000 per investor, which in practical terms means that the fund is suitable for high-net-worth or institutional investors. A closed-ended fund registered under the Private Funds Law is not required to observe any particular minimum investment level.
As indicated in question 5.1, equity interests in a Cayman Islands corporate or partnership fund generally may not be offered to the public in the Cayman Islands. There is no restriction under Cayman Islands law or regulation as to the types of investors to whom equity interests in a Cayman Islands fund may be offered outside of the Cayman Islands, but local law and regulation in the jurisdiction of the offering will apply.
Please see question 5.7 as to the marketing of foreign funds into the Cayman Islands.
5.5 What are the content criteria that marketing materials for alternative investment funds must satisfy?
Please see section 7.1 as to the disclosure standard.
5.6 What other requirements or restrictions apply to marketing materials for alternative investment funds?
There are none.
5.7 Can alternative fund managers from other jurisdictions market alternative investment funds in your jurisdiction without authorisation?
A foreign fund which does not offer its equity interests to the public in the Cayman Islands and otherwise avoids creating a place of business in the Cayman Islands is not required to register or be licensed under the Mutual Funds Law or Private Funds Law. For this purpose, ‘the public in the Cayman Islands' excludes exempted companies, exempted limited partnerships, foreign registered companies or partnerships and similar vehicles (and, depending on the circumstances, sophisticated persons and high-net-worth persons).
A foreign fund which offers its securities to the public in the Cayman Islands must register, in the case of an open-ended fund, under the Mutual Funds Law and, in the case of a closed-ended fund, under the Private Funds Law. An exemption to registration arises where the foreign fund is regulated or listed and appoints a placing agent or distributor which is licensed under the Securities Investment Business Law. A fund which makes a public offer in accordance with the Mutual Funds Law or Private Funds Law (and otherwise avoids creating a place of business in the Cayman Islands) will generally not be subject to any further regulatory laws of the Cayman Islands. Where a foreign fund is formed as a company, it should register as a foreign company with the Registrar of Companies.
5.8 Is the appointment of local marketing entities required in your jurisdiction?
There is no obligation for a Cayman Islands fund or a foreign fund to appoint a local placing agent or distributor; though, as indicated in question 5.7, a locally licensed placing agent or distributor may assist a public offering of securities by a foreign fund into the Cayman Islands.
Any person acting as a placing agent or distributor which is organised, or otherwise establishes a place of business, in the Cayman Islands is subject to the regulatory regime established under the Securities Investment Business Law, which requires the placing agent or distributor to obtain a licence from the Cayman Islands Monetary Authority, unless a registration or other exemption from licensing applies. Please see questions 4.3, 4.4 and 4.5 for a brief summary of the licensing and registration process, which applies equally to placing agents and distributors.
5.9 Is it possible to market alternative investment funds to retail investors in your jurisdiction? If so, are there specific requirements?
As indicated in question 5.1, a Cayman Islands corporate fund may offer its shares to the public only if the shares are listed on the Cayman Islands Stock Exchange. A Cayman Islands exempted limited partnership fund is generally prohibited from making public offers. Cayman Islands unit trust funds are not subject to any direct prohibition on offerings to the public in the Cayman Islands, although this is generally avoided.
As indicated in question 5.7, a foreign fund making a public offer into the Cayman Islands will trigger a registration requirement under the Mutual Funds Law or Private Funds Law (unless the fund is regulated or licensed overseas and appoints a local licensed placing agent or distributor).
Where the fund is required to be regulated under the Mutual Funds Law, it is likely that the ‘fast-track registration' method would be unsuitable, as a retail offering typically entails investment levels below US$100,000 per investor. Accordingly, an open-ended fund is likely to use the other methods set out in question 1.2.
As summarised in question 5.8, placing agents and distributors operating in the Cayman Islands must comply with the Securities Investment Business Law. Where a retail offering is envisaged, it is likely that formal licensing will be required, as the registration route for practical purposes extends only to high-net-worth and sophisticated investors and not typical retail investors.
6 Investment process
6.1 Do any investment or borrowing restrictions apply to the portfolios of alternative investment funds?
Cayman Islands law and regulation imposes no investment or borrowing restrictions or parameters on Cayman Islands funds, irrespective of whether the fund is regulated by the Cayman Islands Monetary Authority. Needless to say, a Cayman Islands fund must observe all international sanctions and criminal laws of general applicability, including the United Nations/UK sanctions as extended to the Cayman Islands (eg, the Islamic State of Iraq and Levant, Ukraine and North Korea sanctions) and laws relating to restricted drugs (eg, cannabis investments) or their proceeds.
6.2 Are there any specific legal or regulatory requirements regarding investments in particular assets?
As set out in question 6.1, no specific investment restrictions or requirements are applicable to Cayman Islands funds. Investments in Cayman Islands real estate or Cayman Islands local businesses will be subject to local ownership and stamp duty laws.
7 Reporting, governance and risk management
7.1 What key disclosure requirements apply to alternative investment funds in your jurisdiction?
Funds must ensure that the offering materials:
- are true, accurate and not misleading;
- disclose applicable fees, costs, expenses and conflicts of interest;
- describe the equity interests in all material respects; and
- contain such other information as is necessary to enable a prospective investor to make an informed decision as to whether to invest.
These obligations arise as a matter of common law and are reiterated in the Mutual Funds Law in respect of funds regulated thereunder.
Closed-ended funds registered under the Private Funds Law are additionally required to disclose in their offering materials any conflicts which arise as a consequence of the portfolio management team providing the valuation, custody or cash monitoring functions of the fund.
Subject to the foregoing general disclosure standard, Cayman Islands law does not prescribe any specific disclosures.
7.2 What key reporting requirements apply to alternative investment funds in your jurisdiction?
A Cayman Islands fund which is regulated under the Mutual Funds Law or Private Funds Law must file with the Cayman Islands Monetary Authority (CIMA):
- audited accounts within six months of the financial year end;
- an annual return setting out the basic particulars of the fund and its service providers, together with summary data as to the fund's financial position and investment portfolio;
- any changes to the key terms or service providers of the fund; and
- in the case of open-ended funds regulated under the Mutual Funds Law, while equity interests are offered, a current offering memorandum.
In addition, CIMA has issued guidance requiring registered or licensed open-ended funds to notify it of any matter which could materially and adversely affect the financial soundness of the fund and any breach of law or regulation. A similar position is expected to arise under the new regime for closed-ended funds.
The disclosure standards applicable to Cayman Islands funds are discussed in question 7.1.
7.3 What key governance requirements apply to alternative investment funds in your jurisdiction?
In addition to the specific obligations imposed by the constitutional documents of the fund, the board of directors to a fund company, the general partner to a fund partnership and a trustee to a unit trust fund stand in a fiduciary relationship to their fund. Accordingly, they must act loyally in the best interests of the fund and exercise an appropriate level of skill and care in respect of its business.
Generally, Cayman Islands funds operate on a delegated model whereby the day-to-day investment management and administrative functions are contracted to the investment manager and administrator, subject to the periodic monitoring and supervision by the directors, general partner or trustee. The appropriate level of supervision is not prescribed by law and is a function of what is required to properly supervise the activities of the fund based on the complexity of its affairs and the issues arising.
In practice, well-run funds will hold quarterly or semi-annual board, general partner or trustee meetings to review the fund's affairs, with additional meetings ad hoc – for example, to assess a specific issue arising or to review the books close and auditing process.
Open-ended funds which are regulated by CIMA are subject to CIMA's Statement of Guidance on Corporate Governance. The statement broadly reiterates the common law principles summarised above. A similar position is expected to arise under the new regime for closed-ended funds.
All Cayman Islands funds must appoint natural persons as money-laundering compliance and reporting officers. They must be autonomous and of managerial level.
7.4 What key risk management requirements apply to alternative investment funds in your jurisdiction?
No risk management requirements are imposed by law on Cayman Islands funds.
8.1 How are alternative investment funds treated for tax purposes in your jurisdiction?
The Cayman Islands does not have a direct taxation regime as a matter of centuries-old fiscal policy.
Accordingly, no taxes are imposed under Cayman Islands law on the profits, income, gains or appreciations of Cayman Islands funds; and there is no withholding in respect of any dividend, distribution or interest payment by a Cayman Islands fund. Nominal stamp duties apply to documents executed or brought into the Cayman Islands. There are no exchange or currency controls in the Cayman Islands.
A Cayman Islands fund formed as an exempted company that desires additional comfort on this matter may obtain, from the governor-in-Cabinet of the Cayman Islands, an undertaking certificate that, for a period of 20 years from the date of the certificate, no laws of the Cayman Islands imposing any tax on profits, income, gains or appreciation shall apply to the fund and that no tax in the nature of estate duty or inheritance tax shall be payable on the equity interests of the fund. An exempted limited partnership fund may obtain a similar undertaking for a period of 50 years. A unit trust fund may also obtain a similar undertaking for a period of 50 years, provided that it excludes investors resident or domiciled in the Cayman Islands (other than Cayman Islands exempted companies and non-resident companies).
Cayman Islands fund structures are generally subject to the Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard (CRS) reporting regimes of the Cayman Islands, as discussed in questions 1.4 and 8.4.
8.2 How are alternative investment fund managers and advisers treated for tax purposes in your jurisdiction?
No taxes are imposed under Cayman Islands law on the profits, income, gains or appreciations of Cayman Islands fund managers or advisers, and there is no withholding in respect of any dividend, distribution or interest payment by a Cayman Islands fund manager or adviser, whether formed as a company or partnership. A fund manager or adviser formed as an exempted company, limited liability company or exempted limited partnership may obtain a tax exemption certificate for a period of 20, 50 and 50 years respectively – please see question 8.1. Cayman Islands based fund managers fall under the Cayman Islands FATCA and CRS tax information reporting regimes, although the registration and notification obligations are usually minimal.
8.3 How are alternative investment fund investors treated for tax purposes in your jurisdiction?
As indicated in question 8.1 above, no direct taxes are imposed by Cayman Islands law.
8.4 What effect do international laws such as the US Foreign Account Tax Compliance Act and international standards such as the Common Reporting Standard have in your jurisdiction?
As indicated in question 1.4, Cayman Islands funds are subject to FATCA and CRS as ‘financial institutions' and so must:
- obtain a Global Intermediary Identification Number from the US Internal Revenue Service;
- register with the Tax Information Authority and appoint a principal point of contact and authorising person;
- collect investor identification and investment value data for annual filing with the Tax Information Authority; and
- establish written policies and procedures regarding CRS compliance.
The regimes operate on the basis that:
- obligations are established under Cayman Islands law;
- reporting obligations are owed to the Tax Information Authority; and
- the Cayman Islands does not receive reciprocal information from the United States or CRS participating jurisdictions.
Fund administrators are well accustomed to the practical application of FATCA and CRS. Fund offering materials are routinely designed to collect the necessary investor identification data, and the fund administrator's accounting service will include the collation of the relevant investor balance and distribution data.
The regimes provide for certain narrow exemptions, including an exemption for funds regulated under the Mutual Funds Law or Private Funds Law which are entirely held by other financial institutions.
The regimes also apply to fund managers and general partners; though where they hold no client assets – whether on balance sheet or in a client omnibus account – and provide services only to fund structures reporting under FATCA and CRS, then usually this amounts to a one-off obligation to notify the Tax Information Authority and no reporting obligations.
8.5 What preferred tax strategies are typically adopted in the alternative investment fund context?
With no direct taxation in the Cayman Islands, there are no domestic tax mitigation strategies as such.
We understand that exempted limited partnership structures (or companies that elect for treatment as a partnership under an onshore tax regime) are often used to obtain a tax-transparent outcome for onshore investors, whereby the partnership is effectively disregarded for tax accounting purposes. The transparent or disregarded entity approach is common with private equity funds which are routinely formed as exempted limited partnerships, and in a similar manner many hedge funds organised as master feeder arrangements use partnership vehicles for US taxable investors. Conversely, certain non-taxable investors often have a preference for the use of corporate blockers or feeder funds to avoid transparent treatment in order to simplify their administration and reporting and avoid or reduce applicable onshore tax.
The Cayman Islands has no double tax treaties relevant to investment fund business, although a double tax treaty with the jurisdiction of ultimate investment may be accessed by way of certain sophisticated structuring. Similarly, Cayman Islands funds will often use investment subsidiaries to achieve a tax-efficient outcome, for example, to access a double tax treaty or to effect an offshore sale of an underlying asset.
9 Trends and predictions
9.1 How would you describe the alternative investment fund landscape and prevailing trends in your
The Cayman Islands has been a leading location for the establishment of offshore alternative fund structures for over three decades. There are currently registered with the Cayman Islands Monetary Authority approximately 8,000 open-ended funds and an additional 2,900 master funds. Exempted limited partnerships, used primarily for private equity investment, have increased dramatically to some 21,000. The assets under management (AUM) for open-ended funds is estimated at US$2.5 trillion, so an estimate of the total US dollar value of Cayman Islands open- and closed-ended funds may be put at US$5 trillion. This figure represents approximately two-thirds of global alternative fund flows. In addition, the Cayman Islands has approximately 2,250 registered or licensed fund managers or advisers.
Cayman Islands funds have historically dominated the alternative investment industry and thus the global trends in the industry are reflected. In terms of the growth of the alternatives industry, we would concur with the general market observations that the alternatives industry has perhaps tripled in AUM over the last decade and is likely to increase another 50% by 2023. Within the more recent growth, we also perceive a distinct acceleration in the private equity sector, with hedge fund assets rising at a slower rate – seemingly due to relatively poor recent performance and increasing regulatory burden onshore. In terms of new launch activity, with increased onshore compliance costs, we are seeing the minimum launch size for new managers increasing, which in turn is tending to skew new launches towards the established investment groups and away from start-ups.
9.2 Are any new legal or regulatory developments anticipated which will impact on alternative investment funds or alternative investment fund managers in your jurisdiction?
The Cayman Islands Monetary Authority is considering the implementation of rules for funds regulated under the Private Funds Law and Mutual Funds Law concerning asset valuation, asset segregation and certain disclosure matters. This Q&A will be updated in due course accordingly.
9.3 Do you envisage any particular industry strategy of attracting particular interest in the next 12 months?
In terms of regulatory developments, the ongoing global initiatives to enhance anti-money laundering, counter-terrorist financing and to establish Foreign Account Tax Compliance Act/Common Reporting Standard regimes have proved positive for Cayman Islands funds, as the jurisdiction has always attracted high-quality asset managers and service providers. We expect that these factors will continue to drive business to the Cayman Islands at the expense of offshore jurisdictions with less well-developed infrastructure.
As for competition from other jurisdictions, we doubt that Cayman Islands funds will be used for EU resident investors, although we understand that onshore EU alternatives funds – while offering distinct marketing benefits within domestic investor segments – are costly, restrictive and slow to implement, leading to impaired relative performance. We envisage that political instability in some jurisdictions will cause promoters to pause before establishing funds outside of the Cayman Islands, which demonstrates a long history of political and legal stability.
10 Tips and traps
10.1 What are your top tips for the smooth establishment and management of an alternative investment fund in your jurisdiction, and what specific challenges would you note?
In general, the establishment of funds in the Cayman Islands is a smooth and efficient process. Based on practical experience, we would recommend that fund promoters determine their bankers at an early stage, as the account opening process (whether in the Cayman Islands or elsewhere) is a lengthy one. Similarly, the administrator should be selected early and its service levels agreed, especially where the banker may in part be relying on the administrator's processes to screen investors.
When structuring a fund, we would recommend the use of considered term sheets prior to commencing formal drafting. The term sheet process can usually drive out the bulk of the commercial decision points and considerably reduce legal drafting time on the formal documentation. As part of the structuring and drafting process, it is critical to ensure that all economic points (e.g., fee structures, hedged classes and overlay arrangements) are considered closely and suitable flexibility retained – we are often instructed to review established fund structures where the supposed commercial terms do not align with the constitutional documents on fundamental areas.
In terms of the approach to disclosure, we are of the view that full disclosure, akin to a traditional equity placement, is highly recommended. There seems to be little upside to understating a risk factor or an indemnification standard.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.