As most hedge fund industry professionals are aware the Cayman Islands are by far the number one jurisdiction for the establishment and registration of hedge funds with around 10,000 being registered with the Cayman Islands Monetary Authority ("CIMA"). They Cayman Islands hedge fund regulation recognizes the importance of disclosure to investors, amongst the disclosures one of the most important is the service providers allowing the investor to assess the quality of those so that investors can make informed decisions regarding their investment (they are sophisticated after all). The process of establishing a Cayman Islands hedge fund are straightforward and set-out below are the typical steps required.
Company or Segregated Portfolio Company – Step Plan
It should be determined whether an exempted liability company or a segregated portfolio company should be used. A Cayman Islands segregated portfolio company can be useful for situations where a company may be undertaking different activities where it is a necessary to separate the assets and liabilities of those activities. In particular, one segregated portfolio cannot be liable for the debts and obligations of another segregated portfolio.
1. Name chosen & reserved
Step 1 - The company name should be chosen and reserved, and in the case of a segregated portfolio company the name must end with the designation "SPC" or "Segregated Portfolio Company", thereafter each segregated portfolio of the company must end with the words "Segregated Portfolio", "SP" or "S. P.". All company names may now contain foreign language characters or a name in foreign language character together with an English name.
2. Terms of offering agreed/ term sheet
Step 2 – Terms of offering agreed and the term sheet or offering documents is finalized.
3. Draft the Memorandum & Articles of Association
Step 3 – The Memorandum and Articles of Association (M&A) are drafted in accordance with the agreed terms of the offering. The memorandum would include the company name, the registered office, the designation of the share capital which is ordinarily US$50,000 designated as 100 voting shares which are nonparticipating and US$49,900 ordinary participating shares. The designation of 100 voting shares allows certain changes to be made to the M&A by the voting shareholder rather than having to revert to the participating shareholders.
4. Company incorporated
Step 4 – The M&A are filed with the registrar of companies together with an affidavit that the business of the company will be conducted mainly outside the Cayman Islands and the company is incorporated in 4 to 5 days (incorporation outlays are approximately US$900).
5. Appoint first directors
Step 5 - Once the company has been incorporated the subscriber to the M&A will elect the first directors and officers.
6. First meeting of the directors/share issuance
Step 6 - Once the first directors and officers are appointed they will convene the first directors meeting to deal with the post incorporation matters such as the transfer of the initial subscriber share, the issuance of further shares, the appointment of service providers, including counsel and auditor and the location where the books and records of the company will be maintained.
Alternatively the company can be incorporated on the same day basis for an additional fee of US $600. The registrar of companies will issue a certificate of incorporation and will return a stamped copy of the M&A. The certificate of incorporation will confirm the company number and name.
7. Tax exemption (if required)
Step 7 - Although the company is not required to do so it may apply for a tax exemption certificate from the Cayman Islands government which confirms that there will be no taxation applied to the company for a period of 20 years (fee of US $1,830)
8. Directors launch meeting
Step 8 - The directors would then typically hold a second meeting in order to approve the launch or closing of the deal that the company was formed for, and such business would normally include the creation of each segregated portfolio, the approval of the term sheet or offering document, the appointment of the manager or advisor, the appointment of an administrator. Also if the company is required to register with the Cayman Islands Monetary Authority the required form MF1 would be approved.
9. CIMA registration (if required)
Step 9 - if the company is required to be registered with the Cayman Islands Monetary Authority then on or before the anticipated launch date, it would file its offering document, form MF1 (including specific details), a Cayman Islands auditors letter of consent, the administrators letter of consent (if appointed) and the required fee US$4,167. Generally a company must register with the Cayman Islands monetary authority when it has 15 or more investors or if it has less than 15 investors if they do not have the power to remove the directors.
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.