On the matter of private investment funds, Lawyer Monthly hears from Nicholas Pattman, a Partner in the Global Investment Funds Group of Walkers in the Cayman Islands. Here Nicholas provides an overview of the benefits of listing investment funds and the process for listing them on the Cayman Islands Stock Exchange.
The Cayman Islands Stock Exchange
This year marks the twenty year anniversary of the passing of the Cayman Islands Stock Exchange Company Law which laid the foundations for the establishment of the Cayman Islands Stock Exchange (the 'CSX'). Since then the CSX has grown rapidly to become one of the leading offshore exchanges with a current listed market value of approximately US$198 billion (of which approximately US$9 billion is represented by the listed securities of investment funds) providing facilities for listing and trading equity and debt securities in the Cayman Islands.
In addition to providing a primary listing and trading facility for products including investment funds, exchange traded funds (ETFs), specialist debt securities (such as asset backed, credit linked and loan participating notes) and insurance linked securities, the CSX also provides a secondary listing facility and offshore trading venue for securities listed and traded on another recognized exchange.
Benefits of Listing Investment Funds
The listing of investment funds, both open and closed-ended, can provide multiple benefits for fund managers and investors alike. The benefits, when combined with the pragmatic and business orientated approach adopted by the CSX, the speed with which a listing can be achieved as compared to other exchanges and the competitive initial and ongoing fees, make the Cayman Islands an attractive choice when considering the domicile for an investment fund and its eventual listing.
Some investors, in particular certain funds of funds or larger institutional investors, such as pension funds and endowments, may have restrictions or internal policies that prohibit an investment in unlisted fund securities or require that their portfolio hold a minimum percentage of listed securities and therefore the listing of a fund's securities on the CSX could potentially increase its target investor base and provide access to an additional source of capital.
So too as fund investors seek ever more transparency when determining where to allocate their capital, listing the fund may provide investors with some comfort and a level of transparency and third party oversight which may enhance the marketability of the fund. Once listed on the CSX, the fund is obliged on an ongoing basis to publish its NAV per share on the CSX's website. The availability of current and historic NAVs in turn means that investments can be easily marked to market.
A fund listing may also provide a variety of tax benefits, such as exemptions or lower rates, for its investors. Some jurisdictions, such as the UK and Japan for instance, can provide a more a favourable tax treatment if investors subject to their tax regime hold securities issued by funds that are listed on an internationally recognised stock exchange such as the CSX.
To the extent that the investment fund to be listed is open-ended and therefore falls within the definition of a "mutual fund" under the Mutual Funds Law of the Cayman Islands then consideration will also need to be given to the requirements of that law albeit, for instance, that the fund may be able to avail itself of certain exemptions if, among other things, its equity interests are listed on a recognised stock exchange such as the CSX.
Steps to Listing on the CSX
The first step when considering the primary listing of a fund's securities on the CSX is to appoint an approved listing agent to assess the suitability of the listing, in particular to ensure that the proposed application satisfies the CSX's conditions to listing. It will also be the listing agent that generally guides the fund through the listing process, coordinating and communicating with the CSX where necessary. In the case of an investment fund the conditions to listing include that the fund must appoint a suitable custodian and independent auditor, that it must calculate its NAV on at least a quarterly basis and that its securities must generally be freely transferable .
Assuming that the listing conditions are met and the CSX approves the listing in principle then the fund together with its listing agent (which will often be the fund's Cayman Islands legal counsel) and professional advisers will prepare the requisite listing documents in accordance with the Listing Rules for submission to the CSX. However, since the CSX is not bound by EU listing directives, the regulatory burden and associated administrative obligations involved with any listing are less onerous than a listing on other major stock exchanges.
The Listing Rules of the CSX are based on IOSCO (International Organization of Securities Commissions) disclosure standards and therefore reflect currently accepted international best practice. Ultimately the aim is to ensure that investors are provided with sufficient and timely information to enable them to make an informed investment decision whilst not imposing unnecessarily onerous conditions or restrictions on issuers. Unlike certain other exchanges, the CSX does not for instance impose restrictions on matters such as a fund's investment objective and policy, counterparty exposure limits, redemption terms (save the requirement that all shareholders be treated equally) or minimum subscription amounts .
Typically the principal listing document will be the prospectus or offering document used to promote the fund (the "Listing Document"). In the case of a fund whose securities will be listed on the CSX the Listing Document must comply with both the general provisions of the Listing Rules applicable to all issuers and the specific provisions contained in Chapter 9 of the Listing Rules in relation to Investment Funds.
The Listing Document must include, among other things, general information on the fund and its service providers, the securities for which the application is being made, its redemption and valuation provisions, the fund's investment policy, disclosure in relation to its directors, risk factors and conflicts of interest and detail on the fund's assets and financial position.
It is worth noting that there are additional requirements in the case of umbrella funds, feeder funds, fund of funds, property funds, closed ended funds and retail funds. The fund's listing agent or Cayman Islands legal counsel will be able to advise further on these rules to the extent applicable.
The nature of the disclosure required by the Listing Rules also means that promoters may often be able to use existing offering documents (with a listing wrapper if need be) to list the securities of a fund that has already launched.
When the Listing Document has been prepared and reviewed by the listing agent for compliance with the Listing Rules then it will be submitted to the listing department of the CSX for initial review. In line with its reputation as a responsive exchange, the CSX commits to provide initial comments within five business days and three business days on subsequent submissions. Any comments received will then need to be incorporated into the Listing Document or otherwise addressed by the applicant, for instance by requesting a waiver of any listing rules deemed not to be applicable or relevant to the fund or its securities.
Once the Listing Document is in final form then it will be lodged with the CSX by the listing agent together with the supporting documentation (which will include various declarations by the issuer, its directors and the listing agent) and applicable listing fee for final approval by the listing committee of the CSX who then convene as often as necessary to approve applications.
Whilst the timeframe to listing on the CSX will depend upon a variety of factors and each application will be considered on its own merits, with advanced documentation, service providers on-boarded and commitment by all involved, three to six weeks is not an unreasonable timeframe for completion of the listing process.
Listing and Beyond
Once the fund and its securities are issued and the CSX listing procedures complete then the securities will be admitted to the Official List, allocated a Bloomberg ticker and details of the fund will be published on the CSX website. The fund will at this point also be subject to certain on-going continuing obligations. In general terms these oblige the fund to notify the market and its investors on a timely basis of any price sensitive information, material developments, operational changes or material changes in its performance or financial position which impact the fund or its securities.
As part of the listing process, the fund will also be obliged, initially and then on an on-going basis, to make certain documents such as its constitutional documents, material service provider agreements and any financial statements, available for public inspection.
Whilst listing the securities of an investment fund may not be appropriate for all managers or investment funds there can be considerable advantages in doing so and, as an integral part of the sophisticated financial services industry of the Cayman Islands, the CSX has demonstrated that there are sound reasons that any issuer should consider the CSX as a listing venue if it does indeed decide to pursue this option. Given that the CSX can approve a newly established fund without a track record, it is also an option open to established and emerging managers alike.
This article is intended to serve as high-level overview of the listing process rather than a comprehensive guide. Walkers is a global offshore law firm and internationally recognised as having a leading investment funds practice. Walkers is also an approved listing agent for the CSX and has a wealth of experience in the listing of investment funds and other products on the CSX.
The full September edition of Lawyer Monthly can be found here.
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.