Europe’s role in the global investment fund market has become increasingly prominent. The introduction of alternative investment strategies has created a more competitive arena and, as a result, jurisdictions closer to the European market are increasingly becoming a more attractive platform for offshore investments.
The Guernsey regulator, the Guernsey Financial Services Commission (GFSC) has always adopted a flexible approach to the authorisation of investment funds in Guernsey. Recent regulatory changes are further easing the requirements for establishing hedge funds in Guernsey by allowing certain funds that qualify to benefit from a quasi "self-certificated" process.
The GFSC announced to that effect in February 2005 the introduction of the Qualifying Investor Funds Regime to complement the existing fund approval procedure which will remain unaltered. The effect of the regime is that the Commission will grant the required fund approval within three working days (of receipt of various documentation including the prospectus) provided that an appropriately licensed Guernsey applicant, and it is thought this will usually be the Guernsey fund administrator, has certified to the Commission that:
- The fund will be restricted to professional, experienced and knowledgeable investors (these are the "qualified investors" referred to),
- The applicant has conducted due diligence on the promoter and associated parties and has found them to be fit and proper; and
- The applicant is satisfied as to the fund’s economic rational and the disclosure in a prospectus of any risks associated with the investment vehicle.
Who/what will the QIF regime apply to?
A QIF can either be an open ended collective investment scheme or a closed ended investment fund. Only qualified investors will be permitted to invest in a QIF. Funds which are approved as QIFs must have in place measures to ensure that they are only available to investors who fall within the definitions. The Commission will assess licensees’ systems and controls in this respect as part of their monitoring of licensees.
The Commission has deliberately tried not to be prescriptive as to the exact requirements relating to the content of warranties to be obtained from potential investors or disclosures to be made in offering documents. However it does provide a suggested minimum wording in relation to such warranties or disclaimers.
Definition of Qualified Investors
As stated above, only qualified investors will be entitled to participate in QIFs as such investors will be deemed to be able to evaluate the risks and strategy of investing in a QIF, and to bear the economic consequences of such investment, including the possibility of any loss arising.
Qualified Investors fall within 3 categories, Professional Investors, Experienced Investors and/or Knowledgeable Employees.
A Professional Investor is:
A Government, local authority, or public authority or supra-national body or a person or entity whose ordinary business includes acquiring, underwriting, managing, holding or disposing of investments whether as principal or agent, or the giving of advice on investments; or an affiliate (or an associate of that affiliate) of the QIF being a person associated, directly or indirectly, with the operation of the QIF.
An Experienced Investor is:
A person or entity which has in any period of 12 months (whether on his own behalf or in the course of his employment) so frequently entered into transactions in connection with funds and/or general securities and derivatives, of substantial size with reputable persons who carry on investment business, and who can reasonably be expected to understand the nature of, and the risks involved in, transactions of that description or a person or entity who provides a certificate from an appropriately qualified investment advisor confirming that the investor has obtained independent advice.
A Knowledgeable Employee is:
A person who is (or has in the last three years) been an employee, director, or shareholder of an affiliate appointed by the Qualifying Investor Fund to advise, manage or administer its investment activities and who is acquiring an investment in the Qualifying Investment Fund as part of his remuneration or an incentive arrangement or by way of co-investment, either directly or indirectly.
The locally based licensee which will administer the QIF will need to conduct due diligence on the promoter and/or investment manager in order to ensure that it is in "good standing". The Guernsey licensed service provider will also need to consider the track record and experience of the directors, controllers and management of the promoter and/or investment manager. The Commission also expects each Guernsey licensee to ensure that its due diligence in respect of the promoter and/or investment manager and associated parties is updated on a regular basis. The promoter and/or investment managers must also be fit and proper.
At the same time the GFSC, as part of the Qualifying Investor Funds Regime, has taken the opportunity to allow the Licensees (Conduct of Business and Notification) (Non-Guernsey Schemes) Rules 1994 (the FNCC Rules) to have a similar fast track, again to complement the existing approval procedure. The FNCC Rules require Guernsey licensees wishing to undertake the restricted activities of management, administration or custody in relation to Non-Guernsey regulated collective investment schemes to provide prior written notice to the Commission of such proposals and obtain formal approval before the licensee can act. Under the new regime the Commission will issue the necessary approval under the Non-Guernsey Scheme Rules within three working days provided that similar confirmations to those stated above are given by the proposed designated manager / administrator.
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.