Jersey: Jersey Investment Funds - Regulatory Options

Jersey is long established as a primary centre for the establishment of offshore funds and has been at the forefront of international developments, which have attracted international sponsors, promoters, fund managers, advisors and investors. One of the key features of Jersey's fund industry is the flexibility and range of structures and corresponding regulatory and commercial approaches that can be used for funds.

Very Private Structures

A fund vehicle that is established for a small number of investors (up to a maximum of 15) or for a single purpose and where there is no formal offering of securities is regarded as a "very private" structure.

• Such funds are regulated under a regulation known as the COBO Order and can be established within a short period, usually within a few days upon disclosure only of the identity of the proposed investor(s) to the Jersey Financial Services Commission (the JFSC).
• This type of structure is appropriate for single investor vehicles, as well as for joint ventures, co-investment structures and club deals.

COBO only/Private Placement Funds

Where a fund is offered to not more than 50 investors and is not listed, then a fund will be treated as a "COBO only" or private placement fund that falls outside the scope of regulation as a collective investment fund. However, the JFSC will exercise regulation both through a preliminary review of the "promoter" behind the scheme as well as a review of the private placement memorandum prior to the issue of a COBO consent.

• Ongoing regulation of the fund will be applied through compliance with the conditions set out in the COBO consent.
• In order for the promoter to satisfy the JFSC's promoter policy, the JFSC will need to be satisfied as to the track record, reputation and experience of the promoter as well as such issues as spread of ownership and financial resources.
• Where each investor is either a professional investor or is investing at least £250,000 and, in either case, formally acknowledges a prescribed investment warning, then there is wide flexibility as to how service providers to the scheme, which may rely on exemptions from regulation of their activities under the Financial Services (Jersey) Law, will be overseen.

Unregulated Funds

Unregulated funds are exempted from regulation as collective investment funds by virtue of an exemption order that specifies schemes or arrangements that have been established as either:

• an unregulated exchange-traded fund, being a scheme or arrangement established in Jersey, which is a closed-ended fund and which is listed on a stock exchange or market or which is applying for its shares or units to be granted such a listing; or 
• an unregulated eligible investor fund, being a scheme or arrangement established in Jersey and in which only eligible investors may invest, being either an investor who makes a minimum initial investment of US$1 million or the currency equivalent (whether through the initial offering or by subsequent acquisition) or, alternatively, institutional investors or professional investors, as defined in the order. An unregulated eligible investor fund may be open or closed and transfers of interests are only possible to other eligible investors. Stock exchange listings for unregulated eligible investor funds will be possible subject to transfer restrictions, as referred to above, still applying.

Either type of unregulated fund may take any form recognised under the laws of Jersey as being a Jersey company (including a cell structure), a Jersey limited partnership having at least one Jersey corporate general partner or a unit trust having a Jersey corporate trustee or manager.

Subject to the structure complying with the order, there is no regulatory review or oversight of the terms or conduct of such an unregulated fund and, therefore, processes for their establishment will depend only on being carried out in accordance with the exemption order.

The offer and / or listing document of an unregulated fund must contain a prominent statement that the fund is unregulated, together with a prescribed form of investment warning.

In order to claim exemption as an unregulated fund, a completed notice needs to be filed with the Jersey registrar of companies.

Following implementation of the Alternative Investment Fund Managers Directive (the AIFMD) it is no longer possible to market COBO-only, private placement or unregulated funds in the EU/EEA without further regulation to ensure compliance with the AIFMD (as set out in further detail below).

Expert Funds

Where a fund is to be regulated as a collective investment fund, which means an unlimited number of offers can be made to an unlimited number of investors, then a light level of regulation is still possible provided that all investors qualify as expert investors and expressly acknowledge an investment warning, which allows a fund to qualify as an "expert fund" under the JFSC Expert Fund Guide. Expert investors include amongst other tests any person investing at least $100,000 or currency equivalent. The approval process for seeking a permit for the fund is streamlined and allows for establishment of a fund within as little as three days of the formal filing of the application. Other necessary features of expert funds include the following:

• The investment manager must be established in an OECD member state or a state that is or subject to a memorandum of understanding with the JFSC or otherwise approved by the JFSC; and either be regulated in that state or satisfy certain criteria under the Expert Fund Guide.
• An expert fund is available only to expert investors.
• The offer document for an expert fund must comply with certain content requirements.
• The fund company, general partner or trustee requires at least two Jersey resident directors and the fund itself must be a Jersey company or have a Jersey general partner (if a limited partnership) or a Jersey trustee (if a unit trust).
• An expert fund must have a Jersey "monitoring functionary" being either an administrator or a manager in Jersey.

Listed Funds

The JFSC Listed Fund Guide provides a fast track process, based on the success of the expert fund, for the establishment of corporate closed-ended funds that are listed on recognised stock exchanges or markets.

The investment manager of a listed fund must be established in an OECD member state or in a jurisdiction with which the JFSC has entered into a memorandum of understanding or otherwise be approved by the JFSC; and either be regulated in that state or satisfy certain criteria under the Listed Fund Guide. Other necessary features of listed funds include the following:

• Listed funds must have at least two Jersey resident directors and a Jersey based monitoring functionary to ensure compliance with the listed fund guide.
• Treatment as a listed fund is currently only available to closed-ended Jersey corporates.
• Listed funds enjoy a fast track approval process modelled on the expert fund approach.
• There is no minimum subscription and listed funds are available to any investor category.
  

Eligible Investor Funds

Eligible investor funds are restricted to "eligible investors" (which, amongst other tests, includes a person committing at least US$1 million (or equivalent) to the fund). They are subject to a streamlined approval process and a relatively light degree of regulation under the Eligible Investor Fund Guide. There are also limited content requirements in respect of an eligible investor fund's offering document.

The investment manager of an eligible investor fund must be of good standing, established in an OECD member state or a jurisdiction with which Jersey has entered into a memorandum of understanding or otherwise be approved by the JFSC; and either be regulated in that state or satisfy certain criteria under the Eligible Investor Fund Guide. An eligible investor fund must have a Jersey based administrator, manager or (in the case of a closed-ended unit trust) trustee and at least two Jersey-resident directors. If open-ended a Jersey-resident custodian will also need to be appointed (unless it is a hedge fund in which case a prime broker with a credit rating of A1 / P1 is required).

Eligible investor funds are alternative investment funds (AIFs) for the purposes of the AIFMD and are therefore only available when they are to be marketed into the EU / EEA. For more information on the AIFMD please see below.

Unclassified Funds

To the extent that a fund is to be offered to more than 50 investors or to be listed and the fund is not able to fall under the expedited regulatory approach offered under any of the Expert Fund Guide, the Listed Fund Guide or the Eligible Investor Fund Guide, a collective investment fund may be regulated as an unclassified fund.  In this situation the JFSC will regulate the fund in accordance with its policy, which will need to include compliance by the promoter of the fund with the JFSC's promoter policy. This will include an evaluation of the track record, experience and reputation of the promoter of the fund as well as of the financial resources and spread of ownership of the promoter. The JFSC will review the prospectus, constitutional documents and material agreements relating to the fund. The fund operation and investment and borrowing restrictions will need to comply with certain established standards against which the JFSC will evaluate funds of this type. Other relevant features of unclassified funds include the following:

• The extent of compliance with regulatory guidelines will depend on the minimum investment level and whether the fund is open-ended (more tightly regulated) or closed-ended.
• Structures of an unclassified fund will, for an open-ended fund, require a Jersey resident manager and custodian.  For a closed-ended fund, no separate custodian is required.
• The lower the minimum investment requirement, the more closely the JFSC will regulate a fund of this type.

Recognised Funds

Recognised funds are authorised as collective investment funds complying with a separate prescriptive Order. Funds of this type may be marketed directly to the "retail" public in the UK under the United Kingdom Financial Services & Markets Act 2000, taking advantage of Jersey's designated territory status for the purpose of this legislation. Recognised funds are more highly regulated and provide investors with access to a statutory compensation scheme. Recognised funds may also be marketed to the public in a number of other territories, including Australia, Belgium, Hong Kong, the Netherlands and South Africa. Functionaries of "recognised funds" are regulated under the Collective Investment Funds Law.

Regulation of service providers to funds

The regulation of service providers to funds in Jersey is under the Financial Services (Jersey) Law, as providers of "fund services business". Once an entity is registered for a class of funds service business it no longer needs to apply for authorisation in relation to each new fund for which it provides that class of services.

This regime has also provided significant advantages for the provision of Jersey fund services to non-Jersey domiciled funds, which means that non-Jersey domiciled funds are subject only to a notification procedure in relation to their service providers and no longer need to seek fund by fund regulation.

A separate briefing on the regulation of service providers to funds is available upon request.

The Alternative Investment Funds Directive

Since July 2013, Jersey alternative investment fund managers (AIFMs) marketing Jersey or other non-EU/EEA AIFs to investors in the EEA have been required to comply with additional disclosure, transparency and reporting requirements pursuant to the AIFMD.

In addition to the requirements summarised above for each relevant fund product, where there is to be marketing into the EU/EEA pursuant to the AIFMD then the impact of the AIFMD on Jersey AIFMs and AIF funds is as follows:

• Very Private / COBO Only / Private Placement Funds

• Expert / Listed / Eligible Investor / Unclassified / Recognised Funds

• Unregulated Funds

Tax

Jersey offers a location for investment funds which does not impose its own tax burden on an investment fund or its investors.

Fund Structures

Jersey domiciled investment funds may be structured as companies (including protected cell companies and incorporated cell companies), limited partnerships (including incorporated limited partnerships and separate limited partnerships) or unit trusts. They may be open- or closed-ended. A number of enhancements to Jersey's existing company law have further developed the flexibility for funds structured as companies.

Separate briefings relating to unit trusts, companies, cell companies and limited partnerships are available upon request.

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.