As a politically stable and tax neutral jurisdiction with over 40 years accumulated experience as an international finance centre, Jersey has gained a strong reputation as a prime location in which to establish collective investment funds.
Initially, Jersey made its reputation in this area in the context of retail funds. However, the funds industry is always evolving, and today Jersey is increasingly attractive to non-retail schemes, whether joint ventures, hedge funds, private equity vehicles or other schemes aimed at "expert investors".
The Jersey Financial Services Commission (the "Commission") recently issued its Expert Funds Guide (the "Guide") to ensure that funds aimed at such investors may be established quickly and cost-effectively in Jersey, and to provide certainty and guidance to those wishing to establish such funds.
The Guide follows detailed consultation with industry in Jersey and the United Kingdom and the results of a benchmarking exercise against other relevant jurisdictions.
The impetus behind the consultation exercise is to position Jersey as the jurisdiction of choice for offshore funds, particularly expert funds and private equity structures.
The Guide represents a radical change in the manner in which Jersey funds are regulated. Funds qualifying as Expert Funds will be established on certification by licensed Jersey service providers – typically, the fund administrator – that the fund complies with the Expert Fund criteria set out in the Guide. The Commission will issue the relevant permits on receipt of the certification.
As a result, an Expert Fund is capable of being established in Jersey within a matter of days. The Commission does not need to review the fund structure, documentation or the promoter.
What Is An Expert Fund?
An Expert Fund is a fund meeting the following criteria:-
- Clearly, the definition of an "expert investor" is crucial. An investor must be one of the following: in the business of buying or selling investments; a person with a net worth of more than US$1m, excluding principal place of residence; an entity with at least US$1m available for distribution; connected with the fund or a functionary of the fund (there is a flexible approach to carried-interest arrangements); an investor making a minimum investment of US$100,000.
- All investors must sign a prescribed form of investment warning before being registered as subscribers in an expert fund.
- The investment manager must either have been previously approved by the Commission or else be without convictions or disciplinary sanctions; solvent; regulated in an OECD member or associate member state; experienced in using similar investment strategies to those adopted by the Expert Fund; able to demonstrate an adequate span of control over the business.
- Jersey-based functionaries will need to comply with Codes of Practice. These will shortly be published by the Commission and they will set out the conduct of business requirements for functionaries holding permits issued by the Commission.
- A small number of key structural requirements are imposed on such funds:
If an investment manager does not meet these requirements, it may approach the Commission on a case by case basis. Of course, if permission is granted then, absent any material change, the investment manager will not need specific approval to establish further Expert Funds.
- The offer document must set out all material information in respect of the fund;
- A licensed Jersey administrator or manager must be appointed and must satisfy itself that the investment manager is acting in accordance with its mandate (save in the case of a closed ended unit trust where a trustee is the only local functionary required);
- A Jersey custodian or (in the case of hedge funds) an international prime broker must be appointed for open-ended funds;
- Two Jersey resident directors with appropriate experience must be appointed to the board of the fund company/general partner/trustee.
There are no investment or borrowing restrictions imposed on the fund, which may be structured as a corporate entity, a limited partnership or a unit trust. Nor is there any limitation on the number of investors such a fund may have.
The Guide aims to provide a "safe harbour" available to the majority of non-retail funds. However, in addition, as well as bringing certainty to the process of establishing funds that fall within this safe harbour, the new policy will free up Commission time so that derogations from the Guide may also be considered on an expedited case by case basis.
It is important to note that a fund which fails to satisfy any of the Guide’s criteria will only need to satisfy the Commission on the points it fails to meet and will not be required to submit a full application for review. For example, if the fund is not regulated in an OECD member state but fulfils the other criteria, the Commission’s approval of investment experience will be required but a full application will not be required.
Other Schemes – In Brief
Private schemes (50 or fewer offerees) may be regulated as Expert Funds. If, however, a client wants a regime that does not attract statutory fees, a private scheme can be regulated under the existing Control of Borrowing legislation whereby the Commission’s approval of the status of the functionaries, fund structure and the Offering Memorandum will be required. A retail fund will continue to be regulated under the existing regime on a case by case basis.
The Commission also intends to introduce a regime where there are no regulatory restrictions on funds with less than 15 investors.
The Guide is the first major overhaul of funds legislation in Jersey since the enactment of the Collective Investment Funds (Jersey) Law 1988. It is an important modernisation of the legal framework further enhancing Jersey’s reputation as a place in which to conduct business.
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.