Jersey has developed some groundbreaking regulatory policies over the past decade, facilitating fast-track well regulated funds, including in the alternative investment funds sector. But Jersey has struggled to establish itself as a cost effective jurisdiction for many fund promoters, especially in the small to medium size fund bracket. That may become history, as Jersey recently introduced an innovative fund structure, the first fund of which has been approved by the Jersey Financial Services Commission ("JFSC"). The structure has the ability to drastically reduce both the time and cost applicable to a Jersey fund formation. Crill Canavan Advocates & Solicitors, and Herald Fund Services Limited, established the fund by capitalising on an incorporated cell company structure, with each new incorporated cell established by the incorporated cell company comprising a separate legal entity and independent investment fund. Each cell constitutes a company which is an Expert Fund subject to a fast-track regulatory procedure and a cost efficient standard form set of documents. Green-shoots are being spoken of ever more frequently in an economic context. To the extent that the funds industry is economically significant, and in an offshore environment such as Jersey it is, proactively reducing both time and cost on fund formation by using structures such as this is the origin of green-shoots.
The development of this new funds product must be considered historically. Jersey started realigning its fund industry to provide for a more diverse range of fund regulation some time ago. One of the important factors which Jersey fund regulation traditionally applied to distinguish between funds, and the level of regulation to which they would be subject, was the number of investors in the fund. With the increase in alternative investment funds offshore, including hedge funds, property funds, venture capital funds and private equity funds, primarily aimed at high net worth or sophisticated investors and with high minimum initial investment requirements, it became apparent that Jersey needed a wider range of fund regulation which included fund regulation focussed on the nature of investors. Accordingly, with the help of the Jersey Funds Association, Jersey introduced a groundbreaking fast-track, light touch, Expert Fund regulatory regime in 2004.
The new Expert Fund classification was established under the Expert Funds Guide issued by the JFSC. An Expert Fund qualifies for lighter touch regulation even though it may make a public offer, and there is therefore no limit on the number of investors in the fund, because it requires all investors to be Expert Investors. There are ten categories of Expert Investor, however, any person who invests US$100,000 or currency equivalent in the fund qualifies as an Expert Investor, while the remaining nine categories relate to high net worth investors and sophisticated investors.
The Expert Funds policy has been immensely successful, and represents an important step for Jersey with reference to reducing time for fund formation, especially in the valuable alternative investment funds sector. With the recent economic turmoil, the meltdown in the alternative investment funds sector, and the general aversion of the funds industry to unregulated funds, appropriately regulated products are receiving greater focus, and Expert Funds are regarded as a prime choice for new alternative investment funds established in Jersey. The time factor solved, attention has moved to cost. The funds sector may be gaining momentum, but it is still very much cost conscious and moving forward cautiously.
So what about developing a standard set of documents for an Expert Fund which could be used for a bouquet of funds, although in this case each fund being formed as a company and managed by an independent Investment Manager, while certain core fund documents were centrally controlled and service providers between funds were identical as far as practical? Changes in the legal environment can facilitate such an approach, and this is what assisted with the newly established Standard Form Expert Fund ("SFEF").
The first step in establishing the SFEF structure was choice of fund vehicle. Incorporated cell companies comprise a separate legal entity and, as a result, can be treated by the JFSC as an independent fund for regulatory purposes, including the issuance of fund certificates. Key controls over the appointment and removal of the Investment Manager, Administrator, Custodian and/or Prime Broker, and amendments to the standard form Prospectus can also be controlled indirectly by the incorporated cell company, which maintains a degree of control over the entire fund structure, near akin to an umbrella fund structure.
The second step in establishing the SFEF structure was preparing standard form fund documents, in particular the constitutional documents of the fund. In the case of a fund established as a company pursuant to the Companies (Jersey) Law 1991, the two key constitutional documents are the Memorandum and Articles of Association, and the Prospectus. Each incorporated cell has the same standard form Prospectus, with differences between funds reflected in an Appendix which is typically about 10 pages long, much of it standard, an easy and quick to read document reflecting the idiosyncrasies of each fund. These include differences in the investment objective, strategy and restrictions, the identity of the Board of Directors and Investment Manager, as well as the specific risks associated with an investment in the fund. Time periods and amounts for the various dealing dates, lock-ups, maximum and minimum initial investment and redemption limits, and so forth, are also dealt with in the Appendix. Although a standard form approach may not be appropriate for all fund products, some of which are bespoke, in practice there tend to be material structural similarities in the terms applicable to many funds, as reflected in the body of the Prospectus. For instance, share rights and restrictions, and provisions dealing with redemption of shares, compulsory redemption, valuation, suspension of valuation, meeting and voting.
With an incorporated cell company fund structure with standard form documents having been successfully established and approved by the JFSC for an Expert Fund, the concept is being quickly extended to additional fund types, even partnerships. This paves the way to a more comprehensive and thorough set of fund documents for both alternative investment and other funds which could be established with drastic time and cost savings, if not low fixed costs with initial expenses for the incorporated cell company, or other fund structure whatever that may be, being recouped over time. Do we have the legal and regulatory framework in Jersey to accommodate more standard form funds? The answer to this is yes. Is this a growth opportunity for the funds industry in Jersey? The answer to this is yes. Is it a good time to push the envelope with ideas? The answer to this is always. Fund green-shoots are already very much present in Jersey.
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