Cayman Islands: Establishing A Cayman Islands Open-Ended Investment Fund

Last Updated: 24 August 2011
Article by Janet Francis

Over eighty percent (80%) of the world's investment funds are believed to be registered in the Cayman Islands. As at December 2010, there were 9,438 investment funds registered with the Cayman Islands Monetary Authority ("CIMA"). This number does not include the numerous closed-ended or private equity funds which do not require registration.

The Cayman Islands have been chosen by leading financial institutions spanning all geographical regions, to be the home for their offshore fund products. Below are just a few of the reasons for their choice.

Efficient Regulatory Environment

Cayman has been placed on the Organisation for Economic Co-operation and Development's ("OECD") "white list" of countries which have substantially implemented internationally agreed tax standards as presented by the OECD. In fact, as at 4 August 2011, Cayman has twenty-five (25) tax information exchange agreements in place with G7, G20 and other nations, putting Cayman way ahead of the "magic number" (twelve (12)) of tax information exchange agreements formerly prescribed by the OECD for countries to be placed on the white list. It is accepted that Cayman's anti-money laundering legislation is superior to that of the United States and most European jurisdictions.

Tax Neutral

Cayman is a tax neutral jurisdiction. There are no corporation, capital gains, income, profit, withholding or inheritance taxes. Cayman investment fund structures may receive an undertaking from the Governor that exempted companies, exempted limited partnerships and exempted trusts will remain tax free, for a period of twenty (20) years for exempted companies and fifty (50) years for exempted partnerships and exempted trusts.

Flexibility

There are no restrictions on the investment policies or strategies that may be employed by Cayman Islands investment funds. There is also no requirement to have directors, administrators or custodians who are resident in the Cayman Islands.

No Prior Approvals for Registration

Provided that the registration requirements are met, no regulatory approvals are required in order to register an investment fund. Investment funds may therefore be established speedily.

Availability of Professional Service Providers

Cayman has highly qualified professional service providers in the form of attorneys, accountants, banks and administrators, which service the fund sector. The "Big Four" accounting firms are all represented in Cayman and forty (40) of the world's top fifty (50) banks have offices on the island. Cayman's service providers are more often than not staffed by long term residents who are committed to the sector's success.

Legal System

Cayman's legal system is based on English common law and local legislation. Cayman's legislation is constantly being reviewed so as to remain relevant and to meet the requirements of the financial services industry. The court system is highly developed and there is a dedicated Financial Services Division. Cayman's final court of appeal remains the Privy Council.

Cayman Islands Stock Exchange

The Cayman Islands Stock Exchange ("CSX") provides a quality listing facility for investment funds. The CSX is recognised by the London Stock Exchange and the UK Inland Revenue. The CSX is an affiliate member of the International Organisation of Securities Commissions ("IOSCO") and is a full member of the Alternative Investment Management Association ("AIMA"). CSX listing rules may be found on the CSX web site at www.csx.com.ky

FUND STRUCTURES

Investment funds may be structured as single class, multi-class, stand alone, master feeder or side by side vehicles. Many Cayman Islands investment funds are established as stand alone structures which mirror the strategy of an on-shore fund established by the same investment manager. Investment funds may also be structured as master feeder funds, with the master fund being established either as a Cayman Islands exempted company or an exempted limited partnership. Feeder funds are normally established in the Cayman Islands and on-shore. The on-shore funds are structured primarily to invest in the Cayman Islands master fund. Side by side structures may also be established where the Cayman investment fund and an existing on-shore fund invest in parallel in the same investment pool managed by the same investment manager.

A Cayman investment fund may be structured as open-ended or closed-ended. An open-ended investment fund is one in which the equity interests issued may be redeemed at the option of the investor. A closed-ended fund will either have no investor redemption rights or will have very restricted investor redemption rights. An investment fund is normally structured as closed-ended funds when the underlying assets of the investment fund cannot be easily realised or liquidated.

TYPES OF FUND VEHICLES

A Cayman Islands investment fund may be established as a company, a unit trust or a limited partnership. It is important to note that of these three (3) vehicles, only a company enjoys separate legal personality, which is separate from its investors. All three (3) vehicles may be established within forty-eight (48) hours.

Exempted Company

The exempted company is the entity which is most often used for the establishment of Cayman Islands investment funds. An exempted company is required to carry on business mainly outside of the Cayman Islands. There are three (3) types of exempted company: (i) a standard exempted company; (ii) an exempted segregated portfolio company; ("SPC"); and (iii) an exempted limited duration company ("LDC").

An exempted company must have a registered office in the Cayman Islands. The registered office must maintain registers of the company's directors and officers and of the company's mortgages and charges. A register of shareholders must also be maintained, although this register may be kept outside of the Cayman Islands. None of the exempted company's registers is open to public inspection.

The annual requirements for maintenance of an exempted company are few. An exempted company must:

  1. file an annual statement with the Registrar of Companies stating that the company has conducted its business mainly outside of the Cayman Islands and has complied with the Companies Law (2010 Revision) of the Cayman Islands (the "Companies Law"); and
  2. pay an annual fee in January of each year (which fee is calculated based on the authorised share capital of the company).

Exempted Limited Partnerships

Exempted limited partnerships are attractive to investors who require a fiscally transparent vehicle. Such partnerships are governed by the Exempted Limited Partnership Law (2010 Revision) and English common law. The assets of the limited partners are vested in a General Partner.

An exempted limited partnership requires at least one (1) general partner and one (1) limited partner. At least one (1) general partner must be:

  1. resident in the Cayman Islands; or
  2. incorporated under the Companies Law; or
  3. registered as a foreign company under the Companies Law; or
  4. an exempted limited partnership.

Unit Trusts

Cayman Islands unit trusts are governed by the Trusts Law (2009 Revision) of the Cayman Islands and English common law principles. The rights and obligations of unit holders are set out in a trust deed.

Unit trusts are often used for investors in jurisdictions where there may be tax benefits in acquiring units in a unit trust as opposed to shares in a company. Japanese institutional investors have favoured investment funds which are structured as unit trusts.

Unit holders contribute funds to a trustee and are issued "units". The Trustee holds funds contributed on trust for the unit holders, and each unit holder is entitled to share pro-rata in the trust's assets.

REGULATION OF INVESTMENT FUNDS

The Mutual Funds Law (2009 Revision) of the Cayman Islands (the "Mutual Funds Law") is the primary legislation for the regulation of investment funds in the Cayman Islands. Investment managers who are based in the Cayman Islands are regulated by the Securities Investment Business Law (2010 Revision) of the Cayman Islands.

CIMA is the body which is responsible for ensuring compliance with regulatory provisions governing investment funds. Cayman Islands Law provides CIMA with broad powers for aimed at protecting investors.

If a Cayman Islands investment fund falls within the definition of "mutual fund" pursuant to the Mutual Funds Law, the fund may not carry on business in or from the Cayman Islands unless it is registered as a mutual fund with CIMA (or is exempt from registration). A Cayman Islands investment fund will be deemed to be carrying on business in or from the Cayman Islands if it is incorporated or established in the Cayman Islands.

An investment fund will be exempt from registration as a mutual fund, if the equity interests issued by it are held by no more than fifteen (15) investors, the majority of whom are capable of appointing or removing the directors, the trustee or the general partner of the company, trust or partnership, as the case may be.

CIMA policy is that regulated funds which are structured as exempted companies, must appoint at least two (2) directors (where the directors are individuals). CIMA may in its discretion, approve the appointment of a single corporate director.

If a trustee of an investment fund is incorporated or registered in the Cayman Islands, the trustee must be licensed under the Bank and Trust Companies Law (2009 Revision) of the Cayman Islands.

DEFINITION OF MUTUAL FUND

Investment Funds are referred to in the Mutual Funds Law as 'mutual funds' which is defined as a company, unit trust or partnership incorporated or otherwise carrying on business in the Cayman Islands, that issues equity interests for the purpose of pooling investor funds, with the aim of spreading investment risk and enabling investors to receive profits or gains from investments. 

The definition of "mutual fund" in the Mutual Funds Law excludes:

  1. closed-ended or private equity funds which do not permit redemption or repurchase of interests;
  2. debt or alternative financial instruments which do not issue equity; and
  3. single investor funds which do not pool investor funds.

CATEGORIES OF MUTUAL FUNDS

There are three (3) categories of mutual funds which are regulated by the Mutual Funds Law:

  1. registered funds;
  2. administered funds;
  3. licensed funds

Registered Funds

Registered funds are the most common type of investment fund registered with CIMA. A registered fund must:

  1. have a minimum investment per investor of at least US$100,000 (or its equivalent in any other currency); or
  2. have its equity interests are listed on a recognised stock exchange.

Registered funds are designed for investors who are regarded as "sophisticated" i.e. they have a minimum of US$100,000 to invest and either have the ability to seek professional advice on investments or can advise themselves. At this time, registered funds require no approval by CIMA as long as the requirements for registration are met. A registered fund may have an administrator which is based outside of the Cayman Islands.

Administered Funds

An administered fund must have its principal office in the Cayman Islands provided by a licensed mutual fund administrator. Administered funds may accept an initial investment per investor which is less than US$100,000.

Licensed Fund

CIMA may issue a license for an investment fund, which license is issued at CIMA's discretion. This type of investment fund would be appropriate where initial subscription amounts will be below US$100,000 and the sponsor is a reputable and well-known institution.

REQUIREMENTS FOR ALL REGULATED FUNDS

All regulated investment funds must:

  1. comply with the anti-money laundering regulations of the Cayman Islands as set out in the Proceeds of Crime Law, 2008;
  2. have a current offering document, which must describe the equity interests of the investment fund in all material respects and must contain all material information to enable a prospective investor to make an informed decision as to whether or not to subscribe;
  3. file their offering document with CIMA, together with the prescribed particulars (which contain details of the offering);
  4. have their accounts audited annually and must file audited financial statements with CIMA within one hundred and eighty (180) days of the year end of the investment fund in electronic format, together with an annual return form including prescribed details, signed by a director. The audited financial statements must be signed-off by an approved local auditor;
  5. where there is a continuing offering, update their offering documents within twenty-one (21) days of any material change, and file the updated offering document and the prescribed particulars with CIMA within twenty-one (21) days of the material change;
  6. pay a fee on registration and an annual fee in January of each year. The fee is US$3,660 at this time.

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.

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Authors
Janet Francis
 
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