1. Market Overview
1.1 State of the Market
The Cayman Islands is a popular domicile for globally managed private equity, hedge and hybrid funds due to its tax neutral status, flexible structuring options and its established and experienced financial services sector and professional service providers. Additionally, the Cayman Islands is recognised as an attractive jurisdiction for investment funds due to its Englishbased legal system, established judiciary and absence of political or sovereign concerns.
In particular, the Cayman Islands is the jurisdiction of choice for US sponsors structuring funds for US tax-exempt investors and non-US investors. Cayman Islands trusts and other vehicles are frequently used as investment vehicles for investors in Asia, including China and Japan.
The majority of investment funds established in the Cayman Islands are private non-retail funds.
2. Alternative Investment Funds
2.1 Fund Formation
2.1.1 Fund Structures
Entity options available for structuring investment funds include exempted limited partnerships, exempted companies, limited liability companies and trusts. Private equity funds are typically structured as exempted limited partnerships and hedge funds make use of both exempted company and exempted limited partnership vehicles in standalone and master-feeder structures. Cayman Islands trusts and other vehicles are frequently used as investment vehicles for investors in Asia, including China and Japan. The limited liability company is becoming the vehicle of choice for general partner and/or management vehicles.
A key difference between an exempted limited partnership and an exempted company is that, notwithstanding registration, an exempted limited partnership is not a separate legal person distinct from its partners. An exempted limited partnership must act through its general partner and all agreements and contracts must be entered into by or on behalf of the general partner (or any agent or delegate of the general partner) under general legal principles of agency on behalf of the exempted limited partnership. Any right or property of the exempted limited partnership that is conveyed to or vested in or held either (i) on behalf of the general partner or (ii) in the name of the exempted limited partnership is an asset of the exempted limited partnership held upon trust in accordance with the terms of the relevant law.
2.1.2 Common Process for Setting up Investment Funds
Formation and registration processes in the Cayman Islands are streamlined and efficient. Exempted companies are formed upon filing of a declaration and the memorandum and articles of association with the Registrar. Exempted limited partnerships and limited liability companies are formed upon the execution of the relevant operating agreement and the filing of a registration statement with the Registrar.
To register a fund under the Cayman Islands Mutual Funds Law (2020 Revision), the requisite application form and offering memorandum must be submitted to the Cayman Islands Monetary Authority (CIMA) in advance of the fund launch and directors must be registered under the Director Registration and Licensing Law. The administrator and auditor of the fund must submit consent letters confirming responsibility for these important roles.
2.1.3 Limited Liability
The Cayman Islands legal system is based on well-recognised legal concepts founded in English law, including limited liability and separate corporate personality, which underpin the corporate, partnership and trust vehicles used as collective investment schemes, all of which have been tried and tested and found to be robust during the global financial crisis.
As a general rule, in the absence of a contractual arrangement to the contrary, the liability of a shareholder of a Cayman Islands company that has been incorporated with limited liability and with a share capital is limited to the amount from time to time unpaid in respect of the shares it holds. A Cayman Islands company has a legal personality separate from that of its shareholders, and is separately liable for its own debts due to third parties.
A Cayman Islands exempted limited partnership does not have a legal personality separate from its partners. General partners have unlimited liability for all the debts and obligations of such partnerships by virtue of the Cayman Islands Exempted Limited Partnership Law (2018 Revision). Fund investors typically subscribe for limited partnership interests on which their liability is generally limited to their contributed capital and outstanding capital commitment (if any).
However, there are limited circumstances under Cayman Islands law whereby if an investor takes part in the conduct of the business of the partnership and holds itself out as a general partner to third parties, it may assume unlimited liability for the debts and obligations of the partnership. Exempted limited partnerships are the most common type of Cayman Islands vehicle used in private equity fund-raising and investors in such funds commonly seek Cayman Islands legal opinions in respect amongst other things, the limited liability nature of their partnership interest.
2.1.4 Disclosure Requirements
Every mutual fund registered with CIMA (unless that fund is a "master fund" as defined under the Mutual Funds Law) is required to issue an offering document that must describe the equity interests in all material respects and contain such other information as is necessary to enable a prospective investor to make an informed decision as to whether or not to invest in the fund. CIMA does not dictate the substance or form of the offering document, although it occasionally issues policy statements with respect to the content of offering documents.
All fund offering documents are subject to the pre-existing statutory obligations with regard to misrepresentation and the general common law duties with regard to proper disclosure of all material matters
2.2 Fund Investment
2.2.1 Types of Investors in Alternative Funds
The Cayman Islands is a popular domicile for globally managed private equity, hedge and hybrid funds due to their tax neutral status, flexible structuring options and established and experienced financial services sector and professional service providers. In particular, the Cayman Islands is the jurisdiction of choice for US sponsors structuring funds for US tax-exempt investors and non-US investors. Cayman Islands trusts and other vehicles are frequently used as investment vehicles for investors in Asia, including China and Japan.
2.2.2 Legal Structures Used by Fund Managers
Private equity investors tend to invest in unregulated private funds structured as exempted limited partnerships. Hedge or regulated fund investors typically invest through exempted company and/or exempted limited partnership structures. Cayman Islands trusts and other vehicles are frequently used as investment vehicles for investors in Asia, including China and Japan.
2.2.3 Restrictions on Investors
Unless a mutual fund is "licensed" or "administered" or was registered with CIMA prior to 14 November 2006, all investors investing into a CIMA regulated fund are subject to an initial minimum investment amount of KYD80,000 (or its equivalent in another currency).
2.3 Regulatory Regime
2.3.1 Regulatory Regime
Only investment funds that fall within the definition of a "mutual fund" under the Mutual Funds Law are currently regulated by CIMA (but see 4.1 Recent Developments and Proposals for Reform). A "mutual fund" is any company, unit trust or partnership (wherever established) that issues equity interests redeemable at the option of the investor, the purpose or effect of which is the pooling of investor funds with the aim of spreading investment risks and enabling investors to receive profits or gains from investments. Thus, funds that provide no redemption or repurchase rights to investors – ie, closed-end funds – are excluded from the definition and regulation under the Mutual Funds Law. Funds that issue debt, even if the bonds or notes are convertible or have warrants attached, are also excluded from regulation.
There are three types of regulated "mutual funds
- The "Licensed Mutual Fund" – if CIMA considers that each promoter is of sound reputation, the administration of the fund will be undertaken by persons who have sufficient expertise and who are fit and proper to be directors (or, as the case may be, managers or officers in their respective positions), and that the business of the fund will be carried out in a proper way, then a licence will be granted to the fund. The licensing process can take a few months and a fund must not commence operations until the licence has been granted. No regulatory minimum initial investment amount applies to this type of fund.
- The "Administered Mutual Fund" – the fund is required to designate its principal office in the Cayman Islands at the office of a licensed mutual fund administrator (MFA). Instead of CIMA doing so, it is the MFA who is required to be satisfied that the promoter is of sound reputation, the administration of the fund will be undertaken by persons who have sufficient expertise to administer the fund and are of sound reputation, and that the business of the mutual fund and the offer of equity interests will be carried out in a proper way. No regulatory minimum initial investment amount applies to this type of fund.
- The "Section 4(3) Mutual Fund" – this type of fund is not subject to licensing nor is it required to have a principal office provided by an MFA. However, it must either have (i) a minimum initial investment amount of at least KYD80,000 (or its equivalent in another currency) per investor, and therefore is suitable only for sophisticated investors, or (ii) its equity interests listed on a recognised stock exchange, and is therefore subject to additional regulation by such stock exchange.
Currently, a "mutual fund" can be exempt from regulation by CIMA if the fund has no more than 15 "investors" (as defined under the Mutual Funds Law) and such investors have the right to appoint and remove the operator of the fund by a majority in number of such "investors" (but see 4.1 Recent Developments and Proposals for Reform).
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Originally published by Chambers and Partners
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