This briefing looks at the amendments made to the Cayman Islands Private Funds Law as well as any fund finance considerations.
In February of this year, the Cayman Islands enacted the Private Funds Law (the "Law") creating a regulatory framework for Cayman Islands closed ended fund structures for the first time. The Law mandates, among other things, that in order to accept capital contributions from investors for the purposes of investment, a "private fund" (as defined in the Law) must register with the Cayman Islands Monetary Authority ("CIMA") by 7 August 2020 (the "Deadline"). The Law has now been amended such that various entities that previously fell outside the definition of a private fund (and thus the ambit of the Law entirely), are now within scope.
Highlights of changes made
In particular the following changes are of note:
- the requirement that a private fund should have, as its "principal business" the "offering and issuing" of its investment interests, has been replaced with the requirement that it now need only offer or issue, or have issued such interests;
- a private fund no longer needs to be separately managed "for reward based on the assets, profits or gains" of the fund; and
- the Law no longer defines a private fund as involving the "spreading of investment risks".
As a result, various classes of entity, including AIVs, non-fee paying structures (such as co-invest and friends and family vehicles), and single investment funds, may now constitute private funds and thus be required to register with CIMA over the course of the next month or so.
Fund finance considerations
In addition to a private fund's obligations to CIMA, consideration should also be given in each case to the amendment's impact, if any, on such fund's financing arrangements. As a general matter, such arrangements should fall into three groups:
- Facilities without specific provision for the Law: In these cases the compliance with law covenant is likely to be of most relevance. Largely, this will simply amount to a contractual requirement that relevant entities register by the Deadline. Indeed, even thereafter, the covenant is often likely to be subject to a material adverse effect qualifier and/or a cure period.
- Facilities with specific provision for the Law but where no Cayman Islands entities have been deemed out of scope: In these cases, the amendment should have no immediate impact, and no doubt funds are progressing or have progressed their registration process as previously envisaged.
- Facilities with specific provision for the Law where one or more Cayman Islands entities have been deemed out of scope: In these instances, both lenders, funds, and their counsel would be advised to re-run such analysis to determine whether or not the original conclusion of non-applicability remains accurate. To the extent that it does not, an application for registration should be progressed as necessary to avoid any administrative breaches under the finance documents, particularly as many covenants specific to the Law that have been included will require certain steps to have been taken in advance of the Deadline.
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.