1. What are the principal legal structures used for Alternative Investment Funds?
Gibraltar Alternative Investment Funds ("AIFs") may be structured either as experienced investor funds ("EIFs") or private schemes (also known as "Private Funds").
An EIF is a regulated collective investment scheme designed for professional, high net worth or experienced investors. An EIF may be open-ended or closed-ended and can be marketed to an unlimited number of investors, provided they meet the definition of an "experienced investor". This definition broadly covers: investment professionals, investors who have a net worth in excess of €1,000,000 and investors that invest a minimum of €100,000 in the EIF.
There are no statutory investment restrictions or limitations on borrowing or leverage. EIFs allow for a wider range of investments from traditional asset classes to more exotic asset classes.
EIFs benefit from the facility to launch themselves and notify (rather than apply to) the local regulator, the Gibraltar Financial Services Commission ("bGFSC") within 10 days of its launch therefore allowing EIFs to be marketed very quickly.
EIFs can be set up within a matter of days of finalising the offering document and appointing service providers as no GFSC approval is required (other than for its initial incorporation). The speed and ease of set up along with the degree of flexibility that the EIF structure allows, makes it an excellent investment vehicle.
Benefits of establishing an EIF include: pre-launch approval or post-launch notification mechanism available, can be marketed very quickly, no investment or borrowing restrictions, ability to be self-managed, competitive start-up and on-going costs and no diversification requirements.
A Private Fund, is an unregulated collective investment scheme that is not subject to any licensing requirements. Private Funds can only be made available to a restricted and identifiable category of persons, the number of offers is limited to fifty and a Private Fund cannot be listed on any stock exchange. Where a Private Fund is established to invest in crypto assets, the Gibraltar Funds and Investments Association's ("GFIA") Corporate Governance Code for Gibraltar Crypto Funds (the "Crypto Fund Code of Conduct") recommends that investment be restricted to a small group of persons who are all known to each other.
There are no specific licensing requirements for the directors on the board of a Private Fund, nor are there any requirements for a Private Fund to appoint a custodian or an investment manager. A Private Fund may be self-managed by its directors and there are no statutory restrictions governing a Private Fund's investments or leverage.
Private Funds are well suited for "family and friend" investors or individuals who wish to manage their investments in a formal fund structure. They are often used as a cost-efficient way of pooling and trading a small group of individuals' funds and are also often established as investment vehicles for family offices. Private Funds are extremely flexible and can be tailored to suit individual requirements.
Private Funds must remain private for one year from the date of offer, after which they may be converted into an EIF to attract further investment outside of the identifiable person category.
Benefits of establishing a Private Fund include: speed, cost-effectiveness and efficiency, no custodian/depositary requirement, no authorised Gibraltar resident directors' requirement and no preapproval from the GFSC is required to commence investment activities.
Funds can be establishing using a variety of legal entities, including:
- Private Limited Companies: which benefit from separate legal personality meaning that, subject to limited circumstances, members will not be held personally liable for any liabilities or debts incurred by the company. It also means that the company can be a party to legal proceedings and hold property in its own name;
- Protected Cell Companies ("PCC"): a PCC is a single body corporate, consisting of a core-company, and any number of subdivisions (cells). Each cell may serve as a sub-fund with separate investment strategies and investors and, therefore, the PCC structure provides the ability to segregate a fund's assets and liabilities between each cell. Each sub-fund may be used for specific investment objectives or strategies and are statutorily protected and remote from each other in the event of insolvency. The PCC structure provides investors with the opportunity to split their investment between different strategies while still complying with any relevant minimum investment thresholds. A Private Fund may not be established as a PCC.
- Limited Partnerships: Limited partnerships consist of one or more persons called 'general partners', who shall be liable for all debts and obligations of the firm, and one or more persons (which may consist of body corporates) to be called 'limited partners', whose liability for the partnership's debts is limited to their capital contribution to the partnership. There are no limits to the number of partners that can make up a limited partnership. In legal proceedings, only the limited partner will be protected, all other partners may be held personally liable.
- Unit Trusts: Unit trusts do not have a separate legal personality, meaning that members of a unit trust will not be protected in legal actions. It is a trust arrangement under which the trustee holds the scheme's assets on trust for the benefit of unitholders.
Her Majesty's Government of Gibraltar has also recently published the Protected Cell Limited Partnerships Bill 2020 which, once in force, will allow experienced investor funds to be structured as protected cell limited partnerships ("PCLPs") to create one or more cells that are statutorily segregated from each other. This means that much in the same way that a protected cell company can create different sub-funds with distinct strategies or fee structures, an experienced investor fund structured as a protected cell limited partnership can will also be able to do the same and benefit from the statutory protection as do protected cell companies.
2. Does a structure provide limited liability to the sponsor and/or manager vis-a-vis investors?
The limited company/partnership structures set out above provide separate legal personality and, accordingly, any liability would be of the entity itself, rather than of its investors. Liability of investors is generally limited to the amount committed/paid in the fund. In the case of a limited partnership, a general partner's liability is unlimited but manageable if set up as a corporate entity with limited liability.
3. Is there a market preference and/or most preferred structure? Does it depend on asset class?
Typically, the most common legal vehicles for AIFs in Gibraltar are: (a) private companies limited by shares; (b) PCCs and (c) limited partnerships.
It must be noted, however, that the most appropriate structure for a fund will depend on a number of factors, such as the particular fund's investment strategy. For example, funds that adopt a single strategy will often find that a private limited company is best suited to their needs. Conversely, a fund adopting multiple strategies may find that the PCC or PCLP are more suitable options. Similarly, the tax transparency offered by limited partnerships means that this may be the most appropriate structure in cases where investors want to take advantage of fiscal arrangements between the jurisdiction(s) of the fund's investments and their home jurisdiction.
4. Does the regulatory regime distinguish between open-ended and closed-ended Alternative Investment Funds (or otherwise differentiate between different types of funds or strategies (e.g. private equity vs. hedge)) and, if so, how?
The law does describe an open-ended investment company, in general terms, as a body corporate, most or all of the shares in, or securities of which can be realised within a reasonable period. Realisation will typically involve the redemption or repurchase of shares in, or securities of, the body corporate. This realisation must be on the basis of the value of the property that the body corporate holds (that is, the net asset value). Generally speaking however, the AIF regime does not distinguish between open-ended and closed ended AIF's, nor does it differentiate between different types of funds or strategies.
Originally Published by Legal 500
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