Following the introduction of the Experienced Investor Fund regime (EIF) a couple of years ago there has been a substantial growth in the Gibraltar funds industry. The number of funds established has been growing at a compound rate and funds now range from $1Million to over $1Billion. The funds invest in all areas of the world including America, Europe, Eastern Europe and the Middle East with investors in a number of different jurisdictions.
Funds established now include, Hedge Funds, Funds of Funds, Property Funds, Private Equity Funds, Funds investing in oil production; Feeder Funds; funds involved in lending secured on property assets; funds investing in Alternative energy (solar, wind farms, bio fuels); funds investing in alternative investments including funds investing in the art market; charitable funds.
The EIF regime allows funds (see below) to be established within a matter of days and with Gibraltar based in Europe the fund has unique fiscal and regulatory advantages over a number of other offshore jurisdictions, not least being able to take advantage of the Parent Subsidiary directive.
The quick and easy regulatory notification process, the possibility of setting up PCC funds and Gibraltar's position within the European Union are all factors that are certain to make Gibraltar a very interesting and competitive jurisdiction for the set up of funds.
The Experienced Investor Fund regime in Gibraltar has not only proven an extremely versatile way of setting up a fund within the European Union but has unique advantages in terms of set up time and taxation. Probably the most exiting and competitive innovation in the Gibraltar fund industry is the possibility to set up funds for experienced investors that are highly versatile and lightly regulated. An EIF fund can be set up and become operative within days, for it is sufficient for the fund to incorporate, appoint service providers, appoint two local directors whom are authorised by the Financial Services Commission ("FSC"), produce a prospectus and hold a board meeting to launch itself as a fund. There is no need to go through the often protracted of obtaining a license. However, it must notify the FSC of its launch within 14 days, and provide certain documentation as well as a, one off, license fee of £2,500.
To qualify for this regime, subscription must be restricted to investors who are deemed to be experienced under the Financial Services (Experienced Investor Funds) Regulations 2005 (the EIF Regulations). Investors who have a net worth of 1m aside from their residential property or whose normal business activity includes investment related activity or those investing a minimum of €100,000 in the fund. Significantly, these definitions are individual and not cumulative so it is sufficient for an investor to invest €100,000 for it not to have to prove any of the other conditions. There is no minimum or maximum number of investors required for an EIF. Unlike in other jurisdictions there is no requirement for the promoters of the fund to be licensed. This is because each fund must have two directors who are authorised by the (FSC) to act as EIF directors. Those roles are to ensure proper governance of the fund. Where the fund is a unit trust with a corporate trustee or where the fund is a limited partnership with a corporate general partner, two directors of the corporate general partner or trustee must be authorised. It is sufficient for the fund administrator to perform the normal "know your client" and client acceptance procedures to be able to set up a fund in Gibraltar.
Although many funds in Gibraltar are managed solely by their boards of directors, an EIF may choose to appoint an investment manager in Gibraltar or in any other jurisdiction. It is sufficient under Gibraltar law that the investment manager or adviser be licensed or be entitled to give investment management advice in its home jurisdiction. A Gibraltar licensed to provide an investment management or adviser is a full European Union licence. This means that the license can be passported anywhere within the European Union. As such, the normal capital adequacy requirements that exist in other European jurisdictions also apply to the Gibraltar managers or advisors. A Gibraltar investment a physical presence and staff in Gibraltar.
An open ended EIF must have a depositary and may appoint brokers to assist with their trading activity. However, neither the depositary nor the brokers need be locally based. Indeed, funds have been established with depositaries and/ or brokers in various countries in Europe, the Bahamas, Switzerland, Canada and America.
An EIF must issue a prospectus that is consistent with industry standards and which will allow an investor to make an informed investment decision. The prospectus/private placement memorandum (PPM) will contain all the usual information one sees in such a document including the fees payable by the fund (both initial setup and ongoing), the investment objectives, borrowing or investment restrictions, if any, (or if there are no restrictions the fact that there are none) and the risks associated with such investment. The prospectus/PPM is a private document except if the fund is incorporated as a public limited company. There is no legal requirement to use a public limited company for a fund in Gibraltar even if the fund has more than 50 investors.
One of the key unique selling points of the Gibraltar fund is the authorisation process. As noted earlier, no regulatory preapproval is needed for launch. Within 14 days of an EIF's launch it is sufficient for the fund to incorporate, appoint its service providers, produce its prospectus and hold a board meeting to launch itself. It must notify the FSC of the launch along with a copy of the prospectus, the memorandum and articles, a legal opinion from senior Gibraltar counsel stating that the fund was set-up in accordance with the EIF regulations and other relevant legislation, a form signed by the administrator and the license fee.
This means in effect there is no regulatory down time and the fund may be launched as quickly as necessary.
The FSC will then review the submitted documents and as with all other jurisdictions may come back with questions or comments. An ongoing requirement is for an EIF, the directors, (especially the authorised directors) and the administrators are to ensure ongoing compliance with the EIF regulations, Gibraltar legislation and with corporate governance requirements.
An EIF must have a fund administrator that is authorised and has a presence in Gibraltar (there are a number to choose from companies). In addition to the two Gibraltar based EIF directors, the fund must also appoint auditors that are registered in Gibraltar. (Three out of the four "big four" auditors are based in Gibraltar as are several other firms that have ample experience in fund audit.) Although any internationally accepted accounting standard might be used for the audit, many Gibraltar funds are audited under IFRS or UK GAAP.
There are no restrictions on borrowing or owning investments. A fund may invest in any class of investment and at any percentage given that this is a fund that is targeted to experienced investors who are informed and are able to bear the risks of such investments. The fund may, however, impose certain restrictions on itself. These are disclosed in the prospectus and, of course, must always be adhered to.
Gibraltar funds may obtain an exemption from the Commissioner of Income Tax on any tax on investment income. There is no capital gains tax, inheritance tax, or wealth tax in Gibraltar. There is a stamp duty of £10 on the creation of share capital of a company and on any increase in share capital. Furthermore, there is no tax in Gibraltar on dividends from quoted securities or on income from trading listed securities. Indeed, a fund may find it more beneficial not to apply for the certificate of exemption from the Commissioner of Income Tax in certain cases and to rely on the regular internal tax regime of Gibraltar which will in the majority of cases not tax any income or gains earned by the fund. There is no withholding tax on payments from a Gibraltar fund to its non-Gibraltarian investors.
Parent Subsidiary Directive
As Gibraltar is part of the European Union, companies and funds can benefit from the European Parent Subsidiary Directive. This means that payments to a Gibraltar company from subsidiaries in certain European jurisdictions (such as Luxembourg) will not be subject to withholding tax. This is another one of Gibraltar's unique selling points and it is particularly relevant in private equity and real estate funds.
The valuation methods for EIFs must be disclosed within the prospectus. There are no particular rules on valuations other than their disclosure.
Protected Cell Companies
An additional advantage of Gibraltar as a jurisdiction is that it is possible to set-up a fund in Gibraltar as a Protected Cell Company (PCCs). PCCs are companies, which can segregate their assets into cells, which are statutorily, protected and are remote from each other in bankruptcy. This means that if one cell incurs a liability, the creditors of that cell will be unable to satisfy their debt from assets attributable to another cell. This is particularly useful to investment mangers that wish to set-up several funds with several strategies under one vehicle and save with economies of scale. Investors can invest in one or more cells according to their investment strategies.
The quick and easy regulatory notification process, the possibility of setting up PCC funds and Gibraltar's position within the European Union are all factors that are certain to make Gibraltar a very interesting and competitive jurisdiction for the set-up of funds.
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.