Recently, Corporate Partner Fiona Chan joined a panel of experts at the third annual APAC Fund Finance Symposium in Hong Kong. The event aims to bring together investors, fund managers, bankers and lawyers for education and networking within the fund finance market.
Fiona discussed alongside Doos Choi, Mayer Brown; Andrew Hutchins, Clifford Chance; Jean Woo, Ashurst; and Charles Clayton-Payne, Harneys, the legal and compliance updates the fund finance market needs to be aware of as this industry continues to grow in Asia.
Cayman Islands fund vehicles in Asia
The Cayman Islands continue to be one of the most popular offshore jurisdictions for the Asian finance industry. There are dozens of Chinese funds that manage USD1 billion or more and the Cayman Islands provide the international recognition that many of these managers are looking for. The Cayman Islands are well known for their stringent Anti Money Laundering (AML) requirements which are pursuant to their AML regime. Cayman Islands vehicles are also often preferred due to the speed and cost of incorporation. A Cayman Islands fund can launch quickly and the cost of forming is relatively low in comparison to other jurisdictions.
Some have suggested that the introduction of Variable Capital Companies in Singapore creates a competitor for the Cayman Islands, with its ability to create a legal entity form or structure for all types of investment funds, however, when this is compared against the offering from the Cayman Islands it is still very much in its infancy, so the full impact is yet to be seen. The Cayman Islands Mutual Funds Law has been enacted for a number of years and overall is better established and flexible to the needs of Asian fund managers.
Economic substance application to Cayman Islands funds
The Cayman Islands is committed to keeping pace with global regulatory standards, for example the recent updates to their AML, and Economic Substance regulations ensures the jurisdiction is well placed to adhere to today’s legal and global regulatory demands and adapt to changing climates as they transpire to support the Asian economy.
Whilst investment funds are not required to comply with economic substance requirements, entities which conduct fund management business are.
Starting in 2020, a relevant entity will be required to file a notice with the Cayman Tax Information Authority (TIA) stating whether it is carrying out any relevant activity and, if so, whether all or any part of the relevant entity's gross income is subject to tax in a jurisdiction outside Cayman (with supporting evidence), and the date of the end of its financial year.
The market trend shows an increase in companies reviewing the level of discretion of fund managers to manage securities.
BVI incubator funds
In 2015 the BVI introduced the Securities and Investment Business (Incubator and Approved Funds) Regulations, 2015, which in particular were designed to appeal to start-up managers. The fund structures are designed to facilitate rapid and cost-efficient setup, with reduced requirements as to fund service providers and an accelerated FSC approval process.
Since then, both products have proven to be highly attractive to fledgling managers looking to launch new fund structures. Both the Incubator and Approved Fund are restricted to up to 20 investors, the Incubator Fund capped net assets at USD 20 million with a minimum individual investor investment of USD 20,000 and the Approved Fund capped net assets at USD 100 million with no minimum individual investor investment. The major benefit to this structure is that the fund manager is required to provide a written description of both the investment strategy and the risks involved rather than a formal offering memorandum making it quicker and easier to apply for.
Appleby has been a long supporter of the FFA and was a platinum sponsor of the Global Fund Finance Symposium in Miami earlier this year, and also sponsored the European Fund Finance Symposium in London in June. We're also a founding member of the Fund Finance Association, supporting its efforts to raise the profile of the funds finance industry globally.
As the number of fund financing products increases and fund structures become more bespoke, our experienced Fund Finance team continue to advise banks and finance providers in the development of sophisticated financing solutions. Find out more here.
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