Understanding the basics of fund regulation
It is important to understand that there may be a number of jurisdictions involved when setting up a new fund, each with their own regulatory regime. A fund may be established in a different jurisdiction to its manager, perhaps because of a better suited regulatory or tax regime, and whilst economic substance requirements recently enacted in a number of Appleby jurisdictions do not directly affect funds, they are likely to influence choice of domicile for fund managers. It is also essential to consider the location of potential investors, as many jurisdictions have rules relating to the offering of interests in a fund to people in that jurisdiction.
Jurisdictions such as the Isle of Man have graduated regulatory requirements, with funds that are only open to sophisticated investors subject to lessor regulation than those available to retail investors. Investment managers or advisors may also benefit from exemptions from licensing in certain circumstances, so it is important to get advice at an early stage to structure a new fund and its management appropriately.
The panel discussed the importance of good governance and of non-executive directors who scrutinise and actively engage with decision making. The Isle of Man Financial Services Authority has issued a guidance note on the governance of collective investment schemes, which includes guidance on conflicts of interest, balancing power and responsibility within the board, and appropriate composition of a board. In the Isle of Man, a person who acts as a director of more than ten companies must also be licensed by the Isle of Man Financial Services Authority, subject to certain exclusions and exemptions such as group arrangements.
The panel highlighted the expanding scope of compliance, with FATCA and CRS reporting to be addressed in addition to anti-money laundering and countering the financing of terrorism obligations. Funds must also be conscious of the application of data protection legislation, given that GDPR has extraterritorial effect and applies to those offering goods or services to individuals in the EU or monitoring their behaviour in the EU. The Isle of Man, Jersey and Guernsey have each enacted data protection legislation mirroring GDPR.
Hot topics for start-ups
Other speakers at the conference through the day spoke on: how to market and find investors; surviving as a smaller manager; whether there is still a place for vanilla trading strategies and opportunities to explore emerging markets, such as trading cryptocurrencies and investing in cannabis businesses; and the benefits of outsourcing and factors to consider when choosing service providers.
Isle of Man exempt scheme
There was a lot of interest in the Isle of Man exempt scheme, which is an ideal vehicle for emerging and start-up managers looking to establish a track record with friends and family money. An exempt scheme may have up to 49 investors but cannot be offered to the public or promoted anywhere in the world. It is subject to minimal regulation, with no regulatory approvals or filings needed, no need for a custodian, and no need for audited accounts. An exempt scheme offers total flexibility on asset classes and trading strategies. Exempt schemes may be structured as companies (including protected cell companies), limited partnerships or unit trusts.
As an exempt scheme grows, there may be good reasons why it would become appropriate to make arrangements for public offerings or to exceed the maximum number of investors. If this is the case, an exempt scheme may convert to another class of Isle of Man fund with proportionately increased regulation, such as a Specialist Fund or Qualifying Fund.
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.