The Mutual Funds and Hedge Fund Act, 1998 was brought into law in the Seychelles with a view to creating an investment fund regime that is designed to be both relatively "light touch" in its regulation at the same time as protecting the interests of investors depending on their level of market experience.

This is achieved by putting in place a modern and comprehensive three-tier fund landscape in the Seychelles, comprising of professional, private and public funds, offering an incremental degree of regulation to afford the appropriate level of protection and security to their respective investors.

In setting up the regulatory framework for funds, the Seychelles has aligned itself with fund offerings from other offshore jurisdictions with a view to ensuring that investors feel that they are dealing with a familiar and well established product. To add an additional level of comfort to investors, every fund licensed in the Seychelles must either have a registered fund administrator that is licensed and has a physical presence in the Seychelles or have a fund administrator that is licensed in an approved jurisdiction outside of the Seychelles.

A Seychelles mutual fund can be a company, unit trust or partnership that collects and pools investor funds for collective investment purposes (including hedge fund purposes) with the aim of spreading investment risks. A key characteristic of a Seychelles mutual fund (as is the case with most mutual funds), is that it issues equity interests enabling investors in the mutual fund to receive or have the right to receive a portion of profits or gains derived from the investments during the life of the fund. This is the typical open end fund model as opposed to the closed end fund model, the latter not being subject to a licensing requirement in the Seychelles. A mutual fund in the Seychelles can include an umbrella fund whose equity interests are split or segregated into different funds or sub-funds or a pure hedge fund.

Favourable Tax Status As well as enjoying favourable tax status via the various fund vehicle options, funds licensed in Seychelles are fully exempt from business tax on the income of a fund except where a Company with Special License is used to access double taxation treaty benefits in which case an income tax rate of 1.5% applies. The exemption also extends to withholding tax (dividends, interest, royalties, capital gains) and stamp duty.

A further attractive benefit relates to the auditing of accounts of Seychelles funds and fund administrators. Auditing may be undertaken by approved overseas auditors including those qualified and belonging to recognised bodies in Australia, Canada, Hong Kong, Singapore, South Africa, the United Kingdom and the USA.

Types of Fund

A professional fund is defined under the Act as a mutual fund, the equity interests of which can only be acquired by professional investors and in respect of which the initial minimum investment per investor is not less than US$100,000. A professional investor is a person who, in the ordinary course of his business or employment, deals with the same kind, or substantially the same kind of property as that dealt with by the fund or who has a net worth exceeding US$1 million. An investor must sign a declaration confirming that he meets these criteria and consenting to be treated as a professional investor for the purposes of the Act. Given the high level of experience of a professional investor, the level of detail required to be included in a professional fund's offering document will be significantly less than that required in the case of a private or public fund.

A private fund or private mutual fund is defined under the (Mutual Funds and Hedge Fund Act) as a fund whose constitutional documents specify that it will not have more than 50 investors, or whose constitutional documents specify that an invitation to the public to subscribe for or purchase equity interests in the mutual fund is prohibited and that invitation is on a private basis. An invitation is made on a private basis when it is made to a specified person or specified ascertainable class of persons and is not calculated to result in shares becoming available to other persons. An invitation may also be classed as private by reason of a private client relationship or other private business connection between the person making or causing the invitation and the investor. Certain other types of fund may be designated as a private fund by regulation.

The terms "public fund" or "public mutual fund" provide a catch all for any mutual fund which does not fall into the definitions of either a private fund or a professional fund. Significant additional information over and above that required in the case of a private or professional fund will need to be included in the offering documents for a public fund. This is designed to ensure the maximum protection possible is afforded to investors who do not have significant financial experience.

Exempt Foreign Funds – The Fast Track

To increase flexibility within the licensing regime and to attract inward investment from established fund managers in other jurisdictions, a fast track regime has been established in the Seychelles. This allows foreign funds which are already licensed in certain recognised jurisdictions to be granted an exemption from the Seychelles licensing requirements provided that they are managed by a Seychelles licensed fund administrator and (i) are listed on a stock exchange in a recognised jurisdiction or (ii) the minimum investment by each investor is more than US$100,000. These Exempt Foreign Funds appeal to already established fund managers looking for a safe but efficient jurisdiction from which to operate their fund. A list of recognised jurisdiction is included in the Act.

Licensing Requirements

In considering whether to grant a fund licence the Seychelles International Business Authority will consider a number of factors including:

(a) whether the applicant and each operator, promoter and administrator of the applicant is a fit and proper person;

(b) whether the administration of the fund will be undertaken by persons who have sufficient expertise to administer the fund;

(c) whether the business of the fund and any offer of equity interests in it will be carried out in a proper manner;

(d) whether the fund is in compliance with the Act;

(e) whether the fund is fit and proper to be approved as a licensed fund;

(f) that the custodian of the fund is appropriately licensed;

(g) that the fund's fund administrator is separate from and independent of the custodian; and

(h) that the investors of the fund are entitled to have their equity interests redeemed or purchased by the fund in accordance with the constitutional documents of the fund.

The Seychelles International Business Authority is afforded a great deal of discretion in approving an applicant for a fund license and it is this discretion, only exercised within the remit of the Act, that allows the Seychelles to offer a streamlined, efficient and well regulated fund regime that ensures the right balance between investor protection, cost and ease of doing business. This, coupled with a favourable time zone for investors in Africa, Europe and Asia makes a compelling case for using a Seychelles 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.