Bahamas Fund Formation

The Bahamas is an attractive destination for advisers and managers wishing to establish investment funds. The number of licensed and regulated investment funds is steadily increasing, with a large percentage of the funds being alternative investment funds (AIFs) rather than retail funds.

The new Investment Funds Act, which took effect on 1 September 2019, provides a flexible and accommodating regulatory framework which supports a wide variety of strategies including pure hedge funds, money market, private equity, real estate and distressed debt. Furthermore, the Standard Fund structure is the most common structure for a retail fund. Most of the investment funds registered in The Bahamas are private funds for a small number of investors, typically family offices and other related investors. Meanwhile, a number of institutional funds have a long-term commitment to The Bahamas and the new Act is attracting more of such investors with a focus on investment management and custody.

An investment fund can be licensed by the Commission or, except for a standard fund, by an unrestricted fund administrator in The Bahamas.

Fund (Vehicle) Structures

International Business Company (IBC) is the most commonly used legal entity and is typically structured as a limited liability company. The IBC are flexible, easy to incorporate and requires no local directors. Unlike a unit trust, it has a legal personality and is able to sue and be sued in its own name.

Segregated Accounts Company (SAC) can be an IBC and allows for the statutory segregation of assets and liabilities to individual accounts. As an example, each account may invest in different asset classes, or different strategies. It would be possible for one account to take a long/short strategy while another account may invest in real estate. The returns of each account are confined to the investors of each account and there is no cross-contamination between accounts in terms of liabilities.

Exempted Limited Partnership (ELP) is made up of one or more general partners and one or more limited partners. The general partner is responsible for the investment and management of the assets of the ELP, and in the event that assets are inadequate, is liable for all debts and obligations of the ELP. The limited partners are not liable for debts and obligations, except as provided in the partnership agreement. At least one general partner is required to be a company incorporated under the IBC Act or a person resident in The Bahamas.

An ELP is a common structure for US master-feeder funds with a US entity (usually a Delaware corporation) acting as general partner. Limited partnership interests would be subscribed for by feeder fund investors who invest all of its assets in limited partnership interests of the ELP.

Unit Trust (UT) is a common law trust managed by a unit trustee. A UT does not possess a legal personality. The trustee represents the fund with units distributed to investors as evidence of their participation in the fund.

Investment Condominium (ICON) was modelled after the Brazilian condominium that has formed part of the Brazilian Civil Code for over 90 years and was developed specifically for the Brazilian market. The ICON is a contractual arrangement between investors pooling assets for the purposes of operating as an investment fund, with the fund’s administrator acting for and on behalf of the fund in all matters. The ICON has no corporate personality, but is deemed to be able to hold assets in its own name when represented by its general administrator.

Categories of Licensing of Bahamas Funds

A professional fund may only be offered to investors meeting requirements under the Investment Funds Act, 2019 (IFA) and may be licensed by an unrestricted fund administrator (which considerably speeds up the setting up process) or by the Securities Commission of The Bahamas (the “Commission”). Eligible investors are:

• any bank or trust company licensed under the Banks and Trust Companies Regulation Act (Chapter 316) or licensed under the laws of another jurisdiction, whether acting in its individual or fiduciary capacity;
• any firm registered under Part VI of the Securities Industry Act, 2011 (No 10 of 2011) that maintains a minimum capital of BSD120,000 of regulatory capital or is registered or licensed to carry on equivalent securities activities in a prescribed jurisdiction;
• any insurance company licensed under the Insurance Act (Chapter 347) or licensed under the laws of another jurisdiction;
• any pension fund where a registered investment fund manager has been appointed to manage the fund’s assets;
• any professional investor, which includes (i) an institutional investor or a financial institution, or (ii) a natural person with a net worth of BSD200,000 or more who has the expertise, experience and knowledge with respect to making their own investment decisions;
• any natural person who had an individual income in excess of BSD200,000 in each of the two most recent years or joint income with that person’s spouse in excess of BSD300,00in each of those years and has a reasonable expectation of reaching the same income level in the current year;
• a trust with total assets in excess of USD5 million where a licensed trustee or investment manager is responsible for investment decisions; and
• any entity with net assets in excess of USD5 million that has appointed a licensed investment manager to make investment decisions on its behalf.

A SMART Fund is designed to provide innovative and flexible structuring of investment funds. The framework allows for any institution to propose a template for adoption as a SMART Fund rule, with specific features distinguishing it from other templates. There must be a valid business case presented to the Commission for the adoption of a new template. Presently there are seven templates. Each template will have been proposed by industry to address market needs. For instance, SMF006 was implemented as a result of the 2008 financial crisis to enable segregation of toxic assets. SMF007 was introduced to mirror the investment requirements of the Brazilian Multi-Mercado Fund and was considered to be more institutional-focused than other templates because of the larger number of investors and the minimum initial investment.

SMART Funds may be licensed by an unrestricted fund administrator or the Commission. Key features of the SMART Fund regulatory scheme common to each model include the prospect of using term sheets, rather than full-scale offering documents, and the opportunity in certain instances for shareholders to waive an annual audit requirement. The different models of the SMART Fund are set out below.

SMF001 (Discretionary Managed Client Fund) – This template provides an investment vehicle for client funds managed under a discretionary management service. It includes the use of term sheets and waiving of the audit requirement, where investors execute a discretionary mandate of a recognised financial institution and the fund is established for administrative rather than asset gathering purposes. In a Discretionary Investment Management Fund, the investor benefits from a lower expense ratio due to lower costs for structuring and the elimination of annual management and audit fees relating purely to the fund structure.

SMF002 (Incubator Fund) – This template provides for an incubator structure to generate performance history prior to upgrading to a third party fund. Investment managers can utilise an Incubator Fund to receive seed capital from a limited number of institutional investors on the basis of a term sheet and an investor approved waiver of a statutory audit.

SMF003 (Transitional Exempt Fund) – This template permits funds previously exempt due to the existence of no more than 15 investors with the power to remove the promoter so that the fund is brought within the full regulatory scope of the Commission.

SMF004 (Private Client Fund) – This template offers a licensed holding vehicle for a small group of persons (no more than 5), such as under a Family Office structure. It is envisaged that the Private Client Fund will not have the same risk profile as a third party fund. There is no statutory audit requirement.

SMF005 (Private Client Fund) – This template allows for a Fund with a maximum of five investors each holding equity interests and operating as a private investment structure for either individuals or families. Each investor in this fund must be a person to whom a Professional Fund could be offered.

SMF006 (Private Client Fund) – This template is a special purpose vehicle designed to hold the illiquid or “hard-to-value” assets of another Bahamian investment fund and offers a significantly lighter administrative and cost-effective environment for the assets whilst respecting the ownership rights of the investors and creditors (if any) of the original fund.

SMF007 (Super Qualified Investor Fund) – This template is designed for ‘super qualified investors’, to better accommodate professional asset managers, institutional investors and ultra-high net worth individuals. The fund can accommodate up to 50 investors, approached on a private placement basis and who must make an initial minimum investment of US$500,000.

An ICON is a contractual relationship between one or more participants who have pooled assets for the purposes of operating as an investment fund, and an investment condominium must be licensed as an investment fund under the Investment Funds Act. It may be formed to operate as an open-end fund (in which participants can call for a redemption of their interests) or a closed-end fund (in which they may not). The ICON does not possess legal personality but, when represented by its administrator, is able to hold assets in its own name, enter into agreements and sue or be sued in its own name.