Cayman Islands Fund Formation

Structuring Of Funds

There are three vehicles available in the Cayman Islands through which to operate a mutual fund or private fund:

CORPORATE VEHICLES

Corporate mutual funds are commonly established as exempted companies, under the Companies Law (as Revised). Mutual funds may also be established as limited liability companies (“LLCs”) or segregated portfolio companies. Under the segregated portfolio structure separate and distinct “pots” or “pools” of assets (referred to as “Portfolios”) are created. The assets and liabilities of one Portfolio are legally segregated and protected from those of every other Portfolio and are also separate and distinct from a segregated portfolio company’s non-portfolio assets.

Typical structures include:

(i) Single/Two Class Structures – either:

(a) a ‘single class structure’ of redeemable shares issued to all investors with all shareholders having the right to vote; or

(b) a ‘two or more share class structure’ with a small class of voting shares usually held by the manager or promoter and one or more classes of non-voting redeemable shares offered to investors at an initial subscription price and thereafter at net asset value per share.

(ii) Side by Side Structures – where an investment manager typically provides services to both an onshore structure and an offshore structure (e.g. a United States domestic limited partnership, which receives investments from United States investors and a Cayman Islands exempted company, which receives investments from non-United States investors).

(iii) Umbrella Funds – multiple classes of shares with separate investment funds established for each class of shares. The articles of association of these funds typically ‘ring fence’ assets and liabilities internally between classes of shares (i.e. the assets of one class of shares cannot be claimed by the holders of another class of shares in the event of a diminution in value of one class of shares). These arrangements however do not protect the fund as a whole from claims from outside creditors unless the fund uses the segregated portfolio structure.

(iv) Master/Feeder Funds – usually established with a Cayman Islands exempted company as the master fund, into which the investment portfolios of separate feeder funds, established as domestic limited partnerships in the United States and as offshore corporate funds in the Cayman Islands, invest.

PARTNERSHIP STRUCTURES

Private funds are generally established as exempted limited partnerships which have certain advantages including the following:

(i) investment performance is allocated to each partner’s capital account in proportion to his investment from the date of investment to the date of redemption or withdrawal; and

(ii) incentive fees are calculated on each partner’s capital account and are charged to that account, generally at fiscal year end and at each withdrawal date.

UNIT TRUSTS

A unit trust may be registered as a mutual fund if each trust unit is redeemable at the option of the investor. Provided that none of the investors of the unit trust are or are likely to become resident or domiciled in the Cayman Islands, they may also be registered as exempted trusts under the Trusts Law (as Revised) which will entitle them to apply for a 50 year tax undertaking.

Types of Mutual Funds

There are six types of mutual funds and two types of private funds that are subject to regulation and supervision under the Mutual Funds Law or the Private Funds Law, 2020 (the “Private Funds Law”) by the Cayman Islands Monetary Authority (“CIMA”): –

Registered Mutual Funds – Streamlined registration procedures are available for mutual funds where:

(i) the initial minimum equity interest purchasable by an investor is US$100,000; or

(ii) whose equity interests are listed on an approved stock exchange such as the CSX.

Registration requires filing the appropriate forms with CIMA together with a copy of the current offering document, consent letters from the auditors and the administrators and payment of the registration fee.

Where the fund is not a registered mutual fund and is not excluded from regulation, it must either apply for a mutual fund licence or apply to be regulated as an administered mutual fund.

Licensed Mutual Funds – A mutual funds licence is suitable for retail funds with a large and reputable promoter who does not intend to appoint a Cayman Islands administrator. In order to obtain a mutual fund licence, the fund is required to:

(i) file and keep on file with CIMA a current copy of the fund’s offering document;

(ii) maintain a registered office in the Cayman Islands (or if a trust, a licensed trust company acting as trustee);

(iii) appoint a reputable administrator which need not be a Cayman Islands administrator; and

(iv) submit evidence to CIMA showing the soundness of the promoter, the expertise of the administrator and that the directors are fit and proper persons.

CIMA provides maintains principal supervisory oversight of the fund.

Administered Mutual Funds – To be regulated as an administered mutual fund, the fund must appoint a Cayman Islands licensed Mutual Fund Administrator to provide its principal office in the Cayman Islands.

Although a majority of the supervisory functions which are performed by CIMA for licensed mutual funds such as verifying the reputation and suitability of the promoter and the administrator and ensuring compliance with the Mutual Funds Law is carried out by the Cayman Islands administrator, CIMA maintains a general supervisory and enforcement role with respect to administered mutual funds.

Non-Cayman Islands Funds – Funds that are established or incorporated outside of the Cayman Islands but whose management or administration is provided in the Cayman Islands may be required to be registered with CIMA in the Cayman Islands. If a corporate mutual fund is subject to regulation under the Mutual Funds Law, it must first register as a foreign company under the Companies Law (as Revised) before it can be licensed or registered as a mutual fund.

Master Funds – Master funds of regulated feeder funds which issue equitable interests which are redeemable at the option of the feeder fund must register with CIMA in accordance with the Mutual Funds Law.

Limited Investor Funds – Open-ended funds with 15 or fewer investors who have the ability to appoint or remove the operator of the fund referred to as “limited investor funds” are required to register with CIMA in accordance with the Mutual Funds Law.

Private Funds – Closed-ended private funds which fall under the definition of “private fund” pursuant to the Private Funds Law are registered to register with CIMA. The Private Funds Law also provides for ‘alternative investment vehicles’ and ‘restricted scope private funds’.

Private Funds (Restricted Scope) – A restricted scope private fund is a private fund that is an exempted limited partnership that is managed or advised by a person who is licensed or registered by CIMA or authorised or registered by a recognised overseas regulatory authority and in which all of the investors are non-retail in nature, being either high net worth persons or sophisticated persons. Registration and ongoing requirements for this new category of funds are yet to be released.

Requirements For All Regulated Funds

All Regulated Mutual Funds are required to:

1. Submit to CIMA a current copy of the fund offering document (other than a section 4(4) fund or a master fund). The offering document must describe the equity interests offered to investors in all material respects and must contain such information as is necessary to enable a prospective investor to make an informed decision as to whether or not to purchase the equity interests.

2. Submit to an annual audit and file accounts within six months of the end of the fund’s financial year. This will involve appointing an auditor in the Cayman Islands. All of the major accounting firms are represented on the Island and we would be pleased to provide you with recommendations.

3. Pay a prescribed annual registration fee.

Registration Of Limited Investor Funds

The Mutual Funds (Amendment) Law, 2020 (the “Amendment Law”) amended the Mutual Funds Law. The primary effect of the Amendment Law was to bring within the scope of CIMA’s regulation, funds with 15 or fewer investors who have the ability to appoint or remove the operator of the fund; these funds were previously referred to as ”exempted funds” and are now referred to as “limited investor funds”.

Limited investor funds are required to register with CIMA in the prescribed form, pay an annual registration fee, submit annual audited accounts audited by a Cayman Islands based auditor (and prepared in the same manner as those required under the Mutual Funds Law) and annual returns, inform CIMA of material changes to the information submitted as part of its registration application and retain appropriate accessible records. In addition, a limited investor fund that is structured as a company is required to have at least two natural persons acting as directors. The directors are required to register with CIMA under the Directors Registration and Licensing Law (Revised).

A certified copy of an extract of the limited investor fund’s constitutional documents needs to be filed with CIMA on registration showing that a majority in number of its investors are capable of appointing or removing the operator of the limited investor fund.

Registration Under The Private Funds Law

The Private Funds Law requires closed-ended private funds to register with CIMA. The Private Funds Law imposes extended administrative and operational requirements upon previously exempted closed-ended funds.

In addition to private funds, the Private Funds Law also provides for ‘alternative investment vehicles’ and ‘restricted scope private funds’.

An alternative investment vehicle is a company, unit trust, partnership or other similar vehicle that is formed in accordance with the constitutional documents of a private fund for the purposes of making, holding and disposing of one or more investments wholly or mainly related to the business of that private fund; and only has as its members, partners or trust beneficiaries, persons that are members, partners or trust beneficiaries of the private fund. Where International Financial Reporting Standards or the generally accepted accounting principles of the United States of America, Japan, Switzerland or a non-high risk jurisdiction permit consolidated or combined financial account reporting and a private fund chooses to report consolidated or combined financial statements with an alternative investment vehicle, the requirements under the Private Funds Law relating to audit, valuation, safe keeping, cash monitoring and identification of securities do not apply to such alternative investment vehicle.

A restricted scope private fund is a private fund that is an exempted limited partnership that is managed or advised by a person who is licensed or registered by CIMA or authorised or registered by a recognised overseas regulatory authority and in which all of the investors are non-retail in nature, being either high net worth persons or sophisticated persons. Details regarding the implications for registration and ongoing requirements for restricted scope private fund are expected in due course.

Private Funds do not include entities which constitute ‘non-fund arrangements’. Non-fund arrangements are set out in the annex attached hereto.

The Private Funds Law sets out a registration process for private funds which involves the filing of prescribed details with CIMA and payment of an annual fee. The Private Funds Law does not require the filing of a full offering memorandum (or similar) in relation to a private fund or impose any requirements on the contents of a private fund’s offering materials (if any). Where a private fund (a) makes any changes, or becomes aware of any changes, that materially affects any information submitted to CIMA under the provisions of the Private Funds Law; or (b) changes its registered office or the location of its principal office, the private fund shall within twenty-one days after making the change or becoming aware of the change, as the case may be, file with CIMA the details of the changes.

Operating Conditions for Private Funds

The Private Funds Law requires a private fund to ensure it has certain ongoing operating provisions in place relating to annual audits, annual returns, retention of records, valuation of assets, safekeeping of fund assets, cash monitoring and identification of securities which can be summarised as follows:

Annual audit of private fund

A private fund shall have its accounts audited annually by an auditor approved by CIMA. Accounts will need to be prepared in accordance with International Financial Reporting Standards or the generally accepted accounting principles of the United States of America, Japan or Switzerland or any non-high-risk jurisdiction.

Annual return

A private fund will, in respect of each financial year of the private fund, be required to submit an annual return in the prescribed form.