During the course of the past 20 to 30 years the Cayman Islands, an independent former British Protectorate in the norther Caribbean Sea, has risen to become one of the World’s Premier Fund set up destinations.
Whether you’re looking to set up a Hedge Fund, a non-regulated Closed End Fund or a High End Mutual Fund Caymans provides options.
Fund setups are governed in the Caymans Islands by the Caymans Mutual Funds Law
The said legislation defines a mutual fund as being any company, trust or partnership either incorporated or established in the Cayman Islands, or if outside the Cayman Islands, managed from inside the Cayman Islands, which issues equity interest redeemable or re-purchaseable at the option of the investor, the purpose of which is the pooling of investors’ funds with the aim of spreading investment risk and enabling investors to receive profits or gains from investments.
Regulation of Funds & Fund Administrators
The Caymans Mutual Funds law makes the Cayman Islands Monetary Authority (“CIMA”) responsibility for regulating certain categories of funds operating in and from the Cayman Islands (see Categories of Regulated Mutual Funds below) as well as Fund administrators.
Interestingly not all mutual funds fall within the Regulatory ambit. Certain categories of mutual fund ie Funds that meet the criteria set out in section 4(4) of the MFL are exempt from Licensing/Regulation. All other mutual funds are regulated and must be licensed.
The licensing requirement is coved in section 4 of the act which states as follows:
“4. (1) Unless a mutual fund is complying with subsection (3) or is exempted under subsection (4), it shall not carry on or attempt to carry on business in or from the Islands unless —
(a) it is the holder of a Mutual Fund Licence, and it has —
(i) a registered office in the Islands; or
(ii) if a unit trust, a trust company licensed under the Banks and Trust Companies Law as its trustee; or
(b) a licensed mutual fund administrator is providing its principal office in the Islands, and, unless an exemption from this requirement has been granted by the Authority, there is filed with the Authority, in respect of the mutual fund, a current offering document that complies with subsection (6).”
Categories of Regulated Mutual Funds
The following categories of funds must apply for a License in the Cayman Islands:
A Licensed Mutual Fund
The MFL (Section 4(1)) specifies that a mutual fund operating in and from the Cayman Islands must have a licence unless: a licensed mutual fund administrator is providing its principal office; it meets the criteria set out in Section 4(3), which allows for funds to be registered, or it is exempt from regulation under Section 4(4).
The provisions relating to licensed mutual funds benefit large, well known and reputable institutions, which do not propose to appoint Cayman Islands service providers.
Administered Mutual Fund
To be approved as an administered mutual fund, the fund must have a CIMA-licensed mutual fund administrator providing its principal office. The regulatory responsibility for the administered fund, which has more than 15 investors and which is not a licensed or registered mutual fund, is placed largely in the hands of a licensed Mutual Fund Administrator.
Registered Mutual Fund
A Registered Fund must have either a minimum aggregate equity interest of CI$80,000 (US$100,000) purchasable by a prospective investor or the equity interests must be listed on a stock exchange approved by CIMA.
A Master Fund must have either a minimum aggregate equity interest of CI$80,000 (US$100,000) purchasable by a prospective investor in the master fund or the equity interests of the master fund must be listed on a stock exchange approved by CIMA.
Common Fund Vehicles
The Cayman Islands has company, trust, partnership and related laws that allow a high degree of flexibility for establishing mutual funds. The four vehicles commonly used for operating mutual funds are the exempted company, the segregated portfolio company, the unit trust and the exempted limited partnership.
Exempted Company - The exempted company may redeem or purchase its own shares and may therefore operate as an open-ended corporate fund. Closed-ended corporate funds can also be established using the exempted company and it is a relatively straightforward procedure to convert from one to the other.
Segregated Portfolio Company - An exempted company can also be established as a “Segregated Portfolio Company” (“SPC”) with protected cells or portfolios. The SPC makes it possible to provide a means for different groups to protect their assets when carrying on business through a single legal entity.
Unit Trust - The unit trust is usually established under a trust deed with the investors’ interest held as trust units.
Exempted Limited Partnership - The exempted and limited partnership provides a second unincorporated vehicle and it can be formed as easily as the exempted company or the unit trust.
Closed End Fund Exemption
Section 4(4) of the Caymans Mutual Funds Law specifically provides that:
“A mutual fund may carry on or attempt to carry on business in or from the Islands without complying with subsection (1) if —
- (a) the equity interests are held by not more than fifteen investors, a majority of whom are capable of appointing or removing the operator of the fund; or
- (b) it is a fund, not incorporated or established in the Islands, which makes an invitation to the public in the Islands to subscribe for its equity interests by or through a person who is the holder of a licence under the Securities Investment Business Law (2019 Revision), for a regulated activity specified by the Authority for the purposes of this subsection and —
- (i) those interests are listed on a stock exchange (including an over the-counter-market) specified by the Authority by notice in the Gazette; or
- (ii) the fund is regulated in a category, and by an overseas regulatory authority, approved by the Authority for the purposes of this subsection.
- The ongoing supervision of funds and fund administrators falls under the remit of CIMA’s Investments and Securities Division.
A Closed End Fund is an investment fund wherein the investor commits to invest his or her money for a set period of time; The investor cannot redeem his /her shares (ie the investor can’t cash out) until the minimum/fixed investment period has expired.
In the case of a Closed End Fund typically a Limited Company is set up (ie a Company Limited by shares); the investor receives shares entitling him/her to take home a percentage of the profits (ie in proportion to the percentage of the company that the investor owns) based on net asset value at the conclusion of the fixed investment period.
A closed-ended fund is most appropriate for investments which typically require a longer period to mature, eg private equity, venture capital, real estate or infrastructure investments.
Exempted funds are mutual funds that are not required to be regulated by CIMA ie where there are no more than 15 investors, the majority of whom are capable of appointing and removing the directors of the fund. (Provided the fund meets the criteria) Closed-ended funds incorporated in the Cayman Islands are not regulated and are not required to obtain a Fund License in the Cayman Islands.
Closed End Fund Companies are often established via a tailored Articles of Association/Constitution which allows the Company to issue 2 different classes of shares ie Class A shares and Class B shares. Class A shares (often called Management Shares) come with both voting rights and the rights to share in profits. Class B shares (often called Equity
Shares or Investor Shares) ony entitle the shareholder to a share in the profits ie they do NOT come with voting rights.
This model of Closed End Fund is most commonly Incorporated in Seychelles or Belize or Nevis because such funds, if incorporated in these jurisdictions, do not fall within the regulatory ambit of the local Mutual Funds Law.
Why Set Up Your Fund In The Cayman Islands?
The Cayman Islands is presently the dominant “Offshore” Fund Jurisdiction. It, reportedly, is home to 75%+ of all new offshore fund formations including nearly half of the World Mutual Funds Industry’s estimated US$1.1 trillion of assets under management.
Why do so many funds choose to call Cayman Islands home? Because the Caymans offers:
- Political and economic stability
- No exchange control restrictions
- Reputable quality professional service providers
- A huge amount of expertise in the investment fund space
- World class banks
- Flexible, modern, quality legislation
- Commerciality – Cayman regulators are very approachable, flexible, innovative and efficient
- Affordability – Cayman’s investment fund fee structure is globally competitive, which benefits the manager and the investor with respect to the launch and ongoing operation/ maintenance of the fund.
- Reputability – The Caymans is on the OECD “White List” and has signed tax information exchange agreements (TIEA) with 19 countries
- Tax effective outcomes for both Funds and Fund Managers
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