Alternative Investment Funds

Transcription

1 hedgeweek guide to setting up Alternative Investment Funds Jul 2010 Focus Report: BVI Cayman Islands Guernsey Ireland Jersey Luxembourg Malta

2 C o n t e n t s In this issue 03 Introduction By Sunil Gopalan, Global Fund Media 05 British Virgin Islands: Jurisdiction information 06 British Virgin Islands: Overview By Ross Munro, Harneys 09 Cayman Islands: Jurisdiction information 10 Cayman Islands: Overview By James Wauchope, Partner, Mourant Ozannes 14 Guernsey: Jurisdiction information 15 Guernsey: Overview By Darren Bacon, Partner, Mourant Ozannes 19 Ireland: Jurisdiction information 21 Ireland: Overview By Dillon Eustace 27 Jersey: Jurisdiction information 28 Jersey: Overview By Ed Devenport, Partner, Mourant Ozannes 31 Luxembourg: Jurisdiction information 33 Luxembourg: Overview By Rémi Chevalier and Olivier Sciales, founding partners at Chevalier & Sciales 39 Malta: Jurisdiction information 42 Malta: Overview Based on information provided by the Malta Financial Services Authority Publisher Special Reports Editor: Simon Gray, simon.gray@globalfundmedia.com Sales Managers: Simon Broch, simon.broch@globalfundmedia.com; Malcolm Dunn, malcolm.dunn@globalfundmedia.com Publisher & Editorial Director: Sunil Gopalan, sunil.gopalan@globalfundmedia.com Marketing Director: Oliver Bradley, oliver.bradley@globalfundmedia.com Graphic Design: Siobhan Brownlow, siobhan.brownlow@globalfundmedia.com Published by: Global Fund Media Limited, 2nd Floor, Berkeley Square House, Berkeley Square, London, W1J 6BD Tel: +44 (0) Website: Copyright 2010 Global Fund Media Limited. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher. FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul

3 I n t r o d u c t i o n Introduction The Hedgeweek Guide to Setting up Alternative Investment Funds 2010 is the third edition of this unique online publication being made available to the 60,000-strong audience of investment managers, institutional investors and service providers that read Hedgeweek and its family of investment management newsletters daily. The focus of the Guide is to help managers, promoters and their advisers decide where best to list their alternative investment funds. This edition of the Guide draws together in one volume all the major current regulations covering the listing of alternative investment funds in a comprehensive treatment of the subject covering the following major jurisdictions BVI, Cayman Islands, Guernsey, Ireland, Jersey, Luxembourg and Malta. The Guide goes from strength to strength with the support of leading law firms and service providers and in this regard we would like to thank the Malta Financial Services Authority, Chevalier & Sciales, Mourant Ozannes, Dillon Eustace, and Harneys for their invaluable time and assistance in preparing a comprehensive overview of each jurisdiction in this edition, in conjunction with Custom House and the Channel Islands Stock Exchange, who also provided their support. We look forward to your feedback and participation in forthcoming editions of this Guide. Sunil Gopalan Publisher Global Fund Media Ltd Hedgeweek.com Globalfundwire.com Privateequitywire.co.uk Propertyfundsworld.com Etfexpress.com Assetadviser.co.uk FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul

4 06: 00 07: 00 12: 00 13: 00 19: 00 CHICAGO CURACAO DUBLIN GUERNSEY LUXEMBOURG AMSTERDAM MALTA SINGAPORE Custom House Offers 24/5 Service Custom House Global Fund Services Limited now offers its clients a full round the world and round the clock hedge fund administration service through its network of offices which, following the merger om with House Equity Trust s fund Offers services business, 24includes 5 Service Amsterdam, Chicago, Dublin, Guernsey, Luxembourg, Malta, and Singapore. Custom House Custom House s Dublin office, which is authorised by the Irish Financial Regulator under Section 10 of the Investment Intermediaries Act 1995, achieved an exception-free SAS70 Type II and was the first hedge fund administrator to be awarded a Moody s Management Quality Rating. is proud to support For more information on Custom House, please review our website: Hedge Funds Care UK or contact Dermot Butler (dermot.butler@customhousegroup.com) a member of the Group of Companies

5 B r i t i s h V i r g i n I s l a n d s Tortola Custodians:...8 licensed Corporate service providers: licensed Accountants/auditors:...7 international firms Trustees:...93 Class I Trust license holders Insolvency Practitioners: licensed Local stock exchange: No Local fund industry body: The Association of BVI Mutual Fund Practitioners, PO Box 71, Road Town, Tortola, VG 1110, BVI Promotion agency for funds/financial sector: BVI International Finance Centre, Haycraft Building, 1 Pasea Estate, Road Town, Tortola VG1120, BVI. info@bviifc.gov.vg; Tel: ; Fax: Double taxation treaties None Tax information exchange agreements Aruba; Australia; China; Denmark; Faroe Islands; Finland; France; Greenland; Iceland; Ireland; Netherlands; Netherlands Antilles; New Zealand; Norway; Sweden; UK; USA British Virgin Islands Fund legislation Securities and Investment Business Act, 2010 (SIBA) Number of funds As at 31 December 2009 (the latest available): Number of funds by category As at 31 December 2009: Private: Professional: Public: Only open ended funds are required to be registered or recognised under SIBA. No statistics are available for other types of funds. There is currently no distinction in the licensing process between directly invested hedge funds and funds of hedge funds and so no official figures exist for the break down. Domiciled and administered fund assets total: No figures currently available. Domiciled and administered fund assets by category: No figures currently available. Regulator Financial Services Commission, Investment Business Division. Contact: Broderick Penn, Director of Investment Business Division; Tel: or ; Fax: Address: BVI Financial Services Commission, Pasea Estate, PO Box 418, Road Town, Tortola, VG 1110, BVI Service providers Law firms:...7 multi-jurisdictional firms;...approximately 10 other BVI commercial firms Administrators:...82 licensed Alternative fund, manager and service provider information Types of alternative fund vehicle Open-ended or closed-ended investment company (see below), limited partnership, unit trust, common contractual fund, umbrella fund Types of Corporate Vehicle: l Company Limited by Shares, including: Restricted Purposes Company Segregated Portfolio Company (for recognised or registered funds and licensed insurance companies only) l Company Limited by Guarantee authorised to issue shares; l Company Limited by Guarantee not authorised to issue shares; l Unlimited Company authorised to issue shares; and l Unlimited Company not authorised to issue shares Types of regulatory fund category Public; Private; Professional Audit requirement l Public Funds: Financial statements must be audited by an auditor approved by the Financial Services Commission (no local sign off). l Private and Professional Funds: Financial statements must be audited by an auditor meeting certain prescribed criteria unless the fund is exempted from the audit requirement by the Financial Services Commission (no local sign off). Not applicable to financial years ending prior to 17 May Financial statement requirements l Public funds: Financial statements for each financial year must be prepared which comply with IFRS, US, UK or Canadian GAAP or such other accounting standards as may be approved by the Financial Services Commission on a case by case basis. FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul

6 B r i t i s h V i r g i n I s l a n d s l Private and professional funds: Financial statements for each financial year must be prepared in accordance with one of the prescribed financial standards (UK, US or Canadian GAAP or IFRS) or internationally recognized and generally accepted accounting standards equivalent to such standards. Not applicable to financial years ending prior to 17 May l All funds regulated under SIBA must also submit an annual return to the Financial Services Commission containing summary prudential and governance information. Overall cost of fund establishment Private and Professional:...From US$12,000 Public:...From US$25,000 Regulatory approval time From submission of complete application: Private and Professional Funds: business days Public Fund: weeks Overall establishment time Private and Professional:...At least 2 weeks Public Fund:... At least weeks Cost of regulatory fees (by type of fund): Private and Professional:...US$350 pa (increasing to...us$1,000 from 1 January 2011). Public:...US$500 pa (increasing to...us$1,500 from 1 January 2011) The British Virgin Islands By Ross Munro, Harneys The British Virgin Islands is a leading jurisdiction for the formation of alternative investment funds, having approximately 2,800 funds registered or recognised under the Securities and Investment Business Act 2010 (SIBA). SIBA replaced the Mutual Funds Act, 1996 (the MFA) in May 2010 and has been welcomed with widespread praise by the industry. SIBA has retained the familiar and well liked framework of public, professional and private funds first established by the MFA but has updated the regime to codify long standing policy and practices as well as bringing the BVI fully into line with best practice and international standards. Funds recognised or registered under SIBA are regulated by the Financial Services Commission (the Commission), the financial regulator in the British Virgin Islands. SIBA requires all investment funds falling within its definition of fund to be recognised or registered with the Commission. SIBA restricts the definition of mutual fund to open-ended funds that entitle investors to demand redemption of their fund interests immediately or within a period of notice. Accordingly only such funds are regulated under SIBA. Closed ended funds are not subject to specific regulation although BVI established managers and other BVI established functionaries of closed ended funds will in many circumstances require a licence under SIBA. SIBA introduces a wide ranging licensing regime which requires any person carrying on investment business in or from within the BVI to hold a licence. The activities constituting investment business include acting as an investment manager, administrator, investment advisor or custodian with respect to a wide variety of financial instruments. It includes most functionaries of open and closed ended funds but the precise outcome depends on the services provided and the structure of the fund. It is important to note, however, that non-bvi functionaries of a BVI fund carrying on business from outside the BVI will not generally need to hold a license under SIBA. Fund vehicles Sponsors and fund managers considering setting up investment funds in the British Virgin Islands may choose from the following range of possible vehicles: l BVI Business Company FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul

7 B r i t i s h V i r g i n I s l a n d s l Limited Partnership l Unit Trust The vast majority of British Virgin Islands investment funds are established as companies limited by shares under the BVI Business Companies Act, 2004 or as limited partnerships formed under the Partnership Act, Categories of fund The three categories of regulated fund are as follows: l Private fund. Restricted to either (a) having no more than 50 investors or (b) only making an invitation to subscribe for or purchase fund interests on a private basis. l Professional fund. May only issue fund interests to professional investors and the initial investment for all investors, other than exempt investors (as defined), may not be less than US$100,000 or equivalent in another currency. l Public fund. Greater regulation imposed as no restrictions on investors or minimum investment. Private funds and public funds must be recognised or registered under SIBA before they commence business whereas professional funds may commence business for a period of up to 21 days without being recognised provided that they otherwise comply with the requirements of SIBA as if they were recognised and that an application is submitted to the Commission within 14 days. A professional investor is a person either (a) whose ordinary business involves the acquisition or disposal of property of the same kind as the property or a substantial part of the property of the fund or (b) who has signed a declaration that he, whether individually or jointly with his spouse, has net worth in excess of US$1,000,000 and that he consents to be being treated as a professional investor. Functionaries / service providers All functionaries of funds regulated under SIBA must satisfy the Commission s fit and proper criteria. Functionaries of a public fund require the prior approval of the Commission. Every public fund must have a manager, administrator and custodian and each must be independent or functionally independent of the fund and each other. Private and professional funds must generally have a manager, administrator and custodian although an exemption from the requirement to appoint a manager and/or administrator is available upon application to the Commission. The Commission confirmed that functionaries of funds established and located in the BVI or any of the following countries may be recognised and accepted by the Commission for the purposes of acting as a functionary of a BVI fund (the notice extends the list of recognised countries which applied under the MFA the new countries are highlighted): Argentina, Australia, Bahamas, Bermuda, Belgium, Brazil, Canada, Cayman Islands, Chile, China, Denmark, Finland, France, Germany, Gibraltar, Greece, Guernsey, Hong Kong, Ireland, Isle of Man, Italy, Japan, Jersey, Luxembourg, Malta, Mexico, Netherlands, Netherlands Antilles, New Zealand, Norway, Panama, Portugal, Singapore, Spain, South Africa, Sweden, Switzerland, United Kingdom and United States of America The Commission has also stated that it may recognise and accept a functionary from outside the BVI and the above countries if it is satisfied that the country has a system for the effective regulation of investment business, including funds. No restrictions on strategy, leverage or valuation There are no restrictions on the strategy a fund may pursue, provided it is not otherwise in breach of the laws of the British Virgin Islands. There are no limits on leverage taken by the funds. There are currently no rules imposed on funds as to how they value their assets. However, a Public Funds Code is currently in consultation and is expected to come into force later in As the name suggests, the Code only applies to registered public funds and imposes additional disclosure and governance requirements on public funds (including provisions relating to valuation policy and disclosure). Financial statements and audit Public funds: Financial statements for each financial year must be prepared which comply with IFRS, US, UK or Canadian GAAP or such other accounting standards as may be approved by the Financial Services Commission on a case by case basis. The financial statements must be audited by an auditor approved by the Financial Services Commission. There is no local sign off. Private and professional funds: Financial statements for each financial year must be prepared in accordance with one of the prescribed financial standards (UK, US or Canadian GAAP or IFRS) or internationally recognized and generally accepted accounting standards equivalent to such standards. The Financial statements must be audited by an auditor meeting certain prescribed criteria unless the fund is exempted from the audit requirement by the Financial Services Commission (no local sign off). The above provisions are not applicable to financial years ending prior to 17 May Annual return All funds regulated under SIBA must submit a return to the Commission no later than 30 June in each year in respect of the calendar year ending on 31 December of FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul

8 B r i t i s h V i r g i n I s l a n d s the previous year. The return contains basic prudential and governance information and summary financial information. The return does not require any information on the identity of investors or the specific investments within the fund s portfolio. Such information is confidential to the Commission and may only be publicly disclosed on an aggregated basis. Fund documentation Public Funds: Public funds may not make an invitation to the public to subscribe for or purchase fund interests unless the offer is contained in a prospectus which has been approved by the fund s governing body and the prospectus has been registered (i.e. approved) by the Commission. The prospectus is required to provide full and accurate disclosure of all information as investors would reasonably require and expect to find for the purpose of making an informed investment decision. Additional minimum disclosure requirements for a prospectus are to be contained in the Public Funds Code (currently in consultation). Private / Professional Funds: A private or professional fund must submit a copy of its proposed offering document to the Commission upon application for recognition or provide an explanation as to why no offering document is to be issued. The prescribed investment warning must be included in a prominent place within an offering document (or if no offering document is issued, provided to each investor or potential investor in a separate document) but otherwise SIBA does not prescribe what should be included within the offering document. Copies of offering documents issued to investors or potential investors must be filed with the Commission. The constitutional documents of private and professional funds must contain prescribed statements referring to their status as private and professional funds respectively. Directors / authorised representative SIBA requires that every fund established as a company have at least 2 directors. Corporate directors are permitted for private and professional funds provided that at least one director is an individual but are not permitted for public funds. There are no requirements for local directors. However, with effect from 12 October 2010, each fund must appoint an authorised representative unless the fund has a significant management presence in the BVI. The authorised representative itself must be a person located in the BVI holding a certificate from the Commission authorising it to act in such capacity. Ongoing requirements Regulated funds are subject to a reasonable number of requirements to notify the Commission either before or after the occurrence of certain events such as appointment and resignation of directors and functionaries and changes to documents. Manager s and administrator s licenses A licence may be granted by the Commission to a person proposing to carry on business in or from within the BVI as the functionary of funds if the Commission is satisfied that, inter alia: a) the applicant, its directors and senior officers and significant shareholders satisfy the Commission s fit and proper criteria; and b) the organisation, management and financial resources of the applicant are, adequate for the carrying on of the relevant investment business. A holder of a licence under SIBA must comply with the requirements of the Act and, upon it becoming applicable to SIBA licensees, relevant sections of the Regulatory Code, AML All BVI funds, managers and administrators must comply with the Anti-Money Laundering Regulations, 2008 and the Anti-money Laundering and Terrorist Financing Code of Practice, However, BVI funds commonly outsource the majority of its obligations under such legislation to its administrator who is then required to comply with the AML laws of its home jurisdiction. Tax BVI funds and functionaries are exempt from BVI income tax. Furthermore, investors in BVI funds are not liable to any BVI income tax with respect to fund interests. There are no estate, inheritance, succession or gift taxes payable in the British Virgin Islands with respect to any interests in a fund. FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul

9 C ay m a n I s l a n d s Georgetown Cayman Islands Local stock exchange: Cayman Islands Stock Exchange Local fund industry body: There is no single fund industry body in the Cayman Islands although there are various professional associations such as, for example, the Cayman Islands Funds Administrators Association. The Alternative Investment Management Association also has a Cayman chapter which represents the Cayman Islands alternative investment community. Promotion agency for funds/financial sector: Cayman Finance, formerly known as the Cayman Islands Financial Services Association. Double taxation treaties None as the Cayman Islands is a zero tax jurisdiction. Tax information exchange agreements 17: United Kingdom; Aruba; Australia; Netherlands Antilles; France; New Zealand; Netherlands; Ireland; Denmark; Faroe Islands; Finland; Greenland; Iceland; Norway; Portugal; Sweden and United States. Cayman Islands Fund legislation l The Mutual Funds Law (2009 Revision), first enacted in 1993, is the principal legislation relevant to the regulation of investment funds in the Cayman Islands. l The Securities Investment Business Law (2004 Revision) regulates fund managers based in the Cayman Islands. Number of funds by category As at 31 March 2010, there were 9,370 funds (predominantly hedge funds) registered with the Cayman Islands Monetary Authority ( CIMA ) under the Mutual Funds Law. There are also significant numbers of private equity and other closed-ended alternative investment funds registered in the Cayman Islands but which are not required to register with CIMA. Consequently, figures are not available for these types of funds. The breakdown of CIMA registered funds is as follows: Registered...8,819 Administered Licensed (retail) Domiciled and administered fund assets total: This information is currently unavailable Domiciled and administered fund assets by category: This information is unavailable Regulator Cayman Islands Monetary Authority, PO Box 10052, 80e Shedden Road, Elizabethan Square, Grand Cayman KY1-1001, Cayman Islands. Tel: Fax: Web: Service providers There are currently 31 law firms, 35 accounting firms, 148 administrators, 259 licensed banks, 81 corporate service providers and 106 licensed trust companies. Types of alternative fund vehicle An alternative investment fund may be established as either a company, limited partnership or unit trust. Any of these vehicles may be formed on an open-ended or closed-ended basis and may also constitute umbrella funds with separate sub-funds permitted under their governing documents. Available types of corporate vehicle Cayman Islands companies may be set up as either ordinary companies or, most commonly, exempted companies. Such companies may be incorporated with limited liability or without limited liability (being known as unlimited companies). Limited companies may be limited by guarantee ( guarantee company ) and a guarantee company may be incorporated with or without a share capital. The vast majority of limited companies are limited by shares. An exempted company may be registered as a limited duration company or as a segregated portfolio company. Types of regulatory fund category l Licensed this is the least common type of regulated investment fund as it involves an approval process such that the investment fund itself is licensed (unlike the categories below). l Administered instead of applying for its own license, an investment fund may seek to rely on the existing license of a licensed mutual fund administrator based in the Cayman Islands. This type of investment fund is favoured by investment managers who wish to have a minimum subscription to invest that is lower than US$100,000 (or its equivalent in any other currency) but who prefer not to go through the approval process outlined above. l Registered this is the most common type of investment fund registered with CIMA. Registered funds are exempt from the requirement to be licensed or administered on the basis that either (i) each investor must subscribe at least US$100,000 or (ii) the equity interests of the fund are listed on a stock exchange recognised by CIMA. FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul

10 C ay m a n I s l a n d s Audit requirement No requirement for funds to be audited locally but any regulated fund is required to have audited financial statements and such audited financial statements must be signed-off by a local firm of approved auditors. Financial statement requirements Annual audited financial statements for regulated funds. Cost of regulatory fees CIMA registration fee of CI$3,000 (US$3,658.54) and annual fee of same amount. Overall cost of fund establishment Typically in the range of US$10,000 US$20,000 (excluding disbursements) per fund. Regulatory approval time Licensed funds carry an approval time of 4-6 weeks. No approval process for Administered or Registered funds. Overall establishment time Save as mentioned above, no regulatory approval process so timetable dependant purely on how long it takes to settle fund documentation. The Cayman Islands By James Wauchope, Partner, Mourant Ozannes The Cayman Islands is one of the world s leading offshore jurisdictions for the establishment of investment funds. As at 31 March 2010, there were 9,370 funds (predominantly hedge funds) registered with the Cayman Island Monetary Authority ( CIMA ) under the Mutual Funds Law (the Mutual Funds Law ). There are also significant numbers of private equity and other closed-ended alternative investment funds registered in the Cayman Islands but which are not required to register with CIMA. Key features include: l The flexibility of the investment fund regime within a clear and effective regulatory environment. l The quality and experience of the legal, administrative and accounting service providers. l Ease of registration procedures. l No requirement to have Cayman-based directors or officers, managers, administrators or custodians. l No restriction on commercial matters such as investment objectives, trading strategies or leverage, trading or diversification limits. Such commercial matters are for the fund s sponsor to determine provided that full disclosure of such matters (and all associated risk factors) is made in the offering document. Regulation of investment funds The Mutual Funds Law is the principal legislation relevant to the regulation of investment funds in the Cayman Islands. Investment managers based in the Cayman Islands will also need to comply with the Securities Investment Business Law, and all investment funds and service providers must also comply with relevant antimoney laundering legislation and regulation. CIMA is the regulatory body responsible for compliance with these regulations and has broad powers to ensure the protection of investors. Definition of mutual funds The Mutual Funds Law refers to investment funds as mutual funds and as such defines a mutual fund as a company, unit trust or partnership incorporated or otherwise carrying on business in the Cayman Islands that issues equity interests for the purpose of pooling investor funds, with the aim of spreading investment risk and enabling investors to receive profits or gains from investments. Scope of the Mutual Funds Law The following exclusions or exemptions from the Mutual Funds Law apply: l Funds with only one investor fall outside the definition of a mutual fund, as there is no pooling of investor funds. l Closed-ended funds or private equity vehicles which do not permit redemption or repurchase of interests also fall outside the definition of mutual fund. l Investment funds with fifteen investors or less, the majority of whom have the power to appoint or remove the operators of the investment fund (i.e. the directors, the general partner or the trustee, as the case may be), are exempt from the licensing and registration provisions of the Mutual Funds Law. FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul

11 C ay m a n I s l a n d s Categories of regulation Three categories of mutual funds are regulated by the Mutual Funds Law, referred to in this briefing as: (a) the registered mutual fund, (b) the administered mutual fund and (c) the licensed mutual fund. a) Registered mutual funds this is the most common type of investment fund registered with CIMA and comprises those funds which have a minimum investment per investor of at least US$100,000 (or its equivalent in any other currency) or whose equity interests are listed on a recognised stock exchange. Registration under this route is straight forward as it does not involve any discretionary approval process on the part of CIMA. Specifically, CIMA does not conduct a prior review of the offering document and there is no discretion for CIMA to refuse to register a registered mutual fund provided that the fund qualifies for registration and the application is properly made. b) Administered mutual funds an alternative route is for the mutual fund to designate its principal office in the Cayman Islands at the office of a licensed mutual fund administrator. An administered mutual fund is the only type of regulated mutual fund which must appoint a mutual fund administrator based in the Cayman Islands. This type of mutual fund is favoured by investment managers who wish to have a minimum subscription per investor that is lower than US$100,000 but who do not wish to pursue the licensing route described below. For an administered mutual fund, the selected administrator undertakes the responsibility of being satisfied of the same matters that CIMA considers for a licensed mutual fund (see below), and provides the principal office of the mutual fund at the administrator s office in the Cayman Islands. A licensed administrator must report to CIMA if it has reason to believe that a fund for which it provides the principal office is acting in breach of the Mutual Funds Law or may be insolvent or is otherwise acting in a manner prejudicial to its creditors or investors. c) Licensed mutual funds the third alternative is to apply to CIMA for a license for the mutual fund that may be issued at CIMA s discretion. This alternative would be appropriate for mutual funds wishing to accept subscription amounts below US$100,000 but which do not propose to appoint a Cayman Islands mutual fund administrator and are sponsored by reputable and well-known institutions. l All regulated mutual funds are required to file their offering document with CIMA, together with the prescribed particulars. The prescribed particulars are set out in forms which summarise certain details from the offering document, as follows: a) Registered fund : Form MF1 b) Administered fund: Form MF2 and MF2A c) Licensed fund: Form MF3 l All regulated mutual funds must, so long as there is a continuing offering, update their offering documents within 21 days of any material change, and must re-file the updated offering document and the prescribed particulars with CIMA within such 21 days. l All regulated mutual funds must have their accounts audited annually, and such audited financial statements must be filed with CIMA within six months of the year end of the relevant mutual fund in electronic format, together with an annual return form including prescribed details, signed by a director. l Such audited financial statements must be signedoff by an approved Cayman Islands-based auditor. In practice this causes little difficulty because all of the main accounting firms have offices in Cayman. The bulk of the preparatory work will invariably be done by the audit firm in the place in which the fund s records are physically located (usually the office of the manager or administrator) and then the Cayman audit firm will sign-off on the audited financial statements. l All regulated mutual funds must pay an application fee and an annual fee each year in January, currently US$3,660. Structures available A Cayman Islands investment fund may be open-ended, closed-ended or a hybrid of the two. In open-ended funds, the equity interest issued is capable of redemption at the option of the investor. A closed-ended fund or private equity fund will either have no redemption or repurchase rights or only restricted rights and will be used when the underlying assets of the fund cannot be easily realised or liquidated to meet redemption requests. A hybrid fund might begin life as a closed-ended fund but, following a liquidity event or a passage of time, may convert to an open-ended fund. Structures that are commonly used for open-ended investment funds include single class, multi-class (umbrella), master/feeder and side-by-side funds. Requirements under the Mutual Funds Law l All mutual funds must have a current offering document, which must describe the equity interests of the mutual fund in all material respects and must contain all material information to enable a prospective investor to make an informed decision as to whether or not to subscribe. Types of fund vehicle A Cayman Islands investment fund may be established as a company, a unit trust or a limited partnership. It is important to note that only a company enjoys separate legal personality, distinct from its investors. FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul

12 C ay m a n I s l a n d s Companies Companies are the most common vehicle for open-ended investment funds. Companies are invariably incorporated with limited liability although, under Cayman Islands law, it is possible to form companies with unlimited liability or with limited liability by guarantee. The majority of Cayman Islands companies issue shares of a stated par value (although no par value shares are permitted). Cayman Islands law permits dividends or other distributions to be paid out of share premium account, subject to a solvency test, even if no profits are available. Shares in a Cayman Islands company may also be redeemed or repurchased out of capital, again subject to solvency considerations. Cayman Islands companies are invariably registered as exempted companies and can be incorporated on a same day basis and are subject to minimal local requirements. There must be a registered office in the Cayman Islands at which a register of directors and a register of mortgages and charges must be maintained. A register of shareholders must also be maintained although this can be kept either in or outside the Cayman Islands. None of these registers is open to public inspection. An exempted company may be registered as a segregated portfolio company ( SPC ). An SPC allows a number of segregated portfolios to be operated with the benefit of statutory segregation of assets and liabilities between segregated portfolios. A liability in respect of a particular segregated portfolio entitles a creditor to have recourse only to the assets attributable to that portfolio and not the assets of other segregated portfolios. Unit trusts Cayman Islands trust law is based on English common law and therefore interpreted according to English case law, as modified by any Cayman case law. Under a unit trust arrangement investors (or unit holders) contribute funds to a trustee which holds those funds on trust for the unit holders, and each unit holder is directly entitled to share pro-rata in the trust s assets. A unit trust is often used for investors in jurisdictions (such as Japan) where participations in a unit trust are more acceptable or tax-effective than shares in a company. The trust deed regulates the rights and obligations of unit holders and will usually give unit holders the right to redeem their units and to purchase further units. The trustee of a unit trust fund is invariably a licensed Cayman Islands trust company. Limited partnerships Limited partnerships are the most common vehicle for closed-ended funds or private equity funds. They are also sometimes used in master-feeder structures. Cayman limited partnerships are governed by a combination of equitable and common law rules (based on English common law) and also statutory provisions, pursuant to the Exempted Limited Partnership Law. An exempted limited partnership requires at least one general partner and at least one limited partner. There is no requirement for a capital contribution by a general partner. In most cases, the general partner is either a Cayman Islands company or an overseas company registered here as a foreign company although may be another Cayman Islands exempted limited partnership. There are no statutory restrictions on distribution of profits and returns of the partnership so long as it remains solvent. Taxation The Cayman Islands has no direct taxation of any kind. There are no income, corporation, capital gains or withholding taxes or death duties. Under the terms of relevant legislation it is possible for all types of fund vehicles - the company, the unit trust and the limited partnership to apply to the government of the Cayman Islands for a written undertaking that they will not be subject to various descriptions of direct taxation, for a minimum period, which in the case of a company is currently twenty years and, in the case of a unit trust and limited partnership, fifty years. AML compliance Cayman investment funds and their service providers must comply with relevant anti-money laundering legislation. In Cayman the relevant provisions are contained in the Proceeds of Crime Law, the Money Laundering Regulations and CIMA s Guidance Notes on the subject. Listing The Cayman Islands Stock Exchange ( CSX ) has become an important offshore listing facility and exchange for investment funds, specialist debt securities and warrants. The CSX is recognised by the London Stock Exchange and the UK Inland Revenue and is also an affiliate member of IOSCO and a full member of AIMA. The CSX has developed a set of listing rules specifically tailored to meet the needs of investment funds of all types. The Cayman Islands has long established itself both as a jurisdiction where hedge funds and other alternative investment vehicles can be set up on a tax-neutral basis and as a jurisdiction which, although well regulated, offers sufficient flexibility for setting-up fund structures suitable for institutional and sophisticated investors. This is the Cayman Islands niche and, although significant onshore regulatory changes are now regarded as inevitable, the Cayman Islands is expected to retain its position as one of the leading jurisdictions for offshore alternative investment funds. FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul

13 Make waves, without the ripples. It's plain sailing offshore with our hedge funds team Best Offshore Legal Firm Hedgeweek Awards 2010 Ranked number one for hedge fund legal services in Cayman HFM Week Offshore Legal Services Report 2010 Jersey Law Firm of the Year International Law Office Client Choice Awards 2010 Mourant is one of the world's leading offshore law firms. From offices in the Cayman Islands, London, Jersey and Guernsey we specialise in providing legal advice to the world's leading financial institutions, corporations, fund managers and private clients. Our hedge funds advisory team has an international reputation as one of the leading offshore funds practices. The team specialises in providing legal advice in relation to funds domiciled in Cayman, Guernsey and Jersey, advising on: Fund formation Fund restructurings Distressed funds Fund litigation and insolvency The hedge funds advisory team is led by partners Neal Lomax (Cayman), Darren Bacon (Guernsey) and Edward Devenport (Jersey). This network gives us the ability to deliver advice to clients worldwide. To find out more, please contact: Neal Lomax (Cayman) T neal.lomax@mourant.com Darren Bacon (Guernsey) T +44 (0) darren.bacon@mourant.com Edward Devenport (Jersey) T +44 (0) edward.devenport@mourant.com On 1 June 2010 Mourant du Feu & Jeune and Ozannes merged to create Mourant Ozannes - Cayman Guernsey Jersey London

14 Guernsey Local fund industry body: Guernsey Investment Fund Association and Guernsey International Business Association Promotion agency for funds/financial sector: Guernsey Finance Double taxation treaties 12: Australia, Denmark, Faroe Islands, Finland, Greenland, Iceland, Ireland, Jersey, New Zealand, Norway, Sweden and the United Kingdom. Tax information exchange agreements 15: Australia, Denmark, Faroe Islands, Finland, France, Germany, Greenland, Iceland, Ireland, Netherlands, New Zealand, Norway, Sweden, United Kingdom and the United States of America. GUERNSEY St. Peter Port JERSEY St Helier Types of alternative fund vehicle Open-ended or closed-ended investment company, limited partnership or unit trust. Available types of corporate vehicle Investment company, incorporated cell company or protected cell company. Guernsey Fund legislation The Protection of Investors (Bailiwick of Guernsey) Law, 1987 as amended. Number of funds Domiciled Domiciled and administered... 1,208 Number of funds by category Hedge...35 Private Equity Property Equities Venture Capital...45 Debt...70 Fund of Funds Domiciled and administered fund assets total: 184 billion Domiciled and administered fund assets by category: Assets by category not available Types of regulatory fund category Authorised (Class A, B or Q), registered or qualifying investor fund. Audit requirement Yes, local sign-off required. Financial statement requirements At least annually with open-ended funds half-yearly. Cost of regulatory fees GFSC application fee of 3,000 per fund. Overall cost of fund establishment Typically 20,000 (excluding disbursements) per fund. Regulatory approval time Authorised funds typically in 4 to 6 weeks and registered or qualifying investor funds in 3 working days. Overall establishment time As above, subject to the relevant promoter having the necessary track record and experience. Regulator Guernsey Financial Services Commission, PO Box 128, La Plaiderie Chambers, La Plaiderie, St Peter Port, Guernsey GY1 3HQ Service providers There are currently 16 law firms, 35 accounting firms (including the big four ), 42 licensed banks, 653 institutions licensed to carry on investment business and over 200 fiduciary licensees. Local stock exchange: The Channel Islands Stock Exchange FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul

15 G u e r n s e y Guernsey By Darren Bacon, Partner, Mourant Ozannes Guernsey provides a robust, yet flexible, regulatory environment and an attractive tax regime for financial services businesses and investment funds. There is a strong corporate governance culture and understanding of central management and control issues. Guernsey retains jurisdictional independence from the UK, allowing the Island s government to make its own laws, set its own budget and determine its own levels of taxation. Regulation of investment funds The Guernsey Financial Services Commission (the Commission ) regulates investment funds to protect investors and to maintain the island s reputation. Guernsey has established a sophisticated infrastructure to foster the establishment of investment funds. The criteria for granting an authorisation or consent to a fund and the manner in which that fund will be regulated largely depends on whether the fund is open or closed-ended and the type of investor targeted. The Commission also regulates the licensing of fund service providers in Guernsey. The formation and operation of investment funds in Guernsey is regulated by the Commission pursuant to the Protection of Investors (Bailiwick of Guernsey) Law, 1987 as amended (the POI Law ) and certain rules and regulations made thereunder. In granting authorisation or consent, the Commission will consider the status, reputation and track record of the promoter, the scope of the fund s investment activities and the nature of its business. It will also consider the protection and/or enhancement of Guernsey s reputation as a financial centre. The two types of fund, open-ended and closed-ended, may make application for authorisation or consent under one of three routes: l Authorised Fund by standard application; l Authorised Fund by Qualifying Investor ( QIF ) application; l Registered Fund application. The distinction between opened-ended and closedended funds is based on redemptions; open-ended funds will allow investors to have their holdings redeemed or repurchased art a price related to the value of the underlying property or assets, whereas closed-ended funds will allow only discretionary redemptions, if any. There is no requirement to establish a Guernsey fund manager, but all Guernsey funds must have a local administrator. Open-ended funds, whether Authorised or Registered must also have a Guernsey-based custodian. An application fee is payable on submission of the initial fund application and an annual authorisation fee is payable on receipt of final consent or authorisation. New promoters Where the promoter of a fund is not known to the Commission, it must submit a new promoter check list, which gives information on the track record of the promoter or its principals, the proposed investment business to be undertaken in Guernsey and personal information on the directors, managers and shareholders of the promoter, the shareholders and directors of any management company and the directors of the proposed fund. Authorised funds by standard application The standard application for authorisation of an openended or closed-ended fund in Guernsey is a three-stage process, comprising outline, interim and final authorisation. Open-ended funds can be structured as one of the following which, to a large extent, will determine the applicable level of regulation: l Class A funds are regulated by the Authorised Collective Investment Schemes (Class A) Rules 2008 (the Class A Rules ), correspond to a UK authorised unit trust or OEIC and may be marketed to retail investors in specific jurisdictions, including the UK, following registration in the relevant jurisdiction. l Class B funds are regulated by the Commission under the Collective Investment Schemes (Class B) Rules 1990 (the Class B Rules ) and allow greater flexibility in investment and borrowing powers. Class B funds vary in scope from retail funds through to strictly private funds established as vehicles for a single institution, but have historically been targeted at institutional investors and high net worth individuals. Certain derogations from the Class B Rules are available on application to the Commission. l Class Q funds, regulated under the Collective Investment Schemes (Qualifying Professional Investors) (Class Q) Rules 1998 (the Class Q Rules ), are restricted to professional investors and allow the investment manager an even greater degree of flexibility. Closed-ended funds are regulated under the Authorised Closed-Ended Investment Schemes Rules 2008 (the Closed-Ended Rules ), which set out such matters as administration and custodian (if any) duties in relation to such funds, disclosures required to be made in the prospectus and the requirements to notify the FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul

16 G u e r n s e y Commission in respect of changes to the fund or its service providers. Where a local fund manager is used in the structure of an authorised fund, it must apply for a licence to conduct restricted activities under the POI Law, the approval process for which typically takes four to six weeks. Authorised funds by QIF application Promoters of authorised funds which will be offered to professional or experienced investors, knowledgeable employees or persons willing to invest a minimum of US$100,000 may take advantage of the qualifying investor fund or QIF fast-track application process. An appropriately licensed Guernsey administrator must certify to the Commission that it has performed sufficient due diligence on the promoter and the procedures for offering the scheme (including procedures for effectively restricting the offer to qualifying investors) and that the requisite disclosures are made in the offering document of the scheme. By placing much of the onus of due diligence on the administrator, the Commission has been able to reduce substantially its period for processing such applications. Once all requisite documentation and the administrator s certification have been submitted, the Commission has a guaranteed response time of three working days. The QIF regime is complemented by a fast track process for consideration of any local fund manager s licence application. A local fund manager is not legally required, but where the fund structure includes a Guernsey fund manager or the fund is structured as a limited partnership and has a Guernsey general partner, the Commission will process the application for the licence of such entity (again with reliance on the administrator s certification) under the fast track licensee application process and put it before the Commission s Licensing Committee within ten business days of receipt. Open-ended Qualifying Investor Funds are subject to the Class A, Class B or Class Q Rules and the QIF Guidelines published by the Commission. Closed-ended Qualifying Investor Funds are subject to the Closed- Ended Rules and the QIF Guidelines. Registered funds Guernsey s Registered Fund regime provides a lighter regulatory touch and a fast-track process to obtain consent from the Commission. As with QIF applications, the Commission s reliance on the administrator s certificate of due diligence on the promoter and the principal documents of the fund reduces the Commission s response time to three working days. Registered funds may not be offered directly to the public in Guernsey, but may be offered to regulated entities in Guernsey or offered to the public by entities appropriately licensed under the POI Law. The Registered Fund regime is complemented by a fast track process for consideration of a licence application for a local fund manager (if any). Where the fund structure includes a fund manager or the fund is structured as a limited partnership and has a Guernsey general partner, the Commission will process the application (again with reliance on the administrator s certification) under the fast track licensee application process and put it before the Commission s Licensing Committee within ten business days of receipt. Registered funds, whether open-ended or closedended are subject to The Registered Collective Investment Scheme Rules 2008 and The Prospectus Rules 2008 (the Prospectus Rules ). The former set out such matters as administration and custodian duties (optional for closed-ended funds), disclosures required to be made in the prospectus and the requirements to notify the Commission in respect of changes to the fund or its service providers and the latter set out information for inclusion in the prospectus of any Registered fund. Structures available Funds in Guernsey can be structured as limited liability companies, protected or incorporated cell companies, unit trusts or limited partnerships. Companies All Guernsey companies, whether cellular or non-cellular are incorporated under the Companies (Guernsey) Law, 2008 (the Companies Law ), and are subject to that law and to their memorandum and articles of incorporation. Companies may elect a stated or unstated share capital and par or no par value shares. Protected Cell Companies (PCCs) In a PCC assets are segregated into cellular and noncellular assets and held in individually created cells, or the core respectively. The assets of each individual cell include the share capital and reserves (including retained earnings, capital reserves and share premiums) attributable to that cell. The noncellular assets are, in effect, the general assets of the company. Importantly, the assets of each individual cell are only available to the creditors of that particular cell. The segregation of assets and liabilities in one legal entity readily lends PCCs to be used for guaranteed or protected products. Incorporated Cell Companies (ICCs) An ICC is similar to a PCC but in an ICC each individual cell is an incorporated company with separate legal personality. The incorporated cells are not subsidiaries of the ICC and cannot bind the ICC but must contract in their own individual names. Each incorporated cell will have the same directors as the ICC. Only certain regulated FOCUS REPORT Hedgeweek Guide to setting up Alternative Investment Funds Jul