For many managers, having a fund which is regulated and subject to overreaching powers of a regulator (whether the British Virgin Islands Financial Services Commission (FSC) or The Cayman Islands Monetary Authority (CIMA)) can be advantageous or essential when attracting investors. On the other hand, a manager seeking to establish a track record whose investors comprise only friends and family, may see advantages in having an unregulated fund, without any of the ongoing obligations that would apply if it were regulated.
Whichever camp you fall into, you will want to know how to structure your fund to ensure the appropriate level of regulation for your purposes. Whether an investment fund will require regulation is determined by a very similar test under the Securities and Investment Business Act (SIBA) in the British Virgin Islands and the Mutual Funds Law (MFL) in the Cayman Islands. Although nuances exist, some key generalisations can be made. Generally, mutual funds that issue equity interests to investors and pool funds for collective investment will require regulation if the equity interests entitle investors to participate in fluctuations in the fund and to redeem their interests at their option. Below we set the criteria applied in each jurisdiction to determine whether a fund is treated as a mutual fund and is subject to regulation.
A company, partnership or unit trust will be a mutual fund and will generally be subject to regulation if:
- it issues equity interests carrying an entitlement to participate in the profits or gains of the vehicle;
- the purpose of issuing the equity interests is to pool investor funds with the aim of spreading investment risks and enabling investors to receive profits or gains from the acquisition, holding, management or disposal of investments; and
- such equity interests are redeemable or repurchasable at the option of the investor.
A company, partnership, unit trust or other body will be a mutual fund and will generally be subject to regulation if:
- it collects and pools investor funds for the purpose of collective investment;
- it issues fund interests that entitle the holder to receive an amount computed by reference to the value of a proportionate interest in the whole or a part of the net assets of the fund; and
- the holder of such equity interest is entitled to receive such amount on demand or within a specified period after demand.
Closed-end funds (i.e. funds for which there are no regular redemptions, redemptions are not at the option of investors or redemptions are subject to extensive lock-up periods) are not subject to regulation in the Cayman Islands or the British Virgin Islands.
If a fund falls under the definition of a mutual fund then it will require some level of licensing, supervision or registration by the regulator (the Cayman Islands Monetary Authority CIMA or the British Virgin Islands Financial Services Commission FSC). The level of supervision (and, in Cayman, whether any exemptions from regulation are available) depends on factors including:
- number of investors;
- sophistication and/or wealth of investors;
- minimum level of investment required to be made by investors;
- whether investment in the fund is offered on a private basis or to the public; and
- (in Cayman only) whether regulatory oversight of the fund can be delegated to another licensed entity.
More detailed information on the products available in the British Virgin Islands and Cayman Islands will be set out in our next posts so stay tuned.