Category Archives: Funds 101

If you are new to offshore investment funds, this is where to start

UK Votes to Leave the EU – what does Brexit mean for Offshore Funds?

So, the pound’s tanked, world stock markets are in turmoil, Scotland and Northern Ireland are considering whether to leave the United Kingdom so they can stay within the EU and the Prime Minister has announced his resignation. Last week’s vote to Leave the EU has certainly had a profound (and depressingly predictable for those of us who voted Remain) impact on the UK economy and politics already, with a long period of uncertainty yet to come. The financial services industry in the UK is likely to be significantly affected by Brexit, with various international investment banks having now announced that they’re reviewing their operations here, given the uncertainty over whether they will still be able to passport their financial services and products across Europe from London.

But what impact will Brexit have on Cayman and BVI offshore funds and how they’re marketed into Europe?

 

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Countdown to the referendum – what could Brexit mean for offshore funds?

Here in the UK the debate is intensifying around the EU referendum on 23 June on whether the UK should remain in or leave the EU. With not long to go to the vote, for obvious reasons a lot of the discussion about the impact of any “Leave” vote has been on the UK economy and UK citizens. Many onshore UK law firms have set out in detail the exit mechanism that would be involved following a vote to Leave and their thoughts on how it could affect the legislative landscape in the UK for financial institutions and investment managers. If the UK votes to remain in the EU, we can expect going back to business as usual in most areas, although quite how the Conservative party will re-unite itself after all the recent mud slinging remains to be seen. However, a Leave vote and subsequent Brexit from the EU could also have a much broader effect around the world, in ways that haven’t necessarily grabbed the headlines so far.

So what impact might any Brexit have on Cayman and BVI offshore funds and how they’re marketed into Europe?

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What do I need to do to register my Section 4(3) Fund with CIMA?

Black pen draws a checkmark in the list. 3d image. Isolated white background.

If you’ve decided that a section 4(3) Cayman fund is the best structure for your fund (see our earlier blog for an Introduction to Cayman Fund Products), you’ll need to register it with the Cayman Islands Monetary Authority (CIMA) before you launch. The process is well established and fairly straightforward, involving your Cayman lawyers filing the following with CIMA via their online registration system.

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Private Placements and AIFMD

 

AIFMD. Love it or loathe it – and let’s face it, it’s not the most popular law – the Alternative Investment Fund Managers Directive (AIFMD) has changed the way that alternative funds are marketed to investors in Europe. Ultimately this will hopefully allow European and non-European alternative investment funds (AIFs) to be marketed to professional investors in Europe by way of a passport, similar to the way that UCITS funds can be passported round Europe. For now, though, the passport only works for European AIFs marketed by European managers, with non-European AIFs and managers waiting for the European Securities and Markets Authority (ESMA)’s further recommendations on extending the passport to non-European jurisdictions. Your typical Cayman or BVI investment fund isn’t capable of being passported yet and so needs to be marketed using the AIFMD private placement regimes in each country.

So how do the AIFMD rules work for Cayman and BVI AIFs being marketed to professional investors in Europe by non-European managers?

 

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The Five Key Ongoing Obligations of BVI Funds

I wanted to write a post on the continuing obligations for BVI funds because if you are thinking of launching a fund in the BVI, knowing what your obligations will be is essential. My challenge was how to do it without boring you all to tears. I think I have managed to capture the obligations in five key headings so, hopefully, I can hold your attention for just long enough!

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Cayman LLCs – a vehicle to unlock foreign tax reclaim entitlements

In this guest post, Brian Sapadin, Executive Director of GlobeTax, discusses the benefits of tax reclamation and the opportunities presented by the new Cayman LLC draft legislation.

With the highly anticipated Cayman LLC law finally being published in draft, once unobtainable foreign tax reclaim entitlements are expected shortly to be in play for eligible investors whose Cayman fund undertakes a conversion to the new structure (or, in the case of a new launch, initially structures as a Cayman LLC). Most U.S. tax-exempts invest through offshore feeders, traditionally a Cayman limited company (Cayman LTD), to avoid Unrelated Business Income Tax (UBIT) which can be assessed to U.S. resident tax-exempt investors for gains made on leverage, including traditional margin or shorting strategies. Unfortunately, investors in such vehicles do not have access to double taxation treaty benefits, since the Cayman vehicle serves as a corporate blocker and Cayman itself is not party to bilateral tax treaties.

In a Cayman LLC — a transparent “look-through” vehicle — U.S. tax-exempts (and the fund manager) should soon be able to reap the benefits of tax treaties, for eligible markets other than the U.S., while still being shielded from UBIT.

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Hedgeweek extols the virtues of the BVI to start-up managers

I had the pleasure of being interviewed by Hedgeweek recently regarding the success of the BVI’s two new funds products focused at the start-up manager; the incubator and approved funds.

As the article makes clear, the BVI now has the complete package for emerging managers, and is, understandably, now being given very serious consideration by new players to the market.

You can read the article in full here.

As always, do let us know if you have any thoughts.

Five Key Ongoing Obligations for Cayman Islands Regulated Funds

Once your fund is registered with the Cayman Islands Monetary Authority (CIMA) it will need to comply with various ongoing obligations under the Mutual Funds Law.

The list isn’t long but it’s important for regulated funds to comply to keep the fund in good standing with CIMA and avoid offences / penalties. Failing to comply with FATCA-related reporting obligations can also potentially result in a 30% withholding tax applying to the fund, which is clearly best avoided.

So, if your fund’s registered under section 4(3) of the Mutual Funds Law (see our earlier blog on the different kinds of funds), what are its ongoing obligations?

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What should your fund director actually be doing?

You’ve appointed your independent directors. They seem like good people, came highly recommended, have great resumes and seem interested and enthusiastic about your strategy. Now that you have them on board though, do you know what they should actually be doing?

Since the 2008 financial crisis, directors of investment funds have faced more and more scrutiny of their actions and decisions. Recent court cases have confirmed the rules on directors’ duties and in December 2013 the Cayman Islands Monetary Authority (CIMA) issued a statement of guidance on corporate governance (the Guidance) which it expects regulated funds to follow as a minimum. Although the BVI does not have an equivalent to the Guidance, the principles under BVI law are the same and a BVI fund director would be well advised to take direction from the Cayman Guidance.

So what should the directors of a regulated fund in Cayman or the BVI actually be doing?

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What are the Directors’ Duties for Cayman Islands and BVI Funds?

There’s been increased focus from the courts and regulators on the duties owed by directors of a Cayman Islands or BVI fund since the financial crisis of 2007-8 and various high profile fund meltdowns. So what duties does a director of a fund actually owe?

In both the Cayman Islands and the BVI, directors’ duties are based on a mix of English common law, statute and regulatory guidance. A director of a corporate fund owes the same duties to the fund as a director of any other Cayman Islands or BVI company owes to its company. Under common law a director owes fiduciary duties and duties of skill, care and diligence.

Directors’ fiduciary duties are:
– to act in good faith in what the director considers is the best interests of the fund;
– to exercise powers for the purposes for which they were conferred and in the fund’s interests;
– to act with unfettered discretion; and
– to avoid conflicts of interest and to disclose personal interests in transactions.

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fund team

What Service Providers Do I Need to Launch My Fund?

So you’ve got a great idea for your fund’s investment strategy, perhaps you have tested it and developed a track record and maybe you even have proposed seed financing, but who else needs to be involved in setting up and launching your fund?  I have set out a list of the key players below.

Cayman and BVI funds are not restricted to using Cayman and BVI service providers.  They have the flexibility to appoint service providers from all over the world, subject to some technicalities which are beyond the scope of this blog.

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