2016: what a year for the Americas. From our offices in Cayman, Sao Paulo, Montevideo and Vancouver, we witnessed a wave of fundamental – at times dramatic and turbulent – change in key markets in the Americas. From impeachment of a sitting president in Brazil, to the election of a centre-right president in Argentina to the ‘glad its over’ election in the US which ushered in centre-right control of two branches of government, 2016 brought fundamental political change across the region. Meanwhile, long-anticipated amnesty programmes in both Argentina and Brazil paved the way for large amounts of assets to be brought back into the formal economy, and away from the increasingly frigid landscapes of undeclared assets. Both programmes succeeded, perhaps even beyond expectation, as investors and common citizens embraced the welcome opportunity to regularise their positions, thus adjusting to a world where transparency and information exchange are the rule. For a jurisdiction like Cayman, this is all potentially good news. Let me explain why.
As a long suffering Liverpool supporter, I can absolutely assure you that I have literally no interest or desire to defend Jose Mourinho or Christian Ronaldo. In fact, I am actually hardwired to positively enjoy any misfortune they may suffer, such is the slightly callous nature of being a football fan.
However, when they recently both appeared on the front pages of various British journalistic publications (rather than adopting their rather comfortable position on the back page about their latest sulk), linked with entities based in my home of the British Virgin Islands, I felt duty bound to comment. Because, once again, some of the rhetoric being used to describe their personal (and frankly, private) tax affairs was in some parts inaccurate and in others categorically misleading to the reader.
Adding to our success at The Lawyer and HFM Awards, Harneys was privileged to win twice at the inaugural Africa Global Funds Awards held recently in Cape Town. The Africa Global Funds Awards were created specifically to honour and generate both industry and public recognition for fund service providers focused on Africa and are the only international awards of their kind.
We were successful both in the Best Offshore Law Firm and Best Offshore Law Firm – Client Service categories, effectively giving us a clean sweep of the awards designated to offshore law firms against some well regarded and formidable competitors. Given that I head up our Africa Practice and for the last 5 years have had a strong focus on the funds industry in Africa, these wins saved me from some awkward internal conversations and allowed me to breathe a long sigh of relief.
After more than 15 months in the wilderness, with goodness knows what to keep him entertained during his recovery from multiple back surgeries, Tiger finally came back to the PGA Tour this weekend and competed in the Hero World Challenge in the Bahamas.
The entire sporting world watched and waited; could he begin down the road to superstardom once again?
Segregated Portfolio Companies (SPCs) are now well recognised and widely used corporate vehicles, and we are seeing increasing demand for them in the funds context in both the BVI and Cayman Islands. An SPC benefits from statutory segregation of its assets and liabilities in one segregated portfolio from those of any other segregated portfolio, and from the general assets and liabilities of the company, but is a single, legal entity. The SPC has only one set of constitutional documents, one board of directors and, importantly, one set of annual licence fees (although additional fees are charged per segregated portfolio on establishment (and, in Cayman, annually) these supplementary fees are much lower than the fees for establishing and maintaining multiple entities).
The ability to segregate the assets and liabilities of one segregated portfolio from another makes SPCs popular for umbrella or multi-class investment funds which can operate different investment strategies and, in particular, different levels of leverage, without risking cross contamination across the segregated portfolios.
In the past, SPCs have been popular with emerging managers who may have used an SPC platform as a cost-effective way to enter the market and establish an investment fund. They would effectively “rent” a segregated portfolio of the SPC platform rather than set up a standalone legal entity. This is still the case for Cayman SPCs although it has become less attractive in the BVI since the introduction there of specific products – the incubator fund and approved fund – tailored to the emerging manager each of which offers a quick and cost-effective set-up and minimum ongoing regulatory requirements.
Regulation of SPCs
In the BVI, a company is only eligible to be an SPC if it is, or will be on incorporation, a private, professional or public fund under the Securities and Investment Business Act, 2010. In Cayman, any exempted company can be incorporated as or convert into an SPC (if it follows the conversion procedure set out in the Companies Law).
The prior approval of the BVI Financial Services Commission (FSC) is required before any BVI company may be registered or incorporated as an SPC and this is only granted where the FSC is satisfied that the applicant has, or has available to it, the knowledge and expertise necessary for the proper management of segregated portfolios. There is no equivalent approval needed for Cayman SPCs.
In both the BVI and Cayman, each segregated portfolio either has its own offering memorandum or there is a base offering memorandum for the fund and each segregated portfolio has its own portfolio supplement.
A BVI SPC is required to have an administrator, manager and custodian. As discussed in our Introduction to Cayman Fund Products blog post, a Cayman SPC which is a regulated fund will need to have an administrator and manager but is not required to have a custodian but a Cayman SPC which is unregulated is not required under Cayman legislation to appoint functionaries. The same functionaries may be appointed to all of the segregated portfolios of a BVI SPC or a Cayman SPC which is a regulated fund. Alternatively, each segregated portfolio may appoint its own functionaries. The documents appointing the functionaries must state clearly the segregated portfolios for which the appointment is being made.
Both a BVI SPC and a Cayman SPC which is a regulated fund are required to have an auditor, and audited financial statements must be filed with the FSC or the Cayman Islands Monetary Authority (as applicable) within six months of the end of its financial year.
The future of SPCs
The use of SPCs, especially in the funds and insurance industries, has grown in recent years and the concept is now well recognised in the international financial services industry. As a consequence, we are getting more frequent enquiries about establishing SPCs and clients are seeing that the features of SPCs are useful, not only for regulated funds but also for a broad range of other uses such as closed-end, unregulated funds or employee benefit schemes. The Cayman legislation is currently more flexible than the BVI legislation and allows unregulated funds to be established as SPCs. Consequently, Cayman is currently winning this work. The BVI Business Companies Act, 2004 provides scope for greater flexibility as to the type of vehicles that are able to adopt the SPC structure, and the FSC is looking into widening the circumstances in which SPCs can be used. When it does this (and we are hopeful that this is imminent), the BVI, with its much lower establishment and annual fees, will become extremely competitive in this market.
If you are interested in setting up an SPC in the BVI or the Cayman Islands, please get in touch.
I am very pleased to be the first offshore funds blogger to give a shout out to our friends and colleagues at harneysoffshorelitigation.com.* All the very best with the launch of the blog! The team here at Harneys offshorefundsblog are extremely proud to be your guiding light and inspiration, your blogging mentors, as you take your first stuttering baby steps towards true blogging greatness. Congratulations on being the first blog devoted to the world of offshore litigation (and, ahem, the second blog devoted to offshore legal matters).
In all seriousness, we are very excited that there will be a blog devoted to offshore litigation matters now. The offshorefundsblog bloggers worked very closely with our litigation colleagues during the GFC helping some of our investment funds clients deal with distressed situations, whether as a result of trading losses, illiquidity or other factors. Together, we were able to find solutions for those clients that I don’t think a funds lawyer or a litigation lawyer would have been able to come up with alone.
* I think I am almost as proud to be the first offshore lawyer to actually give a shout out on a blog. Keeping up with those hip young millennial bloggers for sure…
I have had the distinct honour and pleasure of being invited to speak at two excellent conferences recently.
In September I headed down to Sao Paulo to speak at the DMS 6th Annual Investment Funds Summit. I was joined on a panel by fellow Harneys partner Marco Martins, along with two representatives from Maitland and one from DMS. It was a slight concern of mine that every other panellist was fluent in Portuguese but thankfully this illiterate Englishman managed to scrape by.
We discussed the latest trends and updates from the offshore world, with Marco touching on the new LLCs in Cayman and I was asked to talk through the incubator and approved funds. It was very interesting indeed for both of us to get a real sense of fascination in the room with not only some in-depth queries during the presentation, but also afterwards and well into the evening whilst we were enjoying our caipirinhas. Given the tax amnesty at the moment, offshore structuring remains incredibly poignant and the use of fund vehicles in particular seemed to be of real interest to budding fund managers looking to take in investments from the high net worths who are bringing their money back into Brazil and wanting to put it to good use.
My only disappointment, as you will see from the photo, is that no one provided me with the memo about wearing a pair of bright red socks. Next time.
Not long after I unpacked my bags, I was getting down the suitcase again to fly up to one of our very regular stomping grounds of New York to speak at the Marcum Alternative Investment Manager Forum Dennis Schall put on a truly masterful event which included a keynote speech from Larry Kudlow which was one of the most impressive I have ever heard. A room full of rather loud elephants was hushed into silence by some unbelievably simplistic and yet incredibly brilliant economic policies that led to a standing ovation at the end. Given he acted as senior economic adviser to President-elect Trump throughout his campaign, there is potentially reason to be a little more optimistic than the outlook a number of the political commentators are currently expressing.
Whilst it was far from ideal to speak in and around such an impressive orator, it was great to help emerging managers with both the rationale behind using their service providers in the most efficient manner and then set out the various structures that can be used in our industry to maximise the manager’s goals. Dennis had put together some great panellists indeed and not only do I think we added a little bit of insight, but there was a touch of humour too as you will see demonstrated from my photo with Larry.
Boy, didn’t he look like he was just bubbling with enthusiasm to be seen standing next to the offshore guy…
Last week we had the absolute pleasure of hosting Renee Skolaski, the CEO of Hedge Funds Care, which recently rebranded as Help for Children, here in the BVI.
Help for Children (HFC) is a charity supported by the alternative asset management industry with international recognition, having divisions in the US, Canada, the UK, the Cayman Islands, Ireland and Hong Kong. Its mission is to prevent and treat child abuse using proven methods. HFC has distributed over $44 million in grants, positively impacting 87,000 lives on an annual basis.
Renee was here to help us set the cogs in motion for the establishment of a BVI division of HFC, an idea conceived by Rob Davis, the founder of HFC, Renee, and Phil Graham at an HFC event in New York earlier this year and which we, with other members of the Investment Funds Association, have been working to develop. This is such an exciting opportunity because funds raised in the BVI will go directly to fund BVI projects to prevent and treat child abuse here on our islands.
During the two days that Renee was here, we had a full schedule meeting professionals currently involved in the prevention and treatment of child abuse in order to understand the need here in the BVI. We learned that the BVI has enacted legislation and put in place procedures to address the treatment of child abuse. It also has highly motivated professionals who are working very hard to address this issue. A shortage of funding means that services are suffering and implementation can be challenging. There are so many potential projects that could be funded, and the support of a BVI division of HFC could make a huge impact.
On Wednesday evening, the Investment Funds Association in the BVI sponsored an event at Peter Island at which Renee spoke to members of the industry to drum up support. We were honoured to have Lorna Smith OBE, Interim Executive Director of BVI Finance, attend and speak at the event and to have her full support for this project. Given the positive response that we received from members of the BVI Investment Funds Association, we feel that we have a responsibility to grasp this opportunity for our community. We are totally committed to seeing a branch of HFC established here in the BVI.
Our fund raising will mainly take the traditional HFC form of one big-ticket gala event so keep an eye on our blog for a save the date. In the meantime, if you are a member of the BVI financial services community and your organisation would like to be a local sponsor, please get in touch with Phil or me.
The political and economic rollercoaster ride we’ve been on here in the UK since the EU referendum in June seems set to continue following Thursday’s High Court judgment in London. The High Court held that the UK government doesn’t have the power to give notice to withdraw from the European Union under Article 50 of the Lisbon Treaty. Only parliament has the power to change domestic law in the UK and, as serving notice to leave the EU will affect rights under domestic UK law, the government can’t serve notice without parliament’s approval.
So, just as we’d started to get used to the idea of notice being served by the government in March 2017, with the UK then leaving the EU by March 2019, the Brexit process has now been thrown up in the air again.
Keep calm and stay in London?
I was of course overjoyed with the news that my colleagues in our London office and Hong Kong office had been hugely successful in their respective HFM Awards Ceremonies as HFM is a leading global publication covering the hedge fund industry and these high profile awards (which are judged on the basis of client feedback) are undoubtedly very well regarded in the industry.
But, and I can shamefully admit to this fact only now, another part of me was a touch envious.
The feeling is comparable to the one of sitting on a substitute’s bench and watching your team romp home to a glorious victory without you. Whilst of course externally you smile and whoop with delight, there is another part of you that wishes you could just get a chance to run onto the field and contribute in some way to the success.
Well, our chance to do that very thing came when we found out a few weeks ago that we had been nominated in the US as well and so finally the BVI, Cayman and Vancouver offices had their potential opportunity; could we come on in the 80th minute and bang home the third and final goal? Continue reading
During a recent visit to our London office, I had the privilege of attending AIMA’s Spotlight and Cocktail reception in London, the highlight of which for me was a keynote speech by Robert Peston. For those of you who were not in the UK in 2008 and 2009, Robert was one of the most prevalent economic commentators at the time (and, personally, a bit of a hero of mine).
The theme of Robert’s presentation was uncertainty and the question he asked us all to consider was whether, if 2007 was the age of absolute certainty (albeit, certainty that we were all about to suffer a painful and prolonged recessionary period), 2016 is the age of absolute uncertainty, politically and economically?
One of my favourite aspects of working in the offshore environment is that we get to speak to fund managers based all over the world about the latest hot and trendy investment opportunities. Over the last few years we have dealt with enquiries about bitcoin, crowd-funding, acquiring a portfolio of oil tankers and real estate opportunities in Puerto Rico to name but a few of the more intriguing conversations. It constantly keeps the team on our (permanently parked under the desk) toes and there is no doubt that recently we have been part of a very regular trickle of Cuba based conversations and how to maximise the gradual opening of the borders.
When Raul Castro took over from his brother as President of Cuba in 2008, he began a long-anticipated process of political and economic reform. As a result of his strategy, the stagnant economy has been gradually coming to life, galvanised by a fledgling private sector. Diplomatic advances have been made, animosities are thawing and, slowly but surely, relations with overseas nations are being restored. With this sea change comes the possibility of direct foreign investment, a prospect historically laden with regulatory obstacles and risks – from both sides.
It is easy to see why there is excitement surrounding Cuba’s development. The tourism industry is set to explode and the relaxation in travel restrictions for Americans opens a previously-untapped market of over 300 million potential visitors. Such a vast influx of people will require utilities, hotels, ports, roads and telecoms; truly massive investment is required to improve the current infrastructure and there is cautious optimism from sponsors eager to participate in the process and Cubans looking forward to the resulting developments.
Indeed, it is the tourism sector that US News largely focused on in the following article as the best way to invest in Cuba as a US citizen:
But rather than related company stock-picking, what about direct foreign investment? Is there a way for US based investors to capitalise directly on some of the infrastructure opportunities for example?
It seems like almost six months since I was in Shanghai to present at the 2nd Annual Hedge Fund China Summit 2016 and to enjoy plenty of the vino tinto at the awards dinner afterwards where my firm, Harneys, picked up the trophy for “Best Offshore Law Firm for Hedge Funds”.
Wait, that’s because it was five months ago.
And what a five months it has been.
Shortly after picking up that award, I was thrilled to hear that my colleagues in our London office had been named Best Offshore Law Firm – Client Service at the HFM European Hedge Fund Services Awards, announced on 21 April 2016.
The HFM Awards are high profile in the global hedge funds industry and the client service award is independently judged based on the relative strength of client testimonials and market feedback. The awards recognise Harneys as having provided leading client service, innovation and expertise to our valued hedge fund clients of all sizes, from start-up hedge funds and emerging managers to global multi-billion dollar investment institutions. That is what we do.
Now, when I say thrilled … what I actually mean is … indignant that my colleagues in London would seek more glory than their far more humble colleagues battling away day and night here in the buzzing hub of economic activity that is Asia.
Many of our readers will no doubt have heard about the recent decision by the European Commission that Apple’s tax structure in Ireland breached the EU state aid rules. But what, you may wonder, does that have to do with offshore funds? For me it raises an important question of principle of who should be deciding international tax policy for multi-national corporations and other companies – including investment funds – that operate on a cross-border basis in Europe.
As we’ve blogged about before, the OECD’s been busy working on its BEPS plan to try to make the international tax system more joined up – and limit some of the mismatches that multi-national and other companies have for years (completely legally) used to reduce their tax bills.
Here in Europe, the European Council’s also been working on introducing legislation building on BEPS and the Commission’s 2015 Action Plan for Fair and Efficient Corporate Taxation in the European Union, via the Anti Tax Avoidance Directive. So far, this all looks suitably co-ordinated and sounds sensible when you bear in mind the Commission’s website statement that “National governments are responsible for raising taxes and settling tax rates…The EC Treaty does not specifically call for direct taxes (income and corporate taxes) to be harmonised.”
So how then does the 30 August 2016 state aid decision by the Commission about Apple’s tax structure in Ireland fit into this?
They’ve been talked about for a while by our bloggers and contributors but the moment has now come for the Cayman LLC, which has been available for registration since 13 July and numerous of which have already been formed. The Cayman LLC was introduced to meet the requirements of North American managers and intermediaries who use Delaware LLCs and want a flexible offshore version, and Cayman lawyers dealing regularly with North American clients are particularly excited about now being able to offer a “Cayman” version. Its introduction also highlights Cayman’s responsiveness to market demand as it continues to maintain its position as the dominant brand in North America for funds structures.
So what makes the Cayman LLC – or limited liability company, to give it its full name – so interesting?