A tokenised fund is simply an investment fund whose interests (whether participating shares or limited partnership interests) are issued, recorded or represented using distributed ledger technology. The investment objective and investment strategy of the fund need not have any other connection with financial technology or blockchain. Interests in investment funds whose strategy focuses on more traditional assets classes such  as real estate, private credit, private equity/venture capital and infrastructure projects are all being issued in tokenised form.

The difficulty with tokenisation from a governance perspective is that most of the legal risks in investment fund structures do not sit with the assets in which the fund invests. It instead sits with the relationship between the investment fund, the investment manager and the investors in the fund, and in the myriad of rights, obligations, discretions, constraints and disclosures that are set out in the offering documents (which are underpinned by the constitutional documents of the investment fund).

Despite its other advantages, tokenisation does not make those issues go away. It does, however, require those issues to be expressed and dealt with in a different way depending on the type of tokenisation adopted. Two models of tokenisation tend to dominate; the ‘digital receipt model’ and the ‘native token model’.

In the ‘digital receipt’ model, the token is a digital representation of a traditional interest in an investment fund; e.g. a tokenised participating share or a tokenised limited partnership interest. The legal record and ‘one source of truth’ remains (as with non-tokenised funds) the register of members or register of limited partners that are maintained typically by the fund’s administrator.

In the “native token” model, the token itself is intended to be the legal interest, with the definitive record of ownership sitting on the blockchain ledger rather than in an administrator’s database. From a fund governance perspective, these two models are materially different.

Under the digital receipt model, very little changes either in substance or in practice. Any transfers of participating shares would, to the extent permitted, still need to comply with the transfer provisions in the  constitutional documents of the fund. Consents would still be required as they would be with a non-tokenised fund whilst any side letters providing bespoke terms to individual investors would operate in the same way. The general partner or board of the fund are still required to exercise the same discretions and they remain subject to the same fiduciary duties and contractual constraints. The tokenisation of the interests in the fund is, in legal terms, largely cosmetic and whilst it may improve the user experience, it does not displace the existing framework.

The native token model poses material challenges for this traditional approach, and it is perhaps for this reason that, to date, the digital receipts model is the preferred approach as whilst it embraces blockchain technology, it still feels familiar. However, where the token is the interest, then the rules governing admission, transfers, suspensions, side letters, redemptions (if any) and the enforcement of obligations must, to some degree, be reflected in the token architecture or the smart contracts that underpin it. The difficulty with this is that many issues that were previously ambiguous or subject to the exercise of discretion must now be treated in a binary way. For example, most fund documents are deliberately drafted with a degree of flexibility and in many cases ambiguity so as to give the general partner or board a degree of discretion. They allow managers to respond to tricky, real-world situations that can’t always be anticipated.

By way of example, the terms of a limited partnership agreement of a typical closed-ended private investment fund in the Cayman Islands will typically prohibit transfer of partnership interests without first obtaining the consent of the general partner, and that consent will almost always be exercisable in the general partner’s discretion. What isn’t clear is how that discretion will be implemented on-chain. If the token is freely transferable by design, a core governance control has been surrendered. If transfers are technically blocked unless a permission is toggled, then the system is, in substance, still centralised; just with a more elaborate wrapper.

The same issue arises when one considers that Cayman Islands investment funds are required to undertake anti-money laundering and ‘know your client’ checks on all investors. How can this be done effectively if fund interests are freely transferable on-chain in real time?

Similar issues arise in relation to defaults and the exercise of contractual remedies against investors. Again, these are rarely binary or mechanical decisions. They are governed by layered contractual provisions and, in practice, by judgement calls and a risk-based approach. Encoding that entire framework into smart contracts is not simply a technical exercise; it is a governance choice about which decisions are automated and which remain discretionary.

These issues become even sharper in the context of fund financing, and in particular subscription facilities. Subscription finance is, by design, “upward-looking”; the lender’s credit analysis is focused less on the fund’s assets and more on the legal enforceability of the investors’ capital commitments and the fund’s ability to call and collect them when they become due to secure the servicing of interest payments and repayment of principal.

From a lender’s perspective, the essential question is not whether interests are represented by certificates, entries on a fund’s register or tokens on a ledger. The question is whether the lender can obtain reliable security over the fund’s rights against its investors and whether, in a default scenario, those rights can be exercised quickly and predictably.

Under the digital receipt model, the analysis is largely conventional since, as noted above, the token does not displace the traditional legal infrastructure. The register remains the definitive record of investors. Capital call mechanics remain as set out in the offering documents. Security is taken over the usual rights of the fund (i.e. the right to call capital, the right to receive contributions and the right to enforce remedies against investors who default). From a security perfection and enforcement perspective, the “tokenised” aspect is, to an extent, irrelevant. It may affect how information is presented to investors and how they view their investment, but it does not change what the lender is really relying on.

The native token model is more challenging. If the token is the legal interest, the lender must understand, in detail, how that token carries with it the obligation to fund capital calls and how and when that obligation can be enforced. Immediate issues to consider would be:

Would the smart contract operate to automatically block transfers upon the occurrence of a default?

Can the smart contract automatically redirect distributions?

Does enforcement of these rights still require traditional steps, such as serving statutory demands and the exercise of contractual discretions by the general partner or board? If so, the lender is back in the familiar world of legal process but with an additional technical layer to navigate.

We would also note that there is a natural tension between secondary market liquidity and subscription finance. Subscription facilities typically restrict investor transfers without lender consent, often subject only to narrow baskets and defaulting investors would be prohibited from transferring. The commercially sensible reason for this is the lender underwrites subscription facilities based on a defined and screened pool of investors that have undergone the full credit underwriting process. A freely transferable token cuts directly across that model. In practice, a lender would be likely to insist either on tight transfer controls being written into the token mechanics or the underlying smart contract or on full recourse being preserved against the original investor, regardless of any secondary participation.

In practice, the more conservative digital receipt model fits far more comfortably with both existing governance frameworks and current fund finance structures. The administrator still controls the register. The general partner or board still controls admissions and transfers and the onboarding process thus ensuring AML/KYC compliance. The lender still takes security over recognisable contractual rights. The token becomes a distribution and record-keeping tool, not the legal source of truth. It embraces emerging financial technology which is appealing to many but it remains comfortably familiar.

The native token model may yet mature into something that lenders are willing to underwrite on its own terms. But that will require more than legislative tidying-up or more sophisticated smart contracts. It will require a re-engineering of fund documentation and credit structures so that discretion, enforcement and dispute resolution are coherently integrated with on-chain mechanics. The form that investments take may be evolving into a new form, but the commercial and credit risk, and the law that manages them, are not.

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This publication is not intended to be a substitute for specific legal advice or a legal opinion. For specific legal advice on the subject matter of this Insight, please contact: 

Partner: Robert Farrell
E: robert.farrell@loebsmith.com

Robert is a Partner in the Corporate, Funds & Finance Group.  Robert’s vast experience includes investment funds, banking & finance (for both lenders and borrowers), M&A (including cross-border, joint ventures, acquisitions, reorganisations and private equity).  He has also advised clients in key matters relating to Regulatory obligations and VASP legislation, securities and investment business legislation and economic substance and AML/KYC.

Trusts established under Cayman Islands law are well known for providing tax benefits, flexible structures and effective mechanisms for asset protection and management, with a legal framework based on English common law designed to enhance certainty in court decisions. Chinese high net worth (HNW) persons find these features appealing when seeking to separate personal wealth from risks. Once assets are properly settled into a trust, legal title passes to the trustee, removing them from the settlor’s personal estate and from creditor risks, other business risks, and certain political and economic risks.

Even accounting for CRS reporting obligations, and other rules and restrictions on the transfer of capital from China and other countries into offshore structures, there has been an increase in the use of BVI trusts by investors in Asia. As was shown by the Wahaha case, HNW families now acknowledge the importance and value of such planning in preserving and protecting wealth. Trusts, when properly established during the lifetime of the settlor, allow wealth to pass to beneficiaries outside of probate, avoiding the delays, publicity and costs of estate administration.

Both the Cayman Islands and the BVI have created special trust regimes that deal with the major concern around losing control of underlying businesses.

BVI VISTA trust. The VISTA regime in the BVI disapplies certain traditional trustee duties in relation to trusts owning shares in BVI companies. Although a BVI company’s shares are held in a VISTA trust, the directors of that company are free to administer the company as they see fit, without intervention from the trustee. Key family members may also take up the role of an “Office of Director Rules Appointor”, which allows them to have control over the members of the board of the BVI company. The BVI VISTA trust therefore addresses families’ need for succession planning while retaining some level of control of the underlying companies.

Cayman STAR trust. The STAR trust is unique to the Cayman Islands and can be structured for specific purposes including for the health and wellbeing of family members and/or for the education of the family’s children overseas, giving settlors great flexibility to define outcomes and governance mechanisms.

The settlor may retain a degree of control over other aspects, such as the power to approve distributions, the power to appoint and remove trustees, and the power to revoke the trust.

Neither the BVI nor the Cayman Islands imposes taxes on income or capital gains on the assets in these trusts, increasing the interest of foreign investors. Both jurisdictions allow resident trustees and non-resident trustees to act, and both the BVI and the Cayman Islands remain tax-neutral with respect to the assets in the trust, which is particularly attractive for Chinese clients holding global assets.

From a confidentiality and asset protection perspective, the counterparty of a BVI company or a Cayman company will only see the trustee as the legal owner of the company, and the settlor’s details will not appear in any publicly accessible documents. This privacy is a significant advantage for clients concerned about reputational exposure or political sensitivity.

Fiat currency transactions
What rules and restrictions govern the exchange of fiat currency and cryptoassets?

Assuming the subject cryptoassets fall within the definition of “virtual assets” under the Virtual Asset (Service Providers) Act (As Revised) (the VASP Act), the exchange of fiat currency and cryptoassets will likely constitute a virtual asset service under the VASP Act and hence any person providing the service of exchange of fiat currency and cryptoassets in the course of their business will be a virtual asset service provider regulated by the Cayman Islands Monetary Authority (CIMA) under the VASP Act.

Furthermore, if the exchange of fiat currency and cryptoassets falls within one of the relevant financial businesses under the Cayman Islands’ Proceeds of Crime Act, the relevant service provider will be required to comply with the AML and KYC requirements under the AML Regulations, which include, inter alia, implementing client identification and verification, record-keeping, and internal reporting and control procedures.

Where are investors allowed to trade cryptoassets? How are exchanges, alternative trading systems and secondary markets for cryptoassets regulated?

There are generally no legal requirements or restrictions on where investors are allowed to trade cryptoassets in the Cayman Islands, so investors are usually free to trade cryptoassets wherever they desire.

Assuming the subject cryptoassets that are traded on the exchanges, alternative trading systems and secondary markets qualify as virtual assets under the VASP Act, such exchanges, alternative trading systems and secondary markets will have to apply for a licence with CIMA if either of them qualifies as a virtual asset trading platform under the VASP Act, which is defined as:

“a centralised or decentralised digital platform — (a) which facilitates the exchange of virtual assets for fiat currency or other virtual assets on behalf of third parties for a fee, commission, spread or other benefit; and (b) which — (i) holds custody of or controls virtual assets on behalf of its clients to facilitate an exchange; or (ii) purchases virtual assets from a seller when transactions or bids and offers are matched in order to sell them to a buyer, and includes its owner or operator, but does not include a platform that only provides a forum where sellers and buyers may post bids and offers and a forum where the parties trade in a separate platform or in a peer-to-peer manner.”

If the exchanges, alternative trading systems or secondary markets are licensed with CIMA as virtual asset trading platforms, each of them would be subject to various restrictions and obligations stipulated, inter alia, under section 11 of the VASP Act, such as being restricted from providing financing to its clients for the purchase of virtual assets unless disclosures are made to clients regarding the terms of, and the risk of, the financing, and being obligated to carry out reasonable due diligence procedures on virtual assets and their issuers that are listed on the platform.

Alternatively, the exchanges, alternative trading systems and secondary markets for cryptoassets may otherwise have to be registered or licensed with CIMA if its business activity constitutes any virtual asset service under the VASP Act.

At the same time, the exchanges, alternative trading systems and secondary markets for cryptoassets may be regulated by the Securities Investment Business Act (SIBA) if the subject cryptoassets fall within the definition of “securities” under the SIBA, and if they are engaged in certain securities investment business, which would mandate the registration or licensing with CIMA.

Furthermore, if the business of exchanges, alternative trading systems and secondary markets for cryptoassets falls within one of the relevant financial businesses under the Proceeds of Crime Act, they will be required to comply with the AML and KYC requirements under the AML Regulations, which include, inter alia, implementing client identification and verification, record-keeping, and internal reporting and control procedures.

How are cryptoasset custodians regulated?

Assuming the cryptoassets that are the subject of the custody service of the relevant cryptoasset custodians qualify as “virtual assets” under the VASP Act, such custodians will have to apply for a licence with CIMA if either of them provides virtual asset custody service under the VASP Act, which is defined as “the business of safekeeping or administration of virtual assets or the instruments that enable the holder to exercise control over virtual assets”. If the custodians are licensed with CIMA to provide virtual asset custody service, each of them would be subject to various restrictions and obligations stipulated, among other things, under section 10 of the VASP Act, such as being obligated to:

•maintain best technology practices relating to virtual assets held in custody;
• not encumber or cause any virtual asset to be encumbered, unless specifically agreed to by the beneficial owners of the virtual assets;
• ensure that all proceeds relating to virtual assets held in custody shall accrue for the benefit of the owner, unless otherwise agreed in writing;
• take such steps as may be necessary to safeguard the virtual assets held;
• have adequate safeguards against theft and loss; and
• enter into a custodial arrangement with the owner of a virtual asset, which includes the prescribed details set out in the VASP Act.

Furthermore, if the business of such cryptoasset custodians falls within one of the ‘relevant financial businesses under the Proceeds of Crime Act, they will be required to comply with the AML and KYC requirements under the AML Regulations, which include, inter alia, implementing client identification and verification, record- keeping and internal reporting and control procedures.

How are cryptoasset broker-dealers regulated?
Assuming the broker-dealer business of the relevant cryptoasset broker-dealers involves cryptoassets that qualify as virtual assets under the VASP Act, it is likely that such broker-dealers will have to be registered with CIMA and be regulated accordingly because such broker-dealer business typically involves either one or a combination of the following virtual asset services: transfer of virtual assets, virtual asset custody service, or participation in and provision of financial services related to a virtual asset issuance or the sale of a virtual asset.

At the same time, the cryptoasset broker-dealers may be regulated by the SIBA if the subject cryptoassets fall within the definition of securities under the SIBA, and if they are engaged in certain securities investment business (which would be likely in terms of dealing in securities and/or arranging deals in securities), which would mandate the registration or licensing with CIMA.

Furthermore, if the business of such cryptoasset broker-dealers falls within one of the relevant financial businesses under the Proceeds of Crime Act, they will be required to comply with the AML and KYC requirements under the AML Regulations, which include, inter alia, implementing client identification and verification, record-keeping and internal reporting and control procedures.

What is the legal status of decentralised cryptoasset exchanges?

Since the definition of “virtual asset trading platform” under the VASP Act also covers those trading platforms with a decentralised nature, the legislations and regulations mentioned above (see Exchanges and secondary markets) shall similarly apply to decentralised cryptoasset exchanges so long as the subject cryptoasset and business activities fall within the corresponding scopes.

What is the legal status of peer-to-peer (person- to- person) transfers of cryptoassets?

Assuming the cryptoassets that are the subject of the peer-to-peer transfers qualify as virtual assets under the VASP Act, if such peer-to-peer transfers are conducted in the course of the relevant party’s business, such peer-to-peer transfers may constitute a virtual asset service with respect to transfer of virtual assets under the VASP Act, which renders the need to be registered with CIMA.

Similarly, a party of peer-to-peer transfers of cryptoassets may be regulated by the SIBA if the subject cryptoassets fall within the definition of securities under the SIBA, and if that party is engaged in certain “securities investment business” (which would be likely in terms of dealing in securities), which would mandate the registration or licensing with CIMA.

Furthermore, if such peer-to-peer transfers fall within one of the relevant financial businesses under the Proceeds of Crime Act, the relevant party will be required to comply with the AML and KYC requirements under the AML Regulations, which include, inter alia, implementing client identification and verification, record-keeping, and internal reporting and control procedures.

Does the law permit trading cryptoassets with anonymous parties?

In general, there are no legal restrictions on trading cryptoassets with anonymous parties, unless such trades are considered to be conducted in the course of business of the relevant party and the relevant party is considered to be providing the services of transfer of virtual asset under the VASP Act, and/or carrying out the relevant financial business under the AML Regulations, in which the relevant party will then be subject to certain due diligence requirements of the transaction parties and/or customers, hence making it difficult for a party to keep itself anonymous.

(a) Are foreign cryptocurrency exchanges subject to your jurisdiction’s laws and regulations governing cryptoasset exchanges?

In general, the location of domicile of a foreign cryptocurrency exchange does laws and regulations may govern such exchange.

For the VASP Act, what matters is whether any virtual asset service is provided in or from within the Cayman Islands in the course of business, the affirmation of which will render the foreign cryptocurrency exchange to register or be licensed with CIMA.

In addition, SIBA also does not differentiate between the treatment for varying locations of domicile of a foreign cryptocurrency, and what matters is the actual business activity conducted by the relevant exchanges and whether the service is being provided in or from within the Cayman Islands.

(b) Under what circumstances may a citizen of the Cayman Islands lawfully exchange cryptoassets on a foreign exchange?

From the perspective of Cayman Islands laws, there is generally no legal restriction or requirement on how a citizen of the Cayman Islands shall exchange cryptoassets on a foreign exchange.

Do any tax liabilities arise in the Cayman Islands in the exchange of cryptoassets (for both other cryptoassets and fiat currencies)?

There is generally no Cayman Islands tax liability for the exchange of cryptoassets.

Has the Cayman Islands’ government recognised any cryptoassets as a lawful form of payment or issued its own cryptoassets?
No, the Cayman Islands government has not recognised any particular cryptoasset as a lawful form of payment, nor has it issued its own cryptoasset so far.

Does Bitcoin have any special status among cryptoassets in the Cayman Islands?
No, Bitcoin does not have any special status in the Cayman Islands as compared against other cryptoassets. So long as Bitcoin falls within the definitions of virtual asset under the Virtual Asset (Service Providers) Act (As Revised) (the VASP Act), it will be subject to the corresponding regulations under the VASP Act.

Do any Cayman Islands’ banks or other financial institutions allow crypto-currency accounts?

No, except for institutions that qualify as virtual asset service providers under the VASP Act such as cryptoasset exchanges, we are not aware of any bank or other financial institution in the Cayman Islands that allows crypto-currency accounts. However, we do note that an increasing number of banks and/or other financial institutions have been willing to allow cryptoasset-related businesses (e.g., exchanges or investment funds) to establish traditional bank accounts with them.

What is the legal status of crypto-currency mining activities?

There is currently no specific legislation or regulation in the Cayman Islands that regulates, restricts or prohibits cryptocurrency mining activities.

What views have been expressed by the Cayman Islands’ government officials regarding cryptocurrency mining?

We are not aware of any particular view expressed by government officials in the Cayman Islands specifically regarding cryptocurrency mining.

Cryptocurrency mining licences – Are any licences required to engage in cryptocurrency mining?

Unless cryptocurrency mining is considered to be one of the virtual asset services under the Virtual Asset (Service Providers) Act (As Revised) (which is unlikely), there is no specific legislation or regulation in the Cayman Islands that requires a licence to be obtained before engaging in cryptocurrency mining.

How is the acquisition of crypto-currency by cryptocurrency mining taxed?

There is generally no Cayman Islands tax liability for the acquisition of cryptocurrency by cryptocurrency mining in the Cayman Islands.

Node licensing
Are any licences required to operate a blockchain/DLT node?

Assuming the subject cryptoassets qualify as virtual assets under the Virtual Asset (Service Providers) Act (As Revised) (the VASP Act), it is likely that operating a blockchain or DLT node in the course of one’s business may be considered as ‘participation in and provision of financial services related to a virtual asset issuance or the sale of a virtual asset’, hence qualifying such operator as a virtual asset service provider, which requires registration with Cayman I s lands Monetary Authority (CIMA) under the VASP Act.

Is the operation of a blockchain/DLT node subject to any restrictions (e.g., based on sanctions/AML/KYC/FATF rules and standards)?

There is no legal restriction in the Cayman Islands that is specifically directed towards the operation of a blockchain/DLT node. However, if the operator of a blockchain/DLT node is considered to be a virtual asset service provider under the VASP Act, such operator shall generally be subject to the various anti-money laundering (AML) and know your customer requirements stipulated by the VASP Act and by the AML Regulations.

What legal liabilities do the participants in a decentralised autonomous organisation (DAO) have?

A DAO or its participants generally are not subject to any legal liability in the Cayman Islands, especially when a DAO does not have any legal personality.

However, if a DAO has been established with a corporate legal personality (eg, in the form of a Cayman foundation company or an exempted company), depending on the type of activity it undertakes in the course of its business, it might be subject to various legal regulations or restrictions in the Cayman Islands, such as the VASP Act and the SIBA. For instance, if a corporate DAO’s issuance of any tokens qualified as an issuance of virtual asset under the VASP Act, the corporate DAO will be required to register with CIMA and obtain CIMA’s prior approval before the issuance, but it is also important to note the exclusion of virtual service token from the definition of virtual assets.

Who owns the assets of a DAO?

The ownership of assets of a DAO will generally depend on various factors such as the DAO’s specific structure and any rules encoded in the DAO’s smart contracts or protocols, and such ownership is typically distributed among the participants or token holders of a DAO.

However, if a DAO is structured as a Cayman foundation company and such foundation company has shareholders (which is not mandatory), such shareholders would then be the ultimate owner of the assets of the DAO.

Is DLT based on open-source protocols or software treated differently under the law than private DLT?

No, the Cayman Islands law generally does not impose different treatments to DLT based on open-source protocols or software and private DLT.

Are smart contracts legally enforceable?

Currently, there is no specific legislation or regulations in the Cayman Islands that govern the enforceability of smart contracts. However, the Electronic Transactions Act (As Revised) allows for the formation of a contract by electronic record, and it also recognises the validity of electronic signatures so long as such signatures satisfy the reliability requirement stipulated therein. Therefore, provided that all of the essential elements of a contract (ie, offer, acceptance, intention to be legally bound and consideration), are present, we are of the view that a properly executed smart contract will be legally enforceable in the Cayman Islands.

Can blockchain/DLT technology be patented?

There is no legislation or regulation in the Cayman Islands that prohibits blockchain/DLT technology from being patented. So long as the Patents Act (As Revised) of the Cayman Islands is complied with, the owner of the patent right of blockchain/DLT technology recognised in the United Kingdom may apply to extend such patent right to the Cayman Islands.

Recent developments
Are there any emerging trends, notable rulings or hot topics related to cryptoassets or blockchain in your jurisdiction?

The Mutual Funds (Amendment) Bill, 2026, the Private Funds (Amendment) Bill, 2026, and the Virtual Asset (Service Providers) (Amendment) Bill, 2026 (the “Bills”), collectively pave the way for tokenized funds in the Cayman Islands, by:

(1) materially revising the definition of “issuance of virtual assets” to exclude both (i) the issuance of equity interests under the Mutual Funds Act, and (ii) investment interests under the Private Funds Act, from the requirement to register under the VASP Act; and

(2) establishing specific registration requirements for tokenised funds. For example, a tokenised private fund that applies to CIMA for registration must (i) obtain and securely maintain all records relating to the issuance, creation, sale, transfer, and ownership of an investment interest that is represented by a “digital investment token”, including records containing any additional information which may be required by CIMA. These records must be made available to CIMA or any person assigned by CIMA within such period as may be specified. Licensed mutual fund administrators are required to be satisfied that tokenised mutual funds are compliant with the same obligations.

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This publication is not intended to be a substitute for specific legal advice or a legal opinion. For more information or specific legal advice, please contact:

E: gary.smith@loebsmith.com
E: robert.farrell@loebsmith.com
E: elizabeth.kenny@loebsmith.com
E: vanisha.harjani@loebsmith.com
E: faye.huang@loebsmith.com
E: vivian.huang@loebsmith.com

Legal framework

What legal framework governs cryptoassets? Is there specific legislation governing cryptoassets and businesses transacting with cryptoassets?

Generally, cryptoassets themselves are not subject to any specific regulation in the Cayman Islands, but a person who conducts business in relation to cryptoassets may be regulated by various legislations as detailed below.

The Virtual Asset (Service Providers) Act (As Revised) (the VASP Act) provides the primary legal framework for the conduct of virtual assets business in the Cayman Islands and for the registration and licensing of persons providing virtual asset services. Under the VASP Act, virtual asset service means:

“the issuance of virtual assets or the business of providing one or more of the following services or operations for or on behalf of a natural or legal person or legal arrangement – (a) exchange between virtual assets and fiat currencies; (b) exchange between one or more other forms of convertible virtual assets; (c) transfer of virtual assets; (d) virtual asset custody service; or (e) participation in, and provision of, financial services related to a virtual asset issuance or the sale of a virtual asset.”

However, it is important to note that, according to section 3(2) of the VASP Act, virtual service tokens, defined as “a digital representation of value that is not transferrable or exchangeable with a third party at any time and includes digital tokens whose sole function is to provide access to an application or service or to provide a service or function directly to its owner”, are not considered to be virtual assets and hence anyone providing services involving virtual service tokens will fall out-side the scope of the registration regime and licensing regime under the VASP Act.

Furthermore, if the relevant crypto-asset is considered to be securities under the Securities Investment Business Act (As Revised) (the SIBA), the SIBA may also be applicable in regulating the carrying out of securities investment business that relates to cryptoassets.

How would you describe the government’s general approach to the regulation of cryptoassets in your jurisdiction?

The Cayman Islands government has been proactive in developing a regulatory framework that strives to align with global regulatory standards and requirements of the Financial Action Task Force recommendations, as well as offering satisfactory consumer or investor protections, while striking a balance to provide considerable room for operation and organic growth.

Which government authorities regulate cryptoassets and businesses transacting with cryptoassets?

The Cayman Islands Monetary Authority (CIMA) is the primary government agency that is responsible for enforcing the VASP Act and the SIBA, and has wide discretionary, supervisory and enforcement powers in relation to the regulation of virtual asset services and securities investment businesses.

What penalties can regulators impose for violations relating to cryptoassets (eg, injunctions, fines or prison terms)?

Under the VASP Act, the Cayman Islands Monetary Authority (CIMA) has wide discretionary enforcement powers in response to various corresponding suspected or actual non-compliance circumstances, including but not limited to:

• directing the virtual asset service provider to cease and desist from carrying out a particular act or conduct;
• directing the virtual asset service provider by written notice to comply with the relevant statutory requirement(s) within such period of time and on such conditions as specified therein;
• revoking the virtual asset licence or sandbox licence or cancel the registration;
• imposing conditions upon the relevant licence or amend or revoke such conditions;
• applying to the court for any order that is necessary to protect the interests of clients or creditors of the licensee or registered person;
• at the expense of the virtual asset service provider, requiring that a licensee or registered person obtain an auditor’s report to be submitted to CIMA on its anti-money laundering systems and procedures for compliance with the Anti-Money Laundering Regulations (As Revised);
• requiring the substitution of any senior officer or trustee of the virtual asset service provider appointed, or the divestment of ownership or control;
• at the expense of the licensee, appointing a person to advise the licensee on the proper conduct of its affairs and reporting the same to CIMA; and
• requiring such action to be taken by the virtual asset service provider as CIMA reasonably believes necessary.

Under the SIBA, CIMA has wide discretionary enforcement powers in response to various corresponding suspected or actual non-compliance circumstances, including but not limited to:

• directing the licensee or registered person to cease or refrain from committing a particular act or pursuing a particular course of conduct and to perform such acts as, in the opinion of CIMA, are necessary to remedy or ameliorate the situation;
• directing the licensee or registered person by written notice to comply with the relevant statutory requirement(s) within such period of time and on such conditions as specified therein;
• revoking the relevant licence or cancel the registration;
• imposing conditions or further conditions upon the relevant licence or registration or amend or revoke such conditions;
• applying to the court for any order that is necessary to protect the interests of clients or creditors of the licensee or registered person;
• at the expense of the licensee or registered person, requiring that a licensee or registered person obtain an auditor’s report to be submitted to CIMA on its anti-money laundering systems and procedures for compliance with the Anti-Money Laundering Regulations (As Revised);
• requiring the substitution of any senior officer or trustee of the licensee or registered person appointed, or the divestment of ownership or control;
• at the expense of the licensee or registered person, appointing a person to advise the licensee or registered person on the proper conduct of its affairs and reporting the same to CIMA; and
• requiring such action to be taken by the licensee or registered person as CIMA reasonably believes necessary.

Which courts have jurisdiction over disputes involving cryptoassets?

Generally, the main court of first instance for disputes involving cryptoassets is the Grand Court of the Cayman Islands (the Grand Court), but certain disputes having a subject matter of CI$20,000 or below may be given jurisdiction to the Summary Court of the Cayman Islands. Any appeal from the Grand Court is dealt with by the Court of Appeal of the Cayman Islands (the Court of Appeal), and any further appeal from the Court of Appeal is heard by His Majesty’ s Judicial Committee of the Privy Council in London, UK.

Is it legal to own or possess crypto-currency, use cryptocurrency in commercial transactions and exchange cryptocurrency for local fiat currency in the Cayman Islands?

In general, there is no legal prohibition on owning or possessing crypto-currency, using cryptocurrency in commercial transactions and exchanging cryptocurrency for local fiat currency in the Cayman Islands. However, if the exchange of cryptocurrency for local fiat currency is carried out in the course of business of the relevant person, that person might be considered as a virtual asset service provider under the VASP Act and hence may be legally required to register with CIMA before it may conduct such business.

At the same time, if the relevant cryptocurrency qualifies as securities under the SIBA and the use of such cryptocurrency in commercial transactions is carried on in the course of business of the relevant person, and such use of cryptocurrency qualifies as one of the regulated activities of securities investment business under the SIBA, that person might have to be licensed or registered with CIMA before it may conduct such business.

What fiat currencies are commonly used in the Cayman Islands?

The official currency of the Cayman Islands is the Cayman Islands dollar, but the United States dollar is also accepted in the Cayman Islands.

What are the leading industry associations addressing legal and policy issues relating to cryptoassets?

By way of example, Cayman Finance is one of the industry associations that have been proactive in reporting news and issues relating to cryptoassets.

The Blockchain Association of the Cayman Islands (BACI) is the jurisdiction’s independent, not-for-profit industry body championing the growth of blockchain, digital-asset and Web3 innovation across Cayman and beyond. Founded in 2019 and run by practitioners “on the ground”, BACI brings together technology entrepreneurs, financial services experts, professional advisers, blockchain enthusiasts, regulators and educators to advance one shared goal: positioning Cayman as the premier global hub for compliant, cutting-edge blockchain business.

Regulatory threshold

What attributes do the regulators consider in determining whether a cryptoasset is subject to regulation under the laws in the Cayman Islands?

A person will be regulated by the Virtual Asset (Service Providers) Act (As Revised) (the VASP Act) if it provides certain virtual asset service that involves virtual assets, and a crypto-currency shall be considered as a virtual asset under the VASP Act if it is “a digital representation of value that can be digitally traded or transferred and can be used for payment or investment purposes but does not include a digital representation of fiat currencies”.

Meanwhile, a person will be regulated by the Securities Investment Business Act (SIBA) if it is engaged in certain securities investment business, which involves securities (e.g., advising on securities, dealing in securities, arranging deals in securities, or managing securities), and a cryptocurrency would be considered as securities under the SIBA if it is an asset, right or interest specified in Schedule 1 to the SIBA, which is stated in paragraph 14 of Schedule 1 to the SIBA as including, in particular, virtual assets that “can be sold, traded or exchanged immediately or at any time in the future that — (a) represent or can be converted into any of the securities listed in paragraphs 1 to 13 of this Schedule; or (b) represent a derivative of any of the securities listed in paragraphs 1 to 13 of this Schedule”. Whereas paragraphs 1 to 13 of Schedule 1 to the SIBA include the broad categories of shares, instruments creating or acknowledging indebted-ness, instruments giving entitlements to securities, certificates representing certain securities, options, futures and contracts for differences.

How are investors in cryptoassets classified and treated differently (eg, ordinary (retail), institutional, sophisticated, accredited)?

The applicability and regulations of the VASP Act generally depend on the business activities of a relevant person, instead of the type of investors.

Under the SIBA, however, where the securities investment business is carried out exclusively for one or more sophisticated persons and high net worth person, an exemption will be offered to that relevant person, who is required to only register with CIMA instead of obtaining a full licence from CIMA. The regulatory burden and requirements applicable to a relevant person carrying on securities investment business exclusively for sophisticated persons and for high net worth persons is substantial but not as great as that applicable to a relevant person required to obtain a full licence from CIMA.

Further, in the context of Cayman Islands funds that invest in crypto-assets, it is worth noting that any regulation that typically applies to funds marketed or whose securities are offered to investors situated in certain geographical locations, e.g. Japan and any European Union member state, shall continue to apply.

What rules and restrictions govern the conduct of, and investment in, initial coin offerings (ICOs)?

If the coin or token falls within the definition of a virtual asset under the VASP Act, the ICO might constitute an issuance of virtual assets, which is one of the virtual asset services regulated under the VASP Act, rendering the need to register with CIMA and to obtain advance approval before the issuance. The act of investing in ICOs will likely not be regulated by the VASP Act unless, for example, such act constitutes ‘participation in, and provision of, financial services related to a virtual asset issuance or the sale of a virtual asset’.

At the same time, by making reference to the SIBA and the Electronic Transactions Act (As Revised) of the Cayman Islands, CIMA may qualify coins/tokens issued on blockchain through ICOs as stock or debt (under the SIBA) if the rights attached to the coins/tokens (as represented in the white paper published in connection with the relevant ICO) resemble rights normally attached to equity interests or debt. Therefore, all persons engaging, in the course of business, in the conduct of, or investment in, ICOs may be subject to the registration or licensing requirements under the SIBA.

In certain other circumstances, a registration with or a license from CIMA may also be required in connection with an ICO, such as: (1) under the Money Services Act (As Revised), if the coins/tokens issued could give access to money transmission or currency exchange services; (2) under the Mutual Funds Act (As Revised) or the Private Funds Act (As Revised), if under proposed new amendments to these two pieces of legislation, the issuer of the coins/tokens is essentially a collective investment scheme ( e. g. a tokenised mutual fund or a tokenised private fund) and the coins or tokens are digital equity tokens or digital investment tokens.

Irrespective of whether coins/tokens issued qualify as securities or other-wise, existing anti-money laundering (AML) and know-your-customer (KYC) requirements under Cayman Islands laws will apply if the ICO is used as a money-raising event. Under the Proceeds of Crime Act (As Revised) (the Proceeds of Crime Act) and the Anti-Money Laundering Regulations (As Revised) (the AML Regulations), persons engaged in certain types of financial business are required to implement client identification and verification, record-keeping, and internal reporting and control procedures. In addition, it is an offence for a financial service provider to form a business relationship, or to carry out as a one-off transaction, with an applicant for business without maintaining the AML policies and procedures.

What rules and restrictions govern the conduct of, and investment in, security token offerings (STOs)?

Certain pieces of legislation and regulations shall similarly apply to STOs so long as the security token being offered falls within the corresponding scope.

What rules and restrictions govern the issue of, and investment in, stablecoins?

Generally, stablecoins fall within the definition of a virtual asset under the VASP Act, and therefore the issuance of stablecoins will typically constitute an issuance of virtual assets under the VASP Act, which would require the issuer to register with CIMA and to obtain advance approval before the issuance. On the other hand, the VASP Act does not regulate the making of an investment in stablecoins unless, for example, such act constitutes ‘participation in, and provision of, financial services related to a virtual asset issuance or the sale of a virtual asset’.

If stablecoins fall within one of the broad categories of securities under the SIBA, the issue of, or investment in, stablecoins in the course of a person’s business may constitute a securities investment business that mandates that relevant person to register with or be licensed by CIMA.

Are cryptoassets distributed by air-drop treated differently than other types of offering mechanisms?

Yes, airdrop of cryptoassets might be treated differently by the VASP Act than other types of offering mechanisms as previously mentioned. According to the VASP Act, issuance of virtual assets means “the sale of newly created virtual assets to the public in or from within the Islands in exchange for fiat currency, other virtual assets or other consideration but does not include the sale of virtual service tokens”. However, since an airdrop typically does not involve any consideration, it is likely that an airdrop of cryptoassets would not constitute as an issuance of virtual assets or any other virtual asset ser-vices regulated by the VASP Act.

What laws and regulations govern the advertising and marketing of cryptoassets used for investment and financing?

The VASP Act generally does not regulate or restrict the mere acts of advertising and marketing of cryptoassets used for investment and financing because these activities do not fall within any virtual asset services regulated by the VASP Act, except to the extent such activities constitute “participation in, and provision of, financial services related to a virtual asset service or the sale of a virtual asset”. However, it is worth noting that the Virtual Asset (Service Providers) Regulations, 2020 (the VASP Regulations) differentiates an issuance of virtual assets, which is one of the virtual asset services regulated by the VASP Act, from a private sale, which does not require any registration or licensing with CIMA under the VASP Act. A private sale is defined as “a sale, or offer for sale, which is not advertised and is made available to a limited number of persons or entities who are selected prior to the sale by way of a private agreement”, whereas the VASP Regulations stipulates that CIMA will determine whether a sale of virtual assets qualifies as an issuance of virtual assets by assessing, among other things, whether such sale or offer for sale will be advertised to persons or entities in the Cayman I s lands. Furthermore, when granting a sandbox licence under the VASP Act, CIMA may also impose restrictions on the sandbox licensee’s advertising.

Similarly, the SIBA generally does not regulate or restrict the mere acts of advertising and marketing of crypto-assets used for investment and financing because these activities do not fall within any regulated activities of securities investment business regulated by the SIBA, unless it involves the marketing of the shares, trust units or partnership interests of an EU Connected Fund (as defined in the SIBA) to investors or potential investors in a European Union member state.

Are investors in an ICO/STO/stablecoin subject to any restrictions on their trading after the initial offering?

No, generally investors in an ICO, STO or stablecoin are not subject to any legal restrictions on their trading after the initial offering.

How are crowdfunding and cryptoasset offerings treated differently under the law?

Crowdfunding and cryptoasset offerings are generally not treated differently under laws of the Cayman Islands. So long as the crowdfunding or cryptoasset offering is conducted in the course of one’s business and falls within the relevant regulated business activity under the VASP Act and/or the SIBA, such fundraising exercise would be subject to the corresponding registra-tion or licensing requirements.

What laws and regulations govern cryptoasset transfer agents and share registrars?

If the provision of transfer agency and share registrar services of the crypto-asset transfer agents and share registrars involves cryptoassets that qualify as a virtual asset under the VASP Act, such business may constitute providing a virtual asset service in the sense of ‘participation in, and provision of, financial services related to a virtual asset issuance or the sale of a virtual asset’, thereby subjecting them to the registration or licensing requirements of the VASP Act.

What anti-money laundering (AML) and know- your- customer (KYC) requirements and guidelines apply to the offering of cryptoassets?

In terms of the AML Regulations, assuming an offering of cryptoassets refers to the general issuance of cryptoassets for fundraising purpose, if such offering of cryptoassets qualifies as securities issues or issuing and managing means of payment under the Proceeds of Crime Act, the relevant offeror will be required to comply with the requirements under the AML Regulations, which include, among other things, implementing client identification and verification, record-keeping, and internal reporting and control procedures. However, if the offering of cryptoassets does not qualify as securities issues or issuing and managing means of payment under the Proceeds of Crime Act, it is unlikely that such offering shall be subject to any AML requirements of the AML Regulations, because such offering will not fall within any of the relevant financial businesses under the Proceeds of Crime Act, especially when the definition of virtual asset services therein does not include issuance of virtual assets. On the other hand, assuming an offering of cryptoassets refers to anything other than the general issuance of cryptoassets for fundraising purposes, it will be subject to the relevant AML requirements of the AML Regulations if such activity is consid-ered to fall within any of the relevant financial businesses under the Proceeds of Crime Act.

In terms of the VASP Act, assuming that the offering of cryptoassets constitutes as a “virtual asset service”, when CIMA is making a decision to grant a virtual asset service licence or a sandbox licence, to register an applicant or to waive a requirement to licence or register under the VASP Act, it will consider, among other things, (1) the procedures that the applicant has in place to combat money laundering, terrorist financing and proliferation financing, as well as (2) the applicant’s ability to comply with the VASP Act and the relevant requirements of the AML Regulations.

The VASP Act also sets out the following AML-related factors that CIMA will take into account when determining whether to approve an issuance of virtual assets by a licensee or registered person under the VASP Act:

• whether the virtual asset interferes with the functions of CIMA relating to AML, combating of terrorist financing and anti-proliferation financing; and
• the AML processes utilised by or available to the virtual asset issuer.

In terms of the general ongoing AML requirements in the context of an offering of cryptoassets, virtual asset service providers who carry out virtual asset services (including issuance of virtual assets) and thus are regulated by the VASP Act are required to comply with the following:

• at CIMA’s request, to provide an independent auditor’s report on the AML systems and procedures for compliance with the AML Regulations;
• to comply with the AML Regulations and other laws relating to the combating of money laundering, terrorist financing and proliferation financing;
• for the purpose of ensuring compliance with the AML Regulations, to put in place AML systems and procedures;
• to designate an employee as the officer with responsibility for the procedures for combating money laundering, terrorist financing and proliferation financing; and
• to obtain prior approval from CIMA before appointing a senior officer or trustee or an AML compliance officer, who is required to be a fit and proper person.

Furthermore, according to the VASP Act, CIMA may impose additional requirements specific to the relevant issuance of virtual assets on a virtual asset service provider to ensure compliance with the AML Regulations.

Under the VASP Act, CIMA also has the power to examine the affairs or business of any virtual asset service provider by way of the receipt of regular returns, on-site inspections, auditor’s reports or in such other manner as CIMA may determine, for the purpose of, inter alia, confirming that the AML Regulations are being complied with.

What laws and regulations apply in the context of cryptoassets to enforce government sanctions, anti-terrorism financing principles, and Financial Action Task Force (FATF) standards?

In the context of cryptoassets, both the AML Regulations and the VASP Act were enacted with an aim to ensure that government sanctions are enforced and anti-terrorism financing principles and FATF standards are observed.

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This publication is not intended to be a substitute for specific legal advice or a legal opinion. For more information or specific legal advice, please contact:

E: gary.smith@loebsmith.com
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Other than offering a tax neutral jurisdiction for international investors, the Cayman Islands benefit from financial and political stability, a business-friendly regulatory environment, a sophisticated legal regime based on English common law with a respected court system and a pool of highly skilled professional service providers; all of these factors combine to make it a jurisdiction of distinction for equity financing.

The flexibility of Cayman Islands exempted companies is certainly one of their main appeal. For example, Cayman Islands’ corporate law does not require any director or officer of the exempted company to be resident in the Cayman Islands. An exempted company which is not regulated is not required by statutory law to hold an annual general meeting of its shareholders. Equally, there is no statutory requirement for a non-regulated exempted company to undertake an annual audit. More on the advantages of using Cayman Islands exempted companies for investment purposes here: Advantages of Using Cayman Islands Exempted Companies for Investment Purposes and to… – Loeb Smith.

Whilst investors in PE and VC investment companies would ordinarily look to realise their investment within 3-6 years, these exit strategies have been severely impacted in recent years by macro-economic factors and geopolitical developments, which have made it increasingly difficult for investors to exit their investment. In this economic landscape, investors may have to explore less traditional routes to exiting their investment. In this article, we seek to provide some insight on how investors can navigate the not-so-unconventional waters of exit enforcement when issued with preference shares in a Cayman Islands exempted company.

In usual circumstances, the memorandum and articles of association of the exempted company as well as the subscription and shareholders’ agreements are drafted to include various investor protection provisions such as preference dividend rights, liquidity preference rights, exit rights on the occurrence of certain events, and rights to redeem preference shares in the event that anticipated trigger events for an exit do not materialize.

Investors in Cayman Islands exempted companies ought to be aware that under Cayman Islands law, dividends can only be paid out of available profits or from the company’s share premium account, however, in the latter case, such payment can only be made if immediately following the date on which the distribution or dividend is proposed to be paid, the company is able to pay its debts as they fall due in the ordinary course of business. More on dividends and on what constitutes profits here: Payment of dividends by a Cayman Islands company and what constitutes “profits” – Loeb Smith.

Similarly, it should be noted that the Cayman Islands’ Companies Act (As Revised) prescribes that share redemptions and share buybacks can generally only be funded out of profits, out of a company’s share premium account or out of the proceeds of a fresh issue of shares. However, in limited circumstances, a company can make a payment out of capital provided that immediately following the date on which the payment out of capital is proposed to be made, the company is able to pay its debts as they fall due in the ordinary course of business.

Interestingly, in what is a leading authority on the matter, the Cayman Islands Court of Appeal has held that the cash flow test of solvency mentioned above is not confined to consideration of debts that are immediately due and payable but also permits consideration of debts that will become due and payable in the reasonably near future.

The provisions on distribution of the company’s assets on a winding up or a liquidation under Cayman Islands law are also drafted so as to prioritise creditors over shareholders, and within this group, in particular, preferential and secured creditors. The law of voidable preference which is written into the Companies Act may also be invoked in the event the directors of the exempted company had paid a particular shareholder or a redeemed shareholder ahead of other creditors at a time when the company was unable to pay its debts with a view to giving such redeemed shareholder a preference over the creditors. In such circumstances, such transactions would be voidable upon the application of the company’s liquidator if made within six (6) months of the commencement of the company’s liquidation.

Against this backdrop of limitations on dividends, redemptions and distributions are directors’ fiduciary duties. The duties of directors of a Cayman Islands exempted company are found in the common law and include, amongst others, the duty to act in good faith in the best interest of the company. It is important to note that whilst in many circumstances the best interest of the company align with the best interest of its shareholders, this is not always the case, particularly when a company is nearing insolvency. In those circumstances, the directors, as part of their duties, will likely put the company’s creditors’ interests ahead of the interests of its shareholders and may find themselves unable to satisfy redemption requests from shareholders. This is in spite of the investor protection provisions which may have been negotiated into the preference share financing documents.

Notwithstanding the above, there may be benefits in submitting early redemption requests in situations where the company is in financial difficulty. As a first step, however, any shareholder looking to submit a redemption request should familiarize themselves with the procedure and, if necessary, consult with their legal counsel as procedural compliance can often be the difference between a simple shareholder and a creditor. The company’s articles of association and/or shareholders’ agreement usually set out a detailed procedure where certain steps must occur within a strict timeframe for the redemption request to be valid.

Where there has been a valid redemption request which has been accepted but the company has failed to satisfy, such failure has the important effect of raising the investor’s status to that of an unsecured creditor as opposed to a mere shareholder. At this point, the investor/unsecured creditor has the option to either (i) commence legal proceedings, or (ii) issue a statutory demand to the company requiring it to pay the sums owed under the accepted redemption request within twenty-one (21) days of the date of service.

Option (i) (i.e. the commencement of formal legal proceedings), will be subject to whatever terms regarding dispute resolution were contractually agreed between the investor and the company in the preference share financing documents. Arbitration is often found in these types of agreements. Whilst commencing legal proceedings against the company may cause the company to pay the sums owed, these proceedings are often time-consuming and expensive and, in the event such proceedings are successful and the investor comes out with a judgment or an arbitral award in its favour, even then it may be difficult for the investor to enforce judgment that against the company if the company is insolvent as preferential and secured creditors would take priority under Cayman Islands insolvency law.

Option (ii), on the other hand, only requires the investor to issue the company with a formal letter in a prescribed form called a “statutory demand” requiring it to pay the debt owed within a prescribed period or dispute the debt. Should the company fail to engage, this provides rebuttable evidence that the company is unable to pay its debts as they fall due and such evidence can be used as the basis for winding up proceedings against the company. The next step would then be to petition the Cayman Islands court to wind up the company. It should be noted, however, that a public notice will be advertised which will give other interested parties the opportunity to join the proceedings. The scheduled hearing may result in the company being placed into liquidation unless it can raise a substantive defence as to why the debt has not been paid. Once the company is in liquidation, the appointed liquidator will look into its accounts, realise the company’s assets and pay the creditors in ranking order.

One of the defences that companies often raise in winding up proceedings is that of lack of “legally available funds”. This is due to the fact that when it comes to negotiating the initial set of documents for the preference share financing, provisions restricting the payment of redemptions to situations when the company has “legally available funds” will often be drafted into the articles of association and/or the shareholders’ agreement. It then becomes a question of interpretation as to what “legally available funds” actually means in that particular context. Cayman Islands courts have held such term to mean funds owned by the company or funds that the company could obtain by exercising its legal rights, however, such funds would not include any monies which are required for the company’s ordinary course of business. Generally speaking, to the extent that wording has been drafted into the documents and the company does not have sufficient legally available funds to satisfy the redemption requests, Cayman Islands courts are inclined to hold such a defence as a genuine and substantive dispute of the debt and have set aside winding up proceedings on that basis.

As mentioned at option (i) above, arbitration clauses are often drafted into preference share finance documents and Cayman Islands courts would ordinarily grant a stay of a winding up petition based on a disputed debt where the underlying dispute falls within the scope of an arbitration clause. Importantly, however, the stay of winding up proceedings in favour of arbitration is not automatic and the Cayman Islands courts will first need to be satisfied as to the existence of a bona fide dispute on substantial grounds prior to being able to exercise their discretion to stay the petition in favour of arbitration. In other words, the Cayman Islands courts will not stand for any delaying tactics where there does not appear to be a genuine dispute of the debt.

If a company has run into financial difficulties, there may be scope for the company and the investors to come together and agree to a voluntary restructuring. Where a consensual solution cannot be reached with all interested parties, the agreement may take the form of a court-supervised process such as a scheme of arrangement which may have the potential for a better return to investors than a liquidation of the company.

The corporate team at Loeb Smith has extensive experience in advising companies and investors on the negotiation of these finance documents, the enforcement of redemption requests and the implementation of suitable strategies and solutions for financially-stricken companies.

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This publication is not intended to be a substitute for specific legal advice or a legal opinion. If you require further advice relating to the matters discussed in this Insight, please contact us.  We would be delighted to assist.

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In Abraaj General Partner VIII Ltd v Abraaj ABOF IV SPV Ltd [2025] CICA (Civ) 8, the Cayman Islands Court of Appeal (“CICA”) clarified the scope of a limited partner’s statutory right to receive “true and full information” under section 22 of the ELP Act. The CICA provided guidance by stating that the section provides a fundamental safeguard for limited partners who are otherwise not entitled to interfere with the business of the ELP, with its purpose being to enable the limited partners to have a “comprehensive understanding” of the business decisions being made on their behalf and the financial consequences of those decisions. What is meant by “full information” in section 22 is to be determined in this context.

How does Section 22 impact on Section 21 of the ELP Act?

Section 21 of the ELP Act requires the general partner (“GP”) of an ELP to keep or cause to be kept proper books of account including, where applicable, material underlying documentation including contracts and invoices, with respect to:

1. all sums of money received and expended by the ELP and matters in respect of which the receipt of expenditure takes place;
2. all sales and purchases of goods by the ELP; and
3. the assets and liabilities of the ELP.

Section 21(2) of the ELP Act states that the proper books of account required to be maintained under section 21 will not be deemed to be properly kept if there are not kept in such a manner as are necessary to give a “true and fair view of the business and financial condition of the exempted limited partnership and to explain its transactions”.

In terms of the connection between the two sections, it is clear that section 22 is very wide in scope and will include all of the books and records maintained by the GP pursuant to its statutory obligation under section 21 of the ELP Act. However, it is also clear that section 22 is wider in scope than section 21 as it requires “information” to be provided, not just documents (books of accounts and underlying documentation), and it requires the information to be “true and full”, not merely “true and fair” as is the case with section 21. The CICA re-confirmed the previous Grand Court decision in Dorsey Ventures Limited v. XIO GP Limited (FSD 38 of 2018, unreported 22 October 2018) that section 22 is much wider in scope than section 21.

In most cases, where proper accounts of the ELP have been maintained with the material underlying documentation, these will provide a substantial part of the information needed by the limited partners to understand “the state of the business and financial condition” of the ELP in response to the section information request.

Interaction with the Limited Partnership Agreement (“LPA”) – can the LPA restrict or exclude the Section 22 right?

Section 22 expressly states that a limited partner’s right to information is subject to the express or implied terms of the LPA.  Accordingly, the statutory right to information may be restricted by the terms of the LPA.

In the Dorsey Ventures case, the GP argued that by expressly conferring a right to audited and unaudited quarterly accounts in the LPA, the parties had impliedly excluded any broader right under section 22. The Grand Court rejected this, holding that there was nothing in the LPA inconsistent with an overriding general right to information under section 22, and that the reasonable man could not have understood the parties to have meant that the limited partner’s right to demand information would be excluded. Accordingly, it would seem that for an ELP to effectively restrict or exclude the right to receive true and full information, it would be prudent to expressly do so in the LPA and use clear and unambiguous language in doing so.

A significant issue is whether GP can refuse a section 22 request from a limited partner by challenging the limited partner’s motive or intentions.

The Court in In the Matter of Gulf Investment Corporation et al v The Port Fund LP et al – FSD 235 of 2019 and FSD 13 of 2020 (RPJ) concluded that the intentions or motives for a limited partner’s request for information are irrelevant. This was supported by the principle that because the statutory right of inspection is expressed in unqualified terms, the motives and bona fides of the partner seeking to exercise it, will be irrelevant.  There is no duty of good faith on the limited partner with respect to such requests. Section 19(2) of the ELP Act states that (subject to any express provisions of the LPA to the contrary) a limited partner does not owe any fiduciary duty in exercising any of its rights or authorities or otherwise in performing any of its obligations under the LPA to the ELP or any other partner.

There is no requirement for a limited partner to provide reasons for the initial information request. It is only if there is a proper basis for contending that categories of information demanded fall outside the operation of section 22 that a limited partner’s right would fail. For example, this would be where the information sought clearly did not relate to the business and financial affairs of the ELP. However, the CICA in the Abraaj case was of the view that once a GP provides information about what documents exist in response to a section 22 request, the onus shifts to the LP to explain why those documents are insufficient, or to identify other documents that exist and would be just as material as those identified by the GP. The LP cannot simply identify a particular document and demand all other documents falling within the same category. A fact-specific investigation is required as to what else is necessary to comply with the statutory obligation. Relevant factors to consider in this investigation will be (i) the nature of the ELP’s business, (ii) its mode of conduct, and (iii) the terms of the governing documents read in the light of current business practice.

1. Ongoing Nature of the Obligation. Once a limited partner makes a relevant demand under section 22, the GP has an ongoing obligation to provide the material, provided it falls within the section. This means the duty does not lapse once a response is given; it continues as new relevant information becomes available.
2. Initial breadth of requests. In ordinary circumstances, the GP may be required to accept a limited partner’s request for information, however widely expressed and this will most likely be the case because of the conceptual difficulty of applying section 22 without knowing what documentation actually exists.
3. Shifting of the evidential burden. The CICA in the Abraaj case was of the view that if the GP provides information about what documents exist, the onus will shift to the limited partner to indicate in what respects the available documentation is insufficient and the existence of other documents which would be just as material as those provided. It will not be sufficient for the limited partner simply to identify the existence of a particular document and demand all documents falling within that category.
4. The “functional test.” The CICA held in the Abraaj case that the test is a functional one, with the focus being on the function of the documents that actually exist, and more broadly, whether the information sought is properly required to allow the limited partner a “comprehensive understanding” of the state of the business and of its investment in it, and of the risks attaching to that investment.
5. Relief must address “real and substantial” issues. Once it is established in principle that relief should be granted, the Court should also be satisfied that any disclosure order made is appropriate to address “real and substantial” issues (and not merely theoretical issues).
6. Third-party information subject to reasonableness. In an appropriate case, the Court does have power to require the GP to obtain information within its power from third parties (e.g. service providers), provided this can be done without incurring unreasonable expense.
7. Rejection of the Grand Court’s “Level Playing Field” Approach. The CICA held that the Judge’s observations in the Grand Court hearing of the Abraaj case – to the effect that section 22 is a “very wide target to aim at” and entitles a limited partner to be put on a “level playing field” – was an overly broad interpretation of the scope of section 22. The CICA decision confirms that there are limitations to the statutory entitlement under section 22. The entitlement does not extend to the limited partner being entitled to “everything” that the GP and/or Manager can obtain, or require them to provide “everything they had or could get”.
8. Summary Judgment is not appropriate. The CICA also indicated that disputes relating to section 22 information requests are not appropriate for disposal by summary judgment where the GP has arguable defences which will have to be tested. The factual disputes over whether documents had already been provided, existed at all, or were necessary need to be resolved at trial.

The CICA’s decision could represent a shift towards balancing the interests of GPs, following a previous run of decisions which tended to be pro-investor. Going forward:

• GPs should maintain proper accounts with supporting documentation, as providing these will go a long way toward discharging their section 22 obligations;
• LPs cannot simply identify that a document exists and demand everything in that category. They must demonstrate the insufficiency of what has already been provided and
• Courts will apply a purposive, functional, fact-sensitive approach, with no one-size-fits-all answer.

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A series financing transaction is a type of equity investment deal where an investor injects cash into a business in exchange for preferred shares. Irrespective of whether the investor is a venture capitalist, an angel investor or a private equity house, the issuance of preferred shares to the investor by the relevant company is typically documented by a share subscription agreement between the investor and the company. A shareholders’ agreement (“SHA”) is also entered into among the investor(s) and the relevant company to govern the rights and responsibilities of the parties, and the memorandum of association and articles of association of that company (collectively, the “M&AA”) are typically amended and restated to incorporate relevant provisions of the SHA to ensure that there are no inconsistencies between the contractual provisions of the SHA and the constitution of the company.

A distinction is often drawn between different rounds of series financing transactions. For example, series A financing refers to the first round of venture capital funding for a startup which typically follows a company’s seed round. A series B financing usually follows thereafter if the company is successful. In general terms, while a series A investment usually provides a startup with sufficient capital to develop its products and team and to commence the execution of a go-to-market-strategy, a series B investment is designed to accelerate a company’s growth. Series C financing transactions and other “late-stage” investments generally occur at a subsequent stage to support an initial public offering (IPO) or in anticipation of an acquisition.

Although investors’ key commercial drivers will vary depending on circumstances and between different rounds of series financings, many of the local law issues that arise from a BVI and a Cayman Islands law perspective are materially the same with some nuances, however. For example, there may be differences, such as in relation to board and observer appointment rights, the payment of dividends and the rights in a winding-up, that BVI or Cayman Islands legal counsel (as appropriate) will be able to advise upon.

There are various features of BVI and Cayman Islands law which make these jurisdictions attractive to startups and other early-stage companies, such as:

1. 1. Cost-effective and quick to incorporate. BVI and Cayman Islands companies are inexpensive to incorporate and to maintain in comparison with companies in other premium offshore jurisdictions. BVI companies are typically incorporated within 1-2 business days of submitting an incorporation application and Cayman Islands companies may be incorporated within 3-5 business days or on a same day express basis for an additional fee.
   2. Corporate governance is efficient. Non-regulated entities may have a sole shareholder and a sole director (which may be the same person) and there are no nationality and/or residency requirements with respect to those roles. Corporate director(s) and/or corporate shareholder(s) may also be appointed. There is no requirement to appoint a company secretary and/or to prepare audited financial statements.
   3. Flexibility. There is significant flexibility in tailoring the M&AA of the relevant company to accommodate the issuance of different classes of shares and the rights and restrictions attaching to them, board and shareholder reserved matters and other provisions pertaining to corporate governance issues.
   4. Tax neutrality. There is no corporation tax, capital gains tax, income tax, profits tax and/or share transfer tax as a matter of BVI and Cayman Islands law. Additionally, there is no withholding tax from a local law perspective.
   5. Investor familiarity. Private equity houses and venture capital investors are familiar with the BVI and the Cayman Islands as jurisdictions which are helpful in facilitating investment decisions.
   6. Secured creditor friendly. The BVI and the Cayman Islands are widely recognized as creditor friendly jurisdictions, which are helpful in the context of facilitating any debt financing that an early-stage company may require. The BVI also has a straightforward system of publicly registering security interests which is attractive to secured creditors.

In our experience, most key investors opt to undertake local legal due diligence on a company into which an investment is proposed to be made or which otherwise forms part of the corporate structure.

From a BVI and a Cayman Islands law perspective, the due diligence exercise typically encompasses the following matters.

i.   Basic corporate information, M&AA, directors and shareholders

Whilst certain basic corporate information such as date of incorporation, company name and registered address, and the names of the current directors of a Cayman Islands company are a matter of public record, its constitutional documents and statutory registers are a matter of private record and can only be obtained with the consent of the relevant company authorizing its registered office service provider to disclose them. This consent will invariably be provided as it is market practice for an investor’s Cayman Islands legal counsel to review these documents.

In contrast, a broader range of corporate information is publicly available in relation to a BVI company. Its certificate of incorporation and M&AA may be obtained from a company search, its register of members is only publicly searchable if the company has opted to make it public and it has therefore filed it with the BVI Registrar of Corporate Affairs (the “BVI Registrar”). All of the other statutory registers of a BVI company (such as its register of directors, register of members (to the extent the company opted to keep it private) and private register of charges) are a matter of private record and can only be obtained with the consent of the relevant company authorizing its registered agent to disclose it. Similar to the Cayman Islands, this consent will invariably be provided as it is market practice for an investor’s BVI legal counsel to review these documents.

The M&AA of a BVI company and a Cayman Islands company may reveal important information in the context of a series financing transaction. For example, it could assist in determining whether:

1. 1. any third-party consents are required to implement a series financing, or whether certain conditions need to be complied with prior to its consummation;
   2. there is an existing SHA in relation to the company (which could impose certain consent requirements on the parties with respect to the series financing);
   3. a series financing falls within the scope of any existing board and/or shareholder reserved matters;
   4. there are any most-favored nation provisions in favour of an existing investor;
   5. there are certain procedures which ought to be followed before the issuance of preferred shares, such as with respect to pre-emption rights; and/or
   6. the directors of the company may resolve to refuse or delay the registration of an issuance of shares in the company at their discretion.

ii.   Outstanding charges

Although the register of charges (if maintained) of a BVI company and the register of mortgages and charges of a Cayman Islands company are matters of private record, the register of registered charges of a BVI company is publicly searchable. The primary purpose of filing particulars of a charge in a BVI company’s register of registered charges is to protect the priority of the underlying security interests and to put third parties on constructive notice of them. An investor’s offshore legal counsel will invariably review the register of registered charges of a BVI company and request a copy of the register of charges or register of mortgages and charges (as applicable) to be provided to ascertain whether a company’s assets are subject to existing security interests.

iii.   Good standing

In the BVI, “good standing” means that the relevant company is on the Register of Companies, has paid all fees, annual fees and penalties due and payable, has filed with the BVI Registrar a copy of its register of directors which is complete, and has filed its annual return in accordance with the BVI Business Companies Act (As Revised). Any BVI law firm can order a certificate of good standing from the BVI Registrar with respect to a BVI company which confirms that the relevant company is in good standing as a matter of BVI law.

A Cayman Islands company is deemed to be in good standing if all fees and penalties under the Cayman Companies Act (As Revised) (the “Cayman Act”) have been paid and the Registrar of Companies of the Cayman Islands has no knowledge that the company is in default under the Cayman Act. Only the registered office service provider of a Cayman Islands company can order a certificate of good standing from the Cayman Registrar which confirms that the relevant company is in good standing as a matter of Cayman Islands law.

An offshore law firm that is conducting due diligence on a BVI company or a Cayman Islands company will order or request to be provided (as applicable) a certificate of good standing to ascertain whether the relevant company is in good standing.

iv.   Litigation

In the BVI, a search may be conducted to verify whether there are or have been in the past any actions or petitions against a company in the Eastern Caribbean Supreme Court, the Court of Appeal (Virgin Islands) and the High Court (Civil and Commercial Divisions) at the time of the search.

In the Cayman Islands, a search may be conducted to verify whether there are or have been in the past any actions or petitions against a company in the Grand Court of the Cayman Islands at the time of the search.

These searches will invariably be completed by an investor’s offshore legal counsel.

v.  Certificate of incumbency

An investor’s offshore legal counsel will usually review an up-to-date certificate of incumbency issued by the registered office service provider or registered agent (as applicable) of the relevant company. Most certificates of incumbency typically confirm that the applicable company is in good standing, as well as its name and company number, registered office address, the identities of the director(s) and shareholder(s) and share capital (if applicable). It is usually also possible to request a confirmation from the registered office service provider or the registered agent (as applicable) that it is not aware of any proceedings which are pending or which have been threatened against the relevant company, and that, to its knowledge, no receiver has been appointed over the assets of the company.

vi.  Books and records

Every Cayman Islands company must maintain, or cause to be maintained, proper books of account including information (including contracts and invoices with respect to, assets and liabilities) as are necessary to give a true and fair view of the state of the company’s affairs and to explain its transactions.

Every BVI company must maintain, or cause to be maintained, records and underlying documentation of the company in such form as (i) are sufficient to show and explain the company’s transactions; and (ii) will, at any time, enable the financial position of the company to be determined with reasonable accuracy. This includes keeping copies of invoices, contracts and similar documents. A BVI and a Cayman Islands company must also keep copies of all resolutions of its directors and shareholders and minutes of any meetings.

Whether a review of a BVI or a Cayman Islands company’s books and records is necessary will depend on a variety of factors, including the risk appetite of the investor and the activities of the relevant BVI or the Cayman Islands company. To the extent that any commercial agreements have been entered into by the company, an investor may request these to be reviewed to identify any consent requirements in relation to a proposed series financing and any change of control and/or termination provisions which could be triggered by an issuance of preferred shares. We have generally seen an increase in these types of requests which is reflective of a more cautious approach that is currently being adopted by many investors.

The following is an indicative list of local law issues that we frequently encounter in series financing transactions.

i.  Inconsistencies between the SHA and the M&AA

As noted above, it is important to ensure that there are no inconsistencies between the contractual provisions of the SHA and the M&AA of a BVI or a Cayman Islands company. Although there is no prescriptive approach as to the incorporation process as a matter of BVI and Cayman Islands law, certain types of provisions in the SHA will invariably be included in the M&AA for legal, commercial and other reasons. Examples of such provisions include rights and restrictions with respect to the shares (such as provisions with respect to pre-emption, drag-along and tag-along rights), matters which are reserved to the board of directors and/or the shareholders, distribution rights, share transfer restrictions and other matters that impact the corporate governance of the company (such as provisions with respect to board and shareholder meetings). While the approach that is taken will vary as between BVI and Cayman Islands companies because, as noted above, the M&AA of a BVI company is a matter of public record, whereas the M&AA of a Cayman Islands company is a matter of private record, there may be advantages of incorporating commercially important provisions into the M&AA for the following reasons:

1. 1. new shareholders are automatically bound by the M&AA, whereas only shareholders that execute the SHA or a deed of adherence to it are bound by the SHA;
   2. there are statutory remedies available for a breach of the M&AA, whereas only contractual remedies will be available for a breach of the SHA; and
   3. an amendment to the SHA typically requires the consent of all of the parties, whereas the M&AA of a BVI company may usually be amended by a majority of the directors or shareholders (depending on the nature of the amendment) and the M&AA of a Cayman Islands company may be amended by a special resolution (which ordinarily requires at least two thirds of the votes cast by shareholders).

To address any potential conflict between the provisions of the SHA and the M&AA of a company, the SHA typically provides that its provisions will prevail in the event there is any conflict with the M&AA. This provision is potentially unenforceable against a BVI or a Cayman Islands company which, in the first hand, is bound by its constitutional document, the M&AA. For that reason, the conflicts provision in the SHA should be amended to limit its application to the shareholders and to impose a covenant upon them to amend the M&AA to resolve any such conflict(s). In practice, the circumstances of the conflict and the interpretation of the documents may determine which document takes precedence over the other. For example, in Dear and another v Jackson¹ , where an SHA obliged the parties to ensure that a shareholder would be periodically re-appointed as a director but the M&AA permitted the other directors to remove him, the Court of Appeal of England and Wales ruled that there was no conflict: the SHA was to be read as if it did not purport to affect the removal provisions in the M&AA, especially because some of the directors had no knowledge of the terms of the SHA and were entitled to take the M&AA at face value and to assume that the removal article would work. This underscores the importance of appointing local law counsel in a series financing transaction to ensure that any agreed commercial terms are duly incorporated into each of the SHA and the M&AA.

ii.   Covenants with respect to group companies

Given that BVI and Cayman Islands companies typically serve as holding vehicles, it is relatively usual to see covenants imposed upon them in the SHA with respect to the activities and conduct of their operating subsidiaries. Such covenants usually prescribe that the relevant BVI or Cayman Islands company must procure that its subsidiaries do not take specified corporate actions without meeting the same consent requirements that are applicable to the company. Whether the relevant company is in a position to comply with such procurement obligations is ultimately a matter of fact that will depend on case-specific circumstances, but in practice the company may be unable to do so with respect to any indirect subsidiaries over which it does not exercise direct control. There are different approaches to drafting which may be taken in the SHA to address this issue that local law counsel can advise upon.

iii  Directors that are appointed by key investors

It is relatively common for key investors to be given the right to appoint directors to the board of the relevant company. An SHA typically states that such directors need to comply with the instructions that are given by the appointing shareholder(s).

Under BVI and Cayman Islands law, the directors of a company generally owe their common law and fiduciary duties to the company and not to other parties, such as any individual appointing shareholder(s).² There are certain exceptions to this. For example, where a company is insolvent or potentially insolvent, the duties of a company’s directors may extend to the company’s creditors.³ A BVI company that is carrying out a joint venture may also act in a manner which is in the best interests of a shareholder or shareholders, even if it is not in the best interests of the company, so long as this is expressly permitted by that company’s M&AA.⁴

Absent any exceptions of the above nature, any provisions which seek to curtail the discretion of the directors should be carefully reviewed as they may render the directors unable to comply with their fiduciary duties and may therefore be unenforceable as a matter of local law. Depending on the circumstances, it may be possible to include drafting in the relevant M&AA and SHA to clarify that the directors shall only comply with instructions provided by the appointing shareholder(s) to the extent that they are compatible with BVI or Cayman Islands law (as applicable), including the fiduciary duties of the directors.

iv.   Statutory fetters

A statutory fetter is a restriction that is imposed on the ability of a company or its shareholder(s) to exercise certain rights or powers granted under statute. This is relevant in the context of a series financing transaction because it is relatively common for an SHA and, in turn, the M&AA, to prescribe a list of matters in relation to the company that are reserved to the directors and/or the shareholders. Typical examples of such matters include the alteration of a company’s share capital, the issuance of shares, a change to the name of the company, and amendments to the M&AA. While shareholders may enter into such contractual agreements in the SHA among themselves as they please, any provisions which constitute a statutory fetter that purport to bind the company will be potentially invalid and unenforceable. Offshore legal advice should be sought to identify the most effective solutions with respect to these types of issues.

v.  Definitions and concepts that are incompatible with BVI and Cayman Islands law

As most SHAs are based on precedents that are governed by English or Hong Kong law, it is important to remain alert to any drafting that is incompatible with BVI and Cayman Islands law. Common examples include:

1. 1. share issuance and transfer provisions which purport to pass title to the shares upon delivery of share certificates, as opposed to when the register of members of the relevant company is updated;
   2. conditions precedent and/or conditions subsequent to closing that include items which are not necessary from a local law perspective (such as bought and sold notes) and/or which have no particular meaning from a BVI or Cayman Islands point of view (such as endorsing share certificates);
   3. references to “share capital” with respect to BVI companies, despite the fact that this concept is no longer applicable to most BVI companies; and
   4. definitions that do not meet the minimum requirements of BVI or Cayman Islands law (such as in relation to the thresholds for passing resolutions at a meeting or in writing, or the declaration of a dividend).

These types of issues highlight the importance of seeking local law advice in series financing transactions.

The following items are typically provided to a key investor at closing from a BVI and a Cayman Islands law perspective in connection with a series financing transaction:

1. 1. a copy of the constitutional documents and statutory registers of the relevant company;
   2. an up-to-date certificate of good standing of the relevant company;
   3. an up-to-date certificate of incumbency of the relevant company;
   4. duly executed resolutions of the board of directors and shareholders of the relevant company approving, as applicable and among other customary matters, the issuance of the preferred shares, the updates to the company’s register of members, the issuance of share certificates (to the extent that share certificates are to be issued), the appointment of any new director(s), any updates to the company’s register of directors or register of directors and officers (as applicable), and the amendments to the company’s M&AA;
   5. a certified, updated copy of the relevant company’s register of members showing the investor as the holder of the applicable preferred shares;
   6. a certified, updated copy of the relevant company’s register of directors or register of directors and officers (as applicable) showing the appointment of any new director(s) by the investor;
   7. new share certificates (to the extent that share certificates are to be issued); and
   8. a stamped copy of the amended and restated M&AA in relation to a BVI company (noting that delivery of a stamped copy of the amended and restated M&AA in relation to a Cayman Islands company is usually a post-closing obligation).

Additional documentation may also be necessary if the parties undertake to complete other key actions as part of the closing process, such as changing the registered office service provider or registered agent (as applicable) of the relevant company. Furthermore, to the extent that the relevant company’s M&AA (or any agreements to which the relevant company is a party) impose additional requirements in relation to an issuance of shares, additional deliverables may need to be provided to the relevant investor.

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¹    [2013] EWCA Civ 89
²   Percival v Wright [1902] 2 Ch421
³   Walker v Wimborne (1976) 50 ALJR 446 (High Court of Australia)
⁴   Section 120(4) of the BVI Business Companies Act, 2004 (As Amended)

This publication is not intended to be a substitute for specific legal advice or a legal opinion. If you require further advice relating to the matters discussed in this Briefing, please contact us. We would be delighted to assist.

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