An investor in a fund that is structured as an ELP is issued with limited partnership interests (“LP Interests”) in exchange for their capital contributions. The general partner of an ELP (“General Partner”) is required to maintain a register of partnership interests containing certain prescribed information in respect of each limited partner (“Register”).

Before a lender takes security over LP Interests, it must first undertake detailed due diligence in order to ensure that the security that is available matches its expectations.

First, it should review the relevant provisions of the limited partnership agreement relating to the ELP (“LPA”). LPAs usually contain either an outright prohibition on the creation of security over LP Interests or in the very least require the prior written approval of the General Partner to the creation and subsistence of the security. There is often no express contractual requirement for the General Partner to not ‘unreasonably withhold or delay consent”. Therefore, early and transparent engagement with the General Partner is essential.

A further consent may be required from the General Partner as LPAs also typically restrict the transfer of LP Interests without the General Partner’s consent. A lender will therefore wish to obtain consent upfront to any transfer of title in the relevant LP Interests in the event that the security is enforced.

In addition to reviewing the LPA, a well-advised lender will also insist on reviewing any side letters and the subscription application that may have been entered into by the limited partner with the ELP to ensure that the provisions to the LPA dealing with the creation of security have not been modified. To the extent that a side letter does not exist, the lender should obtain representations and warranties to this effect from the limited partner in the finance documents.

Finally, the lender should also review the Register (to ensure that the security provider does in fact hold title to the LP Interests that are to be the subject of the security) and, in the case of a corporate security provider, its register of security interests to ensure that no prior security interests subsist over the LP Interests. To the extent that any security interests are revealed to already exist, the prior security interests will need to be redeemed prior to concluding the funding. Alternatively, a deed of priority or intercreditor deed could be entered into with the other secured party.

In addition to legal due diligence, the lender should also make enquiries of the ELPs records of capital contributions to ensure that any and all capital commitments have been fully funded (or will be so funded with the financing to be provided).

Under Cayman Islands law, there are no prescribed particulars for how security over LP Interests is created and perfected. That said, the security document that will be entered into to create security over the LP Interests follows a format that will be familiar in finance transactions in other jurisdictions. In particular, the security document will:

• be in writing;
• be signed by the limited partner granting the security (usually as a deed);
• contain a full and detailed description of the LP Interests that will be the subject of the security. In addition to the LP Interests themselves, the security created will also extend to all ‘related rights’ to the LP Interests, such as rights to any distributions and the ultimate return of the invested principal;
• contain details of the amount to be secured by the document. Typically, this will not be a specific monetary amount but will instead be expressed to be either ‘all monies owing by the limited partner to the lender’, or ‘all monies owing by the limited partner to the lender under the finance documents’; and
• specify the powers and entitlements of the lender in the event of a default by the limited partner which results in the security becoming enforceable. The events of default themselves will typically be listed in the accompanying facility letter or loan agreement.

In addition to the security document, a limited partner providing security will also provide the required consent(s) from the General Partner (as noted above) and a signed, undated instrument of transfer relating to the secured LP Interests, with the transferee left blank. Any enforcement transfer remains subject to the transfer restrictions contained in the LPA and the terms of the security document.

A person granting security over LP Interests is required to provide written notice of the creation of the security to the ELP at its registered office. Such notice must specify the agreement pursuant to which security is granted, including its date, the names of the parties and details of the LP Interests that are the subject of security.

In practice, a well-advised lender will insist on the chargor having dialogue with the ELP prior to conclusion of the financing so that the form of notice is agreed in advance and promptly served. As between competing security interests over the same LP Interests, priority is determined by the time at which written notice of the security is received at the ELP’s registered office. The ELP is required to maintain a register of security interests in respect of each such notice that it receives.

The lender will also typically require a written acknowledgement from the ELP as confirmation this requirement has been met as well as a copy of the duly completed register (or an extract therefrom).

If the limited partner providing the security is itself a corporate entity or an ELP, depending on its jurisdiction of incorporation it may need to make filings and update registers of its own in order to remain compliant and to ensure the security remains valid and enforceable.

No stamp or other taxes are typically payable in respect of either the grant of security over LP Interests or any subsequent transfer of LP Interests where the security is enforced save where the document is executed in, or brought into, the Cayman Islands.

In the event of a continuing default by the chargor, the holder of the security over the LP Interests may enforce it in accordance with the terms of the security document. Security documents will usually permit the securityholder to sell the charged LP Interests or appoint a receiver in respect of the same.

However, the securityholder’s rights under the security documents are only part of the overall analysis. Well-advised lenders should, from the outset of the financing, carefully review whether the terms of the LPA adequately accommodate an enforcement scenario and, where necessary, seek appropriate amendments or consents.

LPAs are commonly drafted so as to restrict the transfer of LP Interests without the consent of the General Partner. A secured creditor will therefore typically require either: (i) the General Partner’s advance consent to transfers arising upon enforcement of the security; or (ii) sufficiently broad provisions within the LPA itself permitting transfers of LP Interests by a secured creditor or receiver on enforcement.

This issue is particularly important because, in an enforcement scenario, the General Partner may not necessarily take a position aligned with the interests of the lender. Lenders will therefore wish to ensure that the LPA does not confer overly broad discretion on the General Partner in a manner that could frustrate or materially delay the enforcement process.

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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 Briefing, please contact:

Partner: Robert Farrell

E: robert.farrell@loebsmith.com

Whilst there are no statutory requirements as to the type of legal entity that should be used in the establishment of a closed-ended fund pursuant to the Act, the type of entity most commonly used for this purpose is the Exempted Limited Partnership (“ELP”). Whilst other types of corporate vehicles can be used, such as a Cayman Islands Exempted Company, these are more commonly deployed in the context of an open-ended investment fund pursuant to the Mutual Funds Act (As Revised).

If a closed-ended fund (referred to under the Act as a private fund) is structured as an Exempted Company, it will be the directors of that company who operate it. However, as part of the registration of the fund with the Cayman Islands Monetary Authority (“CIMA”), it will be necessary to ensure that there are at least two directors appointed; this is known as the “four eyes principle” to ensure proper corporate governance and investor protection and is a prerequisite for registration as a private fund with CIMA.

If the fund is established as an ELP, the two-director rule does not apply directly to the ELP as ELPs do not have separate legal personality and therefore do not have directors. An ELP must, however, have a qualifying “general partner” who operates the ELP on behalf of the limited partners. It is at the general partner level that the “four eyes principle” will apply in this context and so a general partner must also have at least two directors.

Presently, it is not necessary for the directors of a private fund (or the directors of a general partner of an ELP which is registered as a private fund) to be registered pursuant to the Directors Registration and Licensing Act (As Revised).

Only closed-ended funds that fall within the definition of a “private fund”, as defined in the Act, will be required to register with CIMA under the Act as a private fund and will be regulated as such. The Act defines a “private fund” as:

“…a company, unit trust or partnership that offers or issues or has issued investment interests, the purpose of effect of which is the pooling of investor funds with the aim of enabling investors to receive profits or gains from such entity’s acquisition, holding, management or disposal of investments, where –

(a) the holders of investment interests do not have day-to-day control over the acquisition, holding, management or disposal of the investments; and

(b) the investments are managed as a whole by or on behalf of the operator of the private fund, directly or indirectly…”

The term “investment interest” is defined in the Act as an interest in the issuing vehicle which carries an entitlement to participate in the profits or gains of the vehicle and which interests are not redeemable or re-purchasable at the option of the investor.

Whether a particular structure will fall within this definition and be subject to regulation can be highly nuanced. We therefore recommend that you speak with an experienced Cayman Islands investment funds attorney to determine whether your proposed project would be regulated or whether an exemption from registration might be available.

For example, the Act itself contains a list of “non-fund arrangements” which are not considered to be “private funds”. The list of non-fund arrangements is extensive and quite broad in remit but we would specifically highlight the following non-fund arrangements:

• Joint ventures;
• Proprietary vehicles;
• Holding vehicles;
• Debt issues and debt issuing vehicles;
• Structured finance vehicles; and
• Sovereign wealth funds.

It should also be noted that single investor funds will also fall outside of the remit of the Act on the basis that where there is only one investor, there will not be any “pooling of investor funds” as required by the above quoted definition of “private fund”.

Where a particular project falls within the definition of a “private fund” and where it is not a “non-fund arrangement”, the corporate vehicle will be required to apply to CIMA for registration as a private fund under the Act.

In order to be registered under the Act, the fund will need to submit a completed application to CIMA via its online portal together with supporting documentation, including its offering document (which should contain, as a minimum, the information specified by CIMA in its Rules on Content of Offering Memorandum) and evidence of the appointment of an auditor and an administrator.

The application must (per section 5 of the Act) be submitted to CIMA (together with payment of the applicable registration fee) within 21 days after its acceptance of capital commitments from investors for the purposes of investments (although the application can be submitted at any time before capital commitments are received). The fund must be registered with CIMA as a private fund before it receives any capital contributions from investors.

In addition to the above, there are certain other key obligations with which private funds must comply.

Where the fund makes any change (or becomes aware of any change) which materially affects any information that was delivered to CIMA as part of the fund’s registration as a private fund, it must file details of the change with CIMA within 21 days of the change taking effect or of the fund becoming aware of the change. Whilst the Act only requires ‘material’ changes to be notified to CIMA, in practice CIMA tends to be notified of all changes given what is ‘material’ is open to interpretation.

Private funds must also file an annual return with CIMA and pay an annual registration fee in order to maintain its registration.

The Act requires that private funds have in place certain mechanisms and safeguards relating to an annual audit of the fund, the valuation of the fund’s assets, the safeguarding of the fund’s assets, cash monitoring and the identification of securities.

• Audit – the fund must engage an approved Cayman Islands auditor to prepare its audited financial statements annually. CIMA maintains a list of the approved auditor firms who are able to provide this service. Such audited financial statements must be filed with CIMA within six (6) months of the end of each financial year of the fund.
•  Valuation of fund assets – the assets of a private fund must be valued periodically. What is considered to be an appropriate period between valuations will depend on the asset class(es) in which the fund is invested. However, valuations should, as a minimum, be carried out at least annually. Each valuation must be carried out by an independent and suitably qualified professional valuer who is familiar with the relevant asset class. If the valuer is not independent, then CIMA reserves the right to have the valuation independently verified at the cost of the fund. Otherwise, if the valuation of assets is carried out by the fund itself or by its investment manager, the valuation function must be independent from the portfolio management function of the fund and any conflicts of interest are required to be identified, managed, monitored and disclosed to investors.
•  Safeguarding of the fund’s assets – private funds are, generally speaking, required to appoint a custodian to hold, in segregated accounts maintained in the name of the fund, the fund’s assets which are capable of physical delivery or capable of registration in a separate account except that the private fund shall not be required to appoint a custodian if it has notified CIMA and it is neither practical nor proportionate to do so, having regard to the nature of the private fund and the type of assets it holds. The duty of custodian appointed is to verify the fund’s title to its assets based on information provided by the fund together with any externally available information. If a custodian is not appointed, the verification of the fund’s title to its assets must be carried out either by the fund’s administrator or by the fund itself or its investment manager. In the case of title verification by the fund or its investment manager, the title verification function must be independent from the portfolio management of the fund and any conflicts of interest are required to be identified, managed, monitored and disclosed to investors in the fund.
• Cash monitoring – private funds are required to appoint any of an administrator, custodian or the investment manager to (1) monitor the cash flows of the fund; (2) ensure that all cash has been booked in cash accounts maintained in the name of the fund; and (3) ensure that payments made by investors to the fund for the purposes of investment have been received. If such monitoring is not undertaken by an independent third party, CIMA reserves the right to have the cash monitoring verified at the cost of the fund. In the case of cash monitoring undertaken by the fund or its investment manager, as above, the cash monitoring function must be independent from the portfolio management of the fund and any conflicts of interest are required to be identified, managed, monitored and disclosed to investors in the fund.
•  Identification of securities – if the private fund in question regularly trades securities or holds them on a consistent basis, it must keep records of the identification codes (such as ISIN codes or CUSIP codes) of those securities that it trades and holds, and such records must be made available to CIMA on request.

In addition to its obligations under the Act and guidance issued by CIMA, private funds are also subject to other obligations under the laws of the Cayman Islands in relation to matters such as FATCA / CRS compliance and, in respect of anti-money laundering legislation and regulations.

• FATCA / CRS – Private funds tend to be classified as ‘Reporting Financial Institutions” for the purposes of FATCA and CRS. Each private fund is therefore required to undertake detailed due diligence on each of its investors (which is typically undertaken on its behalf by its administrator). The fund must also provide information to the Tax Information Authority of the Cayman Islands in respect of each of its investors who constitute ‘reportable accounts’.
• Anti-money laundering – Private funds conduct “relevant financial business” for the purposes of the Proceeds of Crime Act (As Revised) and the Anti-Money Laundering Regulations (As Revised) (being together the “AML Requirements”). Private funds are therefore required to have robust policies and procedures in place to ensure that the AML Requirements are adhered to. The fund must have a detailed Anti-Money Laundering Compliance Manual which contains detailed guidance on the policies and procedures that must be followed in carrying out the fund’s activities, ranging from the onboarding process for investors, record-keeping, processes for the reporting of suspicious activity and other risk management matters.
• Beneficial ownership – The Beneficial Ownership Transparency Act (“BOTA”) requires Cayman Islands exempted companies, ELPs, and limited liability companies to maintain a beneficial ownership register unless an alternative route to compliance applies. Under the BOTA, alternative routes to compliance are available to categories of legal persons such as private funds and each private fund will be required to provide its corporate services provider in the Cayman Islands with:

1. written confirmation of the category into which it falls; and
2. the required particulars specific to it.

The private fund is required to appoint a principal point of contact (“PPoC”) who is responsible for responding to any request for beneficial ownership information received from the Cayman Islands Competent Authority (“Competent Authority”) in relation to the private fund. The PPoC must be licensed in the Cayman Islands and will be required to provide the requested beneficial ownership information to the Competent Authority within 24 hours of a request being made, or such other timeframe as may be stipulated in the request.

Each private fund must also appoint three (3) officers to assist with compliance with the AML Requirements; these are the anti-money laundering compliance officer, money laundering reporting officer, and deputy money laundering reporting officer.

On the basis that private funds are a form of investment fund, private funds that are registered under the Act are not ‘relevant entities’ for the purposes of the International Tax Co-operation (Economic Substance) Act (As Revised). Whilst, therefore, private funds will not be required to demonstrate the extent of their ‘substance’ in the Cayman Islands, they will nonetheless be required to make an annual notification under this legislation to confirm their status as an investment fund.

If you are considering establishing a private fund in the Cayman Islands, it is imperative that you have experienced Cayman Islands legal counsel by your side to assist you in navigating the legislative, regulatory, and compliance landscape. We have a strong reputation for our technical excellence, responsive, forward-thinking and insightful approach to advising clients on offshore Investment Funds and would be happy to be your trusted advisor on the formation, launch and ongoing advisory of your Cayman Islands private fund.

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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 Briefing, please contact us.  We would be delighted to assist.

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

Subscription credit facilities are secured credit arrangements that enable fund managers to access short-term financing (i.e. short-term loans) against the capital commitments of fund investors.

Unlike traditional fund financing, these facilities are typically structured as revolving credit lines, allowing funds to bridge capital calls, manage liquidity, or seize investment opportunities, therefore allowing quick access to cash for investment without having to call on capital commitments from investors immediately.

1. Security and collateral arrangements. The foundation of subscription credit facilities is the security interest over the fund’s unfunded capital commitments. Under Cayman Islands and BVI law, the enforceability of security interests such as a pledge and/or charge over unfunded capital commitments (as collateral for a loan) relies on the proper drafting of security agreements and registration procedures. It is crucial to clearly define the scope of security, including any guarantees or other security interests created to ensure priority and enforceability.
2. Intercreditor arrangements. Given that subscription credit facilities often coexist with other fund financing or investor arrangements, establishing clear intercreditor agreements is vital. Intercreditor agreements safeguard funds and investors by defining the payment hierarchy and security rights among multiple lenders. These agreements are essential for ensuring orderly enforcement and mitigating conflicts, particularly in multi-lender scenarios. Offshore jurisdictions facilitate sophisticated intercreditor arrangements, supported by well-established legal frameworks.
3. Fund governance and limited partnership agreements. Cayman Exempted Limited Partnerships (ELPs) or BVI Limited Partnerships (LPs) are the typical structure, offering flexibility and strong creditor protections. A fund’s constitutional documents determine the scope of authority its general partner or manager has. In the case of an ELP or LP, this is detailed in the limited partnership agreement (LPA).
   Accordingly, to ensure compliance and mitigate legal risks, a fund’s LPA must explicitly authorise the general partner or manager to pledge investor capital commitments as security. It is advisable to include provisions that address the express borrowing authority, mechanics of security, enforcement procedures and investor consent processes (such as through side letters) and any transfer restrictions.
4. Regulatory and Anti-Money Laundering (AML) considerations. The BVI and Cayman Islands have AML regimes requiring the appointment of AML officers. As subscription facilities often involve large capital commitments from institutional investors, enhanced customer due diligence may be required, in addition to measures such as verifying the source of funds, sanctions screening, record keeping and reporting obligations. Proper due diligence, know your customer procedures and compliance measures are essential to prevent regulatory issues and ensure legality of security interests and transaction structure.

Flexibility and speed. Offshore jurisdictions have efficient legal processes and flexible corporate structures, enabling funds to implement subscription credit facilities swiftly. This agility is critical in investment environments.

Tax neutrality and confidentiality. Both the Cayman Islands and BVI offer tax-neutral regimes and strong confidentiality protection, which are attractive for international fund managers seeking discreet and efficient financing arrangements.

Legal certainty and established frameworks. With mature legal systems, both jurisdictions provide a high degree of legal certainty for security enforcement, contractual validity and dispute resolution, backed by a wealth of case law and legal expertise. The final court of appeal for both is the Privy Council in the UK.

Tips for structuring

1. Draft clear security documents. Ensure security interests over capital commitments are precisely defined and properly registered.
2. Obtain investor consent. Incorporate provisions in the LPA or side letters to facilitate or confirm investor approval for security grants.
3. Plan for enforcement. Establish enforcement procedures like notice periods and rights of first refusal.
4. Co-ordinate with creditors. Negotiate intercreditor arrangements early to prevent conflicts.

Subscription credit facilities represent a powerful tool for offshore funds seeking liquidity and operational flexibility, offering a flexible and efficient mechanism aligning well with the governance and operational frameworks of private equity funds in the Cayman Islands or BVI.

The article was first published by Asia Business Law Journal – https://law.asia/cayman-bvi-subscription-credit-facilities/

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 Legal Insight, please contact:

Partner:  Vanisha Harjani
E: vanisha.harjani@loebsmith.com

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

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.

What are the main corporate structures used to set up a retail fund? How are they formed?

The statutory and regulatory frameworks that apply to investment funds in the Cayman Islands do not distinguish between retail funds and non-retail funds as the Cayman Islands is not primarily known as a retail fund jurisdiction. Its laws and regulations applicable to investment funds are geared mainly towards attracting institutional investors. Accordingly, the legal structure used for an investment fund is typically based on whether the fund’s strategy will be open-ended or closed-ended. The exempted company (which includes the segregated portfolio company) is the most commonly used legal structure for open-ended funds and the exempted limited partnership is the most commonly used legal structure for closed-ended funds. Both types of legal structures are formed by filing formation documents with the Companies Registry and paying the requisite government fee. There are no special requirements that apply to managers or operators of retail funds (which for present purposes are taken to mean funds that permit an investor to invest an initial minimum amount of less than US$100,000) as distinct from the specific rules, du􀆟es and guidances that (i) apply to all Cayman Islands’ domiciled managers and (ii) apply to operators of all Cayman Islands investment funds.

What are the key laws and other sets of rules that govern retail funds?

As stated above, the statutory and regulatory frameworks that apply to investment funds in the Cayman Islands do not distinguish between retail funds and non-retail funds. Under section 4(1)(b) of the Mutual Funds Act, a mutual fund can register with the Cayman Islands Monetary Authority (“CIMA”) and permit its investors to each invest an initial minimum amount of less than US$100,000. This type of fund is often referred to as a ‘retail’ fund. However, the regulatory framework that applies to this category of mutual fund (referred to as an administered fund which comprises approximately 1.92% of Cayman Islands’ mutual funds as at 31 December 2025) is pretty much the same as is applicable to other mutual funds registered with CIMA. Closed-ended funds that fall within the scope of the Private Funds Act and are, therefore, registered with, and regulated by, CIMA do not have a minimum initial investment threshold set by law and, therefore, investors will simply have to comply with the investment limits and restrictions set by the manager or operator of the fund.

The Retail Mutual Funds (Japan) Regulations are an exception to the above in that they effectively make a distinction between retail funds and non-retail funds by providing a compliance framework for certain licensed funds under section 4(1)(a) of the Mutual Funds Act that will market to retail investors in Japan, enabling these funds to automatically comply with the applicable securities laws and regulations in Japan. However, these funds are merely a sub-set of licensed funds, which themselves only comprise approximately 0.33% of Cayman Islands’ mutual funds as at 31 December 2025.

Must retail funds be authorised or licensed to be established or marketed in the Cayman Islands?

All mutual funds which fall within the scope of the Mutual Funds Act and all closed-ended funds that fall within the scope of the Private Funds Act are required to be registered with, and be regulated by, CIMA.

Who can market retail funds? To whom can they be marketed?

Investment funds (whether structured as an exempted company or a limited liability company (LLC)) are restricted from making an offer of shares of the company or interests of the LLC to the public in the Cayman Islands to subscribe for such securities unless those securities are listed on the Cayman Islands Stock Exchange. There are no similar restrictions in the laws governing limited partnerships or unit trusts. The term “public in the Islands” excludes certain entities and residents, including other Cayman Islands exempted companies, LLCs, exempted limited partnerships, any exempted or ordinary non-resident companies, foreign companies registered in the Cayman Islands and foreign limited partnerships. It also excludes sophisticated persons and high net worth persons (as defined under the Securities Investment Business Act (SIB Act)), which means that making an offer of securities to “private funds” (as defined in the Private Funds Act) in the Cayman Islands is not restricted. Private funds would most likely qualify as sophisticated persons or high net worth persons, or both. An overseas investment fund that wishes to make an offering of its securities to the public in the Cayman Islands will need to either (1) register with CIMA as a mutual fund under the Mutual Funds Act or a private fund under the Private Funds Act or (2) market its securities through a person who is appropriately licensed or authorised by CIMA under the terms of the SIB Act (provided that the securities being offered to the public in the Cayman Islands are listed on a stock exchange approved by CIMA or the investment fund is regulated by a recognised overseas regulatory authority approved by CIMA). However, there is no legal requirement for a local entity to be involved in the fund marketing process.

Are there any special requirements that apply to managers or operators of retail funds?

The statutory and regulatory frameworks that apply to investment funds in the Cayman Islands do not distinguish between retail funds and non-retail funds. There are no special requirements that apply to managers or operators of retail funds as distinct from the specific rules, du􀆟es and guidances that (i) apply to all Cayman Islands’ domiciled managers and (ii) apply to operators of all Cayman Islands investment funds.

What are the investment and borrowing restrictions on retail funds?

There are no specific legal investment and borrowing restrictions on retail funds under Cayman Islands laws.

What is the tax treatment of retail funds? Are exemptions available?

The tax treatments and exemptions available to non-retail funds apply equally to retail funds. See section on non-retail funds below.

Must the portfolio of assets of a retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?

Under CIMA’s Rule on the Segregation of Assets – Regulated Mutual Funds, a Cayman Islands mutual fund is required to do the following.

1. Appoint a Service Provider (which includes an administrator, custodian, prime broker, or any of their delegates) with regard to ensuring safekeeping of the fund’s Portfolio (i.e. all financial assets and liabilities of an investment fund and any part thereof, including “investor funds” and “investments” as those terms are used in the definition of “mutual fund” in section 2 of the Mutual Funds Act).
2. The Portfolio must be segregated and accounted for separately from any assets of any Service Provider.
3. The fund must ensure that any Service Provider that holds or manages the Por􀆞olio complies with the requirement to ensure that the Portfolio is segregated and accounted for separately from any assets of any Service Provider.
4. The overriding requirement of the Rule is that a fund must ensure that none of its Service Providers use the Portfolio to finance their own or any other operations in  any way.

Closed-ended funds that fall within the scope of the Private Funds Act are required to appoint a custodian:

1. 1. to hold in custody, in segregated accounts opened in the name or for the account, of the private fund, the private fund’s assets that are capable of physical delivery or capable of registration (except where the private fund has notified CIMA and it is neither practical nor proportionate given the nature of the private fund and the type of assets held to do so); and
   2. to verify title to, and maintain records of, fund assets. However, there is no legal requirement for the custodian to be located in the Cayman Islands.

Where a private fund notifies CIMA of its intention not to appoint a custodian, the private fund is required to appoint one of the following persons to carry out the title verification:

1. 1. an administrator or another independent third party; or
   2. the manager or operator, or a person with a control relationship with the manager of the private fund, provided that:
      1. the title verification function is independent from the portfolio management function; or
      2. potential conflicts of interest are properly identified, managed, monitored and disclosed to the investors of the private fund.

What are the main governance requirements for a retail fund formed in the Cayman Islands?

CIMA’s Rule on Corporate Governance for Regulated Entities requires a Cayman Islands regulated investment fund to:

1. establish, implement, and maintain a corporate governance framework which provides for sound and prudent management oversight of the regulated entity’s business and protects the legitimate interests of relevant stakeholders.
2. establish a Governing Body (i.e. the Board of Directors where the entity is a corporation, the General Partner where the entity is a partnership, the manager (or equivalent) where the entity is a Limited Liability Company, and the Board of Trustees where the entity is a trust business) that is responsible for implementing a corporate governance framework that addresses, at a minimum:

1. 1. Objectives and strategies of the regulated entity;
   2. Structure of the governance of the Governing Body;
   3. Appropriate allocation of oversight and management responsibilities;
   4. Independence and objectivity;
   5. Collective duties of the Governing Body;
   6. Duties of individual directors of the Governing Body;
   7. Appointments and delegation of functions and responsibilities;
   8. Risk management and internal control systems;
   9. Conflicts of interest and code of conduct;
   10. Renumeration policy and practices;
   11. Reliable and transparent financial reporting;
   12. Transparency and communications;
   13. Duties of Senior Management;
   14. Relations with CIMA

CIMA’s Rule on Corporate Governance for Regulated Entities also sets out CIMA’s expectations with respect to certain baseline standards that a regulated investment fund should have in
place with respect to the matters listed above.

What are the periodic reporting requirements for retail funds?

Mutual funds regulated by CIMA must, as long as there is a continuing offering, update their offering documents and prescribed particulars within 21 days of any material change, and are required to file the updated offering document or the prescribed particulars with CIMA within this 21-day period.

A private fund is required under the Private Funds Act to notify CIMA of any change that materially affects any information submitted to CIMA and of any change of its registered office or the location of its principal.  The Private Fund will have 21 days a􀅌er making the change or becoming aware of the change to file details of the change with CIMA.

All funds regulated by CIMA (mutual funds and private funds) are required to have their accounts audited annually and such audited financial statements must be filed with CIMA within six months of the year end of the fund, along with a financial annual return form including prescribed details, signed by a director. These audited financial statements must be signed off by a CIMA approved Cayman Islands based audit firm.

Can the manager or operator place any restrictions on the issue, transfer and redemption of interests in retail funds?

Restrictions can be contained in the constitutive documents of a fund or otherwise in the terms of issue of the relevant equity interests or investment interests of the fund.

Available vehicles
What are the main legal vehicles used to set up a non-retail fund? How are they formed?
Open-ended funds
Exempt companies

Exempt companies are the most common legal vehicle for open-ended funds. The exempted company limited by shares and the exempted segregated portfolio companies (SPCs) make up  the overwhelming majority of open-ended funds registered with the Cayman Islands Monetary Authority (CIMA) as at 31 December 2025.

It is possible to incorporate an exempted company limited by shares (including an SPC) on either a standard basis (which takes 4-5 business days after submission of formation documents to the Registrar of Companies) or on an express (same-day) basis subject to paying an additional express fee. Incorporation is effected by filing the company’s memorandum and articles of association and an affidavit sworn by the subscriber to the memorandum of association with the Registrar of Companies. Unless the company proposes to use a restricted word in its
name (eg, “bank” or “insurance”) no prior consent or approval is required from CIMA or any other government agency. The use of the word “fund” in the name is not restricted. The   memorandum of association must contain certain basic information about the company, including its registered office address, its authorised share capital and the objects for which it is incorporated. Shares can be denominated in any currency and denomination. There is no minimum or maximum amount prescribed for authorised, issued or paid-up share capital (although at least one share must be in issue at the time of incorporation).

A limited liability company (LLC) is a corporate entity that has separate legal personality to its members. Formation of an LLC requires the filing of a registration statement with the  Registrar of Companies and payment of the requisite government fee. The LLC must have at least one member and it can be member managed (by some or all of its members) or the LLC agreement can provide for the appointment of persons (who need not be members) to manage and operate the LLC. The liability of an LLC’s members is limited and members can have capital accounts and can agree among themselves (in the LLC agreement) how the profits and losses of the LLC are to be allocated and how and when distributions are to be made (similar to a Cayman Islands exempted limited partnership). An LLC may be formed for any lawful business, purpose or activity and it has full power to carry on its business or affairs unless its LLC agreement provides otherwise. An LLC may (but is not required to) use one of the following suffixes in its name: Limited Liability Company, LLC or L.L.C.

The LLC structure is an attractive option for certain Cayman closed-ended investment funds (eg, they facilitate aligning the rights of investors in onshore and offshore investment funds in a main fund and sub-fund structures) as well as for general partner entities and other carried interest distribution vehicles.

Exempted limited partnerships (ELPs) are most commonly used for closed-ended funds and, to the extent that they fall within the scope of the Private Funds Act, are required to be registered with CIMA.

Unit trusts are based on English trust law but are modified by the Trusts Act of the Cayman Islands for suitability as investment fund vehicles. Under a unit trust arrangement, investors contribute funds to a trustee that holds those funds on trust for the investors, and each investor is directly entitled to share pro rata in the trust’s assets. An advantage of the unit trust is that it may be structured as an ‘umbrella’ unit trust so that different investments may be allocated to different ‘sub-trusts’ with investors subscribing for units in a particular sub-trust. Unlike SPCs, however, there is no statutory segregation of assets and liabilities of each sub-trust.

A unit trust is formed through a declaration of trust by the trustee alone or by a trust deed executed by both the trustee and the investment manager.

The legal vehicles that can be used for closed-ended funds are the same as for open-ended funds. The most popular vehicle used for closed-ended funds is the ELP. Cayman ELPs are  governed by a combination of equitable and common law rules (based on English common law) and also statutory provisions, pursuant to the Exempted Limited Partnership Act (as  revised). An ELP may be formed for any lawful purpose to be carried out and undertaken either in or from within the Cayman Islands or elsewhere upon the terms, with the rights and powers, and subject to the conditions, limitations, restrictions and liabilities set forth in the Exempted Limited Partnership Act.

An ELP is a legal arrangement and does not have separate corporate personality. The terms of the ELP are set out in a limited partnership agreement and registered in the Cayman Islands by
filing a registration statement with the Registrar of Exempted Limited Partnerships containing the following details:

1. the name of the partnership;
2. the general nature of the business and term of the partnership;
3. the address of the registered office of the partnership
4. the name and address of its general partner; and
5. a declaration that the partnership shall not undertake business with the public in the Cayman Islands other than so far as may be necessary to conduct business outside the Cayman Islands.

What are the key laws and other sets of rules that govern non-retail funds?
Open-ended funds

The Mutual Funds Act (for open-ended funds) and the Private Funds Act (for closed-ended funds) are the two main statutes relevant to the regulation of investment funds in the Cayman
Islands. CIMA is the regulatory body responsible for compliance with these laws and related regulations and has broad powers of enforcement.

The Mutual Funds Act defines a mutual fund as [“a company, unit trust or partnership that issues equity interests, the purpose or effect of which is the pooling of investor funds with the aim of spreading investment risks and enabling investors in the mutual fund to receive profits or gains from the acquisition, holding, management or disposal of investments…”] The reference to “equity interests” means that debt instruments (including warrants, convertibles and sukuk instruments) are excluded and funds issuing such instruments will not be required to register with CIMA as a mutual fund. The scope of regulation extends to Cayman Islands incorporated or established master funds that have one or more CIMA-regulated feeder funds and hold investments and conduct trading activities. Under sec􀆟on 4(4) of the Mutual Funds Act, limited investor funds (i.e. mutual funds which have 15 investors or less, the majority of whom have the power to appoint or remove the operators of the investment fund (the operator being the directors, the general partner or the trustee, as is relevant given the legal vehicle used for the fund)), are also required to be registered with CIMA with each investor being able to invest less than US$100,000. As at 31 December 2025 there
were 583 limited investors funds registered with CIMA. As at that same date, there were 8,840 registered funds and 3,164 master funds registered with CIMA.

Each CIMA-registered mutual fund is required to have its accounts audited annually by a firm of auditors on the CIMA approved list of auditors and file such audited accounts with CIMA
within six months of the end of each financial year of the mutual fund (along with a financial annual return in CIMA’s prescribed form).

Mutual funds that are established for a sole investor and do not involve the pooling of investor funds fall outside the regulatory framework of the Mutual Funds Act. Nonetheless, a
mutual fund with a single investor can apply for voluntary registration to, among other things, benefit from the status of being a regulated fund.

Cayman Islands laws and regulations do not impose restrictions on, or prescribe rules for investment strategies of open-ended funds, or their use of leverage, shorting or other techniques.

The Private Funds Act requires the registration of closed-ended funds (typically, investment funds that do not grant investors with a right or entitlement to withdraw or redeem their shares or interests from the fund upon notice) with CIMA. The Private Funds Act applies to private equity funds, venture capital funds, real estate funds, and other types of closed-ended funds set up as Cayman Islands limited partnerships, companies (including SPCs), unit trusts and limited liability companies.

The Private Funds Act also applies to non-Cayman Islands private funds carrying on business or attempting to carry on business in or from the Cayman Islands. In addition to registration with CIMA, the Private Funds Act also imposes the following regulatory requirements to be met by private funds.

1. Audit – Each private fund is required to have its accounts audited annually by a firm of auditors on the CIMA-approved list of auditors and file such audited accounts with CIMA within six months of the end of each financial year of the private fund (along with a financial annual return in CIMA’s prescribed form).
2. Valuation of assets – A private fund must have appropriate and consistent procedures for the purposes of proper valuations of its assets, which ensures that valuations are conducted in accordance with the requirements in the Private Funds Act. Valuations of the assets of a private fund are required to be carried out at a frequency that is appropriate to the assets held by the private fund and, in any case, on at least an annual basis.
3. Safekeeping of fund assets – The Private Funds Act requires a custodian: (1) to hold the private fund’s assets that are capable of physical delivery or capable of registration in a custodial account except where that is neither practical nor proportionate given the nature of the private fund and the type of assets held; and (2) to verify title to, and maintain records of, fund assets.
4. Cash monitoring – The Private Funds Act requires a private fund to appoint an administrator, custodian or another independent third party (or the manager or operator of the private fund):
   1. to monitor the cash flows of the private fund;
   2. to ensure that all cash has been booked in cash accounts opened in the name, or for the account, of the private fund; and
   3. to ensure that all payments made by investors in respect of investment interests have been received.
5. Identification of securities

A private fund that regularly trades securities or holds them on a consistent basis must maintain a record of the identification codes of the securities that it trades and holds and make this available to CIMA upon request.

Directors of mutual funds structured as exempted companies, managers of investment funds structured as LLCs and directors of general partners of investment funds structured as an exempted limited partnership (in each case, wherever in the world these persons are located, not just to Cayman Islands-based directors) regulated by CIMA are required to register with CIMA under the Directors Registration and Licensing Act (DRLA). The DRLA enables CIMA to verify certain information in respect of directors or managers of CIMA-registered funds. There is currently no requirement for registration of directors with CIMA under the DRLA who are directors of closed-ended funds that fall within the scope of the Private Funds Act. However, this may change in the future.

All investment funds are required to comply with Cayman Islands anti-money laundering legislation and regulations, including appointing an anti-money laundering compliance officer, a money laundering reporting officer, and a deputy money laundering reporting officer. The Cayman Islands government and CIMA actively work with the European Union, the Organisation for Economic Co-operation and Development, the Financial Action Task Force and regulators in numerous jurisdictions to observe and maintain international standards on transparency and good corporate governance.

Must non-retail funds be authorised or licensed to be established or marketed in the Cayman Islands?

The statutory and regulatory frameworks that apply to investment funds in the Cayman Islands do not distinguish between retail funds and non-retail funds. All mutual funds (except for those that are single investor funds) are required to be registered with CIMA and fall within its regulatory framework. Closed-ended funds that fall within the scope of the Private Funds Act are required to be registered with, and regulated by, CIMA.

Who can market non-retail funds? To whom can they be marketed?

Investment funds (whether structured as an exempted company or a LLC) are restricted from making an offer of shares of the company or interests of the LLC to the public in the Cayman Islands to subscribe for such securities unless those securities are listed on the Cayman Islands Stock Exchange. There are no similar restrictions in the laws governing limited partnerships or unit trusts. The term “public in the Islands” excludes certain entities and residents, including other Cayman Islands exempted companies, LLCs, exempted limited partnerships, any exempted or ordinary non-resident companies, foreign companies registered in the Cayman Islands and foreign limited partnerships. It also excludes sophisticated persons and high net worth persons (as defined under the Securities Investment Business Act (the “SIB Act”)), which means that making an offer of securities to “private funds” (as defined in the Private Funds Act) in the Cayman Islands is not restricted. Private funds would most likely qualify as sophisticated persons or high net worth persons, or both. An overseas investment fund that wishes to make an offering of its securities to the public in the Cayman Islands will need to either (1) register with CIMA as a mutual fund under the Mutual Funds Act or a private fund under the Private Funds Act, or (2) market its securities through a person who is appropriately licensed or authorised by CIMA under the terms of the SIB Act (provided that the securities being offered to the public in the Cayman Islands are listed on a stock exchange approved by CIMA or the investment fund is regulated by a recognised overseas regulatory authority approved by CIMA). However, there is no legal requirement for a local entity to be involved in the fund marketing process.

Do investor-protection rules restrict ownership in non-retail funds to certain classes of investor?

The legal requirement to be an eligible investor in a registered mutual fund with more than 15 investors is a minimum initial investment of US$100,000 (or its equivalent in any other currency); otherwise no other investor – qualification criteria apply to such funds. This minimum initial investment requirement does not apply to registered mutual funds with 15 or fewer investors and also does not apply to closed-ended funds falling within the scope of the Private Funds Act.

Are there any special requirements that apply to managers or operators of non-retail funds?

There is no requirement for the manager of a Cayman Islands fund to be resident or domiciled in the Cayman Islands.

There are no Cayman Islands laws that seek to regulate overseas managers of Cayman Islands investment funds. Fund managers established in the Cayman Islands need to comply with the provisions of the Securities Investment Business Act and such fund managers must either be licensed or registered with the CIMA. There are also economic substance requirements and AML requirements which must be complied with.

Directors of mutual funds structured as exempted companies, managers of investment funds structured as LLCs and directors of general partners of investment funds structured as exempted limited partnerships (in each case, wherever in the world these persons are located, not just Cayman Islands-based directors) regulated by CIMA are required to register with CIMA under the DRLA. The DRLA enables CIMA to verify certain information in respect of directors or managers of CIMA-registered funds. There is currently no requirement for registration of directors with CIMA under the DRLA who are directors of closed-ended funds that fall within the scope of the Private Funds Act. However, this may change in the future.

What is the tax treatment of non-retail funds? Are any exemptions available?

Cayman Islands tax treatment is the same for both “retail” funds and non-retail funds. The Cayman Islands has no direct taxa􀆟on of any kind. There are no income, corpora􀆟on, capital gains or withholding taxes or death duties. It is possible for all types of Cayman Islands legal structures (exempted company, LLC, unit trust and ELP) to apply to the Cayman Islands government  or a tax undertaking that the legal structure will not be subject to direct taxation, for a minimum period, which in the case of a company is 20 years, and in the case of an LLC, unit trust and an ELP is 50 years.

Must the portfolio of assets of a non-retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?

Under CIMA’s Rule on the Segregation of Assets – Regulated Mutual Funds, a Cayman Islands mutual fund is required to do the following.

1. Appoint a Service Provider (which includes an administrator, custodian, prime broker, or any of their delegates) with regard to ensuring safekeeping of the fund’s  portfolio (i.e. all financial assets and liabilities of an investment fund and any part thereof, including “investor funds” and “investments” as those terms are used in the
   definition of “mutual fund” in section 2 of the Mutual Funds Act).
2. The Portfolio must be segregated and accounted for separately from any assets of any Service Provider.
3. The fund must ensure that any Service Provider that holds or manages the Portfolio complies with the requirement to ensure that the Portfolio is segregated and accounted for separately from any assets of any Service Provider.
4. The overriding requirement of the Rule is that a fund must ensure that none of its Service Providers use the Portfolio to finance their own or any other operations in any way.

Closed-ended funds that fall within the scope of the Private Funds Act are required to appoint a custodian (1) to hold the private fund’s assets that are capable of physical delivery or  capable of registration in a custodial account except where that is neither practical nor proportionate given the nature of the private fund and the type of assets held; and (2) to verify  title to, and maintain records of, fund assets. However, there is no legal requirement for the custodian to be located in the Cayman Islands.

What are the main governance requirements for a non-retail fund formed in the Cayman Islands?

The Mutual Funds Act (for open-ended funds) and the Private Funds Act (for closed-ended funds) are the two main statutes relevant to the regulation of investment funds in the Cayman Islands. CIMA is the regulatory body responsible for compliance with these laws and related regulations and has broad powers of enforcement. Depending on the legal structure of the investment fund, there are also various continuing filing obligations and annual registration fees to be paid.

What are the periodic reporting requirements for non-retail funds?

CIMA’s Rule on Corporate Governance for Regulated Entities requires a Cayman Islands regulated investment fund to:

1. establish, implement, and maintain a corporate governance framework which provides for sound and prudent management oversight of the regulated entity’s business and protects the legitimate interests of relevant stakeholders.
2. establish a Governing Body (i.e. the Board of Directors where the entity is a corporation, the General Partner where the entity is a partnership, the manager (or equivalent) where the entity is a Limited Liability Company, and the Board of Trustees where the entity is a trust business) that is responsible for implementing a corporate governance framework that addresses, at a minimum:

1. 1. Objectives and strategies of the regulated entity;
   2. Structure of the governance of the Governing Body;
   3. Appropriate allocation of oversight and management responsibilities;
   4. Independence and objectivity;
   5. Collective duties of the Governing Body;
   6. Duties of individual directors of the Governing Body;
   7. Appointments and delegation of functions and responsibilities;
   8. Risk management and internal control systems;
   9. Conflicts of interest and code of conduct;
   10. Remuneration policy and practices;
   11. Reliable and transparent financial reporting;
   12. Transparency and communications;
   13. Duties of Senior Management;
   14. Relations with CIMA.

CIMA’s Rule on Corporate Governance for Regulated En􀆟􀆟es also sets out CIMA’s expectations with respect to certain baseline standards that a regulated investment fund should have in place with respect to the matters listed above.

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This publication is not intended to be a substitute for specific legal advice or 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