Cayman Islands | Loeb Smith

On 25 May 2020 the Cayman Islands government passed The Virtual Asset (Service Providers) Law, 2020 (“VASP Law”), which provides a legislative framework for the conduct of virtual assets business in the Cayman Islands and for the registration and licensing of persons providing virtual asset services. The VASP Law is intended to place the Cayman Islands with a cutting edge, robust framework which is in alignment with global regulatory standards, protect consumers and meet the requirements of the Financial Action Task Force recommendations in respect of virtual assets. In this two part series (this being Part 1) we look at the new VASP Law and its requirements with respect to registration. Part 2 will look at the requirements with respect to licensing.

1. WHAT IS A VIRTUAL ASSET?

The VASP Law defines a “virtual asset” as “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”.

The VASP Law makes a distinction between a “virtual asset” as defined above which will be regulated and a “virtual service token” which is defined as “a digital representation of value which 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.”

The distinction is meant to deal with the usual question as to whether or not a digital token or coin is a security or a utility token. Virtual service tokens will be treated as utility tokens and therefore will fall outside the registration regime and the licensing regime under the VASP Law.¹

2. WHAT ARE VIRTUAL ASSET SERVICES?

The VASP Law states that “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:

exchange between virtual assets and fiat currencies;
exchange between one or more other forms of convertible virtual assets;
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.

3. WHO IS A VIRTUAL ASSET SERVICE PROVIDER?

A person is a “virtual asset service provider” (“VASP”) under the VASP Law, if it is (1) a company, or a general partnership, or a limited partnership, or a limited liability company, or a foreign company registered in the Cayman Islands, and (2) provides a virtual asset service as a business or in the course of business in or from within the Cayman Islands and is registered or licensed in accordance with the VASP Law or is an existing licensee that is granted a waiver under the VASP Law.

A natural person cannot carry on or purport to carry on a virtual asset service as a business or in the course of business in or from within the Cayman Islands.
The VASP Law requires a VASP to either register with Cayman Islands Monetary Authority (“CIMA”) or be licensed by CIMA. Whether the VASP will have to register or be licensed will be dependent on the activity carried out by the VASP. However, broadly speaking, in the case of the provision of virtual asset custodial services or the operation of a virtual asset trading platform, the VASP is required to have a virtual asset service licence. It appears that in most cases where the VASP is carrying on business as a VASP but is not providing virtual asset custodial services or the operation of a virtual asset trading platform, registration with CIMA is required.

4. REGISTRATION OF VASPS

Any person who is already carrying on business as a VASP at the date of commencement of the VASP Law or wishes to carry on a virtual asset service (for which a licence is not required under the VASP Law), will be required to apply to CIMA in order to become a “registered person” under the VASP Law.

5. CIMA CONSIDERATIONS: LICENCE OR REGISTER

In determining whether to grant a virtual asset licence, a sandbox licence, register an applicant as a “registered person” or to waive a requirement to licence or register under the VASP Law, CIMA will take into account the following:

size, scope and complexity of the virtual asset service, underlying technology, method of delivery of the service and virtual asset utilised;
knowledge, expertise and experience of the applicant;
the AML procedures that the applicant has in place;
internal safeguards and data protection systems being utilised by the applicant;
the similarity of the virtual asset service to securities investment business or any other regulated activity under any of the other Cayman Islands regulatory laws;
the risks involved;
whether the virtual asset service business involves the offering of virtual asset custodial services or the operation of a virtual asset trading platform;
the net worth, capital reserves and financial stability of the applicant;
the likelihood that the service will promote innovation, competition and benefits to consumers; and
the applicant’s senior officers, trustees and beneficial owners are fit and proper persons.

6. GENERAL REQUIREMENTS APPLICABLE TO A VASP AFTER REGISTRATION

The VASP Law sets out the continuing obligations which apply to a VASP after registration, including the following:

prepare accounts annually which are made available for inspection (including unaudited reports) to CIMA upon request (note: the VASP Law does not specify that the accounts need be audited);
ensure its senior officers and trustees are fit and proper persons to hold the respective positions;
ensure beneficial owners are fit and proper persons to have such control or ownership;
take such steps as are necessary to protect and secure the personal data and virtual assets of its clients;
ensure all communications relating to the virtual asset service are accurate;
comply with the Cayman Islands’ Anti-Money Laundering Regulations (2020 Revision), as amended (“AML Regulations”) i.e. including the appointment of AML officers and putting in place AML systems and procedures;
where performing a transfer of virtual assets, a VASP is required to collect and maintain information on the beneficiary and originator of the transfer in accordance with the AML Regulations, which are to be made available within 48 hours of receipt of a request by CIMA;
to notify CIMA within 15 days of any changes made to the information in the application form submitted to CIMA;
pay an annual renewal fee by the 15th January of each year; and
subject to certain exceptions, the prior approval of CIMA is required for the issue, voluntary transfer or disposal of 10% or more of the total shares or interest in a VASP – the incoming shareholder or partner also needs to be a “fit and proper” person.

In addition, a VASP is not permitted to engage in securities investment business (as defined under the Securities Investment Business Law (2020 Revision) as amended (“SIBL”)) (this is likely where, e.g. a VASP is an investment manager or adviser or is providing brokerage services), unless the person is a licensee or registered person under SIBL and cannot appoint a senior officer or trustee of AMLCO without the prior approval of CIMA.

Given the “four eyes” principle applied by CIMA in respect of other registered persons and licensees, it is likely that a VASP will be required to have a minimum of two directors, members or partners, as applicable.

7. ISSUE OF VIRTUAL ASSETS

Direct issue by VASP – In order to issue newly created virtual assets directly to the public in or from within the Cayman Islands in excess of a “prescribed threshold”, a registered person (i.e. a VASP which has already registered with CIMA) must first submit an “issuance request” to and obtain approval from CIMA. The VASP Law is silent on the value of “prescribed threshold” – this is essentially an amount in fiat currency or equivalent which can be raised by public issue by an issuer within a given timeframe, which will likely be confirmed by further amending regulation.
Issue by a VATP on behalf of a VASP – However, a registered person may engage on one or more virtual asset trading platforms (“VATP”) in order to issue virtual assets over the prescribed threshold on the VATP. This is provided that the VATP is either (i) licensed under the VASP Law or (ii) licensed or registered and supervised for virtual assets by a government regulatory body in another non high-risk jurisdiction. Prior to engaging a VATP for the issuance of newly created virtual assets, a registered person is required to submit a virtual asset issuance request to and obtain approval from CIMA.
Direct issue by a VATP – A licensee who operates a VATP may issue virtual assets directly on its own behalf to the public over the prescribed threshold by submitting an issuance request to CIMA for approval, where permitted by the terms of its licence.
Issue by a VATP on behalf of a VASP – A VATP that is licensed under the VASP Law may issue virtual assets on behalf of a VASP directly to the public over the prescribed threshold where it is permitted under the terms of its licence and the VASP which is creating the virtual assets has obtained CIMA approval for the issuance.
Obligations on issuer under the prescribed threshold – If a virtual asset issuance is within the prescribed threshold or involves the transfer or exchange of other virtual assets or fiat currency, a registered person is required to maintain records containing all the information required by CIMA for every transaction of the issuance and to make such records available to CIMA when requested.
CIMA conditions – On approval of an issuance which is over the prescribed threshold, CIMA may impose requirements in relation to (i) the method by which the issuer may solicit members of the public to participate in the issuance (ii) the information provided to the public
i.e. disclosure of risks (iii) the information that the licensee is required to collect from members of the public who participate in the issuance and (iv) the reporting requirements to CIMA.
Reporting duty of licensee – If a licensee operating a VATP which is facilitating the issuance of newly created virtual assets on behalf of a VASP knows or has reasonably grounds to believe that the virtual asset issuance does not comply with an applicable requirements, the licensee shall immediately give CIMA written notice of its knowledge or belief, with reasons.
CIMA response time – CIMA shall notify the licensee/ virtual asset issuer who submitted the issuance request whether it has been approved within 21 days of receipt of the issuance request.

8. CIMA CONSIDERATIONS: APPROVAL OF AN ISSUE OF VIRTUAL ASSETS

The VASP Law sets out a number of factors that CIMA will take into account in determining whether to approve an issuance request by a VATP or a registered person. This includes the following:

the nature of the virtual asset, including whether the virtual asset is a “security”, as defined in SIBL;
the functions and purpose of the virtual asset and the nature of the underlying asset which the virtual asset may represent (if applicable);
the accuracy and completeness of the disclosures made to the public regarding the issuance of virtual assets;
whether the VASP wishes to solicit the public directly for the purchase of the virtual assets;
the total number of virtual assets that will be available for purchase and the amount to be raised;
the period of time during which the issuance will take place;
the platform from which the virtual assets will be issued; and
the AML processes of the virtual asset issuer.

9. CIMA’S ENFORCEMENT POWERS

As a general note, CIMA has broad discretionary supervisory powers in respect of a registered person or licensee under the VASP Law, including but not limited to, the following:

Examine the affairs – Whenever CIMA considers it necessary, examine the affairs of business of any VASP i.e. by way of regular returns, on-site inspections, auditor’s reports or in any such other manner as CIMA determines in compliance with the VASP Law.
Cease and desist – Where CIMA is of the opinion that a VASP is carrying out, pursuing or about to carry or pursue out an act that is unsafe or an unsound practice in conducting the business of VASP, CIMA may direct the VASP to cease and desist from carrying out the act or conduct.
CIMA direction – If at any time it appears to CIMA that a VASP has failed to comply with any of the requirements under the VASP Law, CIMA may by written notice direct the VASP to comply with the requirement within such period of time and on such conditions as specified in the notice.
Enforcement powers – If CIMA knows or has reasonable grounds to believe that a VASP:

- is unable or appears likely to become unable to meet its obligations as they fall due;
- is carrying on business fraudulently or otherwise in a manner detrimental to the public interest, to the interest of its clients or to the interest of its creditors;
- has contravened any provision of the AML Regulations;
- has failed to comply with a condition of its licence/ registration;
- has not conducted the direction and management of its business in a fit and proper manner or has senior officers, managers or persons who have acquired ownership or control who are not “fit and proper persons”;
- is a “corporate services provider” and has contravened the applicable law; or
- has failed to comply with any lawful direction from CIMA.

CIMA may take certain actions, including, but not limited to the following:

1. revoke the virtual asset licence or sandbox licence or cancel the registration;
2. impose conditions upon the licence or amend or revoke such conditions;
3. apply to the court for any order which is necessary to protect the interests of clients or creditors of the licensee or registered person;
4. at the expense of the VASP, require that a licensee or registered person obtain auditor’s report to be submitted to CIMA on its anti-money laundering systems and procedures for compliance with the AML Regulations;
5. require the substitution of any senior officer or trustee of the VASP appointed, or the divestment of ownership or control;
6. appoint a person to advise the licensee on the proper conduct of its affairs and report the same to CIMA;
7. requiring such action to be taken by the VASP as CIMA reasonably believes necessary.

CIMA may revoke a virtual asset service licence, sandbox licence or cancel the registration if the licensee of registered person has ceased or wishes to cease carrying on virtual asset service or has not commenced business within 1 year of the date of grant of the licence of the registration.

1. Section 3(2) of the VASP Law makes this clear by stating: “For the purposes of this Law, virtual service tokens are not virtual assets and a person or legal arrangement that provides services that involve virtual service tokens only are not required to have a licence or registration under this Law.”

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

E: gary.smith@loebsmith.com
E: elizabeth.kenny@loebsmith.com
E: santiago.carvajal@loebsmith.com

Game Changer! Introduction of the regulation of Virtual Assets in the Cayman Islands

On 25 May 2020 the Cayman Islands government passed The Virtual Asset (Service Providers) Law, 2020 (“VASP Law”), which provides a legislative framework for the conduct of virtual assets business in and from the Cayman Islands through requiring either (i) the registration or (ii) the licensing, of persons providing virtual asset services. The Cayman Islands already has the benefits of a being friendly jurisdiction for token issuers, cryptocurrency funds, and developers of other forms of digital assets. The Cayman Islands Government intends for the VASP Law to place the Cayman Islands with a cutting edge, robust framework which is in alignment with global regulatory standards, protect consumers, and meet the requirements of the Financial Action Task Force recommendations in respect of virtual assets. The new legal framework also makes the Cayman Islands an attractive destination for virtual asset service providers (“VASPs”), as it provides legal and regulatory certainty and supports innovation. For more information on the VASP Law, please see Part 1 of our previous Legal Update.

VASP Regime to commence in Phases

The Cayman Islands Government recently announced that the VASPs regulatory framework is being commenced in two phases. According to the Government, Phase one, which began 31 October 2020, will focus on anti-money laundering (AML) and countering the financing of terrorism (CFT) compliance, supervision and enforcement. Persons engaged in or wishing to engage in virtual asset services must be registered with the Cayman Islands Monetary Authority (“CIMA”) under the VASP Law. Persons engaged in or wishing to engage in virtual asset services currently holding a licence granted by CIMA under another regulatory law must notify CIMA under the VASP Law.

Provisions of the VASP Law which relate to enforcement, penalties or offences will be commenced on 31 January 2021. Persons who have not registered or notified CIMA by CIMA’s application deadline, but who are engaging in virtual asset services on and after 31 January 2021 will be subject to penalties and other enforcement measures. Registration/notification is via the VASP Application Form on CIMA’s REEFS online platform. CIMA will publish a date by which applications have to be received in order to be considered prior to 31 January 2021.

Phase two, which is expected to begin in June 2021, will bring into force the remaining provisions of the VASP Law, including the licensing requirement for virtual asset custodians and trading platform operators, the sandbox licensing regime and other elements of the VASP Law.
The Virtual Asset (Service Providers) (Amendment) Bill, 2020, which will introduce provisions to better facilitate the phased commencement approach, was published on 29 October 2020 and will be presented at the next sitting of the Legislative Assembly.

For specific advice on the application of the VASP Law to your Cayman company or limited partnership, please contact any of:

E: gary.smith@loebsmith.com
E: elizabeth.kenny@loebsmith.com
E: santiago.carvajal@loebsmith.com

There are two principal routes to voluntarily dissolving a Cayman Islands company after the conclusion of its operations. Dissolution can be achieved either through (i) voluntary liquidation, or (ii) a strike-off. The dissolution will mean that the company is removed from the Register maintained by the Registrar of Companies in the Cayman Islands and cease to exist ultimately. If the company has entered into any agreements with investors, clients, customers and suppliers and/or undertaken any trading activities since its incorporation, the more common and appropriate choice is to undertake a formal liquidation of the company by way of a shareholders’ voluntary liquidation. If the company has not entered into any agreements and/or undertaken any trading activities since its incorporation then it might consider a strike-off. However, a strike-off is only suitable as an alternative to a voluntary liquidation for companies that have never actually traded or have not traded for a long period of time because any shareholder or creditor, during the period of up to ten (10) years (see further details below) of the strike-off, can apply to have the company restored or reinstated to the Register maintained by the Registrar of Companies in the Cayman Islands.

Advantages of Strike-off

The main advantages of seeking dissolution of the company via the strike-off route are that (1) this will be a simpler legal process (even though not necessarily a simpler process for the company’s Directors as they have to deal with settling and discharging all liabilities and distributing any remaining company assets prior to a strike-off) than a voluntary liquidation, (2) the fees and expenses chargeable for effecting a strike-off will be less than a voluntary liquidation, (3) it is typically effected by resolution of the Directors of the company, and (4) is normally quicker to complete than a shareholders’ voluntary liquidation of the company.

Risks of Strike-off

Risks of Strike-off

There are risks associated with achieving a dissolution via the strike-off route, including:

the strike-off process is more suited to companies which have never traded because it does not deal with the company’s liabilities to creditors and is not suitable for companies with extensive trading operations or valuable assets;
in cases where there are any dissatisfied creditors or shareholders of the company, they can apply to the Cayman Islands Court at any time within a period of up to two (2) years (this period may be extended by the Governor of the Cayman Islands upon application for up to 10 years from the strike-off date) after the strike-off, to have the company restored or reinstated to the Companies’ Register. The Court will normally order a restoration if it feels that the company was at the time of the strike-off, carrying on business, or was in operation, and it is “just” to restore it – for example, in cases where the Court feels that creditors should be allowed to take proceedings to recover assets. If the company is restored to the Register it is deemed to have continued in existence as if its name had not been struck off but the Court can also make other orders as seem “just” for placing the company and all other persons in the same position as nearly as may be as if the name of the company had not been subject to a strike-off;
unless the company has properly distributed all residual assets prior to strike-off, any assets held by the company at the time of strike-off will pass to the Financial Secretary of the Cayman Islands Government (and will be subject to being disposed of by the Governor of the Cayman Islands or being retained for the benefit of the Cayman Islands) upon dissolution;
the strike-off process, therefore, does not cut off creditors’ options in the way that a properly executed voluntary liquidation process would, and the creditors who wish to challenge distributions made to the shareholders prior to a strike-off, for example, may be able to apply to the Court to have the company restored/reinstated and raise claims well after the strike-off and dissolution.
Unlike the strike-off process, the ability to restore the company is not available to creditors or shareholders after the conclusion of a properly executed voluntary liquidation.

Conclusion

In determining whether to (i) seek a voluntary liquidation, or (ii) a strike-off, the directors of a Cayman Islands company should assess, among other things:

the nature and extent of the assets and liabilities of the company and deal with these accordingly (i.e. discharge any and all creditors and transfer out all assets);
whether or not there is a real risk of, for example, a shareholder or creditor seeking a restoration of the company in the future if the company is dissolved by strike-off.

This publication is not intended to be a substitute for specific legal advice or a legal opinion. For specific advice on voluntary liquidations or strike-offs, please contact your usual Loeb Smith attorney or any of:

E: gary.smith@loebsmith.com
E: elizabeth.kenny@loebsmith.com
E: vivian.huang@loebsmith.com
E: yun.sheng@loebsmith.com
E: santiago.carvajal@loebsmith.com
E: faye.huang@loebsmith.com

Introduction

The information contained in this report is indicative only. Law Business Research is not responsible for any actions (or lack thereof) taken as a result of relying on or in any way using information contained in this report and in no event shall be liable for any damages resulting from reliance on or use of this information.

FUND MANAGEMENT REGULATION

Regulatory framework and authorities

How is fund management regulated in your jurisdiction? Which authorities have primary responsibility for regulating funds, fund managers and those marketing funds?

The main regulatory body in the Cayman Islands that regulates open-ended investment funds, closed-ended investment funds, fund managers and parties marketing investment funds is the Cayman Islands Monetary Authority (CIMA). The main statutes from which CIMA derives its supervisory powers and duties in respect of investment funds are the Mutual Funds Law and the Private Funds Law, and in respect of fund managers, is the Securities Investment Business Law (the SIB Law).

Fund administration

Is fund administration regulated in your jurisdiction?

A Cayman Islands-domiciled entity that carries on business as a mutual fund administrator is required to have a valid licence for doing so and is required to be regulated by CIMA. There is more than one type of mutual fund administrator licence and CIMA will assess, among other things, whether the applicant has sufficient expertise to administer regulated investment funds (both open-ended and closed-ended) and whether the business as a mutual fund administrator will be administered by persons who are fit and proper to be directors or, as the case may be, managers or officers in their respective positions.

Mutual fund administration is defined in the Mutual Funds Law as the management or administration of a mutual fund to provide the principal office of the mutual fund in the Cayman Islands or the provision of an operator to the mutual fund. An overseas fund administrator that is not established in the Cayman Islands is not regulated by CIMA and may be the administrator of a Cayman Islands investor fund if the administrator is authorised or otherwise permitted to carry out administration activities to investment funds in any non-high risk jurisdiction.

Authorisation

What is the authorisation or licensing process for funds?

What are the key requirements that apply to managers and operators of investment funds in your jurisdiction? The vast majority of open-ended funds will qualify as mutual funds under the Mutual Funds Law (as amended), which requires mutual funds to be licensed or regulated as such. Closed-ended funds (i.e., funds that issue investment interests that are not redeemable at the option of the investor of record), which fall within the scope of the Private Funds Law, are required to register with, and consequently become regulated by, CIMA.

The authorisation process for an open-ended fund will depend on the regulatory category it chooses to register under (e.g., a licensed fund under section 4(1)(a) of the Mutual Funds Law, an administered fund under section 4(1)(b) of the Mutual Funds Law, a registered fund under section 4(3) of the Mutual Funds Law, or a limited investor fund under section 4(4) of the Mutual Funds Law). For closed-ended funds, the authorisation process requires the private fund to:

submit an application for registration to CIMA within 21 days after its acceptance of capital commitments from investors for the purposes of investments;

file prescribed details in respect of the private fund with CIMA;

pay a prescribed annual registration fee to CIMA in respect of the private fund;

comply with any conditions of its registration imposed by CIMA;

and comply with the provisions of the Private Funds Law.

A Cayman Islands-domiciled fund manager will have to either apply to CIMA for a licence to undertake business as such under the Securities Investment Business Law (as revised) or apply to CIMA to be registered under a less regulatory onerous regime as a Registered Person. An overseas fund manager can provide services to a Cayman Islands investment fund and there is no requirement for the overseas fund manager to be licensed by or registered with CIMA unless that fund manager establishes itself in the Cayman Islands. Operators of mutual funds, and private funds falling within the scope of the Private Funds Law, such as directors, are subject to registration or licensing requirements under the Director Registration and Licensing Law and are required to register with CIMA.

Territorial scope of regulation

What is the territorial scope of fund regulation? Can an overseas manager perform management activities or provide services to clients in your jurisdiction without authorisation?

The laws in the Cayman Islands (e.g., Mutual Funds Law, Private Funds Law and the Securities Investment Business Law (the SIB Law)) are not extraterritorial in scope and effect. An overseas fund manager can provide services to a Cayman Islands investment fund and there is no legal requirement for the overseas fund manager to be licensed by or registered with CIMA unless that fund manager establishes operations in the Cayman Islands.

Acquisitions

Is the acquisition of a controlling or non-controlling stake in a fund manager in your jurisdiction subject to prior authorisation by the regulator?

There is no requirement for an overseas fund manager to be licensed by or be registered with CIMA unless that fund manager establishes itself in the Cayman Islands. Accordingly, there would be no need for any prior notification to, or authorisation by, CIMA of a change in controlling or non-controlling stake in a fund manager established overseas. A fund manager regulated in the Cayman Islands (ie, whether as a CIMA licensee or a registered person) under the SIB Law is prohibited from issuing, voluntarily transferring or disposing of any shares or partnership interests (as applicable) without the prior approval of CIMA, but CIMA may grant an exemption from this prior approval requirement where the fund manager’s securities are publicly traded on a recognised securities exchange.

Restrictions on compensation and profit sharing

Are there any regulatory restrictions on the structuring of the fund manager’s compensation and profit-sharing arrangements?

There are no regulatory restrictions on the structuring of the fund manager’s compensation and profit-sharing arrangements.

FUND MARKETING

Authorisation

Does the marketing of investment funds in your jurisdiction require authorisation?

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. This restriction on the public offer of securities is contained in the Companies Law and the Limited Liability Companies Law, but 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. The Private Funds Law separately states that the term ‘public in the Islands’ does not include sophisticated persons and high net worth persons (as defined under the Securities Investment Business Law (the SIB Law)), which means that making an offer of securities to ‘private funds’ (as defined in the Private Funds Law) 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 the Cayman Islands Monetary Authority (CIMA) as a mutual fund under the Mutual Funds Law or a private fund under the Private Funds Law or (2) market its securities through a person who is appropriately licensed or authorised by CIMA under the terms of the SIB Law (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).

What marketing activities require authorisation?

Arranging deals in securities with a view to another person dealing in securities, or participating in the arrangements for dealing in securities are regulated under the SIB Law and, therefore, would require prior authorisation from CIMA.

Territorial scope and restrictions

What is the territorial scope of your regulation? May an overseas entity perform fund marketing activities in your jurisdiction without authorisation?

An entity that is performing marketing activities for an investment fund from within the Cayman Islands is required by the terms of the SIB Law to obtain a licence from, or otherwise register with, CIMA, prior to engaging in such activities.

If a local entity must be involved in the fund marketing process, how is this rule satisfied in practice?

There is no legal requirement for a local entity to be involved in the fund marketing process.

Commission payments

What restrictions are there on intermediaries earning commission payments in relation to their marketing activities in your jurisdiction?

There are no legal restrictions on intermediaries earning commission payments in relation to their marketing activities in the Cayman Islands.

RETAIL FUNDS

Available vehicles

What are the main legal vehicles 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 vehicle 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 vehicle for open-ended funds and the exempted limited partnership is the most commonly used legal vehicle for closed-ended funds. Both types of legal vehicles 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).

Laws and regulations

What are the key laws and other sets of rules that govern 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. Under section 4(1)(b) of the Mutual Funds Law, 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) 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 Law 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 Law 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 1 per cent of Cayman Islands’ mutual funds.

Authorisation

Must retail funds be authorised or licensed to be established or marketed in your jurisdiction?

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

Marketing

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 Law), which means that making an offer of securities to ‘private funds’ (as defined in the Private Funds Law) 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 the Cayman Islands Monetary Authority (CIMA) as a mutual fund under the Mutual Funds Law or a private fund under the Private Funds Law or (2) market its securities through a person who is appropriately licensed or authorised by CIMA under the terms of the SIB Law (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.

Managers and operators

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

The statutory and regulatory framework 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.

Investment and borrowing restrictions

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.

Tax treatment

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.

Asset protection

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?

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

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.

Governance

What are the main governance requirements for a retail fund formed in your jurisdiction?

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 Law 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 office.

The private fund will have 21 days after 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.

Reporting

What are the periodic reporting requirements for retail funds?

The Private Fund will have 21 days after making the change or becoming aware of the change to file details of the change with CIMA.

Issue, transfer and redemption of interests

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.

NON-RETAIL POOLED FUNDS

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 and accounted for over 85 per cent of total open-ended funds registered with the Cayman Islands Monetary Authority (CIMA) as at the end of 2019.

It is possible to incorporate an exempted company limited by shares (including an SPC) on either a standard basis (which takes four to five 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 memorandum of association is required to 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)

LLCs

An 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.

Limited partnerships

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 Law, are required to be registered with CIMA.

Unit trusts

Unit trusts are based on English trust law, but are modified by the Trusts Law 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.

Closed-ended funds

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 Law (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 Law.

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:

the name of the partnership;

the general nature of the business and term of the partnership;

the address of the registered office of the partnership;

the name and address of its general partner;

and 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.

Laws and regulations

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

Open-ended funds

The Mutual Funds Law 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 incorporated or established master funds that have one or more CIMA-regulated feeder funds and hold investments and conduct trading activities. Recent changes to the Mutual Funds Law means that certain mutual funds, which were previously exempted from registration with CIMA under section 4(4) of the Mutual Funds Law because they had 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 no longer exempt from registration with CIMA. These limited investor funds are now required to be registered with, and are regulated by, 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 Law. 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.

Closed-ended funds

The Private Funds Law 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 Law applies to private equity 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 Law 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 Law also imposes the following regulatory requirements to be met by private funds.

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).

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 Law. 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.

Safekeeping of fund assets

The Private Funds Law 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.

Cash monitoring

The Private Funds Law requires a private fund to appoint an administrator, custodian or another independent third party (or the manager or operator of the private fund):

to monitor the cash flows of the private fund;

to ensure that all cash has been booked in cash accounts opened in the name, or for the account, of the private fund;

and to ensure that all payments made by investors in respect of investment interests have been received.

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 Law (DRLL). The DRLL 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 DRLL who are directors of closed-ended funds that fall within the scope of the Private Funds Law. 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.

Authorisation

Must non-retail funds be authorised or licensed to be established or marketed in your jurisdiction?

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 Law are required to be registered with, and regulated by, CIMA.

Marketing

Who can market non-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 SIB Law), which means that making an offer of securities to ‘private funds’ (as defined in the Private Funds Law) 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 the Cayman Islands Monetary Authority (CIMA) as a mutual fund under the Mutual Funds Law or a private fund under the Private Funds Law or (2) market its securities through a person who is appropriately licensed or authorised by CIMA under the terms of the SIB Law (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.

Ownership restrictions

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 Law.

Managers and operators

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 seeks to regulate overseas managers of Cayman investment funds. Fund managers established in the Cayman Islands need to comply with the provisions of the Securities Investment Business Law and such fund managers must either be licensed or registered with the CIMA.

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 to Cayman Islands-based directors) regulated by CIMA are required to register with CIMA under the Directors Registration and Licensing Law (DRLL). The DRLL 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 DRLL who are directors of closed-ended funds that fall within the scope of the Private Funds Law. However, this may change in the future.

Tax treatment

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 taxation of any kind. There are no income, corporation, capital gains or withholding taxes or death duties. It is possible for all types of Cayman legal structures (exempted company, LLC, unit trust and ELP) to apply to the Cayman Islands government for 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.

Asset protection

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?

There are no legal requirements in the Cayman Islands for assets of a mutual fund to be held by a separate custodian located in the Cayman Islands. Closed-ended funds that fall within the scope of the Private Funds Law 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.

Governance

What are the main governance requirements for a non-retail fund formed in your jurisdiction?

The Mutual Funds Law (for open-ended funds) and the Private Funds Law (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.

Reporting

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

A private fund is required under the Private Funds Law to notify CIMA of any change that materially affects any information submitted to CIMA and any change of its registered office or the location of its principal office.

The Private Fund will have 21 days after 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 these 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.

SEPARATELY MANAGED ACCOUNTS

Structure

How are separately managed accounts typically structured in your jurisdiction?

Separately managed accounts are not typically structured using Cayman entities. The investment manager entity that provides managed account services may itself be a Cayman-domiciled entity and be regulated by CIMA.

Key legal issues

What are the key legal issues to be determined when structuring a separately managed account?

There are no specific Cayman Islands legal requirements to be determined when structuring a separately managed account unless the managed account is structured using a Cayman legal vehicle, in which case the same issues applicable to a mutual fund or a private fund may apply.

Regulation

Is the management or marketing of separately managed accounts regulated in your jurisdiction?

The manager or entity marketing the separately managed account is regulated in the same manner as fund management.

GENERAL

Proposed reforms

Are there proposals for further regulation of funds, fund managers or marketers of funds in your jurisdiction?

The recent introduction of (1) the requirement to register with the Cayman Islands Monetary Authority (CIMA), mutual funds that were previously exempted from registration, and (2) the registration of private funds with CIMA under the terms of the Private Funds Law has expanded the regulatory landscape for Cayman investment funds considerably. It is anticipated that there will be accompanying regulations that will set out in more detail how this expanded regulatory landscape will apply.

Public listing

Outline any specific requirements for stock-exchange listing of retail and non-retail funds.

The listing of investment funds on the Cayman Islands stock exchange covers all types of legal vehicles (eg, exempted company (including segregated portfolio companies), LLC, unit trust or limited partnership) and every type of strategy (closed-ended funds, open-ended funds, stand-alone and master-feeder funds, real estate funds or umbrella funds) can apply to be listed. Funds based in both the Cayman Islands and in other jurisdictions are permitted under the listing rules to apply.

Overseas vehicles

Is it possible to redomicile an overseas vehicle in your jurisdiction?

Yes.

Foreign investment

Are there any special rules relating to the ability of foreign investors to invest in funds established or managed in your jurisdiction or domestic investors to invest in funds established or managed abroad?

There are no special rules.

Funds investing in derivatives

Are there any special requirements in your jurisdiction relating to funds investing in derivatives?

See www.lexology.com/gtdt.

UPDATE AND TRENDS

Recent developments

Are there any other current developments or emerging trends in your jurisdiction that should be noted? Please include reference to world-wide regulatory concerns, such as high-frequency trading, commodity position limits, capital adequacy for investment firms and ‘shadow banking’.

There are no updates at this time.

LAW STATED DATE

Correct on 23 May 2020

Coronavirus (“Covid-19”) is continuing its spread across the world, with more than 68 million confirmed cases in 220 countries and more than 1.5 million deaths. In response, governments worldwide have implemented far ranging containment measures, such as travel restrictions, mandatory quarantine and social distancing. Many of our clients have additionally activated their business continuity and contingency plans and put in place alternate workplace arrangements and/or heightened measures to ensure the health and safety of their employees. These policies have disrupted “business as usual” and our clients with British Virgin Islands (“BVI”) and Cayman Islands companies have faced a number of challenges accordingly.
In this brief guide, we address certain of the most frequently asked BVI and Cayman Islands law questions that our clients have posed in connection with the difficulties that Covid-19 presents in the context of corporate and finance transactions. We also offer some practical guidance and considerations with respect to these issues.

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1. Meetings

Subject to a company’s memorandum and articles of association (“M&A”), BVI and Cayman Islands law does not impose any restrictions on where a meeting of the board of directors and/or shareholders can be held. That being said, the board of directors should always take into account any tax and economic substance implications (discussed below) when determining the location of a meeting.

In the event it is not possible to hold a face-to-face meeting of the board of directors and/or the shareholders, BVI and Cayman Islands law does offer the following alternative options subject to the M&A of the relevant company permitting such options:

i. A meeting of the board of directors and/or the shareholders may be held by telephone or by other electronic means so long as those persons participating can hear each other. “Electronic means” typically includes video conferencing facilities, Skype, Zoom, Teams and any similar electronic service. As a practical matter, it is important to ensure that the notice of the relevant meeting includes all information that is necessary for the participants to attend via the chosen electronic platform.

ii. The board of directors and/or shareholders (as appropriate) may pass resolutions unanimously in writing. BVI law also permits written resolutions to be passed by a simple majority provided that is expressly permitted by the M&A. Any written resolutions may be executed in counterpart. If the relevant directors or shareholders (as applicable) are located in different time zones and timing is not critical, passing resolutions in writing may be appropriate.

The following additional options should also be kept in mind for the purposes of facilitating a meeting with the required quorum:

i. A shareholder of a BVI or Cayman Islands company may appoint a proxy who may speak and vote on behalf of that shareholder at a meeting. The instrument appointing the proxy should be in writing and comply with any requirements of the relevant company’s M&A.

ii. If permitted by the relevant company’s M&A, a director of a BVI or Cayman Islands company may appoint an alternate to exercise all of the powers and perform all of the responsibilities of that director. The instrument appointing the alternate should be in writing and comply with any requirements of the relevant company’s M&A.

2. Economic substance

The BVI International Tax Authority (“BVI ITA”) has confirmed that only those board meetings relating to a BVI company’s “core income generating activities” are required to be held in the BVI. If, owing to Covid-19, this is not achievable, BVI entities should retain documentary evidence with reasons. Please note that appointing alternate directors in the BVI and/or hosting virtual board meetings as detailed above may assist in achieving compliance. The BVI ITA has also confirmed that all directors do not have to attend board meetings in the BVI – only as many as are required to make the relevant meeting quorate.

The Cayman Islands’ Department for International Tax Cooperation has confirmed that it will adopt a case-by-case approach in determining whether an entity has passed the Economic Substance test in its reporting that is due in 2021 where board meetings are held virtually due to Covid-19. In the event board meetings are held virtually, documentary evidence should be kept with reasons.

3. Execution of documents

BVI law and Cayman Islands law do not generally require documents to be signed with traditional wet-ink signatures by the parties at a signing meeting. Instead, parties entering into commercial contracts will most likely sign a hard copy document in wet ink, which is then converted into electronic form and sent by e-mail. In this regard, it is important to keep in mind the common law “Mercury” guidelines.

As an alternative, and subject to the conditions and exceptions discussed below, a document may also be signed electronically. This may take a number of forms. For example, a signatory may type his/her name into a soft copy of the relevant contract, or apply an electronic image of his/her handwritten signature into the relevant signature block. A web-based e-signing platform, such as DocuSign, may also be used to a similar end. It is important to ensure that the M&A of the relevant company and the terms of the applicable commercial contract do not prohibit the use of electronic signatures.

It is worth noting that multiple forms of execution may be used by the parties to an agreement as a matter of BVI law and Cayman Islands law. For example, one or more parties may use an electronic signature, while one or more of the other parties may sign by wet ink.

The Electronic Transactions Law (2003 Revision) of the Cayman Islands (the “ETL”) and the Electronic Transactions Act 2001 of the BVI (the “ETA”) recognize electronic signatures as legally valid, binding and enforceable so long as the relevant signatory intends to sign the applicable document and the signature is reliable in light of its purpose and the circumstances. Broadly speaking, an electronic signature is deemed to be “reliable” if:

i. the means of creating the electronic signature is linked to, and under the control of, the relevant signatory and of no other person; and

ii. any alteration to the electronic signature made after the time of signing is detectable.
It is worth noting that BVI law also requires the consent of the counterparty if the other party signs a document electronically.

Traditional wet-ink signatures are still required for certain documents with special execution formalities or for other reasons. For example, documents that need to be notarized or filed with certain registries or authorities may need to be executed by hand. Wills and certain property related documents also need to be signed using wet-ink signatures. Importantly, whilst the ETL expressly approves the use of e-signatures with respect to the execution of deeds by Cayman Islands companies, the ETA provides that anything required to be done by deed may not be executed by e-signature. Whilst this has not been tested in the courts to our knowledge, our view is that this exclusion does not apply to documents that are executed as a deed but are not required to be executed as such as a matter of law.

As a practical matter:

i. BVI and Cayman Islands companies transacting with banks or other financial institutions should establish whether wet-ink signatures will be required with respect to security documents or any other finance documents. This is fairly typical in cross-border financing transactions.

ii. To the extent that a legal opinion is required with respect to a document that is executed using an e-signature, it is important to check whether counsel will be able to issue a clean opinion, or whether certain assumptions and qualifications will be required.

iii. Directors of BVI and Cayman Islands companies should consider whether their internal signing policies (if any) need to be updated to cater for the use of e-signatures.
To the extent that any transaction documents need to be sealed as a matter of the governing law of that document, the board of directors of the applicable company should locate the common seal at the outset of the transaction, or authorize the creation of one in a timely fashion. It should be noted that whilst BVI companies must maintain a common seal, Cayman Islands companies do not and directors should be made aware of this to avoid any potential delays in signing.

To the extent that the directors of a BVI or Cayman Islands company may not be available to sign documents using wet-ink signatures or electronically, the relevant company should consider whether a power of attorney ought to be put in place, or whether it is otherwise appropriate to authorize certain persons to sign documents on behalf of that company by way of a resolution of the board of directors. It may also be possible to appoint an alternate director as referenced above. These types of measures should be considered as part of a company’s overall business continuity and contingency planning.

4. Company registries

The BVI Registry of Corporate Affairs and the Cayman Islands Registrar of Companies remain open with some relatively minor changes to cater for Covid-19. Registered agents in the BVI and registered office providers in the Cayman Islands are, on the whole, also operating relatively normally in our experience.

5. Liquidity and financial distress

Covid-19 has had a significant impact on the earnings and revenue streams of some companies. Some companies have lost their investment grade credit ratings and investors have sold down positions in newly created sub-investment grade debt. Lenders have also generally focused on preserving capital and supporting existing clients with bridge financing and liquidity, leaving less appetite for new corporate loan transactions. In addition, certain borrower-friendly terms that regularly featured in loan documentation prior to Covid-19, such as unrestricted subsidiary structures which facilitate additional borrowing, have become more heavily negotiated.

Loan defaults have also increased due to an inability to service debt. For example, US institutional loan defaults climbed to 3.9% on a trailing 12-month basis in June. To put this into perspective though, default rates remain considerably lower than the 10%+ levels observed in 2009 following the global financial crisis. This is due to the fact that many companies have managed to draw down on revolving credit facilities and obtain payment holidays/covenant suspensions and waivers from financial institutions. The increasing prevalence of loan transactions done on cov-lite terms prior to Covid-19 has also mitigated the risk of breaching covenants and triggering a default.

The following practical points may assist the board of directors of a BVI or Cayman Islands company which is experiencing a liquidity crisis and/or seeking to mitigate any potential insolvency risks:

i. Treat creditors fairly (and where they are of the same class, equally). BVI and Cayman Islands law include a vast range of statutory provisions which seek to protect creditors from the unfair distribution of a company’s assets prior to a formal insolvency process. For example, directors may be personally liable for disposing of assets at an undervalue or preferring particular creditors over others. Such transactions may also be unwound by the courts. Directors of a BVI or Cayman Islands company that are continuing to trade in a situation where the relevant company is of dubious solvency should take appropriate legal advice to ensure that they continue to meet all of their statutory and common law obligations.

ii. Ensure compliance with fiduciary and common law directors’ duties owing to the company. Broadly speaking, these include the duties:

a) to act with reasonable care, diligence and skill;
b) to act in good faith in the best interests of the relevant company;
c) to exercise a director’s powers for proper purposes;
d) to avoid conflicts of interest;
e) not to fetter a director’s discretion; and
f) not to misuse or misappropriate the relevant company’s property.

Any breach of these duties may result in personal liability on the part of a director and the relevant transaction may be set aside by the courts.

It is important to note that the board of directors of a BVI or Cayman Islands company has a duty to consider the interests of its creditors as paramount if that company is insolvent or of dubious solvency. This is because the creditors are the ultimate beneficiaries of an insolvent company’s assets. As noted above, appropriate legal advice should be sought if the relevant company’s solvency is in question.

iii. Review contracts to consider whether a default or insolvency event has been (or could be) triggered. Most commercial contracts governed by BVI or Cayman Islands law contain a force majeure clause which may allow a party to terminate the contract and/or be excused from complying with certain of its terms. Whether Covid-19 constitutes a force majeure event will depend on the specific drafting in each case. If it does not, it may nevertheless be possible to rely on the common law doctrine of frustration to excuse performance.

iv. Hold regular board meetings with detailed minutes. The directors of a BVI or Cayman Islands company should keep each other updated in times of financial distress as a company’s financial outlook can rapidly change. This should include forming a plan as to how to return the company to health or achieve the best result possible for creditors. Keeping detailed meeting minutes additionally ensures that there is a written record of such proceedings in the event that any of the directors’ decisions are challenged at a later date.

v. Frequently review financial information. The board of directors should ensure that a BVI or Cayman Islands company’s balance sheet and cash flow position is frequently reviewed with appropriate advisors to detect any solvency concerns. This is particularly important because a director’s compliance with his/her fiduciary and common law duties may include an assessment of his/her actual knowledge and what a reasonable person with the director’s skills and competence ought to have known in that director’s position.

vi. Seek ratification. In certain instances, it may be appropriate to obtain shareholder approval in order to ratify transactions that a company is proposing to enter into. For example, it is relatively commonplace to obtain such approval in circumstances where a BVI or Cayman Islands company enters into a transaction where there is no or little corporate benefit to it. This includes companies that are providing third party collateral support to group entities that are in financial distress.

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

Peter Vas
Partner Loeb Smith Attorneys
Hong Kong
T: +852 5225 4920
E: peter.vas@loebsmith.com

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Shareholder Disputes – A comparison between the Cayman Islands and the British Virgin Islands – Chinese Translation

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Introduction

On 9 February 2016, Clifford J., sitting in the Financial Services Division of the Grand Court of the Cayman Islands gave Judgment in In Re Torchlight Fund L.P. (unreported) reaffirming the principles which the Court will take into account in determining whether to grant a validation order. This article seeks to provide a summary of these factors, which will be of particular interest to the directors of a solvent company or the general partner of a solvent exempted limited partnership against whom a petition for winding-up has been made but not yet granted. This typically arises where shareholders or limited partners are in dispute with the management of the entity and have filed a petition on just and equitable grounds. It should be noted that pursuant to section 95(3) of the Companies Law (2013 Revision) (the “Law”), upon the presentation of a petition on such grounds, the Court has a number of alternative remedies available to it other than insolvency and include, for example, an order regulating the conduct of the entity’s affairs in the future (s.95(3)(a)).¹

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What is a “validation order”:

A validation order is one made pursuant to section 99 of the Law which provides as follows:

“When a winding-up order has been made, any disposition of the company’s property and any transfer of shares or alteration of the status of the company’s members made after the commencement of the winding up is, unless the Court otherwise orders, void.”

By section 100(2) of the Law, the winding-up of a company, and by extension an exempted limited partnership, is deemed to commence at the time of the presentation of the petition to the Court for winding up. As a consequence, directors and general partners need to take care that they do not fall foul of section 99 of the Law in the twilight between the presentation of the petition for winding up to the Court and the granting of the winding-up order by the Court, for which they may become personally liable.

It is therefore common for executives of solvent entities to apply to the Court for a prospective validation order in respect of payments and dispositions which are to be made in the ordinary course of business and in order to enable the entity to continue trading in the interim.

The test following In Re Torchlight Fund L.P.

Clifford, J., reviewed the authorities in the area which have their origin in relation to the interpretation of equivalent statutory provisions at English law.² The learned Judge cited the dicta of Henderson, J., in the Grand Court in In Re Fortuna Development Corporation [2004-2005] CILR 533 in which the Court held that “there are four elements which must be established before an applicant is entitled to a validation order”. These may be summarised as follows:

the proposed disposition must appear to be within the powers of the directors;
the evidence must show that the directors believe the disposition is necessary or expedient in the interests of the company;
it must appear that in reaching the decision the directors have acted in good faith (the burden of establishing bad faith is on the party opposing the application); and
the reasons for the disposition must be shown to be ones which an intelligent and honest director could reasonably hold.

Clifford J. held that these elements:

“have to be established by evidence, even if this has the effect in relation to the third element, of shifting the burden of establishing bad faith on the party opposing the application. There has to be a body of evidence relevant to the required elements for the Court to consider in exercising its discretion.”

In In Re Torchlight Fund L.P. the partnership’s evidence was found to be insufficient for these purposes. For example, the partnership failed to produce specific information concerning the inflow of money and details of the proposed payments to be made. In that case, the Petitioners were particularly concerned about payments being made to related parties.

A fifth element – irregularities in the affairs of the entity

Clifford J., went on to note that these four “elements” had been taken a stage further by the Chief Justice of the Grand Court in In Re Cybervest Fund [2006] CILR 80 in which the Court had refused to make a validation order in respect of management fees on the footing that, where there could be shown to be irregularities in the conduct of the company’s affairs, it by no means followed that because the company was solvent and able to pay its debts as they fell due the conduct of the company’s business should be continued, potentially at the expense of its investors. The Chief Justice held:

“There is another consideration to add to this list, in light of the concerns raised in the matter, although arguably it is subsumed within the third and fourth elements. This would be whether irregularities in the conduct of the affairs of the company can be shown, even of the company is clearly solvent, as is alleged here.”

Indeed, in both In Re Cybervest Fund and In Re Torchlight Fund L.P., the Grand Court that those cases concerned irregularities in the conduct of the affairs of the company and exempted limited partnership respectively which went to the very core of the question of what can properly be regarded as being in the ordinary course of business that it would not be proper to make a general validation order in the form sought.

Notes:
1. The provisions relating to the winding-up of companies under Part V of the Law apply (with a few exceptions) to exempted limited partnerships pursuant to s.36(3) of the Exempted Limited Partnership Law, 2014.
2. See, for example, Re Burton & Deakin Ltd [1977] 1 All ER 631 and Re a company (No 005685 of 1988), ex parte Schwarcz and another [1989] BCLC 424 (both cited by Clifford, J., in his learned Judgment).

For more information on shareholder disputes in Cayman Islands’ companies- please contact:

David Harby

Head of Commercial Disputes and Litigation
E david.harby@loebsmith.com
W www.loebsmith.com

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Author

Robert Farrell

Commencing the voluntary winding-up of a mutual fund is deceptively easy but, as soon as it is contemplated, the Fund Manager’s role and responsibilities change in subtle but very important ways.

Some of these responsibilities have had a timely airing recently in the Cayman Islands’ Grand Court and Court of Appeal’ decision in Adamas Global Alternative Investment Management INC, et al [FSD 232 of 2018; FSD 72 of 2019; and Civil Appeal No. 27 of 2019] in respect of the voluntary liquidation of Adamas Asia Strategic Opportunity Fund Limited (the “Fund“) which arose out of deteriorating relations between the Fund’s investment manager (the “Manager“) and the Fund’s only investor, the Public Institution for Social Security for the State of Kuwait (the “Investor”).

Background to the Case

In December 2017 the Investor made a sizeable redemption request which the Manager acknowledged. However, in August 2018, before the redemption had been effected, the Investor was informed that the Fund’s directors had declared a suspension of redemption requests to take effect from 2 October 2018. It was hoped that a special redemption of 14% of the Fund’s issued share capital would be made in November 2018 but this was cancelled on the grounds that an emergency existed as a result of which a disposal of the Fund’s underlying investments was not practically feasible – the Fund was invested in underlying funds that were themselves locked-up for more than a year (until December 2019).

The Investor was unhappy with the explanations given for the delays. There were also arguments about the extent to which the Manager would agree to waive its fees during the suspen-sion of redemptions.

By 9 December 2018 the Investor requested that, within 7 days, the Manager pass a resolution to commence the voluntary winding-up of the Fund and irrevocably appoint a liquidator of the In-vestor’s choice. Discussions continued and, on 23 December 2018, the Investor wrote to the Manager with an ultimatum that, unless the Manager passed the resolutions to wind-up the Fund and appoint the Investor’s preferred choice of liquidator, the Investor would petition the Court to wind-up the Fund on just and equitable grounds.

Shortly thereafter a winding-up resolution was passed by the Manager, which held the management voting shares in the Fund. However the Manager had decided to appoint a cheaper liquidator rather than the Investor’s much preferred option. The two sides had very different perspectives on whether, as a matter of law, a Manager could ignore the wishes of the Investor in a voluntary winding-up.

The Articles of Association of the Fund were typical of Cayman Islands’ mutual funds and other Common Law offshore jurisdictions. In particular, the Investor held non-voting, redeemable, “Participating Shares” (which participate in the profits but not the running of the Fund) and the Manager held “Management Shares” (that, in contrast, don’t participate in the profits but entitle the Manager to, among other things, pass resolutions to voluntarily wind-up the Fund and to appoint a liquidator for that purpose).

The judgment of the Grand Court observed that “There was no previous case directly on point which made it obvious that the holder of management shares in a Cayman Islands fund company is required, in the context of a contemplated solvent liquidation, to defer to the wishes of the participating shareholders.”

The legal argument in the Grand Court, and later in the Court of Appeal, centred on section 131 of the Companies Law, which states that:

“When a resolution has been passed by a company to wind up voluntarily, the liquidator or any contributory or creditor may apply to the Court for an order for the continuation of the winding up under the supervision of the Court… on the grounds that:

(a) the company is or is likely to become insolvent; or

(b) the supervision of the Court will facilitate a more effective, economic or expeditious liquidation of the company in the interests of the contributors and creditors.”

In common with most mutual funds, the Fund’s “contributors and creditors” (to which section 131 refers) included the Investor and the Manager. The Investor’s redemption request had not been implemented (so the Investor was still a “contributor” rather than a “creditor”). The Manager, on the other hand, was owed a small management/performance fee and so it was both a creditor as well as a modest contributor (by virtue of holding Management Shares in the Fund).

The Court’s Decision

In its judgment the Court of Appeal held that:

“the relationship between those holding the Management Shares and those holding the Partici-pating Shares radically changes when the fund is contemplating the cessation of business and a voluntary winding up. The exclusive power conferred on the Manager to resolve to wind up the company is conferred not for their benefit but for the benefit of the Participating Shareholders who, under the Articles, have the predominant financial interest in the proposed winding up…”

The Court of Appeal did go out of its way to reassure Managers that: “If a supervised liquidation might significantly delay or otherwise prejudice settlement of the Manager’s claims as a creditor, the Manager will of course be entitled to argue against a supervised liquidation for that reason.”

And in the Grand Court the judge pointed out that “no right thinking person could properly infer that the making of a supervision order [the Court appointing an official liquidator] cast doubt on the bona fides [good standing] of the Manager.”

One of the key point of this is decision by the Cayman Islands courts is a reminder that under generally recognized rules of winding up law, the way in which a solvent or insolvent fund should be wound up should be determined by primary reference to the interests or wishes of the fund’s economic stakeholders (which in a solvent winding up will be its investors). In any event, once liq-uidation is contemplated, fund directors (working with the fund manager) need to pay particular attention to the fiduciary duties they owe to shareholders and creditors.

For specific advice on the winding-up of Cayman Funds, please contact your usual Loeb Smith attorney or any of:

E: gary.smith@loebsmith.com
E: elizabeth.kenny@loebsmith.com
E: vivian.huang@loebsmith.com
E: yun.sheng@loebsmith.com
E: faye.huang@loebsmith.com
E: santiago.carvajal@loebsmith.com

1. What is a mutual fund?
The primary legislation regulating mutual funds in the Cayman Islands is the Mutual Funds Law (As Revised) (the “Funds Law”) and accompanying regulations, including the Retail Mutual Funds (Japan) Regulations (As Revised) which generally apply to investment funds licensed under the Funds Law (licensed funds) where the securities are marketed to the public in Japan. The term “mutual fund” applies for Cayman Islands law purposes to all open-ended investment funds irrespective of whether they are hedge funds or other fund with multiple strategies.

The Funds Law defines a “mutual fund” as follows (emphasis added):
“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 but does not include a person licensed under the Banks and Trust Companies Law (2009 Revision) or the Insurance Law (2008 Revision), or a person registered under the Building Societies Law (2010 Revision) or the Friendly Societies Law (1998 Revision)”.

Accordingly, investment funds which are established for a sole investor and do not involve the pooling of investor funds fall outside the regulatory framework of the Funds Law. Nonetheless, a single investor fund can apply for voluntary registration to, among other things, benefit from the status of being a fund registered with and regulated by Cayman Islands Monetary Authority (the “Monetary Authority”).

Will the mutual fund issue “equity interests”?

As can be seen from the definition of “mutual fund” above, the Funds Law applies only to investment funds which issue “equity interests”. Equity interests are defined in the Funds Law as:

“a share, trust unit or partnership interest that-

(a) carries an entitlement to participate in the profits or gains of the company, unit trust or partnership; and

(b) is redeemable or repurchasable at the option of the investor… before the commencement of winding-up or the dissolution of the company, unit trust or partnership, but does not include debt,…”

Accordingly, private equity funds and other closed-ended funds (e.g. real estate funds) which do not give investors the right to redeem their shares, units or interests from the fund at the investor’s option do not fall within the scope of the provisions of the Funds Law. However, please see our Legal Update on the Private Funds Law. Cayman Islands Private Funds Law

The law as set out herein therefore applies only in respect of investment funds with any asset class which satisfies the definition of “equity interests” above. For present purposes we will refer to these funds as “Open-ended Funds”.

1. Types of Open-ended Funds
According to the Funds Law, certain categories of Open-ended Funds are required to subject themselves to regulation by the Monetary Authority. The three types of Open-ended Funds which are regulated by the Monetary Authority are:

i. licensed mutual funds;
ii. administered mutual funds; and
iii. registered mutual funds.

Licensed mutual funds

Licensed mutual funds are covered under section 4(1)(a) of the Funds Law and must apply for and obtain a license from the Monetary Authority to undertake business. This is the least common type of regulated mutual fund owing in no small part to the burdensome approval process for a license.

Administered mutual funds

Administered mutual funds are covered under section 4(1)(b) of the Funds Law and must have appointed a licensed mutual fund administrator which is licensed with the Monetary Authority in the Cayman Islands. The licensed mutual fund administrator must also provide the Fund’s principal office in the Cayman Islands. This type of mutual fund is commonly referred to as a “retail fund” in that it allows an investment manager to establish a fund that permits each investor to have a minimum initial subscription that is lower than US$100,000. An administered mutual fund is the only type of regulated mutual fund which must appoint a mutual fund administrator based in the Cayman Islands. Licensed mutual funds (discussed above) and registered mutual funds (discussed below) may appoint an administrator based in any jurisdiction.

Registered mutual funds

Registered mutual funds are covered under section 4(3) of the Funds Law. This is the most common type of investment fund registered with the Monetary Authority. Registered mutual funds are exempt from the requirement to be licensed under section 4(1)(a) of the Funds Law or administered 4(1)(b) of the Funds Law on the basis that either (i) each investor must invest a minimum initial subscription of no lower than US$100,000 (or its equivalent in any other currency) or (ii) the equity interests of the fund are listed on a stock exchange recognised by the Monetary Authority.

Registration for Section 4(4) Funds

Under section 4(4) of the Funds Law, Open-ended Funds in which the “equity interests” are held by not more than fifteen (15) investors, a majority of whom are capable of appointing or removing the “operator” of the fund are now also required to be registered with the Monetary Authority. See our Legal Update on Section 4(4) Fund registration – Cayman exempted mutual funds now required to register with CIMA.

In the case of an investment fund structured as a company, the operator would be the fund’s Directors. In the case of an investment fund structured as a limited partnership, the operator would be the fund’s general partner(s). In the case of an investment fund structured as a unit trust, the operator would be the fund’s trustee(s).

As noted above, private equity funds and other closed-ended funds (e.g. real estate funds) which do not give investors the right to redeem their shares, units or interests from the fund at the investor’s option do not issue “equity interests” for the purposes of the Funds Law. However, a different registration regime applies to these types of investment funds. Please see our Legal Update on the Private Funds Law. Cayman Islands Private Funds Law

1. What are the key disclosure or filing requirements (if any) that must be completed by the mutual fund?
The following procedures apply to mutual fund registration:

If the minimum aggregate equity interest purchasable by a prospective investor is at least US$100,000 (or its equivalent in any other currency) or the equity interests are listed on a recognised stock exchange, including the Cayman Islands Stock Exchange, then the registration application requires filing of the following documents with the Monetary Authority:
1. a certified copy of the Certificate of Incorporation or Certificate of Registration (as applicable and depending on whether the fund is a company, limited partnership or trust);
2. Form MF1 (this form includes certain prescribed details of the fund, such as the identity of the operators and service providers and the key terms regarding subscriptions and redemptions);
3. a current offering document (for example, a private placement memorandum);
4. a consent letter from the fund’s administrator and a consent letter from the Cayman Islands auditor, approved by the Monetary Authority;
5. a registration fee, which is currently US$4,269 (approximately).
In the case of an administered fund where the investment fund’s administrator provides the fund’s principal office in the Cayman Islands (this may apply in the case of an investment fund that agrees to accept minimum initial investments below the US$100,000 threshold) then the registration is applied for by filing the following documents with the Monetary Authority:

1. Forms MF2 and MF2A, completed by the administrator and the investment fund (including similar particulars to the Form MF1) (see above);
2. the same documents (except the Form MF1) and registration fee as above.

These are filing registration requirements. The Monetary Authority will not perform a substantive review of the filing. Generally, the mutual fund can accept subscription monies once the filing is made.

Fund’s offering document must:

describe the equity interests in all material respects.
contain such other information as is necessary to enable a prospective investor in the fund to make an informed decision about whether to subscribe for or purchase the equity interests.

The fund is required under the Funds Law to file its current offering document with the Monetary Authority within 21 days of becoming aware of any change that materially affects any information in the offering document filed with the Monetary Authority or in the prescribed details of the offering document filed with the Monetary Authority.

This Briefing Note is not intended to be a substitute for specific legal advice or a legal opinion. It deals in broad terms only and is intended to merely provide a brief overview and general guidance only. For more specific advice on the laws relating to Cayman Islands investment funds, please contact:
Gary Smith
Partner
E: gary.smith@loebsmith.com
www.loebsmith.com

Digital Assets: Certain Cayman Islands law issues to consider

Based on our experience of advising initial coin offerings (ICOs) and security token offerings (STOs) and of undertaking legal due diligence for institutional clients seeking to acquire tokens in ICOs and STOs, in this brief update, we discuss a few of the issues that should be considered when determining which offshore jurisdiction to incorporate a legal vehicle in order (i) to reduce your risk of contravening Cayman Islands law, (ii) to facilitate listing on crypto-exchanges, and (iii) to facilitate better relationships with other participants in the growing digital assets space (e.g. banks to open accounts, institutional investors and investment funds which will undertake due diligence as part of the process of acquiring tokens in an ICO or STO).

1. Tax

The Cayman Islands is a tax neutral jurisdiction. There is no direct taxation of any kind on Cayman entities. Structuring issues will largely be driven by business needs and onshore tax considerations, and onshore regulatory issues. There is no income, corporation, capital gains or withholding taxes or death duties. It is possible for all types of Cayman legal structures (exempted company, LLCs, foundation companies, unit trust, and limited partnerships) to apply to the Cayman Islands government for 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.

2. Cayman Islands laws and regulations governing digital asset offerings, formation and operation of cryptocurrency exchanges, etc.

There is no specific existing legislation or regulation regarding cryptocurrency offerings (e.g. ICOs and STOs), cryptocurrency exchanges or investment vehicles investing in cryptocurrency. There are no restrictions or licensing requirements that specifically govern the holding, management or trading of digital assets, whether in a personal capacity or doing so as a manager, trustee or advisor for the account of others. The application of existing laws needs to be considered in relation to this developing digital assets space. It is worth noting that the Cayman Islands Government has published a consultation paper in which it seeks commentary on its proposals for a regulatory framework for virtual asset service providers in order to regulate token offerings and ICOs/ITOs. The consultation paper discusses registration being imposed on issuers prior to the sale, and minimum notice requirements – like a prospectus. Issuances above a certain threshold would have to be undertaken via a licensed or regulated trading platform. Custodial services and trading platforms would be subject to licensing requirements. The regulatory framework would also cover a sandbox license to test out new technologies, which Fintech service providers may apply for.

Until a regulatory framework for virtual asset service providers is introduced, the following existing laws may be applicable in the digital asset space and should be carefully considered by promoters, investors and their advisors:

i. The Cayman Islands Securities Investment Business Law (As Revised) (“SIBL”) defines securities by reference to a list of instruments, including shares and stock of any kind in the share capital of a company, debentures and any other instruments creating or acknowledging indebtedness other than certain exceptions specified, instruments giving entitlements to securities, certificates conferring rights with respect to securities, etc.

The term “instrument” refers to any record and specifically includes an electronic record as defined in the Electronic Transactions Law (2003 Revision), i.e. a record processed and maintained by electronic means.

Accordingly, CIMA may qualify coins/tokens issued on blockchain as stock or debt if the rights attached to the coins/tokens (as represented in the White Paper or the token sale documentation) resemble rights normally attached to equity interests or debt.

ii. In certain circumstances, a registration with or a license from CIMA may be required:

(a) under the Cayman Islands Money Services Law (As Revised), if the coins/tokens issued could give access to money transmission or currency exchange services;

(b) under SIBL, if the coins/tokens may qualify as securities, for all persons engaging, “in the course of business”, in securities investment business, i.e. among other things buying, selling, subscribing for or underwriting securities as agent or principal, arranging deals, managing securities, or advising an investor on buying, selling, underwriting, subscribing for or exercising any right in securities;

(c) under the Cayman Islands Mutual Funds Law (As Revised) if the issuer of the coins/tokens is essentially a collective investment scheme and the coins/tokens are attached to redemption rights for investors; and/or

(d) under the Cayman Islands Private Funds Law, 2020, if the issuer of the coins/tokens is essentially a collective investment scheme and the coins/tokens carry an entitlement to participate in the profits or gains.

The following Cayman Islands statutes and regulations should be considered when structuring a digital asset business through the Cayman Islands:

the Securities Investment Business Law (SIBL);

the Proceeds of Crime Law (PCL), the Anti-Money Laundering Regulations (the AML Regulations) and existing guidance notes, and the Terrorism Law;

the International Tax Co-operation (Economic Substance) Law (the Economic Substance Law).

the Money Services Law (MSL);

the Mutual Funds Law (MFL);

the Private Funds Law (PFL);

the Stock Exchange Companies Law;

the US Foreign Account Tax Compliance Act (FATCA) and the OECD Common Reporting Standard (CRS);

the beneficial ownership regime in the Companies Law and various other statutes; and

the Bank and Trust Companies Law.

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

E: gary.smith@loebsmith.com

E: ramona.tudorancea@loebsmith.com

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Author

Gary Smith