The Cayman Islands has a deserved reputation for boasting a variety of alternative and original structures. Whilst as a common law jurisdiction the concept of a trust is one that is recognised, upheld and commonly utilised, the Cayman Islands nonetheless has some alternative structures to rival the traditional trust arrangement. In this article we will consider “STAR Trusts” and “Foundation Companies” which are two such examples.

We will first consider the Foundation Company which was introduced by its own legislation – the Foundation Companies Act, 2017 and is a structure which has grown in popularity since 2017, particularly for use in the digital asset space (e.g. as a decentralized autonomous organization (“DAO”), service provider to DAO, treasury for fungible tokens, NFTs, and network for building digital asset ecosystems). As the name implies, a Foundation Company is a company and it therefore bears some similarities with more conventional types of company that are available in the Cayman Islands. A Foundation Company is registered with the Registrar of Companies, it has separate legal personality, it is incorporated with a memorandum and articles of association, and it has a Board of Directors who are responsible for the day-to-day conduct of its affairs.

However, this is where the similarities with more conventional companies end as whilst Foundation Companies have some characteristics of a conventional company, practically they operate in a manner that is more akin to a trust. They therefore provide the functionality and flexibility of a trust but without any of the complexities associated with trust administration. Further, as they are a company with separate legal personality, this aids their recognition in civil law jurisdictions whose principles of ‘ownership’ mean that common law trusts often are not recognized.

Ownership

Whilst Foundation Companies can (but don’t necessarily in practice) have shareholders, the shareholders in their capacity as shareholders are not entitled to receive dividends or other distributions. This can be contrasted with conventional companies whose shareholders participate in the profits simply by virtue of being a shareholder. Instead, Foundation Companies have a class of interested parties known as the “beneficiaries” and it is these beneficiaries who (depending on the applicable terms) are entitled to participate in any profits generated by the Foundation Company.

Further, whereas shareholders in more conventional companies have some ability to control the affairs of a company (e.g. by appointing or removing Directors or by passing (or refusing to pass) shareholder resolutions) and they have the right to access certain company records, the beneficiaries of a Foundation Company have no such rights. Beneficiaries’ rights, if any (including in relation to their right to distributions) must be expressly provided for in the Foundation Company’s constitution. Therefore, those who choose to establish a Foundation Company have considerable flexibility in determining what the rights of the beneficiaries will be and when they will arise and therefore careful thought needs to be given to drafting the constitutional documents to ensure that proper effect is given to the founder’s intentions.

Corporate Governance

Whilst the ownership structure of Foundation Companies described above undoubtedly has its benefits, the lack of shareholder oversight removes one of the important checks and balances from the corporate governance of a Foundation Company. It is for this reason that Foundation Companies are required to have a “Supervisor” whose role is to oversee, and hold to account, the Board of Directors. A Supervisor’s role can be greater, to the extent provided for in the constitutional documents and it is common for the constitution to provide for a number of ‘reserved matters’ in favour of the Supervisor, which can range from the right to appoint and remove the Supervisor, Directors and/or beneficiaries to the right to alter the constitution of the Foundation Company.

A Foundation Company is also required to have a Secretary who is either licensed or permitted by the Companies Management Act (As Revised) to provide “company management services”. The Secretary must also provide the Foundation Company’s registered office in the Cayman Islands.

Foundation Companies can also implement a set of by-laws which can extend, modify or supplement the constitutional documents. By-laws can assist with the administration of the Foundation Company but since they don’t form part of the constitution, they are a document that remains entirely private.

Use in practice

As will be apparent from the above, those who choose to use a Foundation Company as their corporate vehicle have considerable flexibility in how the Foundation Company will be established, governed and what the rights of each person associated with it will be. It will therefore come as no surprise that the uses of Foundation Companies are just as varied.

Foundation Companies have proven to be popular with Family Offices and they have also been successfully deployed for philanthropic purposes and with estate planning more generally given the relevance of “beneficiaries” to the structure and the fact that such beneficiaries’ involvement in the Foundation Company beyond their financial entitlement is restricted. Foundation Companies have also been used to establish charitable / non-profit foundations whilst they have also been successfully deployed for purely commercial projects, particularly in the digital assets space (e.g. as DAOs, treasury for fungible tokens, NFTs, and network for building digital asset ecosystems).

STAR Trusts (meaning “Special Trusts – Alternative Regime”) are created pursuant to Part VIII of the Trusts Act (As Revised). STAR Trusts are typically discretionary trusts but crucially they can exist for either charitable or non-charitable purposes, provided that the purposes are “lawful and not contrary to public policy”. The ability to mix charitable and non-charitable purposes is a feature that is unique to the STAR Trust structure and underlines its inherent flexibility.

Further, unlike other trusts, the lifespan of a STAR Trust is not limited by the rule against perpetuities and so the usual position which limits their lifespan to not more than 150 years, does not apply – i.e. a STAR Trust can be of an unlimited duration.

Beneficiaries

The settlor of a STAR Trust has considerable flexibility when defining who, or what general purpose, will benefit from the STAR Trust and on what basis. Any beneficiary’s participation in the STAR Trust is strictly limited to the financial benefits that the terms of the trust grant to them. Indeed, similar to Foundation Companies, a beneficiary of a STAR Trust has no right to enforce the terms of the STAR Trust, whether by way of actions against the Trustee or by having access to information about the activities and current financial position of the STAR Trust.

Corporate Governance

As with Foundation Companies and because the beneficiaries of the STAR Trust have no rights of enforcement, the checks and balances on the administration of the STAR Trust are provided in a different way. The two key positions to be held in relation to a STAR Trust are (1) the Trustee; and (2) the Enforcer.

The Trustee performs the usual role of a trustee in an ordinary trust by holding the legal title to the assets of the STAR Trust on behalf of the beneficiaries. Unless a court order to the contrary is obtained, it is a requirement of a STAR Trust that the Trustee must be (or must include if there is more than one) a trust corporation, which is an entity that is licensed to conduct “trust business” within the Cayman Islands.

A STAR Trust is also required to have an “Enforcer”, who is the only person who has the capacity and power to enforce the terms of the STAR Trust and to hold the Trustees to account. The Enforcer can, but need not, also be a beneficiary. If they are also a beneficiary, they can only enforce the terms of the STAR Trust in their capacity as Enforcer on behalf of all beneficiaries and not in their capacity as an individual beneficiary.

Use in practice

As with Foundation Companies, the inherent flexibility of the STAR Trust structure means that it has been applied in many different ways since their inception in 1997. For example, they have been used (i) in ensuring an orderly succession of interests in family run businesses  (with the limited rights of beneficiaries to enforce the terms of the Trust again being particularly useful), (ii) for philanthropic purposes, (iii) in substitution for an ‘ordinary trust’ in order to obtain the benefit of the unlimited duration of a STAR Trust and to restrict or limit the level of information to which beneficiaries would otherwise have an entitlement to access under an ordinary trust, (iv) in finance and investment transactions to facilitate “off balance sheet” or bankruptcy remoteness in holding assets, (v) in as a holding vehicle for valuable chattels such as artwork, jewelry and vehicles and as an alternative to a charitable trust (especially where the objects of the Trust might be a combination of charitable and non-charitable).

However, one limitation on this structure is that no land in the Cayman Islands (or any interest therein) can be held by a STAR Trust. It would, however, be permissible for a STAR Trust to have an interest in another entity which owns land in the Cayman Islands (or an interest therein) but only for the purposes of carrying on its business.

Conclusion

As will be apparent from the above, the two structures we have considered offer great flexibility for many different types of application. Whilst there is a considerable degree of overlap between the two, the purpose of the venture and/or the preference of those behind the project will dictate the use of one over the other.

View Full PDF

This publication is not intended to be a substitute for specific legal advice or a legal opinion. For specific advice on STAR Trusts and/or Foundation Companies, please contact your usual Loeb Smith attorney or: 

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

The Cayman Islands has taken a material step forward in balancing responsible digital asset innovation with the introduction of the Virtual Asset (Service Providers) (Amendment) Bill, 2025 (the “Amendment Bill”) which, if passed into law, will make key amendments to the Virtual Asset (Service Providers) Act (2024 Revision) (the “VASP Act”). This targeted update would bring significant clarity to the treatment of tokenised equity and investment interests in Cayman Islands registered investment funds.

Whilst the Amendment Bill is a short document, its significance should not be understated as, once it is passed into law, it will affirm the Cayman Islands’ commitment to innovation, legal certainty, and its long-term role as a leading offshore jurisdiction for real-world asset (“RWA”) tokenisation.

In recent years, the tokenisation of interests in Cayman Islands investment funds has gathered significant momentum. By representing ownership in digital form on blockchain networks, tokenisation offers more efficient access, reduced administrative costs as well as the potential for secondary market liquidity (subject to the terms of the offering and compliance with the relevant fund’s obligations under the anti-money laundering regulations in the Cayman Islands).

However, as has been observed in other jurisdictions, innovation quickly outpaced existing legislation and jurisprudence and uncertainty began to mount as to the regulatory status of tokenised interests in Cayman Islands investment funds.

The introduction of the VASP Act in 2020 was a proactive move to bring clarity and oversight to virtual asset markets. However, as more traditional financial instruments began to adopt blockchain-based tokenisation, the boundary between tokenised securities and pure crypto assets became increasingly blurred. The VASP Act contains a broad definition of the “issuance of virtual assets,” which is a regulated activity. This creates ambiguity: are tokenised fund interests virtual asset issuances under the VASP Act? If so, would a Cayman Islands fund that issues tokenised investment interests be subject to regulation under both the VASP Act and the Private Funds Act or, as applicable, the Mutual Funds Act?

The possibility of two layers of regulation has proven to be a disincentive to the tokenisation of interests in Cayman Islands investment funds. The increased compliance burden, higher initial and recurring costs and regulatory uncertainty has threatened to stifle innovation and deter high-quality tokenised fund offerings from launching in the Cayman Islands. Many tokenised funds have, for example, instead chose the British Virgin Islands as their situs where the issuance of virtual assets is not generally regulated.

The Amendment Bill directly addresses this challenge by materially revising the definition of “issuance of virtual assets” to explicitly exclude certain financial instruments from its scope.

If the Amendment Bill passes into law, under the amended definition, the “issuance of virtual assets” will mean the sale of newly created virtual assets to the public in or from within the Cayman Islands in exchange for fiat currency, other virtual assets, or other consideration other than:

• • the sale of virtual service tokens;
  • the issuance of equity interests as defined under the Mutual Funds Act (2025 Revision) and the Securities Investment Business Act (2020 Revision); and
  • the issuance of investment interests under the Private Funds Act (2025 Revision).

Perhaps just as significantly (and unusually), the amendments contemplated by the Amendment Bill will have retrospective effect to the tokenisation of equity or investment interests that occurred before the Amendment Bill’s commencement. This ensures legal certainty for existing structures that may have previously operated in a grey area.

The amendments to the VASP Act proposed by the Amendment Bill mark a significant moment for the Cayman Islands’ financial and digital sectors and have been widely welcomed by industry participants and legal advisors.

With this clarification in the regulatory landscape which regulates without over-regulating, the Cayman Islands strengthens its role as a preferred jurisdiction for tokenised RWAs; offering issuers, fund managers, and investors regulatory certainty on a key issue.

As fund tokenisation becomes increasingly mainstream, and global interest in tokenised RWA platforms and offerings continues to surge, this update helps future-proof Cayman’s offering and provides a strong signal to the market: the Cayman Islands are open for digital business.

This article was first published in the Asia Business Law Journal https://law.asia/cayman-digital-asset-law/.

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

Loeb Smith is a leading offshore corporate law firm, with offices in the British Virgin Islands, the Cayman Islands, and Hong Kong, whose Attorneys have an outstanding record of advising on the Cayman Islands’ law aspects and BVI law aspects of international corporate, investment, and finance transactions. Our team delivers high quality Partner-led professional legal services at competitive rates and has an excellent track record of advising investment fund managers, in-house counsels, financial institutions, onshore counsels, banks, companies, and private clients to find successful outcomes and solutions to their day-to-day issues and complex, strategic matters.

The rapid advancement of artificial intelligence (AI) continues to raise complex questions about the applicability of intellectual property (IP) laws to AI and AI-generated works.

IP remains one of the leading and most contentious issues in respect of AI governance. AI adoption continues to grow, and this year is already showcasing a wider range of commercial applications across all sectors. In light of the IP related challenges, businesses leveraging AI technologies must strategize to navigate the evolving intellectual property landscape. As the legal framework around AI continues to develop, businesses need to ensure that they avoid copyright infringement while also effectively safeguarding their own IP assets. Developing a clear understanding of how existing laws apply to AI technology and staying updated on legal developments will be crucial for companies seeking to innovate responsibly and protect their intellectual property in an AI-driven economy.

Copyright protection in the BVI (for “qualified persons”) and in the Cayman Islands (for “qualifying persons”) is automatic when such person creates an original work (once the work is recorded, in writing or otherwise) such as sound and music recordings; films; when you write a book or poem; or when you develop new software. By virtue of the Copyright (Cayman Islands) Order 2015 and Order 2016 (as amended), Part 1 of the U.K.’s Copyright, Designs and Patents Act 1988, subject to certain exclusions and modifications, was extended to the Cayman Islands. The BVI has implemented its own legislation in the form of the Copyright Act (Revised 2020) which is very similar.

Patent protection in the two jurisdictions is quite similar. As it is in other jurisdictions, in order to get patent protection, the invention must be: (i) new – i.e. the first in the world, (ii) useful – i.e. the invention must serve a purpose or provide a solution, and (iii) inventive – i.e. the invention must not be obvious to persons in the industry in which the invention is intended to be used.

Both the BVI and the Cayman Islands allow for the indirect registration of patents. Once a U.K. patent is granted, an application can be made in either of the Cayman Islands or the BVI to extend the scope of protection. In the Cayman Islands, there is no deadline for the filing of the application to extend rights, whereas in the BVI, rights must be extended within three years from the date of issue of the UK patent.

IP laws are designed to protect human creations. Generative AI (AI which generates text, images, speech, video or technical inventions based on user-inputted instructions) continues to increase in capability and grow in adoption. However, most copyright and patent laws, for example, do not yet explicitly address AI’s role in authorship or inventorship, leaving a legal void requiring attention.  Traditionally, the author or inventor is the person or organisation that creates the works. If now AI is responsible for content creation autonomously without any human input, the question is who owns the copyright protecting such content.

• For countries, such as the UK, this may be answered by the fact that computer-generated works will be owned by the person who made the necessary arrangements for the creation of the work.
• An overwhelming view in the E.U. is that AI cannot be a legitimate author. However, specific ways of using AI may result in a work that is protected for the user.

We expect to see governments across the world grappling with balancing strategies aimed at encouraging the development of AI and innovation while, at the same time, attempting to modernize IP and AI legal frameworks to account for AI.

Training generative AI involves using large bodies of IP-protected works/ data in ways that may be infringing under current laws. Governments seeking to “unlock” the potential of generative AI are now more often looking to legislate to permit text and data mining (TDM) of IP-protected data in order to train AI. The intellectual property in the data used to train AI models is growing as a subject of legislative discourse and is now a key issue in matters that have flooded courts across the world, whether use of copyright-protected materials to train AI models infringes copyright.

Training AI using personal data or protected IP also provides challenges to legislators worldwide. Over the next 2-3 years we expect to see increased regulatory scrutiny of companies that create or use AI technologies which have been trained using (i) personal data and/or (ii) information/data protected by IP rights. Regulators worldwide are now paying greater attention to balancing the benefits of AI against concerns about personal data and the protection of IP, and we expect that this will continue in the next few years.

AI programs usually qualify as IP with software or computer programs being literary works. In some countries however, copyright protection will not apply for functional aspects of AI such as algorithms or system designs. AI systems function however by processing human-provided instructions to generate problem-solving outcomes. This capability makes AI-based programs highly valuable from an IP perspective, as their innovative nature and diverse utility underline their significance of IP protection.

Who owns the copyright?

Copyright laws often require that there must be a natural person to whom copyright can be attributed and many jurisdictions including the Cayman Islands and the BVI, do not provide for “computer generated” works where no human author is involved. This creates a gap in the protection of AI-generated works, which are typically produced autonomously with little or no human intervention. Many copyright laws also require that “sufficient effort” must be expended to make any literary, musical, or artistic work original in character – which involves time, human labour, and skill. What constitutes sufficient effort for AI-generated content remains largely untested, raising debates about whether crafting prompts or editing AI output meets the thresholds. Additionally, if non-human entities are recognized as “authors” then copyright duration may become complex. Generally, copyright protection is granted for an author’s lifetime plus a period of time following, potentially leading to indefinite protection for AI-generated works.

The duration of copyright protection in the Cayman Islands varies depending on the nature of the work at issue. For example:

1. For Literary, Dramatic, Musical or Artistic Works: copyright expires at the end of 70 years from the end of the calendar year in which the author dies. However, if the author is unknown, copyright expires at the end of 70 years from the end of the calendar year in which the work was made or first made public
2. For Computer Generated Literary, Dramatic, Musical or Artistic Works: copyright expires at the end of 50 years from the end of the calendar year in which the work was made.
3. For Sound Recordings: copyright expires at the end of 50 years from the end of the calendar year in which the sound recording was made or first made public.
4. For Films: copyright expires at the end of 70 years from the end of the calendar year in which the film/movie was made or first made public.
5. For Broadcasts: copyright expires at the end of 50 years from the end of the calendar year in which the broadcast was made.

Copyright Protection and Deepfakes

Most IP laws are ill-equipped to address the challenges posed by digital replicas or deepfake technology. Copyright law generally is not fit for purpose in respect of deepfakes as the source material for many deepfakes either falls outside the scope of copyright protection or the copyright owner is not the individual who is harmed by the infringement. Possible causes of action presented by deepfakes include (1) copyright infringement (if a deepfake involves unauthorized use of copyrighted material), (2) trademark infringement (if it uses a registered trademark without permission), (3) the tort of passing off (if it misrepresents a product or service as endorsed by a well-known individual), (4) personal data privacy violations or (5) defamation (if the content defames an individual).  The issue of whether the outputs of AI models – particularly where they substantially reproduce source materials – may infringe copyright and who may be responsible for such infringement, is also unresolved.

Is the person who infringed: the user of the AI generated work without the rights holder’s consent or the AI developer or AI system owner? This ambiguity poses risks for businesses. If there is no clear proprietary right in AI-generated works, businesses may be exposed to unnecessary risk.

AI programs usually qualify as IP with software or computer programs being literary works. In some countries however, copyright protection will not apply for functional aspects of AI such as algorithms or system designs. AI systems function however by processing human-provided instructions to generate problem-solving outcomes. This capability makes AI-based programs highly valuable from an IP perspective, as their innovative nature and diverse utility underline their significance of IP protection.

Fair dealing exceptions

With respect copyright infringement, some jurisdictions such as the Cayman Islands, BVI, U.S., U.K., Australia, Hong Kong and Singapore provide fair dealing exceptions for particular activities, despite the fact that many other jurisdictions do not.

Under Cayman Islands law and BVI law, some of the fair dealing exceptions permitted are:

1. Personal copying for private use
2. Non-commercial research and private study
3. Text and data mining for non-commercial research
4. Criticising, reviewing and reporting current events
5. Use for parody, caricature and pastiche
6. Making backup copies, de-compilation, observing, testing and studying, and correcting computer programme errors.

Who is the inventor? Will the requirement for “novelty” remain?

Many patent laws require the inventor to be a natural person. This requirement could exclude AI from being independently recognized as an inventor. AI-driven innovations, such as those involving algorithms and machine learning processes, face challenges in meeting the criteria for protection as an invention. Under US patent law, for example, absent at least one human inventor, an invention is not patentable. Also, the criteria for patentability in many jurisdictions (including the Cayman Islands and the BVI) usually involves requirements for novelty, an inventive step and industrial applicability. These criteria raise questions about whether AI-generated inventions can ever meet the inventive step requirement, traditionally linked to human ingenuity. AI relies on algorithms and datasets to mimic human cognitive functions, enabling it to generate patentable inventions.

We expect to see a continuing updating of guidance as to the level and type of human contributions that are necessary to support patentability as new cases make their way through courts in various jurisdictions. A vital question that arises is whether AI can be regarded as a legitimate author of content that it generates or an inventor in case of patents, given the want of legal personality of the AI itself.

A particularly effective legal structure for an AI-driven entity is the Cayman Islands foundation company. Such foundation companies do not require shareholders, allowing them to function with a governance model that can be tailored to an AI’s decision-making models. Key advantages of using such foundation companies include the following.

• Legal recognition: foundation companies can provide a defined legal entity that can interact with traditional financial institutions, sign contracts and meet compliance obligations.
• Decentralised governance: the ability to structure the foundation company without shareholders allows for governance mechanisms that can adopt smart contract-based decision-making or AI-driven decision-making.
• Asset protection and Tax mitigation: foundation company can be tax resident in the Cayman Islands, hold and manage assets and ensure legal clarity in asset ownership.
• Regulatory compliance: foundation companies can be designed to comply with regulations, including AML and CFT requirements, making them suitable for global transactions.
• Economic substance rules: foundation companies limited by guarantee are specifically exempted from the economic substance rules and can therefore hold and even make profits from intellectual property without coming under the relevant economic substance compliance regime.

VIEW FULL PDF

This publication is not intended to be a substitute for specific legal advice or a legal opinion. For specific advice on the matters covered above, please contact your usual Loeb Smith attorney or any of the following: 

E: gary.smith@loebsmith.com
E: robert.farrell@loebsmith.com
E: elizabeth.kenny@loebsmith.com
E: kate.sun@loebsmith.com
E: vanisha.harjani@loebsmith.com
E: edmond.fung@loebsmith.com
E: vivian.huang@loebsmith.com
E: faye.huang@loebsmith.com
E: yun.sheng@loebsmith.com