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

The Mutual Funds Act defines a mutual fund as “a company, unit trust or partnership that issues equity interests, the purpose or effect of which is the pooling of investor funds with the aim of spreading investment risks and enabling investors in the mutual fund to receive profits or gains from the acquisition, holding, management or disposal of investments but does not include a person licensed under the Banks and Trust Companies Act (2021 Revision)…” 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.

Limited Investor Funds:

The scope of regulation extends to Cayman Islands incorporated or established master funds that have one or more CIMA-regulated feeder funds and hold investments and conduct trading activities.  Changes to the Mutual Funds Act means that certain mutual funds, which were previously exempted from registration with CIMA because they had 15 investors or less, the majority of whom have the power to appoint and/or remove the operators of the investment fund (the operator being the directors, the general partner or the trustee, as is relevant given the corporate structure used for the fund) (“Limited Investor Funds”), are no longer exempt from registration with CIMA.  Limited Investor Funds are now required to be registered with, and are regulated by, CIMA.

Audit Requirement:

Each CIMA registered mutual fund is required to have its accounts audited annually and filed by a firm of auditors on the CIMA approved list of auditors with CIMA within six (6) months of the end of each financial year of the mutual fund (along with a Financial Annual Return in CIMA’s prescribed form).

Single Investor Funds:

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

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

Registration of Directors:

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 Cayman Islands-based directors) regulated by CIMA are required to register with CIMA under the Directors Registration and Licensing Act (DRLA).  The DRLA enables CIMA to verify certain information in respect of directors or managers of CIMA-registered funds.  There is currently no requirement for registration of directors with CIMA under the DRLA who are directors of closed-ended funds that fall within the scope of the Private Funds Act.  However, this may change in the future.

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

In addition to registration with CIMA, the Private Funds Act also imposes the following regulatory requirements to be met by private funds:

Audit

Each private fund is required to have its accounts audited annually and filed by a firm of auditors on the CIMA approved list of auditors with CIMA within six (6) 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 Act.  Valuations of the assets of a private fund are required to be carried out at a frequency that is appropriate to the assets held by the private fund and, in any case, on at least an annual basis.

Safekeeping of fund assets

The Private Funds Act requires a custodian: (1) to hold the private fund’s assets that are capable of physical delivery or capable of registration in a custodial account except where that is neither practical nor proportionate given the nature of the private fund and the type of assets held; and (2) to verify title to, and maintain records of, fund assets.

Cash monitoring

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

• • 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.

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.

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

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Loeb Smith Attorneys is one of the leading offshore corporate law firms considered one of the most active and knowledgeable firms for advising on offshore investment funds formation and launch of all asset classes including public securities, private equity, venture capital, real estate, and virtual assets. Other areas of strength and growth are advising on M&A, Finance, Corporate Restructurings, Capital Markets, Regulatory Compliance, Investments, Logistics, Shipping and Aviation.

Considered a leading law firm in the Fintech and Blockchain Technology space, Loeb Smith also advises on token issuances, application for VASP licences for Web 3.0 businesses,  etaverse infrastructure and other virtual asset service providers, and utilising Cayman and BVI structures to develop virtual asset platforms for DAOs. Loeb Smith’s clients are investment managers, financial institutions, onshore counsels, and HNWIs who the firm advises on day-to-day legal issues and complex, strategic matters.

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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.

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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: 

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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.