Introduction

 

Initial Coin Offerings (ICOs), used during the past few years as a source of raising capital for early stage blockchain projects, have started to appear so frequently in the financial and/or IT media during the last couple of years that they now seem to be part and parcel of the new social economy. Ethereum launched itself in 2014 by way of an ICO and is now the second largest crypto-currency. According to an ICO-tracking initiative by Coindesk.com, coin and/or token sales worth in excess of US$2.2 billion have been recorded to date.

 

In brief, ICOs represent a type of unregulated crowdfunding built on blockchain technology and use of cryptocurrencies. Coins or tokens may be issued to represent virtual currencies, equity interests, voting rights, units which are part of a company-wide reward or bonus scheme, membership interests, pre-paid services or products, etc.. However, together with all legitimate ICOs came over 2,000 phishing, hacks or Ponzi schemes, which led to rising interest and warnings from regulators worldwide, especially since another criticism related to ICOs is that investors rush to buy coins/tokens in the hope of “flipping” them later in the market without any due diligence or regard to the value of the underlying product, project or company.

 

In the first issue of our series dedicated to FinTech-specific risk factors which may impact the Cayman Islands fund industry, we focused on risk factors related to bitcoin and other cryptocurrencies in general (see Top Ten Risks for the Crypto-Currency Investor: A View from the Cayman Islands). In this second issue, we will take a closer look at ICOs, including views from regulators in various countries, and discuss certain provisions of the existing Cayman Islands laws which may be triggered in connection with an offering of coins / tokens.

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Overview

Yun is a Senior Corporate Paralegal in the Investment Funds and Corporate Group at Loeb Smith Attorneys. She has a wealth of experience in advising on a wide range of matters relating to formation and launch of Cayman and BVI investment funds, on BVI Approved Managers, and also advises on M&A transactions involving Cayman and BVI companies. Prior to joining our Firm, Yun worked at an international law firm in Shanghai.

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The new beneficial ownership regime of the Cayman Islands (the “New BO Regime”), which aims to streamline the Cayman Islands’ beneficial ownership framework and to enhance transparency and access to adequate, accurate and current beneficial ownership particulars, became effective on 31 July 2024 when the Beneficial Ownership Transparency Act, 2023 (the “Act”) came into force. The Act, together with the Beneficial Ownership Transparency Regulations, 2024 and the Guidance on Complying with Beneficial Ownership Obligations in the Cayman Islands published by the Cayman Islands’ Ministry of Financial Services & Commerce (the “Ministry”), form part of the New BO Regime.

We had provided a brief overview of the principal proposed changes or additions to be introduced by the Beneficial Ownership Transparency Bill, 2023 through our legal briefing “Cayman Islands: Proposed Legislation to expand Cayman Islands’ beneficial ownership framework” published on 20 October 2023. Such principal changes or additions have been adopted in the New BO Regime and we shall repeat such principal changes or additions below as a refresher for all stakeholders affected by the New BO Regime.

Expansion of scope 

  • The scope of entities covered by the New BO Regime has been significantly expanded by:
    1. including limited partnerships and exempted limited partnerships into the definition of “legal person”, hence bringing these partnerships into the scope of the New BO Regime; and
    2. removing certain exemptions under the previous beneficial ownership framework, including removal of the exemption for any legal entity registered under a regulatory law such as the Mutual Funds Act (As Revised), the Private Funds Act (As Revised), the Securities Investment Business Act (As Revised) and the Virtual Asset (Service Providers) Act (As Revised).
  • For an investment fund registered under the Mutual Funds Act (As Revised) or registered under the Private Funds Act (As Revised), however, the New BO Regime provides that such fund does not have to supply the full required particulars of beneficial owners as mandated in other cases, and instead such fund will only need to provide its corporate services provider with the contact details of a licensed fund administrator or another contact person licensed or registered under a Cayman Islands regulatory law for providing beneficial ownership information located within the Cayman Islands. Within 24 hours of a request being made by the Minister responsible for financial services (the “Minister”) (or at any other time as the Minister may reasonably stipulate), such licensed fund administrator or contact person of the fund shall provide the Minister with the requested beneficial ownership information.
  • In light of the above, Cayman entities are suggested to review whether they fall within the expanded scope of the New BO Regime and whether the exemptions which they previously relied upon may no longer be applicable.

Revision of “beneficial owner” definition 

  • The definition of “beneficial owner” has been revised under the New BO Regime in order to align with the concepts and wordings used in that of the Cayman Islands Anti-Money Laundering Regulations (As Revised) (the “AML Regs”), such revisions include but are not limited to:
    1. replacing “hold” with “ultimately owns or controls” when describing the 25% threshold in shares, voting rights or partnership interests; and
    2. categorising an individual who “otherwise exercises ultimate effective control over the management” of a legal person as its beneficial owner.
  • By making the definition of “beneficial owner” in the New BO Regime and the AML Regs more consistent with each other to certain extent, it should now be easier for relevant stakeholders to interpret and apply these laws and regulations.

Additional beneficial ownership information required  

  • The New BO Regime expands the scope of required particulars of the relevant beneficial owner by requesting for the nationality and/or the nature of ownership or exercise of control of the relevant beneficial owner. These types of information were not required to be provided in the previous beneficial ownership framework.
  • Through expanding the scope of required particulars, the New BO Regime allows for the Minister (and certain specified Cayman Islands authorities and regulated bodies) to access more transparent beneficial ownership information, which may facilitate their identification of money laundering and/or terrorist financing risks.

Provision of leeway to create a public beneficial ownership register 

  • Currently, the beneficial ownership information provided to the Minister is not available to the public.
  • Noting that the Cayman Islands Government made a commitment to the UK Government in 2019 to introduce a public register of beneficial ownership, the New BO Regime grants the Cayman Islands Cabinet the power to, subject to the affirmative resolution by the Cayman Islands Parliament, make regulations empowering the Minister to provide access of certain beneficial ownership information to the public. However, in light of the November 2022 judgment made by the European Court of Justice which held that indiscriminate public access to information on beneficial ownership of legal persons was a disproportionate and serious interference with the fundamental rights to respect for private life and to the protection of personal data, the Ministry emphasised that the Cayman Islands Parliament would only approve any such regulations to be made by the Cayman Islands Cabinet after discussions with the UK and its other overseas territories, as well as Crown Dependencies, relating to “the necessary privacy safeguards” have been concluded.
  • As such, so long as the relevant regulations have not been approved by the Cayman Islands Parliament, there will not be a public register of beneficial ownership information under the New BO Regime.

Current status  

Though being brought into force on 31 July 2024, the Ministry of Financial Services and Commerce has confirmed that the New BO Regime will not attract any enforcement action against non-compliance until early next year. In addition, until the Ministry notifies that filings under the New BO Regime shall re-commence, the requirement to file beneficial ownership information under the previous beneficial ownership framework has been suspended for the time being.

Conclusion 

As we have commented in our previous legal briefing, the New BO Regime is a welcomed and keen effort by the Cayman Islands to bring itself in line with the FATF international standards in combating money laundering and terrorist financing, which it is believed will continue to solidify its status as a globally-recognised offshore financial centre. Relevant Cayman entities are encouraged to actively review changes made by the New BO Regime and evaluate its applicability to them before the relevant Cayman authorities carry out any enforcement action early next year.

Prior to the Act coming into effect, Loeb Smith has been providing guidance and advice to clients on how to implement changes to facilitate compliance with the requirements under the New BO Regime. We are fully equipped to assist clients in navigating and ensuring full compliance with the requirements of the New BO Regime, so please do not hesitate to reach out if such needs arise.

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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 the New BO Regime, 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: vivian.huang@loebsmith.com
E: faye.huang@loebsmith.com
E: yun.sheng@loebsmith.com

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Overview

Vivian is a Senior Corporate Paralegal in the Investment Funds and Corporate Group at Loeb Smith Attorneys where she advises on a wide range of corporate matters relating to formation and launch of Cayman and BVI investment funds, on Approved Managers, and also advises on M&A transactions involving Cayman and BVI companies.

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1.   Overview

The laws relating to trusts and equity in the Cayman Islands and in the British Virgin Islands are derived directly from English law but have been modified in each jurisdiction by legislation to reflect their respective position as a premier offshore financial centre.

A trust is a legally binding arrangement whereby a person (“Settlor”) transfers assets to another person (“Trustee”) who is entrusted by the Settlor with legal title to the trust assets, not for the Trustee’s own benefit, but for the benefit of other persons (known as “Beneficiaries”, who may include the Settlor) or for a specified purpose. In addition to being a Beneficiary, the Settlor may, in certain circumstances, also act as a co-Trustee. The Settlor may, also, retain a degree of control over the trust, such as the power to approve distributions, the power to appoint and remove Trustees and the power to revoke the trust.

The Settlor will set out detailed instructions to the Trustee as to the disposition of trust assets in a document called the Declaration of Trust or the Trust Deed. This document will inform the Settlor, the Trustee and the Beneficiaries as to their respective rights, entitlements and duties.

2.   Setting up a Trust – Who will be the Trustee? 

The Trustees or Trustee of a Cayman Islands Trust or a BVI Trust (i) may be individuals, or (ii) may be a company licenced as a trust company in the Cayman Islands for Cayman Trusts or in the BVI for BVI Trusts (except in each case, for a Private Trust Company (“PTC”) which does not have to be licensed). An individual Trustee does not have to be a Cayman resident or a BVI resident to be a trustee of a Cayman Trust or a BVI Trust.

Corporate Trustees 

Generally, the Trustee of a Cayman Trust is a trust company based in Cayman or the Trustee of a BVI Trust is a trust company based in the BVI. This can be either (i) a licensed Trust Company which carry on business as a professional trustee, or (ii) a PTC.

Generally, a PTC acts as Trustee of a single trust or a group of related trusts and does not charge fees. For example, instead of using the services of a professional Corporate Trustee in Cayman or in the BVI, the Settlor could establish a PTC in Cayman or in the BVI (as applicable) to act as Trustee of the trust mentioned below. The Settlor or his trusted advisors can serve on the board of directors of the PTC, which allows the Settlor more flexibility, control and continuity in the administration of the trust’s assets. PTCs can also be a more cost-effective solution in certain instances. A PTC in either Cayman or in the BVI is exempt from the regulation and licensing requirements in Cayman or in the BVI (as applicable), subject to certain requirements.

3.   Type of Offshore Trusts 

There are various types of trusts in each of the Cayman Islands and the BVI. The most appropriate trust structure for the settlement of trust assets will depend on the Settlor’s particular circumstances and the Settlor’s objectives. The most common types of offshore Trusts are (1) Discretionary Trusts, (2) Fixed Interest Trusts, (3) Accumulation and Maintenance Trusts, (4) Revocable Trusts, (5) VISTA trusts for the BVI, (6) STAR Trusts for the Cayman Islands, and (7) Non-Charitable Purpose Trusts.

 

Discretionary Trust 

The discretionary trust provides a flexible and efficient structure under which the Settlor transfers ownership of the assets to the Trustee(s), subject to any reserved powers or Protector provisions. The settlement deed generally gives the Trustee(s) wide discretionary powers over the trust fund and its application for the benefit of the Beneficiaries. The Beneficiaries of a discretionary trust have no definite right to the assets of the trust.

Fixed Interest Trust 

A fixed interest trust specifies the rights of Beneficiaries in relation to the capital and/or income of the trust fund. For example, the settlement deed may specify that a Beneficiary is entitled to the income (and not the capital) of the trust fund during his/her lifetime. A trust can also be structured as a combination of a discretionary and a fixed interest trust.

Accumulation and Maintenance Trust 

An Accumulation and Maintenance Trust (“A&M Trust”) is a type of discretionary trust where one or more Beneficiaries will become legally entitled to the income, or both capital and income, of the trust on attaining a specified age. A&M Trusts are generally used to benefit children or grandchildren of the Settlor. The Beneficiaries do not have a fixed entitlement to the benefits or interests accruing to the trust for a certain period, during which time income is accumulated and as it grows is added to the capital assets of the trust. The persons who are ultimately entitled to the trust assets may benefit from the accumulation of capital in the trust. The trust deed may give the Trustee a discretionary power to make distributions amongst the Beneficiaries up to a specific age for their education, maintenance and wellbeing and to provide thereafter for a designated share of the trust fund to be distributed to each child on attaining a specified age.

VISTA Trust 

The VISTA trust is unique to the BVI. The main features of a VISTA trust are: (a) it may only hold shares of an underlying BVI company, although the company is not restricted in what it may invest in; (b) the Trustee is not under a duty to diversify or monitor the trust fund and investments, which is a basic principle of the more standard trusts; (c) at least one of the Trustees must be a ‘designated Trustee’ as defined in the VISTA Act (for example a PTC or a BVI licensed trust company); and (d) the Trustee cannot act as a director of the underlying company.

STAR Trust 

The STAR Trust is unique to the Cayman Islands. The Special Trusts (Alternative Regime) Act, 1997 is now incorporated into Part VIII of the Trusts Act (As Revised) (“Trust Act”. The key features of the STAR Trust are that:

  1. Beneficiaries and/or objects may be persons, purposes or both. There may be any number of Beneficiaries and any number of purposes, whether charitable or not, provided that such purposes/objects are lawful and not contrary to public policy in Cayman.
  2. Any uncertainty as to the objects or mode of execution or administration of a STAR trust can be resolved by the Trustee (or any other person the STAR trust document so specifies) or by the Cayman court, if necessary. A STAR trust is therefore very unlikely to be declared void from the outset on grounds of uncertainty, as could be the case with a poorly drafted non-STAR trusts.
  3. The Trustee of a STAR trust must be or must include a trust company licensed to conduct trust business in the Cayman Islands. This adds a level of oversight and regulation above and beyond other jurisdictions. There are criminal sanctions attached if these requirements are overlooked or bypassed.
  4. STAR trusts must have an “Enforcer” who is the only individual person or corporate entity with legal standing to enforce the terms of the STAR trust (such enforcement powers having been removed from the Beneficiaries by virtue of the Trust Act). The Trust Act therefore makes a clear distinction between the capacity to benefit from a STAR trust and the actual capacity to enforce such a trust. The effect is to remove rights of Beneficiaries not only to enforce the trust, but also their right to seek disclosure of information regarding the STAR trust and its ongoing administration.
  5. The rule against perpetuities does not apply to STAR trusts, which may be created for an unlimited duration (or not, depending on the terms of the trust deed), which eliminates the risk of a resulting trust in favour of the Settlor at the end of the perpetuity period and the adverse tax consequences which may flow from such an event.
  6. A STAR trust cannot hold land in the Cayman Islands but may hold an interest in a company, partnership or other entity which does.

Non-Charitable Purpose Trust 

A Cayman Trust or a BVI Trust can be established partly or wholly for non-charitable purposes. The purpose must be specific, reasonable and possible, and may not be immoral, contrary to public policy or unlawful. An enforcer must be appointed who shall have the duty to ensure the Trustee fulfils the non-charitable purposes of the trust. At least one Trustee must be a “designated person” (for example a PTC or a licensed trust company). A purpose trust may exist in perpetuity or be terminated at a specified date.

4.   Key Advantages of Offshore trusts 

Tax Planning: Offshore trusts are very popular because they are established in jurisdictions such as the Cayman Islands or the British Virgin Islands where the trustees are resident and are subject to zero tax and this brings with it a number of tax planning advantages, even though the tax position of the Settlor and/or the Beneficiaries has to be considered.

Confidentiality: Trustees of offshore trusts have a duty under common law to keep the affairs of the trust confidential. Whilst this duty is not absolute, the courts of the Cayman Islands and the BVI have an inherent supervisory jurisdiction over the administration of trusts and are generally unwilling to sanction the disclosure of information except in cases to avoid potential injustice or harm.

Asset Protection: Global operations may expose the Settlor’s business to different legal and financial challenges. Offshore trusts can protect the Settlor’s finances from lawsuits, bankruptcy actions and political instability in onshore jurisdictions and secure the business’s continuity in these circumstances.

Succession Planning: Changing leadership and ownership within a family business can bring unique complexities. Offshore trusts offer a clear and efficient framework for succession planning where distributions and management roles for future generations can be clearly set out and help prevent potential conflicts among family members and build transparency.

Flexibility and Control: Offshore trusts provide flexibility in that they can be customized to align with the Settlor’s specific goals (e.g. asset protection, philanthropy, or wealth distribution over multiple generations). The Settlor can also retain varying degrees of control over the trust, ensuring his/her vision remains in focus.

Freedom from Onshore rules and regulation: Establishing an offshore trust avoids specific rules relating to trusts onshore which may add additional regulatory and/or compliance burdens.

5.   Common uses for Cayman Trusts and BVI Trusts 

  1. As an instrument for succession planning in the event of death or incapacity.
  2. To mitigate against tax liabilities.
  3. To protect assets (e.g. from exchange controls or other government interference)
  4. As a confidential way of holding assets.
  5. To protect beneficiaries who have difficulty in managing their own affairs.
  6. To circumvent forced heirship rules.
  7. To hold shares in a family company or in corporate transactions.
  8. As a vehicle for philanthropic giving.

Further Assistance 

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

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

 

 

The Special Trusts regime for Cayman Islands STAR trusts (now incorporated into Part VIII of the Trusts Act (As Revised)) provides the legal basis on which private purpose trusts can be established in the Cayman Islands, without affecting the previously existing laws governing the creation and administration of traditional trusts.

STAR trusts have gained a strong reputation for being flexible estate planning tools where special purpose vehicles are too inflexible or otherwise inappropriate. Unlike traditional English common law trust principles, under which a trust is not valid unless it is for the benefit of an identified person or class of persons or for charitable purposes, the STAR trusts can be (i) for the benefit of an identified person or any number of persons or (ii) solely for the benefit of charitable or non-charitable purposes or objectives provided that the purposes are lawful and not contrary to public policy.

1. What was the rationale for creating STAR Trusts?

Before the regime was introduced, it was not possible to create trusts for a purpose other than a charitable purpose. The STAR trusts regime also permits perpetual trusts; that is, trusts without a perpetuity or expiry period. Cayman Islands trusts which are not subject to the STAR trusts regime are currently limited to a maximum duration of 150 years.

As stated above, STAR trusts can be (i) for the benefit of an identified person or any number of persons, or (ii) solely for the benefit of charitable or non-charitable purposes or objectives provided that the purposes are lawful and not contrary to public policy. This is a unique feature of STAR trusts and highlights the flexibility offered by the STAR trust structure. It is a requirement of the STAR trust regime that at least one trustee of a STAR trust is a trust company licensed in the Cayman Islands or a private trust company registered as such in the Cayman Islands.

2. Key Features of STAR Trusts

  1. The beneficiaries and/or objects may be persons, purposes or both. There may be any number of beneficiaries and any number of purposes, whether charitable or not, provided that such purposes/objects are lawful and not contrary to public policy.
  2. Any uncertainty as to the objects or mode of execution or administration of a STAR trust can be resolved by the Trustee (or any other person the STAR trust document so specifies) or by the Cayman court, if necessary. A STAR trust is therefore very unlikely to be declared void ab initio on grounds of uncertainty, as could be the case with a poorly drafted non-STAR trust.
  3. The Trustee of a STAR trust must be or must include a trust company licensed to conduct trust business in the Cayman Islands. This adds a level of oversight and regulation above and beyond other jurisdictions. There are criminal sanctions attached if these requirements are overlooked or bypassed.
  4. STAR trusts must have an “Enforcer” who is the only individual person or corporate entity with legal standing to enforce the terms of the STAR trust. The STAR trust regime makes a clear distinction between the capacity to benefit from a STAR trust and the actual capacity to enforce such a trust. The effect is to remove rights of beneficiaries not only to enforce the trust, but also their right to seek disclosure of information regarding the trust and its ongoing administration.
  5. The rule against perpetuities does not apply to STAR trusts, which may be created for an unlimited duration (or not, depending on the terms of the trust deed), which eliminates the risk of a resulting trust in favour of the settlor at the end of the perpetuity period and the adverse tax consequences which may flow from such an event.
  6. A STAR trust cannot hold land in the Cayman Islands but may hold an interest in a company, partnership or other entity which does.

 

3. What are STAR Trusts used for?

STAR trusts are commonly used for, among other things, the following.

  1. To create dynasty-style trusts for multiple generations primarily for holding treasured family assets, investments, and preserving shares in family businesses.
  2. To create trusts for philanthropic purposes which are outside of the scope of what would be considered charitable as a matter of Cayman Islands law.
  3. To create trusts which restrict the rights of troublesome beneficiaries who may be tempted to challenge the trust, to seek to obtain information in relation to the trust, among other things.
  4. To create trusts which are unrestricted by a perpetuity period.
  5. To create trusts which benefit persons while at the same time achieving alternative objectives such as the continuation of family businesses.
  6. To form “Special Purpose Vehicles” for a wide range of commercial transactions in a safe, flexible, and bankruptcy remote manner.
  7. To act as a vehicle to hold shares in a private company, thus allowing a family member (or members) to retain a degree of control over the administration of the underlying trusts and influence decisions which may affect the underlying trusts and the assets they hold (most typically, shares in a family business).
  8. For clubs and associations whereby their members can enforce terms of contracts without actually being a party to the contract. Also, upon the dissolution of the club or association, the contributed assets may be returned to members in portions specified in the trust deed, rather than in an ad-hoc manner.

4. Registration

The Trustee of a STAR trust must be or must include a trust company licensed to conduct trust business in the Cayman Islands. This adds a level of oversight and regulation above and beyond other jurisdictions.
The Trustee of a STAR trust is also required to keep, in its Cayman Islands office, a documentary record of:

  1. the terms of the STAR trust,
  2. the identity of the Trustee and the enforcer(s),
  3. all settlements of the property upon trust and the identity of the settlor(s),
  4. the property subject to the STAR trust at the end of each of its accounting years, and
  5. all distributions or applications of the trust property.

These additional obligations clarify any uncertainty in the common law regarding the retention of trust records and other vital information. These requirements therefore standardize and clarify important administrative expectations specifically imposed on STAR trust Trustees.

Registration
There is no requirement to register a STAR trust with the regulatory authorities in the Cayman Islands, hence confidentiality is preserved. In fact, all trust deeds (except “exempted trusts”) are exempt from registration. Therefore, the details of a STAR trust will remain confidential, subject only to disclosure as may be required by an order of the Cayman Islands courts.

Conclusion
With sound professional advice, the STAR trust provides a flexible and valuable tool for structured financing arrangements, as well as for the estate and financial planning of private parties seeking a safe and reliable trust mechanism to satisfy their specific needs and purposes.

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

E: gary.smith@loebsmith.com
E: robert.farrell@loebsmith.com
E: elizabeth.kenny@loebsmith.com
E: vivian.huang@loebsmith.com
E: faye.haung@loebsmith.com
E: edmond.fung@loebsmith.com

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