The Cayman Islands is a pre-eminent jurisdiction for the formation of alternative investment funds, with approximately 12,000 regulated open-ended funds and 12,000 regulated closed-ended funds. The reasons for Cayman’s popularity include its tax neutrality, its proximity to the U.S. and its bespoke fund legislation and regulatory regime that have continuously evolved to meet market demands; as well as the jurisdiction’s fundamental appeal as a stable British dependency with a judicial system underpinned by English common law.
The Cayman Islands has the following range of vehicles that are typically used as investment funds:
Exempted company
Segregated portfolio company
Limited liability company
Exempted limited partnership
Unit trust
Exempted companies and segregated portfolio companies are commonly used as open-ended funds, while closed-ended funds are typically structured as exempted limited partnerships.
Cayman Islands investment funds are generally regulated by the Cayman Islands Monetary Authority (CIMA) under the Mutual Funds Act (as revised) (Mutual Funds Act) if they are open-ended (which would include most hedge funds) or the Private Funds Act, 2020 (Private Funds Act) if they are closed-ended (which would include most private equity, venture capital, real estate, infrastructure and other funds investing in illiquid assets). The exceptions to this rule include single investor vehicles, proprietary investment vehicles and pension funds.
Regulatory applications and filings are made through CIMA’s secure Regulatory Enhanced Electronic Forms Submission (REEFS) web portal, which is only accessible to authorised service providers, such as Bell Rock.
Categories of mutual fund
Open-ended Cayman funds are regulated under the Mutual Funds Act. A fund is open-ended if it issues participating equity interests (whether shares, interests or units) that are redeemable by investors on a specified period of notice. There are four categories of regulation under the Mutual Funds Act:
Licensed mutual funds
Administered mutual funds
Registered mutual funds (including master funds)
Limited investor mutual funds
Licensed mutual funds
Licensed mutual funds are subject to full regulation by CIMA and are largely confined to funds marketed locally in the Cayman Islands and funds that comply with regulations designed specifically for the Japanese retail market. Applications for a mutual fund licence take approximately 8-12 weeks and require submission of the following:
Application form (APP-101-22)
Certificate of incorporation/registration
Completed personal questionnaires, 3 references and police clearances (or affidavits of no convictions only if the jurisdiction does not provide police clearances) from all directors, general partner’s directors, trustees (as applicable)
Consent letters from an approved local auditor and an administrator
Offering document
Affidavit authorising the fund’s agent to make electronic filings with CIMA
MLRO application form (MLO-154-99)
Application and licence fees
To approve a licence application, CIMA must be satisfied that each promoter of the fund is of sound reputation, that it will be administered by persons with sufficient expertise, of sound reputation and who are fit and proper to be in their respective positions and that the fund’s business and any offering of its interests will be carried out in a proper way.
Administered mutual funds
Administered mutual funds are similar to licensed funds, except that a licensed Cayman Islands mutual fund administrator must provide the fund with its principal office and certify to CIMA that it believes the fund’s promoter to be of sound reputation and that the fund will be properly managed and administered. Applications for registration as an administered fund take approximately 2-4 weeks and require submission of the following:
Application form (APP-101-22)
Certificate of incorporation/registration
Consent letters from an approved local auditor and the administrator
Offering document
Affidavit authorising the fund’s agent to make electronic filings with CIMA
MLRO application form (MLO-154-99)
Application and registration fees
The administrator providing the fund with its principal office must be satisfied that each promoter of the fund is of sound reputation, that it will be administered by persons with sufficient expertise, of sound reputation and who are fit and proper to be in their respective positions and that the fund’s business and any offering of its interests will be carried out in a proper way. On an ongoing basis the administrator is required to notify CIMA immediately if it knows or believes the fund or any of its promoters or operators to be insolvent, in breach of any law or carrying on business in a manner that is or is likely to be prejudicial to the fund’s investors or creditors.
Registered mutual funds
This is by far the most popular type of regulated mutual fund, comprising around 97% of all such funds. To qualify as a registered mutual fund, a fund must require a minimum initial investment of at least US$100,000 (or its equivalent in any other currency) or have its interests listed on an approved stock exchange. A registered mutual fund can commence trading upon submitting the following, and can expect to receive its registration certificate within 2-4 weeks:
Application form (APP-102-22, or for master funds, APP-101-53)
Certificate of incorporation/registration
Consent letters from an approved local auditor and an administrator
Offering document
Affidavit authorising the fund’s agent to make electronic filings with CIMA
MLRO application form (MLO-154-99)
Application and registration fees
Note that a corporate fund must ensure its directors are registered with CIMA under the Directors Registration and Licensing Act, 2014 prior to the fund submitting its registration application.
Limited investor mutual funds
This previously unregulated category of mutual funds has been required to register with CIMA since August 2020. These funds are similar to registered mutual funds, except that they have no minimum investment requirement; the trade-off being that the fund cannot admit more than 15 investors and the investors must have the right to appoint and remove the fund’s directors, general partners or trustees (as applicable) by majority vote. A limited investor mutual fund can commence trading upon submitting the following, and can expect to receive its registration certificate within 2-4 weeks:
Application form (APP-101-78, or for limited investor master funds, APP-101-79)
Certificate of incorporation/registration
Consent letters from an approved local auditor and an administrator (if applicable)
Offering document, summary of terms or other marketing materials (as applicable)
Confirmation that investors have power to appoint and remove the operator by majority vote (e.g. constitutional documents, offering document or resolutions)
Application and registration fees
Master funds
A master fund is defined in the Mutual Funds Act as a mutual fund that has one or more regulated mutual funds acting as its feeder fund (meaning that the feeder fund conducts more than 51% of its investing through the master fund, directly or indirectly) and which holds investments and conducts trading activities to implement the funder fund’s investment strategy. Master funds are required to register with CIMA as a sub-category of registered mutual funds. Note that a limited investor mutual fund which meets the foregoing definition of a master fund, must register as a registered mutual fund and not as a limited investor mutual fund.
Certain mutual funds that act as master funds, but do not meet the definition above (perhaps because their feeder funds are all non-Cayman funds) would register under the applicable category of mutual fund listed above (which in most cases is likely to be as a limited investor mutual fund).
Mutual fund offering documents
The Mutual Funds Act requires a mutual fund’s offering document to describe the interests it offers to investors in all material respects and to contain such other information as is necessary to enable a prospective investor to make an informed decision whether or not to invest. The mutual fund and/or its promoters or officers could also incur liability in respect of any offering document that contains misrepresentations of fact (made intentionally or negligently), so should take steps to ensure that any factual statements are correct and not misleading.
CIMA has also issued a Rule on Contents of Offering Documents – Regulated Mutual Funds, which sets out specific information that must be contained in any offering document issued by a mutual fund, including:
Basic information about the fund’s place and date of formation, type of entity, financial year and terms of its equity interests
Subscription and redemption procedures
Investment objectives and policy and any investment restrictions
Valuation methodology
Dividend/distribution policy
Material risks and any proposed borrowing
Remuneration of the operator, administrator, manager/ adviser, custodian, prime broker, auditors, legal counsel and any other service providers to the fund
Powers to enter into side letters
Accounting principles to be adopted and frequency of reporting to investors
Biographies of the directors/managers/principals of the fund, its general partner or trustee (as applicable) and its manager/adviser
Description of potential conflicts of interest
Summary of material contracts
Summary of material laws and regulations
Place where fund documents and periodic reports may be inspected and obtained
Ongoing regulatory obligations
The principal ongoing regulatory obligations applicable to all regulated mutual funds are:
Pay annual registration fees to CIMA by 15 January in each year
File audited financial statements with CIMA within 6 months of the financial year end, together with a fund annual return
While its offering of equity interests is ongoing, notify CIMA within 21 days of becoming aware of any change that materially affects the information in its current offering document
Keep the fund’s assets segregated and accounted for separately from the assets of any other person
Comply with the Anti-Money Laundering Regulations, including the requirement to have anti-money laundering officers (see Additional Regulatory Obligations below)
Comply with FATCA/CRS notification, due diligence and reporting obligations (see Additional Regulatory Obligations below)
Private funds
The Private Funds Act defines a private fund as an entity that offers, issues or has issued equity interests to investors, pooling investor funds with the aim of enabling investors to receive profits or gains from such entity’s acquisition, holding, management or disposal of investments, where: (i) investors have no day-to-day control over making, holding or disposing of investments; and (ii) investments are managed by or on behalf of the fund’s operator (meaning its directors, general partners or trustees, as applicable). The definition excludes certain licensed banks and insurance companies, along with non-fund arrangements listed in a schedule (such as proprietary vehicles, securitisation vehicles, joint ventures and holding vehicles).
It is not always easy to distinguish between a private fund and a non-fund arrangement, such as a joint venture. CIMA has issued guidance to assist with the analysis, which essentially hinges on whether the vehicle is investing with a view to disposal of the investment at a profit or with a view to long-term appreciation in the value of the underlying business.
Registration with CIMA
A private fund is required to register with CIMA within 21 days of admitting any investors and in any event prior to accepting any capital contributions from investors. Registration as a private fund requires submission to CIMA of the following:
Application form (APP-101-77)
Certificate of incorporation/registration
Constitutional documents
Offering memorandum/summary of terms/other marketing materials (if any)
Consent letter from an approved local auditor and an administrator (if applicable)
Structure chart
Application and registration fees
Registration will be effective from the date the completed application is filed, but confirmation of registration may take 2-4 weeks to receive.
Ongoing regulatory obligations
The principal ongoing regulatory obligations for private funds are:
Pay annual registration fees to CIMA by 15 January in each year
File audited financial statements with CIMA within 6 months of the financial year end, together with a fund annual return
Comply with the operating requirements in the Private Funds Act relating to: (i) valuations; (ii) title verification; and (iii) cash monitoring
Keep a record of the identification codes of any securities traded or held by the fund
Keep the fund’s assets segregated and accounted for separately from the assets of any other person
Update CIMA within 21 days of becoming aware of any material change to any information provided to CIMA upon registration or otherwise
Comply with the Anti-Money Laundering Regulations, including the requirement to have anti-money laundering officers (see Additional Regulatory Obligations below)
Comply with FATCA/CRS notification, due diligence and reporting obligations (see Additional Regulatory Obligations below)
Valuation requirements
Private funds must adopt appropriate and consistent procedures for proper valuation of assets, with valuations to be carried out at least annually in accordance with the accounting standards adopted by the fund.
Valuations can be carried out by:
the fund’s administrator or another appropriately qualified independent third party; or
the fund’s manager or operator, provided: (i) the valuation function is independent of the portfolio management function; or (ii) potential conflicts of interest are properly identified, managed, monitored and disclosed to investors.
The fund’s written valuation policy, including details of the person responsible for valuations must be disclosed to investors. Further details of the requirements are set out in CIMA’s Rule on Calculation of Net Asset Values – Registered Private Funds.
Where valuations are not carried out by an independent third party, CIMA may require the fund to have its valuations verified by an auditor or other independent third party.
Title verification
Private funds are required to appoint a custodian for their assets, except where it is neither practical nor proportionate to do so. In practice, this is often the case, except where the private fund is trading publicly listed securities.
In respect of any assets of a private fund not held by a custodian, the private fund is required to appoint one of the following to perform title verification:
the fund’s administrator or another independent third party; or
the fund’s manager or operator, provided: (i) the title verification function is independent of the portfolio management function; or (ii) potential conflicts of interest are properly identified, managed, monitored and disclosed to investors.
Where title verification not carried out by an independent third party, CIMA may require the fund to have its title verification verified by an appropriately qualified independent third party.
Cash monitoring
Private funds must appoint a person to monitor cash flows, ensure cash has been booked in appropriate cash accounts and ensure all payments made by investors have been received. The appointed person may be:
the fund’s administrator, custodian or another independent third party; or
the fund’s manager or operator, provided: (i) the cash monitoring function is independent of the portfolio management function; or (ii) potential conflicts of interest are properly identified, managed, monitored and disclosed to investors.
Where cash monitoring is not carried out by an independent third party, CIMA may require the fund to have its cash monitoring verified by an independent third party.
Private fund marketing materials
Neither the Private Funds Act nor CIMA currently requires a private fund to have an offering document or other marketing materials, but if a private fund does issue any marketing materials to solicit subscriptions from investors, they must be filed with CIMA and comply with CIMA’s Rule on Contents of Marketing Material – Registered Private Funds. The rule sets out specific information that must be contained in any marketing materials, including:
Basic information about the fund’s place and date of formation, type of entity, financial year and terms of its equity interests
Subscription and mandatory redemption/withdrawal procedures
Investment objectives and policy and any investment restrictions
Valuation methodology
Dividend/distribution policy
Material risks and any proposed borrowing
Remuneration of the operator, administrator, manager/ adviser, custodian, prime broker, auditors, legal counsel and any other service providers to the fund
Powers to enter into side letters
Accounting principles to be adopted and frequency of reporting to investors
Biographies of the directors/managers/principals of the fund, its general partner or trustee (as applicable) and its manager/adviser
Description of potential conflicts of interest
Summary of material contracts
Summary of material laws and regulations
Place where fund documents and periodic reports may be inspected and obtained
The private fund and/or its promoters or officers could also incur liability in respect of any marketing materials that contain misrepresentations of fact (made intentionally or negligently), so should take steps to ensure that any factual statements are correct and not misleading.
Bell Rock Fund Formation & Ongoing Support
As a regulated professional services firm in the Cayman Islands, we routinely structure, incorporate and register investment funds, investment management companies and other investment entities. Our experience includes fund formation and structuring plus ongoing support services such as highly experienced independent directors (CIMA Registered with over 20 years of industry experience), AML compliance services, registered office, company secretarial services, regulatory reporting, phyisical office and economic substance services and also advice on other service provider selection necessary for fund registration such as fund administrator, auditor, banking, broker and custodian.
We have set up and launched many funds for fund managers around the world with all types of structures, such as:
stand-alone Cayman funds
segregated portfolio funds
master-feeder funds (including managing the US legal requirements)
limited investor funds, administrative funds
private funds (structured for VC and PE) and
registered person investment manager registration, in accordance with the Securities Investment Business Act.
For further information on our fund formation and structuring services, please feel free to contact us: info@bellrockgroup.com
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