Once the investment strategy has been determined, the decision needs to be made on the most optimal structure for your investment fund.
Often an offshore jurisdiction such as the Cayman Islands comes into play in the event where any of the investors are located outside of the U.S. and are U.S. tax exempt. In these scenarios it is very common for an offshore jurisdiction to form part of the fund structure.
Benefits of using the Cayman Islands include:
1. Familiarity to Managers and Investors.
2. Robust and Flexible Legal Framework.
3. Stable Political Climate.
4. Availability of High Quality Service Providers.
5. Proven Record as a World Leading Financial Centre.
Questions to Consider when it comes to structure
What will be the investment strategy of your fund?
Will you mainly be investing and trading in Cryptocurrencies, Blockchain start-ups or a combination of the two?
If cryptocurrencies, what exchanges are you trading on?
Any DeFI protocols and if so, how will the fund administrator and auditor be able to perform valuations? Is there a valuation policy?
Will you be accepting investment in fiat and non-fiat currencies?
What volume of trades will you undertake on a daily and monthly basis?
What liquidity will your investors have? Open-ended or closed-ended?
What fees will you charge for managing your fund in terms of management and performance fees?
Where will your investors be located?
What type of investors will you have e.g. friends and family, family offices, institutions?
Do you currently have a fund management company?
Have your onshore tax advisors expressed a preference for the type of legal entity that the fund should be?
Do you require assistance with the appointment of service providers? No all service providers required are crypto friendly.
Legal Structures
The two most common structures that we see in the Cayman Islands for Cryptocurrency or Blockchain Funds are:
Open-Ended Cayman Islands Exempted Company
This structure is more common for those managers looking to pursue an investment strategy which focuses on trading in Cryptocurrencies. These strategies tend to be more liquid in nature and investors are able to redeem their investment at their own initiative. These structures are therefore open-ended and similar to a traditional hedge fund. They need to be registered with the Cayman Islands Monetary Authority (“CIMA”) unless certain exemptions apply. This CIMA registration means that these funds will need to have at least two directors (who are themselves CIMA registered). To the extent that the equity interests of the fund are to be tokenised, CIMA would consider the fund to still be offering equity interests and therefore CIMA registration will be required.
Closed-Ended Cayman Islands Exempted Limited Partnership
This structure is more common for those managers looking to pursue an investment strategy which focuses on long term investments in Blockchain start-ups or projects. These strategies tend to be illiquid in nature and investors are unable to redeem their investment without the manager’s consent. These types of funds are akin to a private equity or venture capitalist fund. Pursuant to the recently enacted Private Funds Law closedended funds will also need to be registered with CIMA unless certain exemptions apply.
Service Providers
Once you have decided on the most appropriate structure for your fund it is important to consider the range of services providers that your fund
may need to engage. Some of the key ones are:
Legal Counsel
To advise and prepare the necessary legal documentation such as offering memorandum, investment management and advisory agreements, subscriptions documents, side letters and other ancillary agreements.
A Registered Office provider in the Cayman Islands
It is a legal requirement for the fund to have a registered office (“RO”) in the Cayman Islands. The RO will also attend to a wide range of administrative matters on behalf of the fund.
Administrator
For open-ended funds it is common to appoint a third-party administrator who will be responsible for the accounting of investor subscriptions and redemptions and computing the net asset value of the fund.
Custodian
With respect to custodians, many sponsors who have the expertise in the digital asset space prefer to self-custody rather than appoint a third party custodian. However, if institutional investors are to come into Cryptocurrency funds, they are likely to require a third party custodian (and also if the investment fund reaches a particular AUM that requires a third party custodian under applicable laws). CIMA is focused on valuation and custody of Cryptocurrencies and are likely to review the fund offering documents on these issues carefully.
Auditor
Both opened-ended and closed-ended funds registered as mutual funds and private funds respectively will need to appoint a local auditor based in the Cayman Islands who will be responsible for signing off the fund’s annual audit. All of the major accounting firms have branches in the Cayman Islands so it is relatively straightforward to find an auditor for CIMA registered funds.
Independent Directors
The directors are seen to act as “watchdogs” for investors over the investment manager and other service providers to the fund. We are increasingly seeing crypto funds appoint independent directors to demonstrate that they have independent oversight of fund functions. Also, with ever increasing regulatory requirements, having professional directors with experience acting on Cayman funds combined with experience of crypto developments can be extremely beneficial to all involved and provide comfort to investors and regulators.
FATCA and AML
The fund will be required to comply with Cayman Islands laws relating to FATCA, the Common Reporting Standard and Anti-Money Laundering. It is common for funds to appoint specialist third-party providers to assist with this. This is especially common for new funds who have limited experience with these regulatory regimes. To the extent that the fund accepts subscriptions in Cryptocurrencies, CIMA permits this provided that the administrator has the capability to conduct the AML due diligence including the source of wealth. CIMA now also requires natural persons to be appointed as AML officers to investment funds (who are subject to personal liability).
Bank Account
The fund will invariably need a bank account to receive investor subscriptions and on-ramp to exchanges or convert into cryptocurrencies or the funds wallets.
Bell Rock Crypto Fund Services
At Bell Rock we have set up many crypto funds, working with fund managers directly to assist with the legal and operational launch of such funds. We have set up funds with a wide range of investment strategies and understand the optimal legal structures to use and the appropriate service providers for each fund. We also act as independent directors to crypto funds brining over 25 years of senior level industry experience to the board, acting for other investment funds, compliance and regulatory reporting services, registered office and corporate services. We also routinely advise on and set up offshore fund management companies to compliment a crypto fund launch, act on the board of Cayman entities often foundations for DAO communities and blockchain start-up companies. For further information, please contact us: info@bellrockgroup.com
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