Valsen Corporate

Cayman Fund

Cayman Fund
The Mutual Funds Law regulates all mutual funds established in or operating from the Cayman Islands. A mutual fund is defined in the Cayman MFL 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.
Under the Cayman MFL, an equity interest is defined as a share, trust unit or partnership interest that carries an entitlement to participate in the profits or gains of the company, unit trust or partnership and that is redeemable or repurchasable at the option of the investor (but does not include debt).
The Cayman MFL does not therefore cover (a) funds with only one investor (because there is no “pooling of investor funds”), or (b) closed-ended funds (because the investors do not have the right to redeem or require repurchase of their interests).
With one exception, the Cayman MFL requires all open-ended mutual funds to be regulated. The exception is a mutual fund in which the equity interests are held by not more than fifteen investors, the majority of whom are capable of appointing or removing the operator of the fund. The operator for these purposes means the directors in the case of a corporate mutual fund, the general partner of a partnership or the trustee of a trust. It does not include a manager operating under a contractual arrangement with the mutual fund. This exception is often used in a master-feeder structure to avoid having to register the master fund.
Types of mutual funds under Cayman Law
Mutual funds which are required to be regulated under the Cayman MFL must either:

  • apply for and hold a licence under the Cayman MFL (suitable for retail funds);
  • have a licensed Mutual Fund Administrator provide its principal office in the Cayman Islands; or
  • register as a mutual fund under section 4(3) of the Cayman MFL on the basis that (i) the fund’s minimum equity interest purchasable by a prospective investor is US$50,000 (or its equivalent in another currency), or (ii) the fund’s equity interests are listed on an approved stock exchange or over-the-counter market.

Regulation under the third category is designed for mutual funds with sophisticated investors, who are assumed to be better able to afford professional advice in the management of their affairs. As it is the simplest and by far the most commonly used approach, this article will only describe the procedure involved under this third option.
The mutual fund industry has experienced phenomenal growth since it was regulated and the reasons the Cayman Islands is viewed as a jurisdiction of choice include:

  • market access;
  • the availability of professional services; ;
  • the flexibility afforded by the range of structures used to operate mutual funds;
  • positive investor perception;
  • local infrastructure;
  • availability of listing on the Cayman Islands Stock Exchange;
  • geographic location and time zone; and
  • Caymans legal, regulatory and tax environment

Specific advantages of the Cayman Islands as a jurisdiction for mutual funds are that: • Professional service providers including accountants, attorneys, administrators and directors are available, giving fund promoters the assurance that they can acquire high quality service regardless of the complexity of their products.

  • Cayman has a high level of technological sophistication with first-class international telephone, telex, facsimile, cable and Internet links via satellite. This allows the quick processing of transactions, and provides account information for a wide range of products and currencies efficiently and at a cost-effective rate.
  • The Cayman Islands is well known for its close working relationship between government and private sector, This has created a business environment that is efficient and free of time-consuming bureaucracy.
  • The Cayman Islands Mutual Funds Law is designed to be a user-friendly regulatory framework for fund managers. Regulatory and licensing procedures are straightforward.
  • Cayman has a well-developed and sophisticated legal and court system with ultimate appeal to the Privy Council in London. The legal framework permits flexibility and enables Cayman funds to participate in sophisticated investment techniques. These may include leveraging the portfolio to a substantial extent making loans of securities on an unlimited basis, investing in all types of securities and security derivatives, and investing without restriction in any currency or instruments.
  • Cayman is a “no-tax” jurisdiction; it has no history of taxation whatsoever and the country has no mechanism for taxation in existence.

Procedure to register a mutual fund
We will guide you through the following steps to form and register a mutual fund under section 4(3) of the Cayman MFL:

  1. Form the vehicle, ie. incorporate the company, form the partnership or create the unit trust.
  2. Prepare the fund’s offering document. This must describe the equity interests in all material respects and contain such other information as is necessary to enable a prospective investor to make an informed decision as to whether or not to subscribe for or purchase the equity interests.
  3. Prepare the fund’s constitutional documents to reflect the terms of the offering document.
  4. Prepare the service agreements, including the administration agreement and the investment management/advisory agreement.
  5. Prepare the form of subscription agreement to be signed by the investors.
  6. Approve the fund documents. The operator will pass resolutions to approve the terms of the offering document and the service agreements, and to approve the issue of equity interests by the fund.
  7. Submit the following documents to the Cayman Islands Monetary Authority (“CIMA”):
  • a certified copy of the fund’s Certificate of Incorporation/Formation;
  • the offering document;
  • an application form (Form MF1);
  • a letter of consent to act from the fund’s auditors;
  • a letter of consent to act from the fund’s administrator;
  • the registration fee of US$2,440.

The Certificate of Registration as a mutual fund will typically be issued 3 to 5 days following submission of these documents to CIMA. However, the Certificate will be dated the day of submission and this, combined with CIMA’s consistency of approach, means that the fund may commence operations from the date of submission of the documents.
Ongoing requirements for a registered mutual fund
We will also assist you with the following ongoing requirements for a mutual fund registered under section 4(3) of the Cayman MFL:

  • Submission to CIMA a revised offering document and a revised Form MF1 within 21 days of any change materially affecting any information in the fund’s offering document or Form MF1. Common examples of such changes would include a change of directors, alteration of share capital (eg. creation of a new class of shares) and a change of service providers;
  • Submission to CIMA audited annual accounts within 6 months of the fund’s year end; and
  • Payment of the annual mutual fund registration fee of US$2,440.

The Cayman MFL also contains enforcement provisions allowing CIMA to inspect the fund’s books and records, call for accounting and to take action to protect investors where appropriate. The penalties imposed by the Cayman MFL for breach of any statutory requirement are stringent.