CAYMAN ISLANDS: An Introduction to Investment Funds

Introduction 

The Cayman Islands have become the leading offshore jurisdiction for the establishment of mutual funds and private funds. This phenomenal growth has been due, in part, to the use of innovative legislation and the absence of taxation and exchange controls. This, together with the presence of sophisticated and world-class professional service providers, has resulted in the jurisdiction’s reputation for responsible supervision and regulation of funds.

As at Q3 2023, there were 13,008 mutual funds registered with the Cayman Islands Monetary Authority in the Cayman Islands (CIMA). This was an increase from the 12,995 mutual funds registered with CIMA in 2022.

There were 16,530 private funds registered with CIMA at Q3 2022. This was an increase from the 15,662 private funds registered with CIMA in 2022, representing the continual growth of the private fund market in the Cayman Islands.

Virtual Assets 

The Cayman Islands have enacted the Virtual Asset (Service Providers) Act (As Revised) to create a framework for virtual asset products and service providers, and in doing so, CIMA is welcoming these products and related entities and has created a regulatory framework from which these entities may thrive.

Mutual Funds 

The Mutual Funds Act (As Revised) (the “Mutual Funds Act”) applies to all open-ended funds (funds in which the investors have the right to redeem their interests at their option), except those specifically excluded from regulation. The definition of “equity interest” under the Mutual Funds Act was amended to include a digital representation of interest, so tokenised funds are also regulated by CIMA.

Types of Regulated Mutual Funds 

The main type of mutual fund that is subject to regulation and supervision under the Mutual Funds Act by CIMA is the Registered Mutual Fund, which requires an initial minimum equity interest purchasable by an investor of at least USD100,000.

Where the fund is not a registered mutual fund and is not excluded from regulation, it must either apply for a mutual fund licence or apply to be regulated as an administered mutual fund. The only exception to this is the single investor fund, which is not considered a mutual fund and is not required to be regulated.

Master funds of regulated feeder funds which issue equitable interests which are redeemable at the option of the feeder fund must also register with CIMA in accordance with the Mutual Funds Act.

Finally, an open-ended fund with 15 or fewer investors who have the ability to appoint or remove the operator of the fund referred to as “limited investor funds” are required to register with CIMA in accordance with the Mutual Funds Act.

Requirements for Regulated Mutual Funds 

Regulated Mutual Funds are required to do the following.

– Submit to CIMA a current copy of the fund offering document (other than a limited investor fund or a master fund). The offering document must describe the equity interests offered to investors in all material respects and must contain such information as is necessary to enable a prospective investor to make an informed decision as to whether or not to purchase the equity interests.

– Submit to CIMA updated documentation/information where a fund makes any changes, or becomes aware of any changes, that materially affects any information submitted to CIMA within 21 days of such change(s).

– Submit to CIMA an annual fund return, annual audit, and file audited accounts within six months of the end of the fund’s financial year. This will involve appointing an auditor in the Cayman Islands.

– Comply with CIMA regulatory measures.

– Where the fund is structured as a company, have a minimum of two directors and ensure each director/controller is registered with CIMA.

– Pay a prescribed annual registration fee.

Mutual funds are also subject to the automatic exchange of information, anti-money laundering and data privacy requirements of the Cayman Islands. Mutual funds must have appropriate written policies and procedures in place, including, for example, anti-money laundering, data protection, and operational and automatic exchange of information policies. Operators and employees of mutual funds must participate in anti-money laundering training in compliance with the anti-money laundering regulations.

Private Funds 

The Private Funds Act (as revised) of the Cayman Islands (the “Private Funds Act”) applies to all closed-ended funds (funds in which the investors do not have the right to redeem their interests at their option). The Private Funds Act specifically excludes from regulation certain “non-fund arrangements” which include: pension funds; joint ventures; structured finance vehicles; preferred equity financing vehicles and holding vehicles.

Types of Regulated Private Funds 

Closed-ended private funds which fall under the definition of “private fund” pursuant to the Private Funds Act are required to register with CIMA. The Private Funds Act also provides for “alternative investment vehicles” and “restricted scope private funds”.

A restricted scope private fund is a private fund that is an exempted limited partnership that is managed or advised by a person who is licensed or registered by CIMA or authorised or registered by a recognised overseas regulatory authority and in which all of the investors are non-retail in nature, being either high net worth persons or sophisticated persons.

Registration Under the Private Funds Act 

The Private Funds Act sets out a registration process for private funds which involves the filing of prescribed details with CIMA and payment of an annual fee. Although the Private Funds Act does not require the filing of a full offering memorandum in relation to a private fund, CIMA has issued guidance on the contents of a private fund’s offering materials, so in practice a form of offering document is required.

Requirements for Regulated Private Funds 

Private Funds are required to do the following.

– Submit to CIMA a current copy of the offering memorandum/summary of terms/marketing material (as applicable) that must contain the required information as prescribed by CIMA.

– Submit to CIMA updated documentation/information where a fund makes any changes, or becomes aware of any changes, that materially affects any information submitted to CIMA within 21 days of such change(s).

– Submit to CIMA an annual fund return, annual audit and file audited accounts within six months of the end of the fund’s financial year. This will involve appointing an auditor in the Cayman Islands.

– Comply with the prescribed operating conditions including valuation, safekeeping of assets, cash monitoring and identification of securities requirements and CIMA regulatory measures.

– Have a minimum of two natural persons acting as operators of the fund.

– Pay a prescribed annual registration fee.

Private funds are also subject to the automatic exchange of information, anti-money laundering and data privacy requirements of the Cayman Islands. Private funds must have appropriate written policies and procedures in place including, for example, anti-money laundering, data protection, operational and automatic exchange of information policies. Operators and employees of mutual funds must participate in anti-money laundering training in compliance with the anti-money laundering regulations.