Alternative Investment

Alternative Funds 2022 – Fund Management/ REITs

1. General

1.1 General Overview of Jurisdiction

Over the last 40 years, the Cayman Islands has matured into one
of the world’s largest international financial centres,
providing institutionally focused services to a global client base.
The Cayman Islands’ competitive strength in financial services
lies in its ability to provide an effective, cost-efficient and
tax-neutral platform for international capital flows in an
environment of legal, political and economic stability. The blend
of flexibility and certainty of legal structures, compliance with
international regulatory standards and a well-regarded corporate
governance regime ensures Cayman remains at the front and centre as
the choice for investment funds, managers and investors.

Respected Legal System and Political
Stability

The Cayman Islands is a British Overseas Territory and enjoys
the security and stability traditionally associated with its status
as such, while remaining responsible for its own internal affairs
and government. The Islands have an independent judicial system
based on a combination of English common law and local legislation.
The court of final appeal is the Judicial Committee of the Privy
Council. The government and the private sector work closely to
ensure the continued development of the jurisdiction as a place
where business can be conducted efficiently and effectively.

Client-Centred Structures, Institutions and
Advice

Legal structures used for alternative funds offer flexibility to
managers and are well understood by sophisticated investors. Such
structures allow for the management of entities with numerous
investors and multiple layers of debt and equity. The jurisdiction
benefits from the availability of a wide range of professional
service providers from internationally respected firms and
institutions.

Transparency and the Regulatory Regime

Regulation in the Cayman Islands is focused on the management of
systemic risk, the prevention of money laundering and the promotion
of regulatory and financial transparency. A discussion of the
regulatory regime is included later in this chapter.

Tax Neutrality and Transparency

There are no local corporation, capital gains, income, profits,
withholding or inheritance taxes attaching to vehicles established
in the Cayman Islands, nor to investors in such vehicles. Taxation
may be imposed on investors or investments by jurisdictions outside
of the Cayman Islands.

2. Funds

2.1 Types of Alternative Funds

In the Cayman Islands, both open-ended and closed-ended funds
are common.

Historically, the Cayman Islands have been the principal
jurisdiction for the establishment of hedge funds, which are
subject to the registration regime provided by the long-established
Mutual Funds Act (the MFA). More recently, a regime for the
registration and regulation of private funds formed in the Cayman
Islands has been introduced: the Private Funds Act (PFA) now sits
alongside the MFA and promises to offer the same level of sensible
and proportionate oversight and regulation that the jurisdiction
has provided for hedge funds for more than two decades.

2.2 Fund Structures

In the Cayman Islands, alternative investment funds are commonly
established using four types of vehicles. These are:

  • exempted companies (including segregated portfolio
    companies);

  • exempted limited partnerships;

  • unit trusts; and

  • limited liability companies.

Typically, these vehicles are used in a variety of fund
structures, with their most common designations including
standalone funds, master or feeder funds, parallel funds,
alternative investment vehicles (AIVs), co-investment funds, and
umbrella funds. In the Cayman Islands, fund structures tend to be
flexible and are typically driven by onshore considerations such as
taxation and investor qualification requirements.

While each type of vehicle may be used, the most popular vehicle
for open-ended fund structures is the exempted company and the most
popular vehicle for closed-ended funds structures is the exempted
limited partnership.

Standalone Funds

These are the simplest structures, being a single vehicle,
usually with a single investment strategy. Funds of this nature are
often used in start-up situations or where the target market does
not require further complexity. A standalone fund may itself invest
as a “fund of funds” in another fund, but for Cayman
Islands purposes will still be a standalone vehicle as it will
function on an independent basis, with its investment strategy
being to invest in other funds.

Master-Feeder Structures

A master-feeder fund is usually structured so that the combined
assets of two or more “feeder funds” (which may be
domiciled in the Cayman Islands or in another jurisdiction,
typically Delaware) are substantially invested in a separate
vehicle known as the “master fund”, which is managed by
the same investment manager. The pooling of the assets then allows
the master fund to act as the investment vehicle for its feeder
funds. Structurally, this is achieved by investors purchasing
shares or interests in the relevant feeder fund and the feeder
fund, in turn, purchasing shares or interests for equivalent
consideration in the master fund. Even though there may be direct
investments made by investors into the master fund, in most cases
the only direct investors are the feeders.

Master-feeder structures provide for certain cost efficiencies
whilst allowing for the investment manager to pursue the same
investment strategy for both feeder funds. This also allows for
different categories of investors to invest through the structure.
A Cayman Islands exempted company or partnership is often
established as the feeder fund for non-US investors and US
tax-exempt investors, and a Delaware limited liability company or
partnership is established as the feeder fund for US taxable
investors. An investment manager may also opt to set up a master
fund as an onshore vehicle and then subsequently wish to admit a
non-US or tax-exempt investor via a Cayman Islands feeder fund.

Parallel Funds, Co-investment Funds and
AIVs

Parallel structures consist of single investment vehicles that
invest alongside each other and are most common in the closed-ended
space. These may be used to accommodate the needs of a particular
investor or group of investors and may consist of Cayman Islands
and onshore vehicles.

Co-investment funds are generally formed for a specific
investment in order to invest alongside a main fund. The
participation in co-investment funds is typically initially offered
to investors in the main fund, allowing them to increase their
exposure to the relevant investment and increase the amount of
capital the fund structure can commit to the investment as a whole.
Co-investment funds are usually fee-free vehicles.

AIVs are often formed alongside main funds in order to
facilitate the structuring requirements for specific transactions
and/or investors. Although the investors will have made contractual
commitments to the main fund, the general partner of the main fund
can exercise discretion granted under the main fund documents to
route a proportion of contributed capital through one or more
AIVs.

Umbrella Funds

Umbrella funds are typically open-ended vehicles that pursue
multiple strategies and provide scope for investors to invest in
one or more strategies and to switch their investment strategy at
particular times. For corporate vehicles, this may be achieved by
using separate share classes and entrenching segregation in the
constitutional documents of the relevant company (to the extent
possible). However, segregated portfolio companies provide an
appropriate corporate vehicle for such funds that are grouped into
multiple segregated portfolios with a variety of strategies,
thereby achieving statutory segregation. Investors in such vehicles
can be given the ability to switch between portfolios (typically by
redemption or repurchase of shares in one segregated portfolio and
a new issuance of shares in another). Unit trusts are also commonly
used for umbrella structures, with the trust documentation
describing the ring-fencing and fund-switching arrangements between
separate sub-trusts. Umbrella structures are also used for
multi-issuance fund programmes.

2.3 Funds: Regulatory Regime

Broadly, Cayman Islands open-ended funds are regulated under the
MFA and closed-ended private funds are regulated under the PFA.

Funds Regulated under the MFA

The MFA defines a “mutual fund” 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…”

For these purposes, an “equity interest” is defined as
“a share, trust unit or partnership interest that (a) carries
an entitlement to participate in the profits or gains of the
company, unit trust or partnership and (b) is redeemable or
repurchasable at the option of the investor… before the
commencement of winding up or dissolution of the company… but
does not include debt.” Accordingly, the two key components of
the definition are:

  • the option on the part of an investor to redeem or withdraw;
    and

  • the pooling of assets.

The MFA makes it clear that debt-issuance vehicles do not fall
within its scope (unless they also issue relevant equity
interests). The vast majority of Cayman Islands hedge funds are
regulated under the MFA (see “Highly Restricted Placement or
Exempted Funds”, below), although they are not necessarily
“mutual funds” as the term is used in certain onshore
jurisdictions.

There are four categories of regulated mutual funds in the
Cayman Islands, with the distinction based on the way in which they
are regulated under the MFA, rather than on the type of vehicle or
configuration of vehicles regulated.

These four categories are as follows.

Funds with a USD100,000 Minimum Investment
Threshold

The vast majority of regulated mutual funds are registered with
the Cayman Islands Monetary Authority (CIMA) under this category,
and it is likely that a hedge fund with a sophisticated client base
will fall within this category.

These are mutual funds where either:

  • the minimum equity interest purchasable by a prospective
    investor is USD100,000 or its equivalent in another currency (the
    Minimum Equity Interest Requirement); or

  • the equity interests are listed on an approved stock exchange
    or over-the-counter market.

They are required to produce an offering document, appoint an
administrator and have their financial statements signed off by a
CIMA-approved auditor in the Cayman Islands. There is no prior
approval process required by CIMA before the launch of such a fund,
but it must be registered with CIMA as described in 2.6
Regulatory Approval Process
below and care should be taken
in relation to 2.5 Non-traditional Assets. In the
event CIMA deems a registration application incomplete, it
typically allows up to 24 hours to respond to any requests for
additional information before requiring that application to be
re-submitted.

Licensed Funds

Licensed mutual funds are funds that hold a licence under the
MFA and must have either a registered office in the Cayman Islands
or, if a unit trust, a trustee who is licensed under the Banks and
Trust Companies Act of the Cayman Islands. They are subject to a
prior approval process, requiring CIMA to be satisfied with the
experience and reputation of the promoter and administrator and
that the business of the fund and the offering of its interests
will be carried out in a proper way.

These types of funds are relatively rare (and in terms of the
total number of the Cayman Islands mutual funds, a de minimis
percentage) and tend to be used by certain types of retail funds as
there is no minimum investment threshold. However, in practice,
retail funds are more commonly dealt with under the third category
of mutual funds, as described below.

Funds with No Minimum Investment Threshold

Save for Limited Investor Funds (as detailed under “Highly
Restricted Placement or Exempted Funds”, below), mutual funds
with a minimum subscription level of less than USD100,000 must have
a licensed mutual fund administrator providing their principal
office in the Cayman Islands. Again, given the usual hedge fund
investor profile, funds regulated in this manner are fairly
rare.

Highly Restricted Placement or Exempted
Funds

Finally, although not appropriate for a fund that will be widely
placed, there is scope for registering an open-ended vehicle that
is not required to satisfy the Minimum Equity Interest Requirement
(referred to here as a Limited Investor Fund). The equity interests
in a Limited Investor Fund must be held by 15 or fewer investors,
the majority of whom have the right to appoint or remove the
“operator” of the fund (which means the trustee, general
partner or directors, depending on the structure of the relevant
vehicle). These investor rights are built into the constitutional
documents for the relevant Limited Investor Fund.

Master funds in master-feeder structures that do not have a
CIMA-regulated feeder may also be structured in this way.

Single investor funds are not required to register under the MFA
as there is no pooling of investor funds as required by the
MFA.

Funds Regulated under the PFA

The recently enacted PFA applies to “private funds”,
which for these purposes refers to any company (including LLCs),
unit trust or partnership that offers or issues investment
interests, the purpose or effect of which is the pooling of
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:

  • the holders of investment interests do not have day-to-day
    control over the acquisition, holding, management or disposal of
    the investments; and

  • the investments are managed as a whole by or on behalf of the
    operator of the private fund, directly or indirectly.

The PFA includes a substantial list of “non-fund
arrangements” that are excluded from the definition of private
funds and are therefore outside of the scope of the PFA
altogether.

Unlike the MFA, the PFA does not provide for differing
categories of regulation at CIMA depending on minimum investment
thresholds.

2.4 Loan Origination

Generally speaking, there are no restrictions on the origination
of loans by funds established in the Cayman Islands, so long as a
fund is otherwise in compliance with all of its regulatory
obligations. Lenders to Cayman Islands funds may also take the
benefit of security interests but may seek to utilise the services
of an administrative or security agent for such a purpose.

2.5 Non-traditional Assets

Generally, Cayman Islands laws and regulations do not impose
limitations on the assets in which a fund may invest. However,
there are some notable areas where special attention needs to be
taken in order to comply with the Cayman Islands laws regarding
investment, such as the ones listed below.

  • “Virtual assets”. The fund should ensure it does not
    engage in the business of providing financial services or
    transferring “virtual assets” on behalf of another
    person. Such activity would require registration or licensing under
    the Virtual Asset (Service Providers) Act. For this purpose, a
    “virtual asset” is a digital representation of value that
    can be digitally traded or transferred and can be used for payment
    or investment purposes.

  • Cannabis. The sale of cannabis (including CBD), where not in a
    medical context, is currently a criminal offence in the Cayman
    Islands under the Misuse of Drugs Act (as amended). The sale of
    such items is therefore classed as criminal conduct and any
    resulting proceeds will be criminal property. Under the Proceeds of
    Crime Act, it is an offence to acquire criminal property. However,
    this may not be an offence where the fund knows that the sale of
    the cannabis occurred outside the Cayman Islands and that the sale
    is not an offence under the laws of the country where the cannabis
    is produced and sold.

2.6 Regulatory Approval Process

Private funds and mutual funds registered with CIMA under the
most common categories of registration can be submitted to CIMA for
registration. CIMA will typically honour the date on which the
application is submitted as the registration date for the fund.

There is no pre-approval process for these categories of
registration. The application is submitted online through
CIMA’s REEFS system, along with the relevant documents and the
requisite fee.

2.7 Requirement for Local Investment
Managers

There is no requirement in the Cayman Islands for a fund to
appoint a local investment manager. A Cayman Islands investment
management company must comply with the requirements of the
Securities Investment Business Act and may also need a degree of
physical substance if it falls under the relevant provisions of the
Economic Substance Act. Please see 3.7 Local Substance
Requirements
.

2.8 Other Local Requirements

The Cayman Islands require all entities used in investment fund
structures to maintain a registered office provided by a licensed
service provider on island. They are not required to appoint local
directors, and the funds themselves are not required to demonstrate
substance nor maintain a physical presence, other than through
their registered office provider.

While no legal requirement exists to appoint local directors for
open-ended funds, it is common for experienced independent
directors to be appointed from the Cayman Islands.

In investment funds with a partnership structure, the general
partner must be either a Cayman Islands entity or a foreign entity
registered as such in the Cayman Islands.

2.9 Rules Concerning Other Service
Providers

Aside from the requirement to maintain a registered office in
the Cayman Islands, investment funds are not required to have other
service providers located on the Islands, subject to limited
exceptions.

As noted under 2.8 Other Local Requirements,
there are large numbers of services providers located in the Cayman
Islands, including those focused on fund administration and
director services, so it is common for investment funds to use
local service providers for these functions.

2.10 Requirements for Non-local Service
Providers

Directors or managers of funds registered under the MFA are
required to be registered or licensed with CIMA under the Directors
Registration and Licensing Act. This requirement does not apply to
funds registered under the PFA.

There are three categories of registered directors, namely:

  • Registered director (a natural person who does not fall into
    the category of a professional director).

  • Professional director (a person appointed to 20 or more covered
    entities).

  • Corporate Director (refers to corporate bodies that serve as
    directors of covered entities).

Under the Directors Registration and Licensing Act, directors or
managers of general partners of funds structured as partnerships
and registered under the MFA are not required to be registered or
licensed with CIMA.

In certain circumstances, non-local service providers, such as
administrators or custodians, may become subject to regulation if
they are conducting business within or from the Cayman Islands.

2.11 Funds: Tax Regime

There is currently no direct taxation in the Cayman Islands, and
interest, dividends and gains payable to alternative funds will be
received free from all Cayman Islands taxes. For investors, this
means that resources can be pooled to invest, without returns on
that investment being subject to an additional layer of taxation
beyond that imposed by the investor’s home jurisdiction and the
jurisdictions where trading profits are generated.

Funds are typically established as exempted companies, exempted
limited partnerships, exempted limited liability companies or
exempted trusts and, as such, are eligible to apply for (and can
expect to receive) an undertaking from the government of the Cayman
Islands confirming this status for a period of years. The
undertaking will be valid for 30 years from the date of the
undertaking for exempted company and for 50 years for an exempted
limited partnership or a limited liability company (LLC). For an
exempted trust, an undertaking will be 50 years from the date of
creation of the trust. Such an undertaking will provide that, for
the relevant period, no law that is thereafter enacted in the
Cayman Islands imposing any tax or duty to be levied on profits,
income or on gains or appreciation, or any tax in the nature of
estate duty or inheritance tax, will apply to any property
comprised in or any income arising under the fund, or to the share,
interest or unit holders thereof, in respect of any such property
or income.

FATCA and CRS have each been implemented into the Cayman Islands
and for more detail please see 4.8 FATCA/CRS Compliance
Regime
.

2.12 Double-Tax Treaties

The Cayman Islands is a tax neutral jurisdiction and
consequently is not party to any double-tax treaties that are
relevant to investment funds.

2.13 Use of Subsidiaries for Investment
Purposes

Subsidiaries established in the Cayman Islands are often used
for investment purposes or for the segregation of assets and
liabilities. Cayman Islands may be a suitable location for the
formation of entities acting as holding or trading vehicles for
internationally sourced and generated business due to the absence
of corporation tax and withholding taxes or levies.

2.14 Origin of Promoters/Sponsors of Alternative
Funds

The Cayman Islands is the most popular non-US jurisdiction for
US fund sponsors. There is also a tendency for fund sponsors in
Asia to establish fund vehicles in the Cayman Islands.

2.15 Origin of Investors in Alternative
Funds

Cayman Islands investment funds are commonly used by US
tax-exempt investors and other non-US investors. Investors from
many different jurisdictions invest through Cayman Islands
structures, particularly investors from North America and Asia, who
are very familiar with Cayman Islands funds.

2.16 Key Trends

According to statistics produced by CIMA, the number of
registered mutual funds of all categories is 13,016 as of 30
September 2022, once again confirming the Cayman Islands as the
domicile of choice for hedge funds. Furthermore, there has been a
steady increase in the number of closed-ended funds that are
registered with 15,662 funds registered as of 30 September 2022.
The Cayman Islands remains the offshore financial centre of choice
for global fund managers domiciling their funds in the Cayman
Islands. That trend can be expected to continue.

2.17 Disclosure/Reporting Requirements

As a starting point, sophisticated investors should be aware of
the risks associated with their investments in regulated funds. The
MFA requires an offering document for the relevant fund to describe
the equity interests in all material respects and to include such
other information as necessary so a prospective investor can make
informed decisions as to whether or not to subscribe for or
purchase the equity interests. Furthermore, CIMA has issued Rules
on the Contents of Offering Document for both Regulated Mutual
Funds and Registered Private Funds, which contain comprehensive
lists of certain minimum disclosure requirements for fund marketing
materials.

2.18 Anticipated Changes

In recent years, Cayman legislation and regulation have evolved
considerably and continue to respond to trends and challenges in
current market practice, and to embrace transparency and
anti-avoidance initiatives.

3. Managers

3.1 Legal Structures Used by Fund Managers

The majority of investment fund managers of Cayman Islands
alternative funds are located onshore and are not required to
register or otherwise be regulated in the Cayman Islands. Whilst
this is not typical, where managers choose to be established or
registered in the Cayman Islands, the flexibility of Cayman
structures allows for fund managers to choose the vehicle depending
on their preference, whether this is for a partnership structure
with a general partner, or a company with directors or
managers.

3.2 Managers: Regulatory Regime

Under the Securities Investment Business Act (the SIBA),
alternative fund managers established or with a place of business
in the Cayman Islands dealing in securities, arranging deals in
securities, advising on securities or managing securities, are
required to register with, or be licensed by, CIMA. This will be
the case for the vast majority of managers, unless they do not
manage “securities”, which is broadly defined but with
some exceptions (eg, real estate). However, if the manager is not
regulated under SIBA on this basis, then it may be necessary for
the manager to be regulated under the Companies Management Act.

Fund managers that solely provide services to funds that are
sophisticated or high net worth persons (as defined) will only need
to be registered under SIBA; other managers will need to obtain a
full licence under SIBA.

Fund managers will need to comply with the Anti-Money
Laundering, Counter-Terrorist Financing, and Proliferation
Financing regime in the Cayman Islands as a result of conducting
“relevant financial business”. The sanctions regime will
also apply to the managers.

The Economic Substance framework will apply in some capacity and
fund managers will likely need to take certain steps to establish
economic substance in the Cayman Islands. Please see 3.7
Local Substance Requirements
.

In addition, the fund manager will have certain notification
(and possibly reporting) obligations under FATCA and the Common
Reporting Standard (CRS) as implemented in the Cayman Islands.

The fund manager will also be subject to the Data Protection Act
(DPA), the obligations under which are similar to those under the
GDPR.

3.3 Managers: Tax Regime

Please see 2.11 Tax Regime.

3.4 Rules Concerning Permanent
Establishments

The Cayman Islands does not have legislation on permanent
establishments as there is no taxation of investment managers.

3.5 Taxation of Carried Interest

Please see 2.11 Tax Regime.

3.6 Outsourcing of Investment Functions/Business
Operations

Managers can outsource functions and business operations.

CIMA’s Statement of Guidance on Outsourcing will apply to
managers regulated under SIBA. This requires entities to take
certain steps when outsourcing and includes a requirement to have a
written outsourcing agreement in place that meets certain
criteria.

Any outsourcing may also have an impact on the application of
the Economic Substance Act, particularly the need to conduct
certain activities in the Cayman Islands. Please see 3.7
Local Substance Requirements
.

3.7 Local Substance Requirements

The Economic Substance Act will likely apply to a person who is
registered as “managing securities” for an investment
fund under SIBA, as set out in 3.2 Regulatory
Regime
.

As a result, the manager may, depending on the operation of the
Economic Substance Act, be required to:

  • conduct core income-generating activities relating to managing
    securities in the Cayman Islands;

  • be “directed and managed” in the Cayman Islands
    (which will include having board meetings in Cayman); and

  • have regard to the level of relevant income derived from the
    relevant activity carried out in the Islands, such as:

  1. have an adequate amount of operating expenditure incurred in
    the Cayman Islands;

  2. have an adequate physical presence in the Cayman Islands;
    and

  3. have an adequate number of full-time employees or other
    personnel with appropriate qualifications in the Cayman
    Islands.

What is considered adequate and appropriate will depend on the
particular facts and level of activity carried out by the
manager.

This is only a summary and if the manager is tax resident in
another jurisdiction, for example, it may not need to comply with
the above requirements.

The manager will also have associated record-keeping,
notification and filing requirements.

3.8 Local Regulatory Requirements for Non-local
Managers

Please see 3.1 Legal Structures Used by Fund
Managers
and 4.3 Local Investors.

4. Investors

4.1 Types of Investors in Alternative Funds

A broad spectrum of investors invest in Cayman Islands
investment funds. Investors will often include non-US and
tax-exempt institutions.

4.2 Marketing of Alternative Funds

Different rules apply to the following in the Cayman
Islands:

  • Cayman Islands domiciled funds;

  • non-Cayman Islands domiciled funds; and

  • a sponsor or manager marketing interests on behalf of a fund
    (whether Cayman Islands domiciled or non-Cayman Islands
    domiciled).

Please refer to 4.3 Rules Concerning Marketing of
Alternative Funds
and 4.4 Local Investors
for the position of sponsors and managers and Cayman Islands
domiciled funds.

Non-Cayman Islands domiciled funds (ie, “overseas
funds”) are permitted to invite persons who are not the
“public in the Cayman Islands” to subscribe for their
interests without restrictions under the MFA or the PFA. These Acts
do not specifically define the meaning of “public in the
Cayman Islands” and simply state, non-exhaustively, that this
expression does not include certain types of persons and entities
(for example, sophisticated or high net worth persons and
companies, foreign companies or partnerships that are incorporated,
established or registered in the Cayman Islands).

Overseas funds are only permitted to invite members of the
“public in the Cayman Islands” to subscribe for their
interests in one of two circumstances:

  • if the invitation is made by or through a person who is the
    holder of a licence under the SIBA (please see 4.3 Rules
    Concerning Marketing of Alternative Funds
    ); and

    • the interests are listed on a stock exchange (including an
      over-the counter market) specified by CIMA by notice in the
      Gazette; or

    • the overseas fund is regulated by a recognised overseas
      authority approved by CIMA; or

  • if the overseas fund becomes regulated by CIMA under the MFA or
    the PFA (as applicable).

4.3 Rules Concerning Marketing of Alternative
Funds

A sponsor or manager marketing interests on behalf of an
investment (whether domiciled in Cayman Islands or not) must
register with or be licensed by CIMA if they fall within SIBA’s
scope. The SIBA does not contain an express definition of
“marketing”, but instead lists a number of activities
that constitute “securities investment business”. The
marketing of interests in a fund will generally constitute
“securities investment business”.

A sponsor or manager carrying on “securities investment
business” will be an “In-scope Entity” under the
SIBA if it is:

  • a company, foreign company or partnership that is incorporated,
    established or registered in the Cayman Islands; or

  • a person that has otherwise “established a place of
    business in the Islands” through which such activities are
    carried out.

Those in-scope entities that do not qualify for an exemption
within the SIBA must either register with CIMA (if eligible, eg, if
they conduct securities investment business exclusively for
sophisticated or high net worth investors) or apply for a full
licence from CIMA (if not eligible for registration alone).

4.4 Local Investors

Specific rules apply under Cayman Islands law to each type of
vehicle that a Cayman Islands domiciled fund could be established
as (for example, exempted companies and exempted limited
partnerships). These laws generally only permit the vehicle to
carry on business in the Cayman Islands in narrow circumstances,
such as where any business in the Cayman Islands is ultimately in
furtherance of business that is exterior to the Cayman Islands. In
view of the restrictions on conduct of business in the Cayman
Islands, funds domiciled in Cayman Islands are generally not
permitted to offer their interests to the public there. However, it
is common for these vehicles to invest in other vehicles in the
Cayman Islands that are subject to the same or similar restrictions
(for example, other exempted companies or exempted limited
partnerships).

4.5 Investors: Regulatory Regime

Please refer to 4.2 Marketing of Alternative
Funds
, 4.3 Rules Concerning Marketing of
Alternative Funds
and 4.4 Local
Investors
. There are no regulatory filing obligations that
are specific to marketing into the Cayman Islands.

The Cayman Islands has also implemented a robust legal and
regulatory regime with respect to anti-money laundering,
counter-terrorist and proliferation financing, and compliance with
targeted financial sanctions. This is contained within the Proceeds
of Crime Act, the Terrorism Act, the Proliferation Financing
(Prohibition) Act, the Anti-Money Laundering Regulations (each as
amended from time-to-time) and supported by guidance notes
published by CIMA (the “AML Regime”).

Investment funds will typically need to comply with the AML
Regime. This includes establishing, implementing and complying with
written policies and procedures and documenting and keeping current
a risk assessment in accordance with the requirements in the AML
Regime. Compliance will encompass the implementation of certain
procedures, including due diligence on investors, and internal
controls, including the appointment of natural persons to fulfil
key roles. CIMA is responsible for supervising compliance with the
AML Regime.

4.6 Disclosure Requirements

Please see 2.17 Disclosure/Reporting
Requirements
.

4.7 Investors: Tax Regime

Please see 2.11 Tax Regime.

4.8 Foreign Account Tax Compliance Act (FATCA)/Common
Reporting Standard (CRS) Compliance Regime

FATCA and CRS have each been implemented into the Cayman Islands
via the Tax Information Authority (International Tax Compliance)
(United States of America) Regulations, 2014 (as amended) and the
Tax Information Authority (International Tax Compliance) (Common
Reporting Standard) Regulations, 2015 (as amended) (together and as
applicable in the Cayman Islands, the “FATCA and CRS
Regime”). The Cayman Islands Tax Information Authority (TIA)
is responsible for overseeing compliance with the FATCA and CRS
Regime.

An alternative investment fund will typically be classified as
an “Investment Entity” under the FATCA and CRS Regime
and, therefore, will be subject to a number of obligations,
including:

  • registering with the United States Internal Revenue Service to
    obtain a Global Intermediary Identification Number (including
    appointing a “Responsible Officer”);

  • submitting a notification to the TIA providing specified
    information (including appointing a “Principal Point of
    Contact” and “Authorising Person”);

  • establishing, implementing and complying with written policies
    and procedures to comply with CRS;

  • implementing a due diligence programme to facilitate the
    identification of any reportable account holders (including the
    collection of “self-certification forms”) and reporting
    on any such accounts to the TIA or providing “nil
    returns” if no reportable accounts have been identified;
    and

  • submitting an annual “CRS Compliance Form” to the
    TIA.

Originally published by Chambers Global Practice
Guides
.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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