CAYMAN ISLANDS: An Introduction to Investment Funds

Introduction

The Cayman Islands has been the leading offshore jurisdiction for the establishment of mutual funds and private funds for several decades. This competitive position has been maintained by the use of innovative legislation and the absence of taxation and exchange controls. This, together with the presence of sophisticated and world-class professional and responsive service providers has resulted in the jurisdiction’s reputation for responsible supervision and regulation of funds.

The total number of registered mutual funds and private funds continues to increase year on year, strengthening the Cayman Islands’ position as a global leader. As at the end of Q3 2024, there were over 30,000 mutual funds and private funds registered under the Mutual Funds Act (As Revised) (MFA) and the Private Funds Act (As Revised) (PFA), respectively, with the Cayman Islands Monetary Authority (CIMA).

Additionally, the Cayman Islands has introduced innovative legislation to regulate virtual asset services by introducing the Virtual Asset (Service Providers) Act (As Revised) (VASPA), opening the doors to the digital asset marketplace. It is no surprise, therefore, that when fund managers are looking for the best jurisdiction to establish mutual funds and private funds as well as alternative funds investing in cryptocurrencies, Web3 and blockchain products, the Cayman Islands is the jurisdiction of choice.

Mutual Funds

The MFA 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 MFA was amended to include a digital representation of interest so tokenised funds are also regulated by CIMA.

Types of regulated mutual funds

Several categories of mutual funds are subject to regulation and supervision by CIMA:

• Registered Mutual Funds: These funds require an initial minimum equity interest purchasable by all prospective investors of at least USD100,000.
• Master Funds: Master funds of regulated feeder funds that issue equitable interests redeemable at the option of the feeder fund must also register with CIMA in accordance with the MFA.
• Limited Investor Funds: These funds are open-ended but limited to 15 or fewer investors who collectively hold the power to appoint or remove the operators.

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 MFA mandates that mutual funds that register with CIMA submit a detailed offering memorandum, submit any material changes to the offering from time to time, have annual audited accounts, comply with certain governance and operating standards for management and accountability and maintain AML, data protection and operational procedures.

Private Funds

The PFA applies to all closed-ended funds (funds in which the investors do not have the right to redeem their interests at their option). The PFA mandates that private funds that register with CIMA submit any material changes to the offering from time to time, have annual audited accounts, comply with certain governance and operating standards for management, accountability, valuation, safekeeping of assets, cash monitoring, and securities identification and maintain AML, data protection and operational procedures.

Types of registered private funds

Closed-ended private funds that fall under the definition of “private fund” pursuant to the PFA are required to register with CIMA. The PFA 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 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.

Non-fund Arrangements

Many non-fund arrangements in the Cayman Islands are established in accordance with the Guidance issued by CIMA and fall outside the scope of the PFA. These arrangements include entities that, while structured similarly to private funds, do not meet the Act’s definition of a “fund” and are therefore exempt from its regulatory requirements. Examples of such arrangements include pension funds, joint ventures, proprietary investment vehicles, debt issues and debt issuing vehicles, individual investment management arrangements, structured finance vehicles and holding companies. By adhering to CIMA’s Guidance, these non-fund arrangements ensure compliance with local regulatory expectations without being subject to the same oversight and registration requirements that apply to private funds, providing flexibility for specialised investment structures.

Funds Exempt From CIMA Registration

It is worth restating what is not a registerable mutual fund or a private fund. A fund with a single investor has no comingling of assets and is not registerable under the MFA or the PFA. Equity interests do not include debt, so a fund that issues debt is not subject to the registration process under the MFA or the PFA. Lastly, as stated above, the definition of a private fund does not include any “non-fund arrangement”. Care must be taken to ensure that a fund structure is not caught under a different regulatory regime in the Cayman Islands, such as the virtual asset regime, which would require separate regulation by CIMA.

Virtual Assets and Crypto Funds

The Cayman Islandsis distinguished by its progressive legislation, notably the VASPA and the Special Economic Zones Act (as Revised) (SEZA). Many investment managers seek to capitalise on the potentially huge gains associated with digital assets, and the Cayman Islands has fast become one of the leading markets for crypto funds, security token offerings (STOs), blockchain and other digital products. In particular, there has been a significant increase in the number of crypto funds being established in the past two years.

VASPA

The VASPA applies to any persons involved in providing one or more of the “virtual asset services”. The VASPA provides that a “virtual asset” means a digital representation of value that can be digitally traded or transferred and can be used for payment or investment purposes but does not include a digital representation of fiat currencies. All virtual asset service providers (a “VASP entity”) are required to register with, or be licensed by, CIMA.

Where a fund issues or accepts cryptocurrency for subscriptions and/or redemptions, it would likely fall into the VASP regime and require registration under both the mutual funds or private funds regime as well as the VASP regime.

The Special Economic Zone

The Special Economic Zone (SEZ) provides a practical solution to those businesses seeking to establish a physical presence in the Cayman Islands and offers a number of benefits to companies and funds setting up within the zone, including tax incentives, duty exemptions, expedited immigration processes anda collaborative ecosystem.

There are many ways to utilise the Cayman Islands’ fund structures, as well as VASPA and SEZ legislation, to maximise alternative investment strategies, including:

• establishing mutual funds and private funds in the Cayman Islands that invest in cryptocurrencies, Web3 or blockchain products;
• establishing exempted and foundation companies for token issuers, NFTs, DAOs, DeFi projects, centralised and decentralised exchanges, intellectual property holding entities and other Web3 projects;
• utilising blockchain technology and smart contracts by funds and VASP entities;
• incorporating Cayman Islands companies to hold and trade cryptocurrencies and other digital products; and
• establishing SEZ companies that operate in the digital asset space and physically moving business operations to the Cayman Islands.

Updates in Regulatory Obligations for Funds

AML obligations

A fund and a VASP entity must establish AML systems and procedures for the purpose of complying with the Cayman Islands anti-money laundering (AML) regime, including combating terrorist financing (CTF), proliferation financing (PF) and targeted financial sanctions (TSF). Designated officers must also be appointed for compliance oversight and to conduct annual audits of their AML procedures.

Beneficial ownership

The Beneficial Ownership Transparency Act, 2023 (BOTA), came into effect on 31 July 2024, replacing the previous regime. VASP entities and funds that were previously out of scope are now brought into scope and are required to identify their beneficial owner(s) and maintain updated beneficial ownership registers. CIMA-registered funds are allowed the option to delegate register maintenance to their Cayman Islands corporate service provider.

The Future of Investment Funds in the Cayman Islands

The Cayman Islands maintains its position as the leading offshore jurisdiction for the establishment of mutual funds and private funds and continues to position itself at the forefront of alternative funds investing in cryptocurrencies, Web3 and blockchain products. The sophisticated regulatory framework in the Cayman Islands can accommodate any mutual fund or private fund seeking a dynamic environment with sophisticated and professional service providers and legal infrastructure conducive to digital innovation. As a result, the Cayman Islands has emerged as a leader in this digital revolution and is on track to sustain this trajectory into the foreseeable future.

Stuarts’ Funds Department

Stuarts’ investment funds department is a market leader in advising managers on the set-up and establishment of a broad range of investment funds, including private funds, limited investor funds and funds focusing on bitcoin and digital asset strategies in the Cayman Islands. The team’s expertise is broad and includes fund formation, structures, regulation, de-registration, liquidation and on-going advice to international law firms, investment managers and high net worth individuals. Stuarts maintains enduring relationships with their clients through the combined legal expertise and business acumen of their practice groups and by providing outstanding service.