Accepting US Investors in a Cayman Fund

Whether a Cayman fund can admit US investors is not a Cayman question. The Mutual Funds Act (2025 Revision) does not classify investors by nationality, and the constraints sit instead in four separate United States regimes. Regulation S under the Securities Act 1933 is a safe harbour for sales made outside the United States, not permission to accept US subscribers. Admitting one requires a separate exemption, usually Rule 506(b) of Regulation D, together with an Investment Company Act exclusion under section 3(c)(1) or 3(c)(7). It also requires a tax analysis that differs sharply between US taxable and US tax-exempt investors.

The question managers ask is whether they can take US money. The question that actually decides the structure is which US money. Non-US capital and US tax-exempt capital sit comfortably in a single offshore vehicle, and US taxable capital does not. That one fact is the origin of almost every master-feeder structure we are asked to build. David Lloyd, Chief Executive Officer at CV5 Capital

Executive Summary

Nothing in Cayman Islands law prevents a fund from admitting US investors. The analysis that decides the point is American, it runs across four independent regimes, and each of those regimes defines the persons it captures differently. The practical consequence is that the investor question and the structure question are the same question.

• Regulation S and Regulation D do different jobs: Regulation S covers the non-US offering and requires an offshore transaction with no directed selling efforts in the United States, while Rule 506(b) covers the US offering, so a fund taking both pools runs two offerings under one offering memorandum.
• Three different definitions of "US" apply to the same subscriber, and a US citizen resident in London is not a US person under Rule 902(k)(1)(i), is a United States person under Internal Revenue Code section 7701(a)(30)(A), and is reportable under FATCA.
• US taxable and US tax-exempt investors do not route to the same vehicle, because a Cayman corporate fund is a passive foreign investment company as to a US taxable holder yet is used deliberately by US tax-exempt investors to block unrelated business taxable income.
• Section 3(c)(1) caps beneficial owners at 100, while section 3(c)(7) removes the cap and instead requires every holder to be a qualified purchaser, which for a natural person means owning not less than US$5,000,000 in investments.
• The master-feeder structure is not a preference but a consequence: it is what happens when a manager expects both US taxable capital and non-US or US tax-exempt capital and cannot put them in one vehicle.
• The cost of getting this wrong includes a rescission right under Securities Act section 12(a)(1) and potential loss of the Investment Company Act exclusion for the whole fund, not merely for the investor concerned.

The Short Answer

There is no Cayman prohibition on US investors. Cayman Islands fund legislation regulates the fund, its operators, its auditor and its offering process. It is indifferent to where the subscriber lives. A Cayman fund with an entirely US investor base is registrable with CIMA on exactly the same basis as one with none.

The prohibition, where it exists, is American. Interests in a Cayman fund are securities. Offering them into the United States without registration under the Securities Act 1933 requires an exemption. Selling them to more than a small number of US holders without an exclusion under the Investment Company Act 1940 makes the fund an unregistered investment company. And because a Cayman corporate fund is opaque for US federal income tax purposes, admitting a US taxable investor to it produces a tax outcome most US taxpayers will not accept.

So the practical answer runs like this. A single offshore Cayman vehicle can usually be analysed to accommodate non-US investors and US tax-exempt investors. It is generally not the right home for US taxable investors. When a manager expects meaningful capital from both, the structure has to split, and that is the whole origin of the master-feeder. The question "can I take US money?" is really the question "which US money, and what does that do to my entity map?"

The Four Layers: Securities Act, Investment Company Act, Tax and Advisers Act

Four separate US federal regimes bear on a single admission decision. They are independent. Satisfying one says nothing about the others, and each has its own definition of the persons it captures.

Layer 4 is the one managers forget. US investors in an offshore fund count as investors for the Advisers Act exemption thresholds, so the decision to admit US capital is simultaneously a decision about the manager's own US regulatory status. A manager comfortably outside SEC registration with a purely non-US book can be pulled inside it by a handful of US subscriptions. The reporting consequences of crossing those thresholds are set out in Form PF for Cayman Fund Managers. What matters here is that the investor decision drives the manager's own status.

Three definitions of "US" and why they diverge

Before any of the four layers can be applied, the subscriber has to be classified. There is no single test. The three that matter most give different answers about the same person, and subscription documents that use one definition for all purposes are defective.

The consequence is practical. A fund can correctly determine that a subscriber is not a US person for Regulation S purposes, admit them to the offshore vehicle without any Regulation D analysis, and still owe a FATCA report on the same account. It can also still deliver a PFIC problem to that investor's US tax return. Cayman FATCA and CRS obligations run on their own calendar, with notification by 30 April 2026, FATCA and CRS reporting by 31 July 2026, and the CRS Compliance Form by 15 September 2026 per the DITC industry advisory. The operational side is covered in FATCA and CRS Compliance for Cayman Funds.

Rule 902(k)(1) treats a wide range of persons as US persons. They include any natural person resident in the United States, any partnership or corporation organised or incorporated under the laws of the United States, any estate of which any executor or administrator is a US person, and any trust of which any trustee is a US person. They also include any agency or branch of a foreign entity located in the United States, any non-discretionary account held by a dealer or other fiduciary for the benefit or account of a US person, and any discretionary account held by a dealer or other fiduciary organised, incorporated or, if an individual, resident in the United States. A final limb captures a partnership or corporation organised under foreign law and formed by a US person principally to invest in unregistered securities, unless it is organised and owned by accredited investors who are not natural persons, estates or trusts. Rule 902(k)(2) then carves out several categories, including employee benefit plans established and administered under the law of a country other than the United States, and certain discretionary accounts held for non-US persons by US professional fiduciaries.

Regulation S: What It Is and What It Actually Requires

Regulation S is a set of safe harbours, not an exemption in the ordinary sense. Rule 901 states the underlying territorial principle. For the purposes of section 5 of the Securities Act, the terms "offer", "offer to sell", "sell", "sale" and "offer to buy" are deemed to include offers and sales that occur within the United States and not to include those that occur outside the United States. Rules 903 and 904 then provide non-exclusive safe harbours, with 903 for the issuer, its distributors and their affiliates, and 904 for resales.

Two general conditions must be satisfied for the Rule 903 issuer safe harbour.

1. The offer or sale must be made in an offshore transaction. Under Rule 902(h) this means the offer is not made to a person in the United States and either the buyer is outside the United States at the time the buy order is originated, or the seller and any person acting on its behalf reasonably believe the buyer is outside the United States. Alternatively, the transaction is executed in, on or through the facilities of a designated offshore securities market and neither the seller nor any person acting on its behalf knows the transaction has been pre-arranged with a buyer in the United States.
2. There must be no directed selling efforts in the United States. Rule 902(c) defines these as any activity undertaken for the purpose of, or that could reasonably be expected to have the effect of, conditioning the market in the United States for any of the securities being offered. The activity is caught whether undertaken by the issuer, a distributor, any of their respective affiliates, or any person acting on behalf of any of them.

Rule 903(b) then sorts offerings into three categories with escalating additional requirements. Category 1 imposes no additional conditions. It is available, among other routes, to securities issued by a foreign issuer that reasonably believes at the commencement of the offering that there is no substantial US market interest in the class of securities offered. A Cayman company is a foreign issuer on the incorporation test in Rule 405, and a private fund whose shares do not trade has no substantial US market interest as defined in Rule 902(j). Categories 2 and 3 apply offering restrictions and distribution compliance periods of 40 days, six months or one year depending on the security and the issuer, and are the relevant analysis where the Category 1 conditions are not met.

In practice, the Regulation S condition that causes most trouble for fund managers is not offshore transaction status. It is directed selling efforts. Placing a fund on a US-hosted capital introduction platform, presenting at a US conference, publishing performance to a US mailing list, or maintaining an unrestricted website carrying fund terms can all be characterised as conditioning the US market. This is why offshore funds relying on Regulation S maintain website access restrictions, jurisdiction gates and non-solicitation protocols that look excessive until the condition is read closely. The broader placement analysis is set out in Private Placement Rules for Cayman Funds.

Regulation D and Running Both Offerings at Once

Where the fund wants to sell into the United States, Regulation S is irrelevant to that leg and a domestic exemption is required. The exemption used by essentially every private fund is Rule 506 of Regulation D, a safe harbour under Securities Act section 4(a)(2).

Rule 506(b) and Rule 506(c)

Rule 506(b) permits sales to an unlimited number of accredited investors and to not more than 35 non-accredited purchasers, subject to all of the following conditions.

• No general solicitation or general advertising, per Rule 502(c). This includes advertisements, articles, notices or other communications published in any newspaper, magazine or similar media or broadcast, and seminars or meetings whose attendees have been invited by general solicitation.
• Each non-accredited purchaser must, either alone or with a purchaser representative, have such knowledge and experience in financial and business matters that they are capable of evaluating the merits and risks of the prospective investment, under Rule 506(b)(2)(ii).
• Where there is any non-accredited purchaser, the information requirements of Rule 502(b) apply. In substance that means disclosure comparable to that in a registered offering, including audited financial statements.
• The securities are restricted securities under Rule 502(d) and the issuer must exercise reasonable care to ensure purchasers are not underwriters, including reasonable inquiry, written disclosure of transfer restrictions and a legend.
• Form D must be filed with the SEC no later than 15 calendar days after the first sale of securities in the offering, under Rule 503.
• No covered person may be subject to a disqualifying event under the bad actor provisions of Rule 506(d), and Rule 506(e) requires written disclosure of pre-existing disqualifying events.

Rule 506(c) permits general solicitation, but on the conditions that all purchasers are accredited investors and the issuer takes reasonable steps to verify accredited investor status. That means verification, not reliance on a self-certification tick box. Rule 506(c)(2)(ii) sets out non-exclusive verification methods for natural persons, including review of tax and income documentation for the two most recent years, or review of specified asset and liability documentation dated within the prior three months together with a written representation.

In practice, offshore funds admitting US investors overwhelmingly use Rule 506(b) and restrict the US offering to accredited investors only, admitting no non-accredited purchasers at all. There are two reasons. First, a single non-accredited purchaser triggers the Rule 502(b) disclosure regime, which is disproportionate for a fund. Second, and more importantly, general solicitation under Rule 506(c) sits very uncomfortably alongside a concurrent Regulation S offering.

Regulation S and Regulation D compared

Relying on both at once

Concurrent reliance is normal and is expressly contemplated. Preliminary Note 7 to Regulation S provides that offers and sales of securities outside the United States under Regulation S will not be integrated with registered domestic offerings or with domestic offerings that are exempt from registration. Running a Regulation S offering to non-US investors alongside a Rule 506(b) offering to US accredited investors, under a single offering memorandum with two sets of subscription representations, therefore does not of itself destroy either.

The Commission confirmed the integration point when it adopted Rule 506(c). Release No. 33-9415 of 10 July 2013 states that concurrent offshore offerings conducted in compliance with Regulation S will not be integrated with domestic unregistered offerings conducted in compliance with Rule 506 or Rule 144A. That release settles integration and nothing more. It does not address whether general solicitation conducted in the United States under Rule 506(c) amounts to directed selling efforts under Rule 902(c), which is a separate condition of the Regulation S safe harbour operating independently of integration. The manager therefore has to resolve that question on the facts of the marketing actually undertaken, with US securities counsel. The conservative practitioner position, and the one most offshore funds adopt, is to avoid the question entirely by using Rule 506(b) and conducting no general solicitation anywhere.

Three drafting consequences follow for a fund running both offerings.

1. The subscription document must ask three different questions. Not "are you a US person?" but "are you a US person within the meaning of Rule 902(k) of Regulation S?", then "if so, are you an accredited investor within the meaning of Rule 501(a)?", then "are you a United States person for the purposes of Internal Revenue Code section 7701(a)(30)?" Three questions, three definitions, three consequences.
2. The offering memorandum needs jurisdiction-specific selling restrictions, not a generic legend. The Regulation S legend and the Regulation D legend say different things and both are needed.
3. Ongoing eligibility must be tested, not just initial eligibility. Investor status changes. A non-US person who relocates to the United States, or an entity that is restructured, can convert a compliant holding into a non-compliant one without any subscription taking place. The remedy is a compulsory redemption power, discussed below.

The Investment Company Act Exclusions: 3(c)(1) and 3(c)(7)

The Investment Company Act layer is separate from and additional to the Securities Act layer. An offering can be perfectly exempt under Rule 506(b) and still leave the fund an unregistered investment company.

The relevance for an offshore fund is section 7(d). It provides that no investment company organised under the laws of a foreign country may make use of the mails or interstate commerce to offer or sell securities in the United States unless the SEC has issued an order permitting it. Orders under section 7(d) are, in practice, not available to private funds. The route out is therefore not an order but an exclusion: a fund that falls within section 3(c)(1) or 3(c)(7) is not an investment company at all, and section 7(d) never engages.

Section 3(c)(1)

Section 3(c)(1) excludes from the definition of investment company any issuer whose outstanding securities, other than short-term paper, are beneficially owned by not more than 100 persons, or 250 persons in the case of a qualifying venture capital fund, and which is not making and does not presently propose to make a public offering of its securities. Both limbs are conditions. The counting rules matter.

• The 10 per cent look-through. Where a company owns 10 per cent or more of the outstanding voting securities of the fund and is itself a registered investment company or an issuer relying on section 3(c)(1) or 3(c)(7), the fund's securities are deemed to be beneficially owned by the holders of that company's securities. Fund-of-funds and feeder investors therefore have to be looked through.
• Non-US funds count only US resident beneficial owners. A long-standing Division of Investment Management staff position permits a foreign private investment company to count only its US resident beneficial owners for section 3(c)(1) purposes, provided it makes no public offering in the United States. The position was published on 27 August 1984 and was restated by the staff in later no-action correspondence, including a letter dated 24 October 1996 confirming that a foreign fund which has sold securities to 100 or fewer US resident beneficial owners may rely on it. Staff no-action positions are not rules and bind neither the Commission nor a court, so current availability is a question for US counsel. This is the single most consequential point for a Cayman fund and is routinely misstated as a 100-investor cap on the whole fund.
• Knowledgeable employees are excluded from the count under Rule 3c-5, which defines knowledgeable employee to include executive officers, directors, trustees, general partners and advisory board members of the fund or its affiliated manager, and employees who participate in the investment activities of the fund and have done so for at least 12 months.
• The qualifying venture capital fund limb raising the ceiling to 250 persons applies only to a venture capital fund below a capital ceiling that the Commission indexes for inflation. The base figure in the statute is US$10,000,000 in aggregate capital contributions and uncalled committed capital. Rule 3c-7, adopted by Release No. IC-35305 on 21 August 2024 and effective 30 September 2024, sets the current amount at US$12,000,000. The next adjustment is due on or about 1 November 2029 and approximately every five years thereafter.

Section 3(c)(7)

Section 3(c)(7) excludes any issuer whose outstanding securities are owned exclusively by persons who, at the time of acquisition, are qualified purchasers, and which is not making and does not presently propose to make a public offering of its securities. Again both limbs apply.

Qualified purchaser is defined in section 2(a)(51)(A). In summary, it comprises four categories.

• A natural person who owns not less than US$5,000,000 in investments.
• A company owning not less than US$5,000,000 in investments that is owned directly or indirectly by two or more natural persons related as siblings, spouse or spousal equivalent, or as direct lineal descendants or ancestors, or by estates or trusts of such persons.
• A trust not formed for the specific purpose of acquiring the securities, as to which the trustee and each settlor is a qualified purchaser.
• Any person, acting for its own account or the accounts of other qualified purchasers, who in the aggregate owns and invests on a discretionary basis not less than US$25,000,000 in investments.

Rule 2a51-1 defines "investments" and the valuation method, and deducts indebtedness incurred to acquire them.

Two practical additions follow. Rule 3c-5 permits knowledgeable employees to hold interests in a 3(c)(7) fund without themselves being qualified purchasers. Separately, a fund with a large number of US holders of record needs to watch Exchange Act section 12(g) registration. Rule 12g-1 relieves an issuer from section 12(g)(1) registration where, on the last day of its most recent fiscal year, total assets did not exceed US$10,000,000, or the class of equity security was held of record by fewer than 2,000 persons or fewer than 500 persons who are not accredited investors. The Rule 12g3-2(b) exemption for foreign private issuers is not a general answer for a private fund, because it is conditioned on the securities having a primary trading market outside the United States and on continuous English-language publication of home-market disclosure, neither of which an unlisted private fund satisfies.

Comparison

The decision is usually driven by who the first fifteen US investors are, not by aspiration. A fund whose US pipeline is founders, former colleagues and single-family offices will find qualified purchaser status hard to evidence across the board and will land on 3(c)(1). A fund whose US pipeline is institutional will land on 3(c)(7) and should do so from the outset, because moving from 3(c)(1) to 3(c)(7) later requires either a redemption of every non-qualified holder or a new vehicle. The distinction is developed further in Cayman Funds, US Accredited Investors and Qualified Purchasers and Accredited and Sophisticated Investors.

The Rule 501(a) monetary thresholds for a natural person stand in the Code of Federal Regulations at net worth over US$1,000,000 excluding primary residence, or individual income over US$200,000 in each of the two most recent years, or joint income with a spouse or spousal equivalent over US$300,000, with a reasonable expectation of the same level in the current year. Those figures carry no automatic inflation indexation, so they move only when the Commission amends the rule. The amendments adopted on 26 August 2020 by Release No. 33-10824 added qualification routes rather than changing the monetary tests. Those routes include holders in good standing of the Series 7, Series 65 and Series 82 licences, knowledgeable employees of a private fund with respect to that fund, SEC-registered and state-registered investment advisers and exempt reporting advisers, and family offices with at least US$5,000,000 in assets under management together with their family clients.

The Tax Layer: Why US Taxable and US Tax-Exempt Investors Behave Differently

This is where the structure is actually decided, and where the categories are most often conflated. US taxable investors and US tax-exempt investors are both US persons for securities law purposes and both require the same Securities Act and Investment Company Act analysis. For tax they are close to opposites.

US taxable investors and the offshore corporate vehicle

A Cayman exempted company is a corporation for US federal income tax purposes unless an election is made otherwise. A US person holding shares in a foreign corporation that meets either the income test or the asset test in Internal Revenue Code section 1297 holds shares in a passive foreign investment company. A securities fund meets both comfortably.

The default PFIC regime in section 1291 taxes excess distributions and gain on disposition by allocating them rateably over the holding period, taxing the amounts allocated to prior years at the highest ordinary rate for those years, and adding an interest charge. The two elective alternatives each carry a cost. A qualified electing fund election under section 1295 requires the fund to provide the shareholder with an annual PFIC information statement containing the shareholder's pro rata share of ordinary earnings and net capital gain, which imposes a real and continuing accounting obligation on the fund. A mark-to-market election under section 1296 is available only for marketable stock.

Separately, if United States shareholders, meaning US persons owning 10 per cent or more of the total combined voting power or value, own in aggregate more than 50 per cent of the foreign corporation, it is a controlled foreign corporation. Those shareholders then have current inclusions under sections 951 and 951A regardless of distribution. A small offshore fund with a concentrated US holder base can become a CFC without anyone intending it.

The practical result is that US taxable investors are routed to a US onshore vehicle, typically a Delaware limited partnership or limited liability company treated as a partnership, which is fiscally transparent and delivers a Schedule K-1 rather than a PFIC problem.

US tax-exempt investors and the offshore corporate vehicle

US tax-exempt investors, meaning qualified pension and profit-sharing plans, endowments, foundations and individual retirement accounts, face the opposite problem. They are generally not taxed on investment income. However, sections 511 to 514 subject them to unrelated business income tax on unrelated business taxable income, and section 514 treats income from debt-financed property as UBTI in proportion to the acquisition indebtedness. A leveraged trading partnership passes UBTI through to its tax-exempt partners.

An offshore corporation is opaque. A dividend from a foreign corporation to a US tax-exempt investor is generally not UBTI even where the corporation itself was leveraged, because the corporation is a separate taxpayer and the leverage sits inside it. That is why the offshore corporate feeder is used deliberately by US tax-exempt investors, and why it is often described as a blocker. Treasury Regulation section 1.1291-1(e)(1) reinforces the point from the other direction: where the shareholder of a PFIC is an organisation exempt from tax, section 1291 and those regulations apply only if a dividend from the PFIC would be taxable to the organisation under subchapter F.

Non-US investors

Non-US investors want the offshore corporate vehicle for a third reason, which is to avoid being treated as engaged in a US trade or business. Section 864(b)(2) provides a safe harbour under which trading in stocks or securities, or in commodities of a kind customarily dealt in on an organised commodity exchange, for the taxpayer's own account does not constitute the conduct of a US trade or business. The safe harbour is subject to the exclusion for dealers and, for commodities, to the requirement that the transaction be of a kind customarily consummated at such a place. It does not extend to originating loans, to holding US real property interests, which are governed by section 897, or to operating business income. US-source dividends remain subject to withholding at 30 per cent under sections 871 and 881 unless reduced by treaty, and section 871(m) can treat dividend equivalent payments on certain derivatives as US-source dividends.

Investor category mapped to structural consequence

The last row is the one to sit with. A fund can lawfully admit a US citizen living abroad under Regulation S, having correctly concluded they are not a US person, and in doing so deliver a PFIC to a US taxpayer who may not discover it until they file. That is not a legal failure by the fund, but it is a commercial one, which is why mature subscription documents ask the tax question separately.

Where This Becomes a Structure: Standalone, Master-Feeder, Mini-Master

Once the investor categories are known, the entity map follows almost mechanically.

A Cayman master fund with at least one regulated feeder fund is itself registrable with CIMA and pays its own annual fee. The Mutual Funds Act (2025 Revision) defines a master fund in section 2 as a company, partnership or unit trust established or incorporated in the Islands which issues equity interests to one or more investors and holds investments and conducts trading activities for the principal purpose of implementing the overall investment strategy of the regulated feeder fund. Registration sits in section 4(3), which for a master fund requires a minimum aggregate equity interest purchasable by a prospective investor of eighty thousand Cayman Islands dollars, or its equivalent in another currency, and registration with the Authority in the prescribed manner.

The honest position is that most emerging managers do not need a master-feeder on day one and should not build one speculatively. Three entities, three audits and three sets of financial statements against a hypothetical US taxable allocation is a poor use of a first-fund budget. The better sequence is to launch the offshore vehicle, draft the constitutional documents and offering memorandum so a master can be inserted and a US feeder added without amending the trading arrangements, and build the second and third entities when the onshore capital is committed rather than forecast. That argument is set out at length in Emerging Managers Do Not Need a Master-Feeder, with the mechanics in Cayman Master-Feeder Structures Explained and The Mini-Master Fund Structure.

A segregated portfolio company sits on a different axis and the two are often conflated. It gives statutory segregation between portfolios without a separate legal entity per strategy, at a CIMA mutual fund sub-fund increment of CI$750 under the fee schedule effective 1 January 2026, which is a 150 per cent increase on the prior CI$300. But it segregates strategies. It does not solve the PFIC problem for a US taxable investor.

Whichever route is chosen, the cost driver is coordination rather than entities. A standalone launch means separately sourcing and contracting Cayman counsel for formation, US securities counsel for selling restrictions and the subscription document, US tax counsel for the PFIC and UBTI analysis, an independent fund administrator whose eligibility screening must be configured to enforce all of it, an auditor, independent directors, AML officers, registered office and corporate services, and filing agents for CIMA, FATCA and CRS. Each is a separate engagement, fee, onboarding cycle and point of failure, falling on the manager at exactly the moment they should be raising. A platform launch consolidates that into one engagement in which the umbrella is already registered and the eligibility controls already exist and have already been run. The limits are real. A manager with an existing multi-fund programme already carries the infrastructure, an allocator may mandate a standalone vehicle, a bespoke feeder or master arrangement the umbrella cannot accommodate will not fit, and at sufficient scale the fixed cost is immaterial. The line-by-line comparison is in Cayman Fund Platform versus Standalone Launch.

Failure Modes and the Admission Decision Tree

The failure modes are specific, and several of them attach to the fund rather than to the investor who caused them.

Two things follow for drafting. First, the constitutional documents and the offering memorandum should contain an unqualified compulsory redemption power exercisable by the directors where an investor's continued holding would, or might, cause the fund to breach a securities law condition, lose an exclusion, or suffer a regulatory or tax detriment. This is the only remedy that works after the fact, and it needs to be drafted so it does not depend on the investor's cooperation. Second, transfer of interests should require directors' consent in all cases, because an unconsented transfer to a US person defeats the whole analysis. The role of the offering document in carrying these mechanics is set out in The Offering Memorandum Explained.

The administrator is the operational control point. Investor eligibility screening covers Regulation S status, accredited or qualified purchaser status, tax classification for FATCA and CRS, and the eighty thousand Cayman Islands dollar minimum under Mutual Funds Act (2025 Revision) section 4(3) where the fund is a registered mutual fund. All of that sits in the subscription process, not in the manager's inbox. A fund that runs subscriptions through a manager's own email will eventually admit someone it should not have.

The decision tree

The following routes an admission decision through the four layers in order. Work through the nodes in sequence, since each node states its outputs explicitly. The tree assumes an open-ended Cayman vehicle and does not decide the Cayman registration category, which is addressed at Node 7.

1. Node 1. Will any subscriber be a US person within the meaning of Rule 902(k) of Regulation S?
   If no, and you are confident the answer stays no: run a Regulation S-only offering, maintain Rule 902(c) directed selling efforts controls, confirm the Investment Company Act position at Node 6 on the basis of a nil US holder count, and go to Node 7.
   If yes, or if it is likely to become yes: go to Node 2.
2. Node 2. Are those US subscribers taxable, tax-exempt, or both?
   Tax-exempt only, meaning pension plans, endowments, foundations and IRAs: go to Node 3.
   Taxable only, meaning US-resident individuals, taxable entities, taxable trusts, and US citizens resident abroad: go to Node 4.
   Both: go to Node 5.
3. Node 3. US tax-exempt investors. The offshore Cayman corporate vehicle is the vehicle normally analysed for this category, because it is opaque and therefore blocks UBTI arising from acquisition indebtedness under Internal Revenue Code section 514. No second entity is indicated by tax alone. Go to Node 6 for the securities analysis, which still applies in full.
4. Node 4. US taxable investors. The offshore Cayman corporate vehicle is a PFIC as to these investors under sections 1291 to 1298. Three routes follow.
   (a) Do not admit them offshore, and establish a US onshore partnership as the vehicle for this category. Go to Node 5.
   (b) Admit them offshore and commit the fund to producing annual PFIC information statements enabling QEF elections under section 1295. Confirm with the administrator and auditor that this can be produced before agreeing to it.
   (c) If the entire expected investor base is US taxable, use a US onshore partnership only and do not form a Cayman vehicle. Exit the tree.
   Also test whether United States shareholders owning 10 per cent or more will in aggregate exceed 50 per cent, which would make the offshore vehicle a controlled foreign corporation under section 957.
5. Node 5. US taxable capital alongside non-US or US tax-exempt capital. Select the structure.
   US taxable capital small, uncommitted, or expected late: form the offshore vehicle now, draft for conversion, and revisit. Go to Node 6.
   US taxable capital committed but modest, offshore book established: mini-master, in which the Cayman fund trades directly and accepts a US onshore partnership as an investor. Go to Node 6.
   Both pools material and expected to grow, or the trading book must be single with clean allocation across both: full master-feeder, meaning a Cayman master with a US partnership election on Form 8832, a Cayman offshore feeder and a US onshore feeder. Go to Node 6.
6. Node 6. Investment Company Act exclusion. Ask whether every US beneficial owner can evidence qualified purchaser status under section 2(a)(51), which for a natural person means not less than US$5,000,000 in investments.
   Yes, and more than 100 US beneficial owners are expected: section 3(c)(7).
   Yes, but few US investors expected: either works, since 3(c)(7) preserves headroom and 3(c)(1) is simpler to document.
   No, because some US investors are accredited but not qualified purchasers: section 3(c)(1) only, subject to the 100-person limit counted on US resident beneficial owners, the 10 per cent look-through, and Rule 3c-5 for knowledgeable employees.
   In all cases the fund must not be making, and must not presently propose to make, a public offering. Then confirm the Securities Act route: Rule 506(b), accredited investors only, no general solicitation, Form D within 15 days of first sale. Go to Node 7.
7. Node 7. Cayman classification. If investors may redeem at their option, the vehicle is a mutual fund and registers under the Mutual Funds Act (2025 Revision). A registered fund under section 4(3) must carry a minimum aggregate equity interest purchasable by a prospective investor of eighty thousand Cayman Islands dollars, or its equivalent in another currency. If interests are not redeemable at the investor's option, it is a private fund under the Private Funds Act (2025 Revision), with the application due within twenty-one days after acceptance of capital commitments under section 5(1)(a) and no capital contributions accepted before registration under section 5(6). Go to Node 8.
8. Node 8. Manager status. Count US clients and US investors across all the manager's funds. Test the foreign private adviser definition in Advisers Act section 202(a)(30). It requires no place of business in the United States, and fewer than 15 clients and investors in the United States in private funds advised by the adviser. It also requires aggregate assets under management attributable to those US clients and investors of less than US$25,000,000, and no holding out to the public in the United States as an investment adviser. Then test the private fund adviser exemption in Rule 203(m)-1. For an adviser with its principal office outside the United States, that rule requires all assets managed at a place of business in the United States to be solely private fund assets with a total value of less than US$150,000,000. Confirm whether Form ADV, exempt reporting adviser status or full registration follows.
9. Node 9. Document the controls. Compulsory redemption power in the articles and offering memorandum; directors' consent required for all transfers; three separate investor status questions in the subscription document, being Rule 902(k), Rule 501(a) or section 2(a)(51), and section 7701(a)(30); ongoing eligibility re-testing; and the administrator instructed to enforce all of the above at subscription and at transfer.

Key Takeaways

• Decide which categories of US capital you will accept before you draft anything, because the investor category dictates the entity map rather than the other way round.
• Build three separate status questions into the subscription document, covering Rule 902(k), Rule 501(a) or section 2(a)(51), and Internal Revenue Code section 7701(a)(30), and re-test eligibility on an ongoing basis rather than only at subscription.
• Choose between section 3(c)(1) and section 3(c)(7) at the outset on the evidence your first US investors can actually produce, since moving from one to the other later requires redemptions or a new vehicle.
• If you intend to rely on Regulation S, put the directed selling efforts controls in place before marketing begins, including website access gating, and take US counsel's view on any US-facing activity.
• Do not build a master-feeder speculatively; instead launch the offshore vehicle and draft the constitutional documents and offering memorandum so a master and a US feeder can be added when onshore capital is committed.
• Give the directors an unqualified compulsory redemption power and require board consent for every transfer, then instruct the administrator to enforce eligibility screening at subscription and at transfer.

Frequently Asked Questions

Can US investors invest in a Cayman fund?

There is no Cayman prohibition, because the Mutual Funds Act (2025 Revision) does not classify investors by nationality. Whether a particular US person may be admitted is determined by US law: an exemption from Securities Act registration, typically Rule 506(b) of Regulation D; an exclusion under Investment Company Act section 3(c)(1) or 3(c)(7); and a tax analysis that differs sharply between US taxable and US tax-exempt investors. Each requires US counsel's confirmation on the specific facts.

What is the difference between Regulation D and Regulation S for an offshore fund?

Regulation S (Rules 901 to 905) is a safe harbour for offers and sales made outside the United States, requiring an offshore transaction under Rule 902(h) and no directed selling efforts in the United States under Rule 902(c). Regulation D Rule 506(b) is a domestic exemption permitting sales to unlimited accredited investors and up to 35 sophisticated non-accredited purchasers, with no general solicitation. Regulation S does not permit US sales, whereas Rule 506 does.

Should my Cayman fund be 3(c)(1) or 3(c)(7)?

Section 3(c)(1) excludes a fund whose securities are beneficially owned by not more than 100 persons and which is not making and does not presently propose to make a public offering. Section 3(c)(7) excludes a fund owned exclusively by qualified purchasers, on the same public offering condition. Section 3(c)(1) accepts accredited investors but caps the count, while 3(c)(7) removes the cap and requires each natural person to own not less than US$5,000,000 in investments.

What is the difference between an accredited investor and a qualified purchaser?

Accredited investor is a Securities Act concept in Rule 501(a). For a natural person it means net worth over US$1,000,000 excluding primary residence, or income over US$200,000 individually or US$300,000 with a spouse or spousal equivalent, in each of the two most recent years with a reasonable expectation of the same. Qualified purchaser is an Investment Company Act concept in section 2(a)(51), meaning a natural person owning not less than US$5,000,000 in investments. Every qualified purchaser is accredited, and the converse is not true.

Can a Cayman fund accept US tax-exempt investors?

US tax-exempt investors such as pension plans, endowments, foundations and IRAs are analysed differently from US taxable investors, because a Cayman corporate vehicle is opaque for US tax purposes and therefore blocks unrelated business taxable income arising from acquisition indebtedness under Internal Revenue Code section 514. They remain US persons for Regulation S, Regulation D and FATCA. The securities and Investment Company Act analysis is unchanged and applies in full.

Do I need a master-feeder structure for US investors?

Only where you expect both US taxable capital and non-US or US tax-exempt capital. US taxable investors are generally routed to a US onshore partnership, because a Cayman corporate fund is a passive foreign investment company under Internal Revenue Code sections 1291 to 1298. A single offshore vehicle is usually sufficient for non-US and US tax-exempt investors. A Cayman master fund is separately registrable with CIMA and carries its own annual fee of CI$3,075 under the schedule effective 1 January 2026.