Cayman Fund Formation - Digital Assets, Crypto & Blockchain Funds
When contemplating launching a digital asset fund, it is important to understand the regulatory requirements to launch and ongoing expenses. This will help you factor in the total expense ratio of your fund, the optimal legal structure, jurisdictional benefits of domiciling your fund in one country over another, service providers you will need and so on.
Open-ended funds (digital asset hedge funds, hedge funds, retail funds)
The Mutual Funds Act (for open-ended funds) and the Private Funds Act (for closed-ended funds) are the two main laws relevant to the regulation of investment funds in the Cayman Islands. The Cayman Islands Monetary Authority (CIMA) is the regulatory body responsible for compliance with these laws and related regulations and has broad powers of enforcement.
The Mutual Funds Act 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 …”
There are four main categories of regulated fund, given below.
Registered mutual funds (MFA Section 4(3))
Funds that require a minimum initial investment of at least US$100,000 (i.e., those targeted at institutional or sophisticated high net worth investors) or are listed on an approved stock exchange may be registered on filing the following documentation with CIMA:
a prospectus that properly describes the equity interest (i.e., shares) and contains the information necessary to enable a prospective investor to make an informed decision as to whether or not to subscribe;
a registration form (Form MF1) and letters of consent from the auditors and administrator;
an affidavit from the directors of the fund;
a minimum of two CIMA registered directors;
the appointment of individuals to act as the AMLCO, MLRO and Deputy MLRO;
evidence of incorporation; and
the prescribed registration fee and the initial administrative filing fee.
The majority of regulated funds in the Cayman Islands fall into this category. We have advised on the launch of regulated funds that invest in whole or in part in digital assets. There is no requirement that the administrator of a registered fund is resident in the Cayman Islands and the emphasis is on self-regulation. The fund must, however, have locally approved auditors.
2. Limited Investor Funds (typically the choice for emerging managers): The scope of regulation extends to Cayman incorporated or established master funds that have one or more CIMA-regulated feeder funds and hold investments and conduct trading activities. It also includes those funds with 15 investors MFA Section (4)(4) or less, the majority of whom have the power to appoint and/or remove the operators of the investment fund. Limited Investor Funds are now required to be registered with, and are regulated by, CIMA.
3. Administered mutual funds (MF Act section 4(1)(b))
Funds, including those that permit a minimum initial investment of less than US$100,000, may be established by appointing a licensed mutual fund administrator to provide the principal office of the fund in the Cayman Islands. The administrator has primary regulatory responsibility for the administered fund and has a statutory duty to ensure that the fund is properly administered and that the promoters are of sound reputation. The administrator has a statutory obligation to notify CIMA if it knows or has reason to believe that a fund for which it provides the principal office is or is likely to become insolvent or is carrying on business in a manner that is or is likely to be prejudicial to its investors or creditors. The auditors have a similar statutory obligation as described above for registered funds. Similar documentation to that required for a registered fund must be filed with CIMA by the licensed administrator in respect of an administered fund and the prescribed fee paid.
4. Licensed mutual funds (MFL Section 4(1)(a))
Funds (typically retail funds) that are established and operated by large, well-known and reputable institutions may apply for a mutual fund licence. CIMA must be satisfied that the promoting institution is of sound reputation and that the fund will be properly administered by fit and proper persons with sufficient expertise before a licence will be granted.
Audit Requirement: Each CIMA registered mutual fund is required to have its accounts audited annually by a firm of auditors on the CIMA approved list of auditors and file such audited accounts with CIMA within six months of the end of each financial year of the mutual fund (along with an Financial Annual Return).
Single Investor Fund: Mutual funds that are established for a sole investor and do not involve the pooling of investor funds fall outside the regulatory framework of the Mutual Funds Act. Nonetheless, a mutual fund with a single investor can apply for voluntary registration to, among other things, benefit from the status of being a regulated fund.
Cayman Islands laws and regulations do not impose restrictions on, or prescribe rules for investment strategies of open-ended funds, or their use of leverage, shorting or other techniques.
Registration of Directors: Directors of mutual funds structured as exempted companies, managers of investment funds structured as LLCs and directors of general partners of investment funds structured as an exempted limited partnership (in each case, wherever in the world these persons are located, not just to Cayman Islands-based directors) regulated by CIMA are required to register with CIMA under the Directors Registration and Licensing Law (DRLL).
Closed-ended funds (Venture Capital, Private Equity, Real Estate)
The Private Funds Law requires the registration of closed-ended funds (typically, investment funds that do not grant investors with a right or entitlement to withdraw or redeem their shares or interests from the fund upon notice) with CIMA. The Private Funds Act applies to private equity funds, real estate funds, and other types of closed-ended funds set up as Cayman Islands limited partnerships, companies (including SPCs), unit trusts and limited liability companies. The Private Funds Act also applies to non-Cayman Islands private funds carrying on business or attempting to carry on business in or from the Cayman Islands.
In addition to registration with CIMA, the Private Funds Act also imposes the following regulatory requirements to be met by private funds:
Each private fund is required to have its accounts audited annually by a firm of auditors on the CIMA approved list of auditors and file such audited accounts with CIMA within six months of the end of each financial year of the private fund (along with a financial annual return in CIMA's prescribed form).
Valuation of assets
A private fund must have appropriate and consistent procedures for the purposes of proper valuations of its assets, which ensures that valuations are conducted in accordance with the requirements in the Private Funds Act. Valuations of the assets of a private fund are required to be carried out at a frequency that is appropriate to the assets held by the private fund and, in any case, on at least an annual basis.
Safekeeping of fund assets
The Private Funds Act requires a custodian: (1) to hold the private fund’s assets that are capable of physical delivery or capable of registration in a custodial account except where that is neither practical nor proportionate given the nature of the private fund and the type of assets held; and (2) to verify title to, and maintain records of, fund assets.
The Private Funds Act requires a private fund to appoint an administrator, custodian or another independent third party (or the manager or operator of the private fund):
to monitor the cash flows of the private fund;
to ensure that all cash has been booked in cash accounts opened in the name, or for the account, of the private fund; and
to ensure that all payments made by investors in respect of investment interests have been received.
Identification of securities
A private fund that regularly trades securities or holds them on a consistent basis must maintain a record of the identification codes of the securities that it trades and holds and make this available to CIMA upon request.
About CV5 Capital
CV5 Capital, is a leading fund services group focused on digital asset fund formation, blockchain funds, legal set up and operational structuring. We handle the entire process from advising on the optimal fund structure for your strategy all the way through to set-up, the appointment of best-in-class service providers and ongoing governance support. We also provide platform solutions for seamlessly launching institutional grade digital asset funds. Whatever your proposed fund strategy or terms might be, feel free to contact us for an informal discussion. Contact us: email@example.com
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