Setting up a Digital Asset Management Company
Updated: Mar 2
Cayman Islands Edition
Whether you are considering setting up a digital asset fund or managing, advising or selling securities linked to digital assets, then it is important that you establish an investment management company or investment adviser.
The Cayman Islands is an ideal choice of jurisdiction for establishing an investment management company, for the following key reasons:
(i) Zero taxes - no corporation, income, dividend, withholding, capital gains or any other taxes.
(ii) Compliments a fund offering if you have or are in the process of launching a fund or range of funds
(iii) Unlike certain jurisdictions, it is relatively quick to establish and no minimum capital requirements
(iv) Ability to relocate and establish operations in the Cayman Islands, which of itself has many benefits and forms part of a separate discussion.
The Securities Investment Business Act (2020 Revision), as amended, (the Act) provides for the licensing and control of 'securities investment business' carried on in, or from, the Cayman Islands. Under the Act, a person shall not carry on or purport to carry on securities investment business without being either registered or licensed under the Act, unless exempt as a non-registrable person.
Who does the Act apply to?
The Act applies to companies, limited liability companies, foreign companies, partnerships or limited liability partnerships incorporated or registered under the laws of the Cayman Islands through which securities investment business is carried on (whether or not that securities investment business is carried on in the Cayman Islands). It also applies to foreign entities that have established a place of business in the Cayman Islands through which the relevant activity constituting the securities investment business is carried on.
What is securities investment business?
For the purposes of the Act, a person carries on securities investment business if that person is engaged in the course of business in any of the following activities:
dealing in securities as an agent or, where the relevant person holds himself out as dealing in securities for other persons, as principal;
arranging deals in securities with a view to another person dealing in securities;
participating in the arrangements for dealing in securities;
discretionary management of securities belonging to another person;
advising a person on securities if:
◦ the advice is given to that person in their capacity as an investor or as an agent for an investor; and
◦ the advice is on the merits of dealing in the security or of exercising a right conferred by a security to deal in securities;
managing or marketing an EU Connected Fund; or
acting as a depositary for an EU Connected Fund.
Definition of Securities
The term 'securities' is widely defined in the Act and includes shares, partnership interests, trust units, debtinstruments, warrants, options, futures, contracts for differences and virtual assets.
Who will need to register with CIMA as a registered person?
The following persons need to register with CIMA as registered persons:
• companies that carry on securities investment business exclusively for one or more companies within the same group;
• persons who carry on securities investment business exclusively for:
◦ sophisticated persons or high net worth persons; and/or
◦ companies, partnerships or trusts (whether or not regulated as a mutual fund) of which the shareholders, limited partners or unitholders are sophisticated persons or high net worth persons; and who have a registered office or a place of business in the Cayman Islands for which services are provided by a person licensed to provide such services; and
• persons who would be required to be licensed under the Act, but who are regulated in relation to securities investment business by a recognised overseas regulatory authority in the country where that business is conducted.
Definition of Sophisticated Persons & High Net Worth Persons
Sophisticated Persons means "certain regulated persons and those persons who, due to their knowledge and experience, are regarded as being capable of evaluating proposed transactions and where the minimum single transaction value is US$100,000 or its
equivalent in any other currency."
High Net Worth Persons means "(a) an individual whose net worth is US$1,000,000 or its equivalent in any other currency or (b) any person with total assets of not less than US$5,000,000 or its equivalent in any other currency.
What is the application process for registration?
In order to register, a completed application must be submitted to CIMA via an online portal, together with the registration fee of CI$5,000 (US$6,098) and any other information requested by CIMA. Registration is subject to the applicant:
being in good standing;
having a minimum of two (2) directors ;
having directors, senior officers and shareholders who are deemed by CIMA to be fit and proper persons; and
having directors in good standing that are currently registered or licensed in accordance with the Director Registration and Licensing Act, 2014 (as amended, the DRLA.). Applicants will also be required to provide details of their anti-money laundering (AML) compliance and reporting officers.
What are the ongoing requirements?
The key ongoing requirements relating to registered persons are summarised below.
Direction and management
As detailed above, a registered person must have a minimum of two directors, partners, managers or managing members (as applicable) and, where the registered person is a Cayman company or LLC, at least two directors or managers must be registered or licensed in accordance with the DRLA.
Segregation of property
Registered persons are required to account separately for their own funds and property, and the funds and property of each client.
Annual declaration and fee
Registered persons are required to file an annual declaration and pay an annual fee of CI$5,000 (US$6,098) on or before 15 January in each year following the year of registration. Failure to pay the annual fee will result in a surcharge of one twelfth of the fee for every month that the fee is not paid.
Registered persons are subject to scrutiny by CIMA in terms of their operation and control. In particular, CIMA must be notified within 21 days of:
any change in the information filed by the registered person in its application or annual declaration;
any change in the directors or senior officers of a registered person;
the issue, voluntary transfer or disposal of the legal or beneficial interest in any shares or interests in a registered person; and
a registered person ceasing to carry on in the Cayman Islands any relevant regulated activity (with notification of its intention to deregister to be made in the prescribed form).
Will the economic substance regime apply?
The International Tax Co-operation (Economic Substance) Act (2020 Revision), as amended, came into force on 1 January 2019 and imposes economic substance requirements on companies and limited liability companies in the Cayman Islands. Registered persons under the Act will be required to consider whether they fall within the scope of the Cayman Islands economic substance regime.
CV5 Capital can assist with all aspects of setting up your investment management company, registration, provision of experienced CIMA registered directors, economic substance and other support services. We work extensively with digital asset managers, digital asset funds and the worldwide ecosystem focused on digital asset developments. Contact us for more information: firstname.lastname@example.org