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On 8 January 2020, the Cayman Islands Government ("CIG") published a draft Private Funds Bill, 2020 (the "Bill") which provides for the registration of closed-ended funds (termed 'private funds') with the Cayman Islands Monetary Authority ("CIMA").
The Bill, reflecting the Cayman Islands' commitment as a co-operative jurisdiction, is responsive to EU and other international recommendations and covers similar ground to existing or proposed legislation in a number of other jurisdictions.
As the Bill will not be considered by the Cayman Islands Legislative Assembly until 30 January 2020, the details in the Bill outlined below remain subject to change.
Definition of Private Fund
A vehicle will be a 'private fund' where:
(a) its principal business is the offering and issuing of its investment interests the purpose or effect of which is the pooling of investor funds with the aim of spreading investment risks and enabling investors to receive profits or gains from such vehicle's investments;
(b) its investment interests carry an entitlement to participate in the profits or gains of the vehicle and are not redeemable or repurchasable at the option of the investor, i.e. are closed-ended;
(c) its purpose or effect is the pooling of investor funds with the aim of spreading investment risks;
(d) the investors do not have day-to-day control over the investments;
(e) its investments are managed as a whole by or on behalf of the operator, directly or indirectly, for reward based on the assets, profits or gains of the vehicle; and
(f) it does not constitute a 'non-fund arrangement', as listed in the schedule to the Bill.
Which private funds are caught?
The Bill will apply to private funds set up as Cayman Islands partnerships, companies, unit trusts and limited liability companies unless out of scope on the basis set out in the Bill.
The Bill will also apply to non-Cayman Islands private funds which make an 'invitation to the public in the Islands'.
The Bill sets out a registration process for private funds which involves filing of prescribed details with CIMA and payment of an annual fee.
The Bill also includes provisions relating to a private fund being able to elect to be registered as a 'restricted scope private fund'.
At what point must a new private fund be registered?
The Bill provides that a new private fund which has to comply with the law must (i) submit its registration application to CIMA within 21 days after its acceptance of capital commitments from investors for the purposes of investments and; (ii) be registered by CIMA before it accepts capital contributions from investors in respect of investments.
Helpfully, the Bill clarifies that oral or written communications and agreements can be entered into with potential investors who are high net worth persons or sophisticated persons prior to the new private fund's registration application being filed with CIMA.
Timing of registration for existing private funds that have to comply with the law will depend upon the transitional provisions discussed below.
What documentation is required to register with CIMA?
The Bill refers to 'prescribed details' being filed in respect of the private fund. To reflect the commercial flexibility of the closed-ended fund industry, the Bill does not require an offering memorandum (or similar) in relation to a private fund or impose any requirements on the contents of a private fund's offering materials (if any).
Requirements for Private Funds
The Bill's headline requirements for a private fund that is subject to the law include provisions relating to valuation of assets, safekeeping of fund assets, cash monitoring and identification of securities which can be summarised as follows:
• Valuation of assets; the Bill requires appropriate and consistent valuation procedures and that valuations be carried out at least annually. Such valuation can be performed by any of the manager or operator of the private fund (subject to functional independence or conflicts management requirements), an independent valuer or an administrator.
• Safekeeping of fund assets; the Bill requires a custodian (i) to hold private fund assets which 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 (ii) to verify title to, and maintain records of, fund assets. Where having a custodian is neither practical nor proportionate given the nature of the private fund and the type of assets held, title verification can be carried out by any of the manager or operator of the fund (subject to functional independence or conflicts management requirements), an independent administrator or another independent third party.
• Cash monitoring; the Bill requires that monitoring of cash flows and checking of cash accounts and receipt of investor payments be carried out by any of the manager or operator of the private fund (subject to functional independence or conflicts management requirements), an independent administrator, independent custodian or other independent third party.
• Identification of securities; the Bill requires a private fund that regularly trades securities, or holds them on a consistent basis, to maintain a record of the identification codes of the securities in question.
The Bill also includes a headline requirement that all private funds which are subject to the law have their accounts audited annually by a Cayman Islands based auditor.
Timing and Transition for Registration of both New and Existing Private Funds
The Bill does not contain detailed timing provisions for new private funds or transitional provisions for existing private funds, leaving such matters to be covered by separate regulations.
Given that CIMA registration is a new requirement for private funds, and that there are significant numbers of private funds already in existence and being formed annually in the Cayman Islands, we anticipate that CIG will take into account the logistical and commercial aspects of the registration process both for new private funds and for existing private funds in order to make the transition to this new registration framework as smooth as possible for the funds industry. In this regard we would expect differing timetables for registration of new private funds going forward and for registration of private funds which are in existence at the time that the Bill becomes law.
If you would like further information, please contact your regular Maples Group contact or any of the contacts listed below.