1. MARKET OVERVIEW

1.1 State of the Market
The Cayman Islands is a popular domicile for globally managed private equity, hedge and hybrid funds due to its tax neutral status, its flexible structuring options and its established and experienced financial services sector and professional service providers. Additionally, the Cayman Islands is recognised as an attractive jurisdiction for investment funds due to its English-based legal system, established judiciary and absence of political or sovereign concerns.

In particular, the Cayman Islands is the jurisdiction of choice for US sponsors structuring funds for US tax-exempt investors and non-US investors. Cayman Islands trusts and other vehicles are frequently used as investment vehicles for investors in Asia, including China and Japan.

The majority of investment funds established in the Cayman Islands are private non-retail funds.

2 . ALTERNATIVE INVESTMENT FUNDS

2.1 Fund Formation

2.1.1 Fund Structures
Entity options available for structuring investment funds include exempted limited partnerships, exempted companies, limited liability companies and trusts. Private equity funds are typically structured as exempted limited partnerships, and hedge funds make use of both exempted company and exempted limited partnership vehicles in standalone and master-feeder structures. Cayman Islands trusts and other vehicles are frequently used as investment vehicles for investors in Asia, including China and Japan. The limited liability company is becoming the vehicle of choice for general partner and/or management vehicles.

A key difference between an exempted limited partnership and an exempted company is that, notwithstanding registration, an exempted limited partnership is not a separate legal person distinct from its partners. An exempted limited partnership must act through its general partner, and all agreements and contracts must be entered into by or on behalf of the general partner (or any agent or delegate of the general partner) under general legal principles of agency on behalf of the exempted limited partnership. Any right or property of the exempted limited partnership that is conveyed to or vested in or held either on behalf of the general partner or in the name of the exempted limited partnership is an asset of the exempted limited partnership held upon trust in accordance with the terms of the relevant law.

2.1.2 Common Process for Setting Up
Investment Funds
The formation and registration processes in the Cayman Islands are streamlined and efficient. Exempted companies are formed upon the filing of a declaration and the memorandum and articles of association with the Registrar. Exempted limited partnerships and limited liability companies are formed upon the execution of the relevant operating agreement and the filing of a registration statement with the Registrar.

With limited exceptions, all open-ended funds must register with the Cayman Islands Monetary Authority (CIMA) under the Mutual Funds Act (As Revised), and all closed-ended funds must register with CIMA under the Private Funds Act (As Revised).

To register an open-ended fund, the requisite application form and offering memorandum must be submitted to CIMA in advance of the fund launch and directors must be registered under the Director Registration and Licensing Act. The administrator and auditor of the fund must submit consent letters confirming responsibility for these important roles.

To register a closed-ended fund, the requisite application form and offering memorandum (or summary of terms) must be submitted to CIMA within 21 days of a fund accepting capital commitments or, if earlier, prior to the fund receiving any capital contributions for the purpose of investments. The administrator and auditor of the fund must submit consent letters confirming responsibility for these important roles.

2.1.3 Limited Liability
The Cayman Islands legal system is based on well-recognised legal concepts founded in English law, including limited liability and separate corporate personality, which underpin the corporate, partnership and trust vehicles used as collective investment schemes, all of which have been tried and tested and found to be robust during the global financial crisis.

As a general rule, in the absence of a contractual arrangement to the contrary, the liability of a shareholder of a Cayman Islands company that has been incorporated with limited liability and with a share capital is limited to the amount from time to time unpaid in respect of the shares it holds. A Cayman Islands company has a legal personality separate from that of its shareholders, and is separately liable for its own debts due to third parties.

A Cayman Islands exempted limited partnership does not have a legal personality separate from its partners. General partners have unlimited liability for all the debts and obligations of such partnerships by virtue of the Cayman Islands Exempted Limited Partnership Act (As Revised). Fund investors typically subscribe for limited partnership interests on which their liability is generally limited to their contributed capital and outstanding capital commitment (if any). 

However, there are limited circumstances under Cayman Islands law whereby an investor who takes part in the conduct of the business of the partnership and holds itself out as a general partner to third parties may assume unlimited liability for the debts and obligations of the partnership. Exempted limited partnerships are the most common type of Cayman Islands vehicle used in private equity fundraising, and investors in such funds commonly seek Cayman Islands legal opinions in respect of the limited liability nature of their partnership interest, amongst other things.

2.1.4 Disclosure Requirements
Every mutual fund registered with CIMA (unless that fund is a "master fund" as defined under the Mutual Funds Act or a "Limited Investor Fund" – see 2.3.1 Regulatory Regime) is required to issue an offering document that must describe the equity interests in all material respects and contain such other information as is necessary to enable a prospective investor to make an informed decision as to whether or not to invest in the fund. CIMA has issued rules regarding the content of offering documents for registered mutual funds and rules regarding the content of marketing materials for registered private funds.

All fund offering documents are subject to the pre-existing statutory obligations with regard to misrepresentation and the general common law duties with regard to the proper disclosure of all material matters.

2.2 Fund Investment

2.2.1 Types of Investors in Alternative Funds
The Cayman Islands is a popular domicile for globally managed private equity, hedge and hybrid funds due to its tax neutral status, its flexible structuring options and its established and experienced financial services sector and professional service providers. In particular, the Cayman Islands is the jurisdiction of choice for US sponsors structuring funds for US tax-exempt investors and non-US investors. Cayman Islands trusts and other vehicles are frequently used as investment vehicles for investors in Asia, including China and Japan.

To view the full article, please click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.