Eve Kosofsky and Edward Quinn of law firm Carey Olsen outline the provisions of the new Jersey Unregulated Funds regime that was brought into effect this week.
As a politically stable and tax neutral jurisdiction with more than 40 years’ accumulated experience as an international finance centre, Jersey has gained a strong reputation as a prime location in which to establish collective investment funds. This month, at the recommendation of the Jersey Financial Services Commission, Jersey introduced an Unregulated Funds regime that allows investment funds to be established without regulatory approval under Jersey’s funds legislation.
There are two categories of Unregulated Funds:
- Unregulated Eligible Investor Funds, open- or closed-ended and restricted to sophisticated investors, including those investing a minimum amount equivalent to USD1m.
- Unregulated Exchange Traded Funds, closed-ended and listed on an approved stock exchange; the 50 pre-approved exchanges include the London, New York and Irish stock exchanges as well as Aim, Nasdaq, Euronext and the Channel Islands Stock Exchange.
There is no audit requirement, no need for Jersey service providers and no investment or borrowing restrictions imposed on an Unregulated Fund, which may be structured as a corporate entity, a limited partnership or a unit trust, nor is there any limitation on the number of investors such a fund may have.
Jersey has been experiencing record growth in fund assets under administration. The introduction of Unregulated Funds completes Jersey’s offering of investment funds and builds on a suite of carefully targeted changes in the island’s regulatory regime that have made it even more attractive for the establishment of investment funds.
Other changes now also make it even easier for both non-Jersey funds and Jersey funds to engage Jersey administrators, investment managers and custodians. The revision of Jersey’s funds regime followed detailed consultation with industry in Jersey and the United Kingdom and a benchmarking exercise against other relevant jurisdictions. The impetus behind the consultation exercise is to position Jersey as the jurisdiction of choice for offshore funds.
An Unregulated Eligible Investor Fund may be sold to or held by an unlimited number of eligible investors, does not need to produce audited accounts, may be listed provided that the exchange permits transfer restrictions to ensure that only eligible investors are allowed to invest in the fund, and must obtain written acknowledgement from each investor confirming their acceptance of the risks involved in the fund (typically dealt with on the application form).
Clearly, the definition of an eligible investor is crucial. This category includes investors:
- who make a minimum initial investment or commitment of USD1m or equivalent.
- whose ordinary business or professional activity includes dealing in, managing, underwriting or giving advice on investments, or an employee, director, consultant or shareholder of such a person.
- who is an individual with a net worth of more than USD10m or equivalent, calculated alone or jointly with their spouse and excluding a principal place of residence.
- which is a company, limited partnership, trust or other unincorporated association and which either has a market value of USD10m or equivalent (calculated either alone or together with its associates), or has only eligible investors as members, partners or beneficiaries.
- which is, or acts for, a public-sector body,
- which is the trustee of a trust which either was established by an eligible investor or is established for the benefit of one or more eligible investors.
- which is, or is an associate of, a service provider to the fund, or an employee, director, consultant or shareholder of such a service provider or associate and who acquires the investment as remuneration or reward.
The regime also expressly recognises that a discretionary investment manager may make investments on behalf of investors who do not qualify as eligible investors, provided that it is satisfied that the investment is suitable and the underlying investor is able to bear the economic consequences of the investment.
An Unregulated Exchange Traded Fund must be closed-ended, must be listed on one or more approved stock exchanges, initially comprising 50 exchanges in more than 40 countries, does not need to produce audited accounts, has no minimum investment level and no limit on the number of investors, and must include a specified investment warning in its offer documents notifying investors that the fund is not regulated in Jersey.
Unregulated Exchange Traded Funds are expected to be particularly attractive as a technical listing may not be overly onerous to achieve and may expand the fund’s potential investor base.
Once the fund vehicle is established, no further regulatory approvals of any kind will be required if the fund meets the requirements for qualifying as an Unregulated Fund.
Unregulated Funds can be established as a Jersey company, protected cell company or incorporated cell company, as a limited partnership with at least one general partner which is a Jersey company or as a unit trust with at least one trustee or manager which is a Jersey company. PCCs and ICCs offer significant advantages and recently introduced changes further increase their flexibility, while maintaining the bankruptcy remoteness of each cell.
The usual application procedure for incorporating a company or registering a limited partnership will apply, each of which can often be completed on the same working day. Using a unit trust avoids even these requirements. Jersey public companies will still be subject to an audit requirement under the companies law.
Only new funds will be able to be established as Unregulated Funds; existing Jersey funds will not be able to convert to the new regime. Unregulated Funds must file a notice with the commission confirming that the relevant eligibility requirements are met. An Unregulated Fund has no obligation to have any Jersey-resident directors or any Jersey-based administrator, custodian or other service provider.
Jersey’s current suite of investment funds also includes:
- Expert Funds, aimed at expert investors, including those investing a minimum of USD100,000 or equivalent, which benefit from a three-day approval process.
- Listed Funds for closed-ended corporate funds that are listed on recognised stock exchanges or markets, also benefit from a three-day approval process and have no minimum investment requirement.
- very private schemes with 15 or fewer investors where the commission generally does not review any scheme documents.
- private schemes with 50 or fewer offerees, where the commission’s approval of the status of the functionaries, fund structure and offering memorandum will be required, unless the fund is established as an Expert Fund.
Other retail funds continue to be regulated on a case-by-case basis, while recognised funds are designed to be marketed freely to the UK public.
The introduction of Unregulated Funds is yet another stage in the modernisation of the legal framework for investment funds, further enhancing Jersey’s reputation as a place in which to conduct business.
