By James Lasry, Hassans – Since 2005 with advent of the Financial Services (Experienced Investor Funds) Regulations 2005, recently updated to Financial Services (Experienced Investor Funds) Regulations 2012 (“EIF Regs”) Gibraltar’s funds industry has experienced positive and qualitative growth. As the majority of Gibraltar’s funds are Experienced Investor Funds (“EIFs”) this article will focus primarily on that regime.
The investors who are eligible to invest in EIFs include investors who:
1. Have EUR1million in assets besides the value of their residential home; or
2. In their ordinary employment activity are investment professionals; or
3. Invest an aggregate of EUR100,000 in one or more EIFs.
The EIF Regulations were recently amended to add to the following non-cumulative categories
4. Investors who are classed as professional investors under MiFID; or
5. Investors who invest EUR50,000 in an EIF and are advised to do so by an investment adviser that is regulated to European standards.
There is no minimum or maximum amount of investors or investment necessary for EIFs. Gibraltar EIFs can trade as private companies but are not restricted to a maximum number of investors. Although it is possible to set up an EIF as a PLC it is generally no longer necessary to do this. Gibraltar EIFs do not have any legislative restrictions on accepting US investors provided that the fund and its manager adhere to the relevant US securities laws.
Since Gibraltar funds can trade as private companies, they are eligible under US law to do a “check the box” election and thus be treated, for US tax purposes, as a partnership. In some cases this obviates the need to set up a US feeder fund structure for US investors.
Promoter / Investment manager / Custody requirements
There are no promoter requirements in Gibraltar beyond the ordinary due diligence and KYC requirements. A fund can be self-managed (by its board of directors) or it can be managed by a third party investment manager or by the directors on advice from an investment adviser. The investment manager must comply with the legislation from the jurisdiction where it acts. If the advisor or manager is in Gibraltar or another European jurisdiction, it will generally require a MiFID license. If it is in any other jurisdiction, such as Switzerland or the Caribbean jurisdictions, it is sufficient from a Gibraltar perspective that it comply with the legislation in those jurisdictions. There is no requirement for a Gibraltar based investment manager or adviser.
At present, there is no legislative requirement for a Gibraltar based custodian or prime broker. This is likely to change in July 2013 when the Alternative Investment Fund Manager Directive is enacted into local legislation, with respect to funds to which the Directive applies (i.e. larger than EUR100million or EUR500million for Private Equity Funds or smaller funds that wish to opt in to the benefits of the Directive). Smaller funds that are exempt from the provisions of the Directive will therefore be able to continue to use custodians from any jurisdiction that is considered acceptable to the Gibraltar Regulator.
Directors and offering documents
A key element of the new EIF Regulations is the requirement for 2 directors who are resident in Gibraltar and who are licensed by the Financial Services Commission to act as EIF directors. There need not be a majority of authorised directors on the board of the fund. Other directors may be resident in any other jurisdiction subject to fiscal considerations. The presence of the authorised directors allows for the flexible EIF regime as they, in essence, act as the Regulator’s “eyes and ears” on the board of every fund thus ensuring the proper management and operation of each fund.
Each fund must produce an offering document that outlines the service providers, investments, risks, exit strategies, and such general information as is standard in this industry. The offering document is the document which lists the information that an investor would reasonably expect to have before making an informed investment decision.
Authorisation and regulation
The authorisation process for EIFs is probably the EIF regime’s most attractive element. Gibraltar is possibly the only jurisdiction in the European Union that allows for a fund to be launched on the basis of a legal opinion, provided that the fund’s documentation is submitted to the Regulator within 10 business days of the fund’s launch. There is also an optional pre-approval channel of authorisation whereby the documents can be submitted to the Regulator before launch and the Regulator has 10 business days to respond. The majority of Gibraltar’s funds, however, still opt for the pre-authorisation launch with the caveat that any unexpected or unusual structures or elements are generally discussed with the Regulator beforehand. Going forward, the fund must submit its audited accounts to the Regulator within 6 months of its financial year end along with a form containing general compliance and statistical information.
An EIF has an obligation to notify the Regulator of any material changes within 20 business days. There is an obligation to notify the Regulator of any breaches to regulations immediately.
The fund administrator plays a central role in the ongoing communication with the Regulator. Indeed they are often the primary interface with the Regulator. There is a requirement under the EIF Regs to use a Gibraltar based fund administrator. This was recently relaxed under the new Regulations to allow non-Gibraltar based fund administrators who are approved by the FSC and by the Minister with responsibility for Financial Services. It is anticipated that the larger internationally recognised fund administrators will be permitted to administer Gibraltar based EIFs. It is important to note that this is not an authorisation procedure but a much shorter approval process by the local authorities. In such cases the foreign administrator would have to appoint a local agent for service of documents as it is not otherwise required to maintain any presence in Gibraltar.
It is important to note that when a fund is established outside of Gibraltar and redomiciles to Gibraltar it may retain its foreign administrator. This will be of particular benefit to funds wishing to redomicile to the European Union and yet have legitimate concerns about retaining continuity with their service providers. Investors in funds in jurisdictions that have similar although not identical experienced investor regimes will, with approval of the Regulator either on a fund by fund or jurisdiction by jurisdiction basis, be deemed to be experienced investors under the EIF Regs.
Since EIFs are targeted to experienced investors, there are no statutory investment or borrowing restrictions save that the fund must state in its offering memorandum what its policy is with respect these issues.
Gibraltar funds are generally structured to be tax neutral. This can be achieved in two possible ways. The first is by obtaining a certificate from the Commissioner of Income Tax on the basis that the fund is a Collective Investment Scheme. Under this certificate the fund is not subject to corporate tax on investment income. There is no capital gains tax in Gibraltar. The other option is that the fund may elect to be taxed under Gibraltar’s 10% territorially based corporate tax regime. This latter option is often used for Real Estate or Private Equity funds that wish to avail themselves of the European Parent Subsidiary Directive and which need to demonstrate that they are taxable in order to gain the benefits of that directive. These funds are nevertheless unlikely to be liable to any Gibraltar corporate tax as Gibraltar’s territorial corporate tax regime only taxes profits of a trade which are accrued in or derived from Gibraltar sourced assets. Unless a fund invests in physical assets located in Gibraltar it is unlikely it will produce any taxable income in Gibraltar.
Investment Managers on the other hand are taxable, if established as a limited company, at a rate of 10% of profits, subject to all the usual deductions. When the principals of the investment manager or adviser are expatriates to Gibraltar and have elected to be taxed under a tax regime such as that known as Higher Executives Possessing Specialist Skills (“HEPSS”), their personal employment and dividend income tax is capped at under £30,000. In order to be considered under the HEPSS scheme, applicants must possess skills (such as fund management) which are not readily available in Gibraltar, earn more £100,000 from their employment and they must own or rent a residence in Gibraltar that is suitable to their family’s needs and that is approved for such categories of residents.
A fund must state its policy on valuation in its offering memorandum. Funds in Gibraltar must be audited to internationally accepted accounting standards such as UK or US GAAP or IFRS.
Gibraltar EIFs are probably the most user friendly fund vehicles within the European Union. They certainly have the quickest time to market within the EU as it is possible to launch a Gibraltar EIF before getting approval from the Regulator. The Gibraltar Regulator on the other hand has a plethora of powers in order to regulate such funds and to protect the interests of the investors. This, along with the generally closely-knit investment community in Gibraltar allows for a quick, efficient and safe funds jurisdiction within the European Union.