By Volaw Trust & Corporate Services Limited – The island of Jersey has been a key player in the international investment funds market for over forty years and has continually adapted its regulatory regime to facilitate the establishment and administration of alternative investment funds. Expert Funds were introduced in 2004, which provided a streamlined regulated product for funds targeting expert investors.
The Unregulated Fund product was launched in February 2008, whilst in November 2007 changes were made to the regulation of Jersey fund functionaries (local entities providing services to funds, for example, administrators and custodians) to improve the efficiency of interaction between the Jersey Financial Services Commission (the “JFSC”) and functionaries. in January 2012 the Jersey Private Placement Fund Guide was issued by the JFSC and the Island is in the process of enhancing its regulatory framework where required, in order to offer fund promoters and managers a regime that is fully compliant with the EU’s Alternative Investment Fund Manager Directive, for those that wish to have access to European investors and markets, while maintaining its existing regime in parallel for those that do not.
Fund promoters are attracted to Jersey by the Island’s stable government, its proximity to both the UK and continental Europe, the significant expertise developed by the industry in a wide range of financial services and a competitive, co-operative and well-regulated tax environment. Jersey is a parliamentary democracy that is a dependency of the British Crown. It is a British Island, but is not part of the United Kingdom, nor is it a colony.
Under Protocol 3 to the United Kingdom’s treaty of Accession to the European Economic Community, the Island is part of the customs territory of the European Community. Jersey is not, however part of the single market in financial services and as a result is not required to implement EU Directives on such matters as movement of capital, company law or money laundering. However, Jersey will emulate such measures where appropriate, having particular regard to the Island’s commitment to meeting international standards of financial regulation and countering money laundering and terrorist financing.
The establishment and operation of investment funds in Jersey is governed principally by two pieces of legislation, namely, the Control of Borrowing (Jersey) Law, 1947 as amended, (the “Borrowing Law”) and the Collective Investment Funds (Jersey) Law, 1988 as amended, (the “CIF Law”). Together the two statutes provide the framework for appropriate investor protection whilst retaining the flexibility to adapt quickly to changing market conditions.
A fund’s promoter and advisers will need to examine the constituent parts of the fund structure, namely its target type and number of investors, expected investments, the fund itself and functionaries to the fund. Each of these will have an impact on the preferred fund structure and regulatory consent required.
Investors will generally fall into three categories: (i) high net worth individuals, (ii) institutions, and (iii) fund-of-funds. At one extreme, fund structures can target private arrangements with a small number of investors that are identified at the outset. Alternatively, promoters may wish to market a fund to the public and therefore require an offering document and possible third party assistance in sourcing investors. The number of “offers” made to potential investors and the number of actual subscriptions made by investors has an impact on whether a fund is a private or public arrangement and also affects the regulatory fund categories that can be applied. Further, the promoter should consider what (if any) minimum investment will be applied as this is a prerequisite of certain regulatory categories and is also a requirement for potential exemptions for the regulation of an investment manager/adviser. Finally, the domicile and residency of investors is an important consideration and the JFSC’s list of approved countries and territories may also have an impact on the structure due to investor considerations.
Investment funds generally focus on investing in property, private equity, equities, debt, derivatives and fund-of-fund investments, although more diverse asset classes are emerging such as art, film and carbon credits. The income and expenses of the fund will vary depending on the asset classes held, which in turn may have taxation considerations.
It is essential therefore that the fund promoter has clearly considered the investment strategy of the fund, based on a realistic assessment of the market. A promoter should be able to forecast the expected costs and revenues from a strategy to ensure that sufficient returns will be achieved to attract investors. A strategy will generally focus on capital growth and/or income, which is an important distinction as investors may be taxed differently depending on how a fund distributes monies back to them.
It is common for the promoter to provide investment management and/or advisory expertise to the fund. The JFSC may require this functionary to be regulated.
The fund’s characteristics
An open-ended fund will generally require periodic valuations and dealing days whereby new investors can be received and existing investors can redeem their holdings. Conversely, closed-ended funds are usually less liquid with investors committing to a longer-term investment period. As a result, administrative costs vary depending on the frequency and complexity of such valuations and dealing procedures. Fund promoters should consider the basis for valuing their fund assets, seeking to ensure that independent valuations are available at dealing and reporting dates.
A fund may also generate periodic net income, which can be re-invested, accumulated, or distributed back to investors. The promoter should identify the preferred treatment for such income balances in conjunction with appropriate tax advice, which should also cover their own remuneration. Whilst individual investors are encouraged to obtain their own tax advice in assessing the appropriateness of any fund, if a promoter is clear on the type of investors that are being targeted, it should be simpler to pre-empt the tax considerations of the investors and organise the fund’s distribution policy accordingly. The fund itself should be tax neutral.
The fund will require the services of certain third party functionaries. These could include an administrator, auditor, custodian and advisory committee. A regulated administrator or custodian may be required in some circumstances and most regulatory categories of fund will require an annual audit.
Functionaries with a presence in Jersey, who provide services to both Jersey and non-Jersey domiciled investment funds are regulated by the Financial Services (Jersey) Law, 1998 (the “FSJ Law”). Under the FSJ Law a fund services business must be registered to provide one or more classes of Fund Services Business. Codes of Practice set out the principles and standards of conduct expected of persons registered under the FSJ Law for carrying on Fund Services Business activities.
In April 2012 the JFSC introduced separate Codes of Practice covering the operations of funds established under the CIF Law and funds in Jersey are established with a real presence. There are real boards of directors making decisions and these boards are made up of sufficiently knowledgeable and experienced individuals to ensure that the board carries out its duties properly and with appropriate diligence. Jersey has an increasing pool of non-executive directors available to act on structures.
Types of vehicle
Several different structures are available for use as investment funds in Jersey and a combination of structures may also be permitted.
The principal piece of legislation governing Jersey companies is the Companies (Jersey) Law, 1991 (the “Law”), which is a comprehensive, modern statute governing all aspects of the regulation of the formation and administration of private companies in Jersey. Share capital can be denominated in any currency and issued in various classes, including redeemable shares. The ability to incorporate “no par value” companies has added yet more flexibility.
The Articles of Association registered upon incorporation can include any entity specific provisions such as classes of shares, rights attaching to shares, dividend and voting rights, rights to winding up or return of capital, appointment and removal of directors and pre-emption rights.
Incorporated Cell Companies (“ICCs”) and Protected Cell Companies (“PCCs”)
In 2006, the Law was amended to introduce the concept of incorporated and protected cell companies. Both forms of Cell Company are vehicles that can create individual segregated cells. Segregated Cells in both PCCs and ICCs will have their own assets and liabilities, distinct and “ring fenced” from those of other Cells and the Cell Company itself. The key legal principle of both PCCs and ICCs is that assets of each individual Cell will not be available to the creditors of any other Cell.
A PCC is a separate legal entity, but individual protected cells do not have legal personality independent of the PCC. ICCs are similar to PCCs, however, each incorporated cell is a separate corporate entity with the ability to appoint separate boards of directors. Administratively, once a Cell Company is created, repeat transactions can be established on a much-reduced timescale. Hence, Cell Companies have advantages for funds and securitisations structures where initial documentation can be complex but may potentially be replicated in future offerings.
In contrast to an investment company, a unit trust is not a separate legal entity as such, but a trust arrangement whereby legal ownership of the fund’s assets is vested in a trustee who holds the assets of the fund on trust for the benefit of the unit-holders.
The unit trust will generally be constituted by means of a trust instrument made between a trustee company and an independent manager. Typically the manager will promote, manage and administer the scheme. Subscription proceeds will be paid to the trustee which will act as custodian of the investment assets of the fund. In addition, the trustee will generally supervise compliance by the manager with its obligations under the trust instrument.
The trust instrument will generally contain provisions regulating the issue, redemption and valuation of units, the appointment and removal of the trustee and the manager, their duties and remuneration, borrowing powers, investment restrictions and for the winding-up of the trust. For most practical purposes a unit trust scheme will operate and be regulated in the same manner as a corporate investment fund.
A limited partnership may be an appropriate structure for a number of different purposes. A principle use is to provide an additional form of investment vehicle, in particular for the venture capital industry. A limited partnership can also be an attractive structure for various tax planning purposes as the partnership is generally treated as being fiscally transparent.
There is no maximum or minimum imposed on the number of limited partners. The general partner will manage the business of the partnership and have unlimited liability for its debts. The liability of investors taking interests as limited partners (and who do not participate in the management of the business) will be limited generally to the amount of their investment.
Jersey can offer further flexibility and options in this area in the form of Incorporated Limited Partnerships and Separate Limited Partnerships.
The range of regulatory categories that may be applied to fund structures by the JFSC is summarised below:
This regime allows eligible funds merely to notify the Jersey Financial Services Commission of their establishment, rather than going through a full authorisation process. Two forms of unregulated fund have been introduced; an Unregulated Eligible Investor Fund and an Unregulated Exchange Traded Fund.
An Unregulated Eligible Investor Fund is available to investors injecting a minimum of USD1,000,000 each into the fund, or to a sophisticated investor. The investors will be required to acknowledge in writing their acceptance of the risks involved in a prescribed form. In addition, the fund must take steps to ensure that its investors meet the legal requirements to invest in the fund. The fund may be open-ended or closed-ended and may take the form of a company (or cell company), unit trust or limited partnership. There is no requirement for an Unregulated Eligible Investor Fund to have a Jersey-based administrator or custodian, nor for it to have any Jersey resident directors. There is also no need for Jersey-based auditors to be appointed to the fund. The fund may only list on a stock exchange, such as The Channel Islands Stock Exchange (the “CISX”), which permits restrictions upon transfers of interests within the fund. This is in order to ensure that only eligible investors are allowed to invest in the fund.
An Unregulated Exchange Traded Fund is not regulated by the Jersey Financial Services Commission on the basis that it already complies with the listing requirements of an approved stock exchange. There is a prescribed list of stock exchanges for which funds listed on them may classify as Unregulated Exchange Traded Funds.
An Unregulated Exchange Traded Fund may only take the form of a closed-ended fund, but may be established as a company (or cell company), unit trust or limited partnership. As with an Unregulated Eligible Investor Fund, there is no need for Jersey-based auditors to be appointed to the fund.
Very private and COBO-only funds
Very Private investment funds (whether in corporate form or as a special purpose unit trust) can be tailored for a single individual, a strictly limited number of investors or structured as a closely held joint venture investment vehicle. These Very Private Funds will require very little regulatory supervision and can be formed very quickly. Very Private Funds are usually established to meet the requirements of a single investor or a corporate group (up to a maximum of 15 investors). The fund’s constitutional documents will usually state that there is a specific restriction on the nature of the investor. Thereafter little more is required than the disclosure of the beneficial ownership to the JFSC. Hence the fund may be structured to suit particular needs or circumstances.
Where a promoter seeks to make a number of “offers” to potential investors to invest in a proposed structure, there will be additional regulation by the JFSC. “COBO Only Funds” are those where the number of such offers is less than 50 and where the fund is not listed.
Consent will be required from the JFSC under the Control of Borrowing (Jersey) Order, 1958. Prior to the issue of a COBO consent, the JFSC will perform a preliminary review of the promoter behind the scheme as well as a review of the private placement memorandum. In considering a promoter, the JFSC will analyse its track record, reputation and experience as well as such issues as spread of ownership and financial resources. The JFSC will also have an ongoing regulatory role and the COBO consent will set out various conditions, which the fund will need to comply with.
Exemptions are available under the FSJ Law whereby flexibility in the regulation and appointment of service providers (i.e. for investment management / advisory services) can be achieved. These exemptions are normally dependent on the investors being considered professional investors, or if the minimum investment per investor is £250,000 or more, and where all investors have acknowledged a prescribed investment warning.
Private Placement Funds
The Jersey Private Placement Fund Guide (the “Guide”) was issued by the JFSC on 26 January 2012. A Private Placement Fund satisfying the Guide’s conditions brings a number of advantages – it removes the Commission’s traditional “promoter test” (which sets out detailed criteria against which the Commission vets new promoters of funds), making it much simpler for new and existing promoters to establish funds in Jersey; it offers a streamlined 72-hour authorisation process for the approval of funds which meet the Guide’s criteria, and it provides certainty in relation to the contents of the offering document requirements. It is anticipated that the new regime will be of particular interest to promoters of specialised and alternative investment funds aimed at sophisticated and professional investors, including private equity, mezzanine, infrastructure and property funds and is expected to enhance Jersey’s position as a leading jurisdiction for the servicing of alternative investment funds.
A Private Placement Fund is a closed-ended investment. Participation can be offered to no more than 50 potential investors, who must be either Professional Investors or Sophisticated Investors, as defined in the Guide. Annual accounts and an auditor’s report must be provided to all investors.
A Private Placement Fund can be structured as a company, a unit trust, or one or more forms of limited partnership. It may be a fund established in Jersey or elsewhere but a fund established outside Jersey must be managed in Jersey by a Designated Service Provider as defined in the Guide.
In most cases, it should be possible to structure the PPF in such a way as to ensure that the general partner, trustee or manager falls outside the licensing regime for fund services businesses pursuant to the FSJ Law.
Expert Funds can use any fund vehicle type and are established for sophisticated, high net worth, professional and institutional investors. Expert Funds can be set up as open or closed ended funds and have no restrictions on the number of investors.
Existing authorised Jersey Fund Administrators are able to progress the launch of Expert Funds by self-certifying that the fund meets the criteria expected of an Expert Fund. In particular, a Jersey Administrator is required to certify that any offering documentation contains appropriate disclosures and information on the fund’s investment and borrowing strategies. The appropriate criteria for an Expert Fund are contained in the Jersey Expert Fund Guide issued by the JFSC and available from their website.
Each Expert Fund will require its investors to confirm in writing that they have received and accepted an investment warning acknowledging that the fund is suitable only for expert investors and confirm their awareness that the fund involves special risks and that only limited regulatory oversight applies. An investor will also have to confirm that he is either: a) investing USD100,000 in the fund; or b) is a “professional investor”; or c) is a “high net worth individual”. The applicable definition of a “high net worth individual” is USD1,000,000 of assets (excluding the principal residence). Such assets can be jointly held with a spouse. The definition of a “professional investor” is “a person, partnership or other unincorporated association or body corporate, whose ordinary business or professional activity includes, or it is reasonable to expect that it includes, acquiring, underwriting, managing, holding or disposing of investments whether as principal or agent, or the giving of advice on investments.”
Due to their nature, most Expert Funds will probably rely on the professional investor exemption or the minimum subscription of USD100,000. However, circumstances will, of course, make the “high net worth individual threshold” extremely relevant in smaller private client / family type of fund arrangements. In addition those involved in establishing and providing services to an Expert Fund are able to invest in the fund. The JFSC have confirmed that any application to extend the definition of “Expert Investor” in respect of types of “carried interest” investors is likely to be treated sympathetically.
A fund that is established for expert investors can have considerable flexibility in both its structure and operation.
The Jersey Listed Funds Guide provides certainty and guidance to those wishing to establish such funds in a quick and cost-effective manner, and is a response to an increased market demand for Listed Funds. Listed Funds are established on certification by the fund administrator that the fund complies with the criteria set out in the Guide. The JFSC issues the relevant permits on receipt of the certification.
A Listed Fund can only be listed on an exchange approved by the JFSC. The number of approved exchanges is extensive, global in scope and includes all exchanges upon which listings are ordinarily sought.
The investment manager of a Listed Fund must be of good standing, established and regulated (if appropriate – the JFSC recognizes that some investment managers may not be regulated) in an OECD member state or a jurisdiction with which the JFSC has a memorandum of understanding.
A small number of key structural requirements are imposed on such funds including that the fund must be closed-ended (meaning that it is not normally open for subscriptions and redemptions at the option of investors) and that the fund’s offering document must carry a clear investment warning and contain all information necessary for potential investors to make an informed decision.
There are no investment or borrowing restrictions imposed on Listed Funds and no limit on the number or type of investors in such funds.
Public funds: unclassified funds
These funds are authorised under the CIF Law. They may be open-ended or closed-ended and may have a corporate structure, be a unit trust or a limited partnership. Typically, they will have a lower minimum investment requirement than Expert Funds.
The JFSC’s policy is that each Unclassified Fund is regulated to an extent and in a manner considered to be appropriate to the nature of the particular fund. This involves negotiations with the promoter and/or his professional adviser, following scrutiny of all the documentation and other information associated with the Unclassified Fund.
Public funds: recognised funds
A Jersey fund that has been registered as a “Recognised Fund” may be marketed freely to the public in the UK due to the granting of “Designated Territory Status” under Section 87 of the UK’s Financial Services Act 1986 (now Section 270 of the Financial Services and Markets Act 2000). “Designated Territory Status” also helps a Recognised Fund to be marketed to other European Union jurisdictions.
To qualify as a “Recognised Fund”, a fund must adopt constitutional documents, restrictions on investments and protection of investors, which are equivalent to those of a conventional UK authorised unit trust. Recognised Funds are the most highly regulated and are subject to a compensation scheme for the protection of investors. Many types of equity, bond and money market funds have been established in Jersey as Recognised Funds.