Gibraltar, as a jurisdiction, has a reputation of being entrepreneurial and innovative. It has shown that it is possible to effectively regulate new sectors without stifling growth. Online gambling being a perfect example.
By Jay Gomez and Javi Triay – Gibraltar, as a jurisdiction, has a reputation of being entrepreneurial and innovative. It has shown that it is possible to effectively regulate new sectors without stifling growth. Online gambling being a perfect example.
In 2018, Gibraltar introduced a principles-based regulatory regime for distributed ledger technology (DLT) providers. It became the first jurisdiction in world to regulate the blockchain sector. In doing so, Gibraltar laid the foundations for growth as a hub for blockchain and DLT businesses. This has led to the territory being considered “crypto-friendly” by the sector, investors and managers alike.
The Gibraltar Funds & Investment Association (GFIA) works in close partnership with HM Government of Gibraltar to carefully refine Gibraltar’s fund products to make them as competitive and attractive to prospective clients as they can be. In 2018, shortly after the entry into force of the DLT regime, GFIA published its Corporate Governance Code for Gibraltar Crypto Funds which illustrates its position as the global leader within the crypto funds space.
While regulators across the world were grappling with the emergence of crypto, blockchain and DLT, by 2018 Gibraltar already had a regime which regulated DLT providers, a regulator (the GFSC) and industry which understood the sector and in the case of funds, a code for Gibraltar’s crypto private funds and experienced investor funds (EIF) wishing to invest in crypto. The latter is an extremely important point to highlight. The private fund and the EIF were not created specifically to cater for investment in crypto but in fact the flexibility of the existing regimes, which had been tried and tested for many years, meant that both funds could be structured as investment vehicles for crypto. This in turn gave, and continues to give, managers and investors alike, the comfort of knowing that the fund regime has a track record. Importantly, there is also no capital gains tax or withholding tax in Gibraltar and a well-structured Gibraltar fund should be tax neutral.
One of Gibraltar’s USPs is its speed to market. In the case of the EIF, the authorisation process is either via a post-launch notification or a prior approval procedure.
The EIF’s post-launch notification is the most popular route to market given that it guarantees no regulatory downtime as would be the case with other regulated entities and instead the requirement is to notify the GFSC within 10 days of launch thereby providing for regulatory certainty. For the EIF to launch, it is necessary for the vehicle to have been established (this, for example could be a private company limited by shares, a protected cell company, a limited partnership or a protected cell limited partnership), for an offer document to have been prepared in accordance with the law and for certain service providers to be appointed.
Adding to the attractiveness of EIFs is that there are no borrowing or leverage restrictions and no maximum or minimum requirements on invested capital. EIFs are typically marketed on a private placement basis and investment into the fund is limited to Experienced Investors which generally means an investor (a) with a net worth of EUR1M; (b) who invests a minimum of EUR100k; or (c) whose business includes investment activity (i.e. investment professionals). EIFs are therefore primarily used for raising capital from high-net-worth individuals and/or institutional investors.
The private scheme is, as the name insinuates, a private vehicle intended for a small group of investors. Private schemes are limited to a maximum of 50 investors and the promotion of a private scheme is limited to a restricted category of persons, which amongst other things, cannot exceed 50 persons. In practice therefore, private funds tend to have a relatively small number of investors but of course there is no limit on the amount those investors may invest and as such the AUM of private funds can be quite substantial.
Given their nature, private funds are not regulated by the GFSC and there is no statutory requirement for the production of an offer document, audited accounts or to engage the services of a fund administrator. Notwithstanding this, and in keeping with the GFIA Code for Gibraltar Crypto Funds, it is industry practice for many of these to be adopted/implemented.
In the case of crypto funds, it has not been uncommon to see Gibraltar funds (both EIFs and private funds) structure themselves to allow subscriptions and redemptions in crypto, primarily in USDT. While this may sound exotic, in practice it is no different to funds that permit subscriptions and redemptions in different currencies or in fact, in specie. A sound valuation methodology is critical so as to not prejudice the subscriber or existing investors. Interestingly, in these situations, some funds opted not to appoint a bank and solely trade in crypto. This at times can present some difficulties particularly if, for example, some of the funds service providers need to be paid in FIAT but of course solutions can be found. On the other hand, for those that do opt to appoint a bank, there are a number of players in Gibraltar willing and able to provide the service. Ironically, this is itself a USP given the problems still faced obtaining traditional banking services where there is exposure to crypto.
As many will be aware, Brexit also meant a Gibraltar exit from the EU. The EIF and private scheme regimes are domestic legislation and are therefore unaffected. In fact, this has resulted in an opportunity for the funds sector and work continues in partnership between the industry (driven by GFIA), the GFSC and Government on to create a dual regime for investment funds and managers with the aim of giving them the ability to opt-out of the provisions of AIFMD.
Gibraltar’s position in the market was recently recognised in a report published by PwC and Elwood Asset Management which ranked Gibraltar as the third most popular jurisdiction for the domiciliation of crypto funds. The industry is reporting a common trend, a marked increase in funds, and specifically crypto funds, making Gibraltar their home and we believe this will continue, particularly with the imminent introduction of the dual-regime.
Jay Gomez, Director, Triay Lawyers Limited
Jay has developed a strong reputation as an expert in financial services and regularly advises funds and investment managers on licensing, regulatory, operational and distribution matters. He has been elected on numerous occasions by the legal community in Gibraltar to the executive body of the Gibraltar Funds & Investments Association (GFIA) and is the Chairman of GFIA. Jay is recognised by Chambers and Partners as “a respected figure in the Gibraltarian legal community, especially in relation to funds matters.” and by Legal 500 as a “rising star”.
Javi Triay, Senior Associate, Triay Lawyers Limited
Javi has advised on a wide variety of financial services matters which include establishing regulated entities and advising them on their applications to the GFSC. He also regularly advises licensed entities with regulatory issues and has advised a number of clients on the establishment of crypto funds in Gibraltar. Notably, Javi was actively involved in the establishment of the first Gibraltar crypto fund to list on a recognised ESMA stock exchange.