Investment managers often seek to launch new fund operations with a relatively small number of investors. These compact fund models require that set-up and on-going costs are contained and the fund’s regulatory footprint minimised, until critical mass has been achieved. Cayman has long had a prescription for these exact requirements in the form of the “Section 4(4) Exempt” Investment Fund.
The Mutual Funds Law (2015 Revision) of the Cayman Islands provides that an investment fund which has fifteen (15) or fewer investors, the majority of which have the ability to appoint or remove the operator of the fund, is exempt from registration with the Cayman Islands Monetary Authority (“CIMA“). It is to be noted that in order to qualify for the exemption BOTH criteria must continuously be met. An investment fund which is able to rely on the exemption provisions, will have the advantage, like registered funds, of being domiciled in the leading offshore fund jurisdiction, being entirely flexible i.e. not restricted to any one strategy or type of provider and not being required to have any special custody arrangements. Where the exempt fund grows to accommodate more than fifteen (15) investors, it will be required to register with CIMA however it may easily and quickly be converted to a registered fund.
AML Obligations of Exempt Funds
Exempt funds like registered funds, will be subject to The Proceeds of Crime Law (2018 Revision), the Anti-Money Laundering Regulations (2018 Revision) and the Revised Guidance Notes on the Prevention and Detection of Money Laundering and Terrorist Financing issued by CIMA (collectively the “AML Laws“).
The AML Laws require that exempt funds assess their money laundering and terrorist financing risks as well as, among other things:
- maintain procedures for KYC and client identification;
- maintain records;
- appoint an individual in a managerial position to be the Anti-Money Laundering Compliance Officer (AMLCO), Money Laundering Reporting Officer (MLRO) and Deputy Money Laundering Reporting Officer (DMLRO). All of these roles may be delegated to appropriately qualified persons per the AML Laws; and
- provide training of its employees in the Anti-Money Laundering Regime of the Cayman Islands.
Advantages of the Exempt Fund
The advantages of utilising the exempt fund structure include relief from regulatory requirements which are applicable to funds regulated by CIMA. Unlike registered funds, exempt funds will NOT be required to:
- pay registration and filing fees to CIMA which amount to approximately US$4,269 per annum;
- file revisions to the fund’s Offering Documents with CIMA and pay filing fees with each revision and filing;
- appoint a local Cayman auditor;
- prepare and file audited financial statements with CIMA annually and file Fund Annual Returns; or
- appoint directors who are registered under the Directors Registration and Licensing Law, 2014, which directors are required to pay annual registration fees to CIMA.
Where an exempt fund is a feeder fund in a master feeder structure which includes a Cayman master fund, for so long as no other Cayman registered fund is a feeder to it, the master fund will not be required to register with CIMA as well.
Exempt funds are also not obliged to adhere to CIMA’s Statement of Guidance applicable to regulated funds though it is to be noted that the directions contained in CIMA’s Statement of Guidance are best practice for good corporate governance and are recommended as measures which preserve a fund’s integrity and investor confidence.
Who May Benefit from the Use of an Exempt Fund?
The Cayman exempt fund is of value to:
- managers who wish to set up incubator funds and are seeking to establish a track record prior to incurring significant costs;
- managers who wish to launch prior to achieving critical mass and who seeking to lower operating costs and reduce the fund’s administrative burden in the interim;
- persons who wish to establish friends and family type funds where investors are affiliated and wish to avoid the regulatory burdens and costs of registration with CIMA;
- established managers seeking to launch funds with a restricted number of investors who wish to avoid the regulatory burdens of registration with CIMA; and
- qualified foreign funds wishing to redomicile to Cayman to benefit from Cayman’s superior reputation as a fund domicile.
Converting an Exempt Fund to a Registered Fund
As soon as an exempt fund is approaching the fifteen (15) investor threshold, it’s operators must take steps register the fund with CIMA. The process of changing a fund’s status from exempt to registered, is a straightforward one which will entail:
- making simple revisions to the fund’s offering document to reflect the fund’s changed status to a registered fund; and
- filing the fund’s offering document, declaration of AML Officers in CIMA’s online system, , administrator’s and auditor’s consent with CIMA and payment of registration and administrative filing fees totalling US$4,634.14.
The process of registration with CIMA is done via CIMA’s
online REEFS portal and is a same day process which is effected as at the date
The availability of exempt funds as part of Cayman’s suite of
fund offerings is a handy feature which allows managers to structure their
offshore fund in a manner which is commensurate with fund size and overall
objectives and to develop the fund’s
track record in a premier jurisdiction with minimal administrative burdens.
 The operator of a fund being the directors in the case of a fund established as a company, the general partner in the case of a fund established as a partnership and the trustee in the case of a fund established as a trust.
 An exempt fund may also choose in accordance with their agreement with investors, to prepare audited financial statements less frequently than once every year or as and when the directors see fit.
This note has been provided as a general guide only and should not be relied upon as a substitute for specific legal advice. Advice which is specific to your circumstances should always be obtained. If you would like further information on any aspect of this note or on any other Cayman Islands legal issue please contact us at:
Corporate & Commercial Practice Group
D. +1 345 815 2807
Suite 2206, Cassia Court
72 Market Street, Camana Bay
P.O. Box 32302
Grand Cayman KY1-1209
T. +1 345. 815. 2800
F. +1 345. 947. 4728