The purpose of this legal update is to: (i) inform you of the enactment of the Private Funds (Amendment) Law, 2020 on 7 July 2020 (the PFL Amendment) which introduces some important changes to the Cayman Islands Private Funds Law 2020 (the Private Funds Law and together with the PFL Amendment and regulations pertaining to the Private Funds Law, the Private Funds Regime); and (ii) update our client advisory regarding the implications of the introduction of the Private Funds Law released by us in June 2020 (our Previous Update)
Per our Previous Update, the Private Funds Regime introduced a regulatory regime for private equity funds and other closed ended investment vehicles (termed ‘private funds’ in the legislation) domiciled in the Cayman Islands.
The Private Funds Regime has been introduced by the Cayman Islands government in response to EU and other international recommendations and is in line with similar legislation being introduced in a range of other jurisdictions.
Effect of the PFL Amendment
The PFL Amendment expands the scope of the Private Funds Law by extending its application to closed ended entities that do not necessarily have ‘fund business’ as their principal business. In addition, the PFL Amendment clarifies that a lack of an ongoing offering of investment interests does not of itself remove a closed ended entity from the ambit of the Private Funds Law nor does the fact that a closed ended entity has a single investment or that there is no fee payment based on the closed ended entity’s assets, profits or gains, or fee payment is at a different point in the closed ended entity’s structure.
Continuing obligations relating to valuations, safekeeping of fund assets (custodial) and cash monitoring now include the managing and monitoring of potential conflicts of interest relating to these functions where the manager or operator is relying on disclosure of these potential conflicts of interest as provided for in the Private Funds Law. Accordingly, it is not enough to just identify potential conflicts of interest related to the valuation, custodial and cash monitoring functions.
Lastly, the Cayman Islands government cabinet will no longer be able to make regulations exempting any person or class of persons or business or class of business from any provision of the Private Funds Law. Any such exemptions would therefore have to be made by amendment to the Private Funds Law itself, which requires the approval of the legislative assembly of the Cayman Islands.
Which vehicles fall under the Private Funds Regime
The following vehicles constitute private funds and will be required to register with the Cayman Islands Monetary Authority (CIMA):
(a) any company, unit trust or partnership domiciled in the Cayman Islands;
(b) that offers or issues or has issued investment interests, that carry an entitlement to participate in the profits or gains of the vehicle and are not redeemable or repurchasable at the option of the investor;
(c) the purpose or effect of which is the pooling of investor funds; and
(d) which enables investors to receive profits or gains from its investments, where
a. the holders of investment interests do not have day-to-day control over the investments; and
b. the investments are managed as a whole by or on behalf of the directors, trustees or general partner of the vehicle, directly or indirectly.
In addition to the above, the Private Funds Regime also applies to any non-Cayman domiciled private funds which make an invitation to the public in the Cayman Islands.
Private funds constituted as Cayman domiciled exempted limited partnerships managed or advised by a duly licensed or registered person that have only high net worth and sophisticated investors may register with CIMA as restricted scope private funds.
What exclusions exist under the Private Funds Regime
The following exclusions exist under the Private Funds Regime:
(a) where the vehicle itself issues debt or alternative financial instruments, such investor interests in the vehicle will not constitute investment interests and the vehicle will fall out of scope of the Private Funds Regime;
(b) where the vehicle is already registered with CIMA under the Mutual Funds Law (2020 Revision) it will fall out of scope of the Private Funds Law;
(c) where the vehicle is a person licensed under the Banks and Trust Companies Law (2020 Revision) or the Insurance Law 2010 it will fall out of scope of the Private Funds Law;
(d) where the vehicle is registered under the Building Societies Law (2020 Revision) or Friendly Societies Law (1998 Revision) it will fall out of scope of the Private Funds Law;
(e) Cayman domiciled alternative investment vehicles (AIVs, as such term is typically understood in the private equity industry) are not required to register separately under the Private Funds Law, although information relating to such entities will be collected at the time of registration of the relevant private fund;
(f) Single investor closed ended investment vehicles (in which case CIMA would expect that the constitutive documents of the private fund, or any other provision or arrangement of binding legal effect, expressly state that the fund only has and is only intended to ever have a single investor of record) ; and
(g) where the vehicle is a non-fund arrangement, being any of the following, it will fall out of scope of the Private Funds Law (i) pension funds, (ii) securitisation special purpose vehicles, (iii) contracts of insurance, (iv) joint ventures, (v) proprietary vehicles, (vi) officer, manager or employee incentive, participation or compensation schemes, and programmes or schemes to similar effect, (vii) holding vehicles, (viii) individual investment management arrangements, (ix) pure deposit-based schemes, (x) arrangements not operated by way of business, (xi) debt issues and debt issuing vehicles, (xii) common accounts, (xiii) franchise arrangements, (xiv) timeshare and long-term holiday product schemes, (xv) schemes involving the issue of certificates representing investments, (xvi) clearing services, (xvii) settlement services, (xviii) funeral plan contracts, (xix) individual pension accounts, (xx) structured finance vehicles, (xxi) preferred equity financing vehicles, (xxii) a fund of whose investment interests are listed on a stock exchange (including an OTC market) specified by CIMA, (xxiii) occupational and personal pension schemes, (xxiv) sovereign wealth funds, or (xxv) single family offices.
Timing and transitional provisions
Existing private funds and private funds established between 7 February 2020 and 7 August 2020 are still required to register with CIMA by 7 August 2020. Thereafter, private funds must register within the timelines established by the Private Funds Regime, as summarised in the paragraph below.
Helpfully, a private fund has 21 days after acceptance of capital commitments from investors for the purposes of investment to submit their registration application to CIMA; provided that the private fund must be registered with CIMA before it accepts capital contributions from investors with respect to investments. In short, a private fund must be registered with CIMA before it accepts capital contributions but it has 21 days after it accepts capital commitments (as opposed to capital contributions) to submit its registration application to CIMA.
A private fund may therefore (i) enter into oral and written communications (ii) enter into agreements (i.e. fund partnership agreements, subscription agreements and side letters) and (iii) accept capital commitments prior to submitting its application for registration to CIMA.
CIMA registration fees and documents required for registration under the Private Funds Law
(a) Administrative fee payable on making an application for registration – USD366.
(b) Administrative fee payable on filing details of any changes with CIMA – USD366.
(c) Annual registration fee – USD4,269.
(d) Additional fee with respect to each AIV up to a maximum of 25 AIVs USD305.
Note private funds in existence prior to 7 August 2020 that are making their first application for registration under the Private Funds Regime prior to 7 August 2020 are exempt from the annual registration fee for 2020.
What documents need to be filed for the purposes of registration under the Private Funds Regime
(a) REEFS application form (electronic form accessed by authorised persons);
(b) Certificate of incorporation/registration;
(c) Constitutive documents;
(d) Offering document, summary of terms, marketing material (as applicable);
(e) Auditor’s consent letter;
(f) Administrator’s consent letter (if applicable); and
(g) Structure chart.
Operating conditions for private funds
The following operating conditions are required to be implemented by registered private funds. This is to ensure the transparency and proper papering of a private fund’s core operations and processes. It is likely that these operating conditions align with the existing procedures of most private funds:
(a) Audit – duly audited financial statements must be filed with CIMA within 6 months of a private fund’s year end. Financial accounts combined and consolidated with an AIV may be prepared and filed;
(b) Valuation – asset valuations must be carried out by a prescribed person and independently of the portfolio management function at an appropriate frequency according to the nature of the assets held by the private fund and at least on an annual basis. Where asset valuations are not carried out by a prescribed person independently of the portfolio management function, it is not enough to rely on identification and disclosure of potential conflicts of interest, rather there is also an obligation for management and monitoring of these potential conflicts of interest. CIMA has a discretion in the fulfilment of this obligation.
(c) Custody – subject to (i) a notification to CIMA that it is neither practical nor proportionate to custody the assets of the private fund and (ii) appropriate title verification of the assets, a custodian must be appointed with the assets being custodied in a segregated account. Where the custodial function is not carried out by a prescribed person independently of the portfolio management function, it is not enough to rely on identification and disclosure of potential conflicts of interest, rather there is also an obligation for management and monitoring of these potential conflicts of interest.
(d) Cash monitoring – an appropriate person must be appointed to monitor cash flows, ensure the proper booking of all cash and ensure that all payments made by investors in respect of investment interests have been received. Where cash monitoring is not carried out by a prescribed person independently of the portfolio management function, it is not enough to rely on identification and disclosure of potential conflicts of interest, rather there is also an obligation for management and monitoring of these potential conflicts of interest;
(e) Securities identification – where securities are regularly traded or held on a consistent basis, a private fund must maintain a record of the identification codes of these securities and make this record available to CIMA; and
(f) A minimum of two natural persons are required as directors of any applicants that are companies or to be named in respect of a general partner or corporate director of a private fund.
CIMAs supervision and monitoring of these operating conditions is on a risk based approach, giving due consideration to the scale and operation of the private fund.
How can Forbes Hare assist you
We can advise you on whether your private equity fund or closed ended investment vehicle is caught by the Private Funds Regime and is required to be registered with CIMA and take you through the registration process, including the drafting of any required documentation. In addition, we can advise on the ongoing obligations under the new regime.
Our Investment Funds Team is comprised of senior experienced practitioners who have been in the industry for many years and who deliver pragmatic solutions to suit our clients’ needs in a cost effective manner. For further information on the Private Funds Regime and how it might impact you, please contact your regular Forbes Hare contact or a member of our Investment Funds Team listed below.
This legal update is intended to be for the general information of the clients and professional contacts of Forbes Hare. It is not intended to be comprehensive and should not be relied on as a substitute for independent legal advice in any circumstances.
Partner and Head of Investment Funds
T: +65 6823 1540 firstname.lastname@example.org
Partner and Head of Corporate
BVI and Cayman Islands
T: +1 284 542 1899 email@example.com
Partner Investment Funds and Corporate
T: +44 (0) 27 7014 3220 firstname.lastname@example.org
Senior Associate Investment Funds and Corporate
T: +44 (0) 27 7014 3220 email@example.com
 Private Funds (Amendment) Law, 2020 http://www.gov.ky/portal/pls/portal/docs/1/12984486.PDF
 Private Funds Law, 2020 https://www.cima.ky/upimages/commonfiles/PrivateFundsLaw2020_1581524961.PDF
 Private Funds Regulations, 2020 https://www.cima.ky/upimages/commonfiles/PrivateFundsRegulations2020_1581526299.PDF
Private Funds (Savings and Transitional Provisions) Regulations, 2020 https://www.cima.ky/upimages/commonfiles/PrivateFundsSavingsandTransitionalProvisionsRegulations2020_1581526431.PDF
Private Funds (Fees) Regulations, 2020 https://www.cima.ky/upimages/commonfiles/PrivateFundsFeesRegulations2020_1582667597.PDF
 There is no specific guidance yet on what the implications of a restricted scope private fund are. We assume that it will speak to CIMAs supervision and monitoring of a restricted scope private fund.
 Debt means an obligation of a vehicle to repay principal either without interest or together with interest calculated at either a fixed, floating or variable rate and whether or not together with any other entitlement, but payable in the event of the event of the liquidation, termination or dissolution of the vehicle otherwise than in respect of, and, unless otherwise provided for by its terms, in priority to any payment in respect of a share, trust unit or a partnership interest of that vehicle.
 As prescribed under the Banks and Trust Companies Law (2020 Revision).
 Alternative investment vehicles are vehicles formed in accordance with the constitutional documents of a private fund for the purposes of making, holding and disposing of one or more investments wholly or mainly related to the business of that private fund and which only have as their members, partners or trust beneficiaries, persons that are members, partners or trust beneficiaries of the private fund.