27 January 2003
Offshore jurisdictions are currently benefiting from a global demand from fund promoters wanting to domicile their investment funds in tax-favourable jurisdictions. The most attractive jurisdictions offer sophisticated company, partnership and trust laws, professional service providers and fund regulation administered in a consistent manner by regulatory authorities.
Many of these fund promoters focus on jurisdictions offering regulatory regimes for funds that either satisfy prescribed minimum investment requirements, or will be made available for investment exclusively by sophisticated or high-net-worth investors - the so-called 'professional funds'.
Recent amendments to the Companies (Jersey) Law 1991 (the Companies Law), as well as the proposed formal introduction of an 'expert fund' policy by the Jersey Financial Services Commission (JFSC), could facilitate a dramatic increase in the number of professional funds being domiciled in Jersey.
In addition, the Collective Investment Funds (Jersey) Law 1988, (the CIF Law) regulates retail funds as either recognised funds or unclassified funds; and the Borrowing (Control) (Jersey) Law 1947 (the BC Law) provides that all Jersey investment funds require a form of consent (known as the COBO Consent).
In November 2002, the JFSC published Consultation Paper No 4 2002, which contemplates the formal introduction of a new category of funds that can only be marketed to expert investors. The proposals, including the definition of an expert investor, are currently being finalised. One of the main suggestions is that all expert funds, including unclassified funds that constitute expert funds, will ultimately require only COBO Consent. They will also be subject to some concessions, including having a single promoter (thus relaxing the old requirement for a locally-based fund manager and custodian) and the use of a prime broker as opposed to a custodian in the case of hedge funds.
The JFSC proposes streamlining the regulatory process by concentrating efforts on the so-called expert fund. It is hoped that this approach will develop so that no Jersey-based functionaries are required for expert funds.
In the meantime, the JFSC will publish a definition of, and regulatory requirements for, an expert fund, and associated codes of practice will require the responsible local functionary to certify that the fund meets the characteristics for an expert fund. Based on this certification, the JFSC will issue COBO Consent for the relevant fund, unless further examination of the fund is specifically required. In addition, the JFSC is proposing to reduce the regulatory requirements for expert funds by focusing not on the imposition of limitations aimed at minimising risk, but instead on risk disclosure.
The introduction of an expert fund policy is not due to a relaxation in regulatory standards by the JFSC. On the contrary, it represents a focused response to a niche market of investors, who neither desire nor require offshore regulation aimed at protecting them from risks. A special regulatory approach to professional funds is not confined to Jersey. The British Virgin Islands, Cayman Islands, Guernsey, Isle of Man and Ireland all offer a regulatory regime for professional funds.
In addition, sophisticated onshore jurisdictions, including the US, UK and Hong Kong, provide regulatory exemptions that are dependent upon the type of investors who are beneficiaries of securities in a fund. Accordingly, professional funds may be structured so as to qualify for a lower level of regulation in their offshore domicile, and also take advantage of regulatory exemptions in the onshore jurisdictions in which their securities may be made available.
For instance, offshore funds that wish to place securities with US investors may avoid the registration requirements of the US Securities Act 1933. They can do this by relying on Regulation D, promulgated by the Securities and Exchange Commission, which among other things provides a safe harbour for sales of securities to sophisticated investors or accredited investors (the latter being determined by net worth or income tests).
In relation to the Companies Law, the recent amendments of significance to investment funds are a relaxation in certain maintenance of capital rules, as well as statutory merger and continuation procedures comparable to those applicable in other offshore jurisdictions.
Prior to the amendments, Jersey companies could only issue par value shares. Par value shares can be issued for a subscription price in excess of the par value, in which case the excess constitutes premium. On issuance, the par value is allocated to the relevant company's capital account and any premium is allocated to the share premium account. However, on a redemption, the capital account cannot be used to fund the repayment of the par value of shares being redeemed. Instead, the par value must be funded out of distributable reserves or from the proceeds of a fresh issuance of shares.
However, the new Companies Law permits a Jersey company to issue either par value shares or no-par value shares. This makes no-par value companies attractive for the formation of open-ended investment funds, as there is no capital account protected by maintenance of capital provisions.
Instead, on the issuance of shares, the full subscription amount is allocated to a stated capital account, which may be applied to the payment of redemption payments provided the company meets the required solvency tests. In addition, the Companies Law provides for an open-ended collective investment fund, which holds a permit under the CIF Law, to fund redemptions from any source, including the capital account, provided that the company meets the required statutory solvency tests.
In relation to mergers: two or more Jersey companies can now merge by statutory procedure, the merged company effectively assuming the assets and liabilities of the merging companies, and the shares of the merging companies being exchanged for shares in the merged company. This procedure is also applicable to holding companies and their subsidiaries.
Merger will be useful for consolidating investment funds with similar investment strategies and for establishing umbrella fund structures, with improved economies of scale and administration efficiencies. A statutory continuation procedure has also been introduced, which facilitates a Jersey company redomiciling to a foreign jurisdiction, and a foreign company redomiciling to Jersey. Also, statutory merger and continuation procedures avoid the administrative and legal complexities of transferring assets and shareholders to a new company by means of asset transfers and share exchanges, both of which may have undesirable tax consequences.
Following the amendments to the Companies Law, the focus is now on the JFSC, which has a watershed opportunity to introduce a much-needed formal expert fund policy, which will facilitate Jersey's exponential growth as a professional fund domicile and translate to inevitable growth opportunities for local service providers involved in the fund industry.
Adrian Odell is a corporate partner at Jersey commercial law firm Bailhache Labesse
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