INVESTMENT BASIC: NON-FUND ARRANGEMENTS
The Cayman Islands Monetary Authority (the “Authority”) in November of 2020 issued a Statement of Guidance under section 34 of the Monetary Authority Act (2020 Revision) to clarify the following arrangements which constitute non-fund arrangements.
Any Arrangement that meets any of the following definitions shall be considered a non- fund arrangements and should not be considered to be private fund within the meaning of the definition of a “private fund” under Section 2 of the Private Funds Act (2021 Revision).
Pension Funds
Pension fund has the same meaning as that prescribed in the National Pensions Act (2024 Revision) “a fund maintained to provide benefits payable under a pension plan”. This exemption also includes the Public Service Pensions Fund as defined under the Public Service Pensions Act (2023 Revision). Any arrangement under which a right to benefits results from contributions made under an occupation or personal pension plan is a non-fund arrangement.
Securitisation Special Purpose Vehicles
A securitisation vehicle is a non-fund arrangement, as long as its sole purpose is to carry on:
(a)Securitisation or securitisations; or
(b)other activities which are appropriate to accomplish that purpose.
Securitization is the process in which certain types of assets are pooled so that they can be repackaged into interest-bearing securities.
Contract of Insurance
Any contract of insurance which is a contract of long-term insurance or a contract of general insurance is a non-fund arrangement, and includes:
(a)fidelity bonds, performance bonds, administration bonds, bail bonds, customs bonds or similar contracts of guarantee, where these are;
(i)effected or carried out by a person not carrying on a banking business;
(ii)not effected merely incidentally to some other business carried on by the person effecting them; and
(iii)effected in return for the payment of one or more premiums;
(b)tontines, an investment linked to a living person which provides an income for as long as that person is alive;
(c)capital redemption contracts or pension fund management contracts, where these are effected or carried out by a person who;
(i)does not carry on a banking business; and
(ii)otherwise carries on a regulated business involving effecting or carrying out a contract of insurance as a principal;
(d)contracts to pay annuities on human life;
(e)collective insurance contracts; and
(f)social insurance contracts.
but does not include a funeral plan contract that is a type of legal agreement which requires payment in advance for funeral services, cemetery services or merchandise and the physical delivery and retention of which would occur after death
Joint Ventures
A joint venture refers to an arrangement into which two or persons enter for commercial purposes related to a business or businesses (other than business regulated under the Private Fund Act) carried on by the participators themselves and with capital invested from amongst themselves; where a participator is a member of a group, each other member of this group is also to be regarded as a participator in the arrangement.
Proprietary Vehicles
A proprietary vehicle refers to an arrangement which is solely comprised of, and its investors limited only to, a promoter, operator and proprietary investors.
For an investor to be considered a proprietary investor under this exemption, the capital invested in the arrangement must be entirely proprietary capital.
Officer, manager or employee incentive, participation or compensation schemes, and programmes or schemes to similar effect
This includes arrangements that are designed to enable profits from a business to be used to purchase equity interests or other securities which are held on behalf of employees, former employees or another member of the same group or their spouses, close relatives and/or dependents are non-fund arrangements. Trustees of an employee’s family trust may also participate. This covers most employee share option arrangements and other employee share incentivisation arrangements.
Under this exemption, the term employee includes personnel who work in the business or formerly worked in the business of the undertaking concerned, contributing their skills and time.
Holding Vehicles
A holding vehicle includes any arrangement that holds interests in one or more other arrangement or assets, the commercial purpose of which is to carry out a business strategy or strategies through its subsidiaries, associated vehicles or participations in order to contribute to their long- term value, and which is a vehicle wholly owned by a single investor that is either:
a) operating on its own account; or
b) not established for the main purpose of generating returns for its investors by means of divestment of its subsidiaries or associated vehicle, as evidenced in official documentation.
Generally, an arrangement will be considered a non-fund arrangement if:
a) it carries out a commercial business strategy through its participations by contributing to their long-term value; and
b) it does not generate its returns for its investors by means of divestment of its participations.
Individual Investment Management Arrangements
The management of portfolio investment or other property on an individual client-by-client basis is a non-fund arrangement as long as, at a minimum there I no pooling of capital, risk and return considering that pooling for these purposes does not require that the underlying property is pooled.
Where a client is a member of a group, each member of the group is to be regarded collectively as a single client.
Pure Deposit-Based Schemes
An arrangement is a non-fund arrangement if it is a pure deposit-based scheme, in the sense that the whole amount of each participant’s contribution is a deposit which is accepted by a person authorised to accept deposits.
Arrangements not Operated by way of Business
Whether the arrangements in question are operated by way of business will depend on the facts in each case, the activity in question and the property or investment(s) concerned.
This exemption may include arrangements such as family trusts, family holding vehicles and a syndicate of private individuals involved in an investment club.
Debt Issues and Debt Issuing Vehicles
Arrangements that only issue debt or prescribed alternative financial instruments are generally not deemed to be issuing investment interests and therefore are non-fund arrangements.
The arrangements for an issue of debt securities by an ordinary commercial or financial company will generally not be considered a private fund or turn the issuer into one as long as the issuer does not invest the capital it raises for the benefit of the subscribers of the debt securities.
Common Accounts
A Common Account arrangement is a non-fund arrangement if:
(a) they are arrangements under which the rights or interests of participants are rights to or interests in money held in a common account; and
(b) that money is held in the account on the understanding that an amount representing the contribution of each participant is to be applied:
(i)in making payments to that participant;
(ii)in satisfaction of sums owed by that participant; or
(iii)in the acquisition of property for him/her or the provision of services to that participant.
Franchise Arrangements
Franchise arrangements include any arrangement under which a person earns profits or income by exploiting a right conferred by the arrangement to use a trademark or design or other intellectual property or the good-will attached to it.
Timeshare and long-term holiday product schemes
A Timeshare and long-term holiday product scheme is an arrangement that shall be considered a non-fund arrangement if the rights of the investors are rights under a timeshare contract or a long-term holiday product contract.
Schemes involving the issue of certificates representing investments
A Scheme involving the issuance of certificates representing investment is an arrangement pursuant to which a certificate or other instrument confers contractual or property rights (other than rights consisting of options):
a) in respect of any share, debenture, alternative debenture, government and public security or warrant held by a person other than the person on whom the rights are conferred by the certificate or instrument; and
b) the transfer of which may be effected without requiring the consent of that person;
but excluding any certificate or other instrument which confers rights in respect of two or more investments issued by different persons or in respect of two or more different government and public securities issued by the same person, is a non-fund arrangement.
Clearing Services
A Clearing Service arrangement is a non-fund arrangement if its purpose is the provision of clearing services (the correct and timely transfer of funds to the seller and securities to the buyer) and it is operated by an authorised person, a recognised clearing house or a recognised investment exchange.
Under this exemption, the arrangement provides a service to members of the clearing system in its role as central counterparty and not investing in the securities bought and sold for its benefit.
Settlement Services
A Settlement Service arrangement is a non-fund arrangement if its purpose is the provision of settlement services and it is operated by an authorised person or a recognised central securities depository.
Settlement Services are includes any service provided in connection with a real estate settlement including, but not limited to, the following: title searches, title examinations, the provision of title certificates, title insurance, services rendered by an attorney, the preparation of documents, property surveys, the rendering of credit reports or appraisals, pest and fungus inspections, services rendered by a real estate agent or broker, the origination of a federally related mortgage loan (including, but not limited to, the taking of loan applications, loan processing, and the underwriting and funding of loans), and the handling of the processing, and closing or settlement
Funeral Plan Contracts
As discussed above, a funeral plan contract includes an arrangement under which a customer makes one or more payments to a service provider; and the provider undertakes to provide, or secure that another person provides, a funeral for the customer (or some other person who is living at the date when the contract is entered into) on his/her death unless, at the time of entering into the contract, the customer and the provider intend or expect the funeral to occur within one month; but excluding certain contracts under which sums paid will be applied towards a contract of insurance or will be held on trust.
Individual Pension Accounts
An Individual Pension Account, sometimes called a personal pension plan, is an individual investment vehicle, with the primary purpose of building a capital sum to provide retirement benefits, although it will usually also provide death benefits.
Structured Finance Vehicles
Structured finance vehicles include arrangements that pool income producing assets and issue securities backed by those assets.
An asset-backed security is a type of financial investment that is collateralized by an underlying pool of assets, usually ones that generate a cash flow from debt, such as loans, leases, credit card balances, or receivables. It normally takes the form of a bond or note, paying income at a fixed rate for a set amount of time, until maturity.
Preferred Equity Financing Vehicles
A preferred equity financing vehicle is an arrangement, which is not an operating entity, which issues preferred stock, preferred shares or other preferred equity instruments to investors, giving those investors a preference over ordinary or common shareholders or other ordinary or common equity holders.
The purpose of such an arrangement is the provision of financing to an operating entity. Any amounts attributed to common equity are inconsequential to the entity and the preferred entity instrument is typically structured to earn a fixed or market interest rate based return and/or upside economic returns though the issue of options or warrants in the operating entity that is the subject of the preferred equity financing vehicle.
A fund of whose investment interests are listed on a stock exchange (including an over-the-counter-market) specified by the Authority by notice in the Gazette.
A fund of whose investment interests are listed on a stock exchange is a pooled investment security that can be bought and sold like an individual stock. These funds can be structured to track anything from the price of a commodity to a large and diverse collection of securities.
Occupational and Personal Pension Scheme
The exclusion of personal pension schemes from the scope of the Private Fund Act does not extend to personal pension unit trusts which are constituted as feeder funds or comprises feeder funds.
Sovereign Wealth Funds
Sovereign wealth funds (SWF) refer to special purpose investment funds that are created and owned by the state/general government. SWFs are funded by state/government reserves but managed separately from official reserves and typically invested in a diversified portfolio of financial assets.
Single Family Offices
A single-family office means a legal entity or legal arrangement formed in the Cayman Islands by a single family (to manage the wealth) for or on behalf of that single family.
In this article, we have explored the non-fund arrangements that are outside of the scope of the Private Funds Act, for specific guidance on the features and regulations on any of the non-fund arrangements discussed above or a closed-ended fund in the Cayman Islands and how your business may be impacted by these regulations, please contact your usual Vale Law attorney or any of:
Shelley Do Vale: shelley.vale@valelaw.ky
Santiago Mtnez-Carvajal: sc@valelaw.ky