INVESTMENT BASICS: SECURITIES

INVESTMENT BASICS: SECURITIES

In the Cayman Islands, the Securities Investment Business Act (as Revised) (“SIBA”) is the main securities statute and regulates among other the securities investment activities and the assets, rights and/or interests that could be considered securities within the territory.

Under the Schedule 1 of SIBA, securities are defined loosely defined as shares(including stocks, interests in partnerships, LLC interests, trust units) instruments creating or acknowledging indebtedness, instruments giving entitlement of securities, certificates representing certain securities, options, futures and contracts for difference.

In this article, we are going to breakdown each of the securities defined in SIBA and what distinctions are made in the Cayman Islands in terms of their form

1. SHARES

Under Shares, the Schedule 1 of SIBA includes shares, stock and any analogous figure to shares that you may find in different corporate structures and or legal arrangements such as the following:
(a) shares and stock of any kind in the share capital of a company;
(b) interests in a limited partnership established under the Partnership Act;
(c) interests in an exempted limited partnership as defined in the Exempted Limited Partnership Act;
(d) interests in a limited partnership, or an exempted limited partnership, constituted under the laws of a jurisdiction other than the Islands; and
(e) units of participation in a unit trust as defined in the Mutual Funds Act.

2. INSTRUMENTS CREATING OR ACKNOWLEDGING INDEBTEDNESS

Under Instruments Creating or Acknowledging Indebtedness, SIBA includes the following securities:

1. Debentures: a type of long term debt instrument or bond that is not backed by any collateral;
2. Debenture Stock: Like regular debentures, debenture stocks are normally not backed by any collateral, however, holder of debenture stock is entitled to dividend payments at a fix rate;
3. Loan Stock: Normally in refers to common or preferred shares that are used as collateral to secure a loan. The loan stock may earn a fixed interest rate and can be secured or unsecured.
4. Bonds: A fixed-income instrument that represents a loan made by a lender/investor to a borrower that could be a corporate or governmental.
5. Certificates of Deposit: A type of savings account, traditionally offered by bank and other financial institutions, that pays a fixed interest rate on money held for a period of time that has been agreed in advance. In Certificates of Deposit the funds must remain untouched for the entirety of the term. And;
6. Any Other Instruments Creating or Acknowledging Indebtedness:
including but not limited to leases, certificates and/or promissory notes other than:
(a) any instrument acknowledging or creating indebtedness for, or for money borrowed to defray, the         consideration payable under a contract for the supply of goods or services;
(b) a check or other bill of exchange, a bankers draft or a letter of  credit;
(c) a bank note, a statement showing a balance in a current, deposit  or savings account, a lease or other   disposition of property;
(d) a contract of insurance;
(e) any instrument creating or acknowledging indebtedness in  respect of money raised by the Government of the Islands or any  public authority created thereby; and
(f) an instrument creating or acknowledging indebtedness and creating security for that indebtedness over land.

3. INSTRUMENTS GIVING ENTITLEMENTS TO SECURITIES

The Schedule 1 of SIBA defines the Instruments Giving Entitlement to Securities as warrants and other instruments entitling the holder to subscribe for securities falling within the definitions of Shares and Instruments Creating or Acknowledging Indebtedness. These Instruments Giving Entitlement to Securities includes include but are not limited to:
1. Warrants: A warrant is a financial instrument that provides the holder of the warrant the right, but not the obligation, to buy a company’s stock in the future at a predetermined price.
2. Stock Rights: such as Instruments issued by companies to provide current shareholders with the opportunity to preserve their fraction of corporate ownership.

4. CERTIFICATES REPRESENTING CERTAIN SECURITIES

SIBA in its Schedule 1, defines the Certificate Representing Certain Securities as the instruments which confer contractual or proprietary rights:

(a) in respect of any security such as Shares, Instruments Creating or Acknowledging Indebtedness and/or Instruments Giving Entitlement to Securities being a security 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 the consent of that person.

The most popular Certificates Representing Certain Securities are also known as depositary receipts or global depositary receipts and are a negotiable certificate issued by a bank or financial institutions that represents shares or stocks in a foreign company traded on a local stock exchange that allows the investors the opportunity to hold shares in the equity of foreign countries. It gives them an alternative to trading on an international market.

5. OPTIONS

An Option is a contract which conveys to its the holder the right, but not the obligation, to buy or sell a specific quantity of an underlying asset or instrument ata specified strike price on or before a specified date, depending on the style of the option. Options may be traded between private parties in over-the-counter (OTC) transactions, or they may be exchange-traded in live, public markets in the form of standardized contracts.
The Schedule 1 of SIBA defines Options as the Options to acquire or dispose of:
(a) a security falling in any other paragraph of this Schedule 1 of SIBA;
(b) any currency;
(c) any precious metal; or
(d) an option to acquire or dispose of a security falling within this paragraph by virtue of subparagraph (a), (b) or (c) above.

6. FUTURES

A Future Contract or Futures are standardized legal contracts to buy or sell something at a predetermined price for delivery at a specified time in the future, between parties not yet known to each other.
The Schedule 1 of SIBA includes the following as Futures:
1. Rights under a contract for the disposal of a commodity or property of any other description under which delivery is to be made at a future date and at a price agreed upon when the contract is made other than a contract made for commercial and not investment purposes.
2. A contract is to be regarded as made for investment purposes if it is made or traded on a recognised securities exchange or made otherwise than on a recognised securities exchange but is expressed to be as traded on such an exchange or on the same terms as those on which an equivalent contract would be made on such an exchange.
3. A contract not falling within paragraph above is to be regarded as made for commercial purposes if under the terms of the contract delivery is to be made within seven days.
4. The following are indications that a contract not falling within paragraph 2 or 3 above is made for commercial purposes and the absence of them is an indication that it is made for investment purposes:
(a) one or more of the parties is a producer of the commodity or other property or uses it in that person’s business; or
(b) the seller delivers or intends to deliver the property or the purchaser takes or intends to take delivery of it.
5. It is an indication that a contract is made for commercial purposes that the prices, the lot, the delivery date or other terms are determined by the parties for the purposes of the particular contract and not by reference (or not solely by reference) to regularly published prices, to standard lots or delivery dates or to standard terms.
6. The following are indications that a contract is made for investment purposes:
(a) it is expressed to be as traded on a securities exchange;
(b) performance of the contract is ensured by a securities exchange or a clearing house; or
(c) there are arrangements for the payment or provision of margin.
7. For the purposes of paragraph 1 above, a price is to be taken to be agreed on when a contract is made:
(a) notwithstanding that it is left to be determined by reference to the price at which a contract is to be entered into on a market or exchange or could be entered into at a time and place specified in the contact; or
(b) in a case where the contract is expressed to be by reference to a standard lot and quality, notwithstanding that provision is made for a variation in the price to take account of any variation in quantity or quality on delivery.

7. CONTRACTS FOR DIFFERENCES

A Contract for Difference is an agreement that creates, defines, and governs mutual rights and obligations between two parties, typically described as “buyer” and “seller”, stipulating that the buyer will pay to the seller the difference
between the current value of an asset and its value at contract time.
SIBA in its Schedule 1 defines Contracts for Difference as rights under;
(a) a contract for differences; or
(b) any other contract the purpose or pretended purpose of which is to secure a profit or avoid a loss by reference to fluctuations in:
(i) the value or price of property of any description; or
(ii) an index or other factor designated for that purpose in that contract; other than;
(A) rights under a contract if the parties intend that the profit is to be secured or the loss is to be avoided by one or more of the parties taking delivery of any property to which the contract relates; or
(B) rights under a contract under which money is received by way of deposit on terms that any interest or other return to be paid on the sum deposited will be calculated by reference to fluctuations in an index or other factor.

8. Virtual Assets

On October 2020, an amendment to SIBA came into effect providing for certain circumstances in which “virtual assets” may fall or may be considered as securities for the purposes of the SIBA.
Virtual assets are defined as a digital representation of value that can be digitally traded or transferred and can be used for payment or investment purposes but do not include a digital representation of fiat currencies. Similarly, after the above-mentioned amendment SIBA, contracts made for investment purposes not only on a recognised securities exchange but also on any virtual asset trading platform in the case of virtual assets may be considered as securities, specifically, virtual assets which can be sold, traded or exchanged that represent or can be converted into any of the traditional “securities” within scope of the SIBA, or which represent a derivative of any of those securities.

We have explore the Investment Businesses regulated by SIBA in this Article but for specific guidance on the features and regulations on any of the securities discussed above 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