Cayman and the BVI: Facilitating Chinese Inbound and Outbound Investment

For the six-month period ending in June 2017, over 50 new Cayman companies had been listed on the Hong Kong Stock Exchange (HKSE). The HKSE now has more than 1000 Cayman companies listed on its main board and on Hong Kong's Growth Enterprise Market (GEM). Cayman Islands companies currently account for approximately 50 per cent of the number of companies listed on the HKSE with growth expected to increase. The Hong Kong IPO market is also expected to sustain its momentum in 2018.

For cayman venture capital and private equity funds, the Cayman exempted limited partnership remains the preferred structure due to its flexibility and because it is very well understood by Chinese venture capital promoters and private equity asset managers and investors. For hedge fund managers, the Cayman corporate fund structure is preferred and the Cayman segregated portfolio company (SPC) is particularly popular because of the cost and administrative economies of scale benefits that can be achieved by administering multiple funds within the SPC. The SPC structure, for example, permits the creation of segregated portfolios that can each have their own investors and be used to implement a different investment strategy and which has its own assets and liabilities, separate from the other segregated portfolios of the SPC. Another flexible advantage of the SPC is that it can allow service providers, such as fund administrators and prime brokers, to be appointed to service specific portfolios or all of them.

In operation for just over a year, Cayman Limited Liability Companies (LLCs) have proven to be a very popular choice for private equity and hedge fund managers. Widely used in North America, LLCs are most flexible type of fund structure and can enable partnership type provisions such as capital call mechanics to be housed in a corporate vehicle without the need to comply with company law requirements such as those associated with redeeming and issuing shares (as is the case for a normal company). According to the Cayman Registrar of Companies' statistics - as at the end of September 2017 - 663 Cayman LLCs were formed following the enactment of the Cayman Limited Liability Companies Law on 8 July 2016. This has had no corresponding effects on other Cayman structures such as exempted limited partnerships and exempted companies.

Cayman and BVI also saw increased interest from asset managers wishing to use their jurisdictions as domiciles to structure fundraising activities for initial coin offerings (ICOs) and blockchain related applications. However, there are a number of practical difficulties and complexities surround the ICO compliance. This includes compliance with existing regulation concerning due dilligence, anti-money laundering requirements, automatic exchange of tax information requirements and adequate investor disclosure. Cayman and the BVI are closely monitoring how these issues are being addressed by the major onshore jurisdictions, including regular reviews of onshore regulatory directives and guidance, (from the United States Securities and Exchange Commission and the Hong Kong Securities & Futures Commission, for example).

On 1 July 2017, a new beneficial ownership regime came into force in the Cayman Islands to provide for the collection and reporting of certain ultimate beneficial owners of equity interests in Cayman companies and LLCs. The new regime applies to Cayman Islands companies and LLCs, but there are a number of exemptions that apply. For example, entities that are publicly listed, entities that are regulated or licensed under certain Cayman Islands regulatory laws, investment fund vehicles (private equity funds and collective investment schemes) and their operators (such as general partners) may be out of scope and not covered by the regime. We understand that the Cayman regime will undergo further amendments shortly, anticipated in December 2017.

The BVI also introduced a beneficial ownership regime, which came into effect on 30 June 2017. Under the BVI regime, companies that fall within the ambit of the regime are required to identify and collect details of the individuals who ultimately own or control 25 per cent or more of the shares or voting rights, or who otherwise exercise control over the management of the entities that are considered to be in-scope, together with details of certain intermediate holding companies through which such interests are held. Similar to the Cayman regime, there are certain exemptions that apply (including for investment funds, listed companies or companies that are subject to certain direct or indirect regulatory oversight in the BVI or other recognised jurisdictions).

On 2 October 2017, significant changes to the Cayman Islands anti-money laundering regulations regime came into force in order to ensure that Cayman's AML regime be further aligned with Financial Action Task Force Recommendations and developments in international practice. As part of these changes, private equity funds, closed ended investment funds and structured finance vehicles that were previously out of the scope of the Cayman AML regime have now been brought into scope and need to take appropriate steps to comply with Cayman Islands AML laws and regulations.

Maples and Calder
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