Download Marketing and Sale of Securities to Cayman Islands Investors

August 2015
Marketing and Sale of Securities to Cayman Islands Investors
Author:
Jonathan R. McLean, Associate
The Cayman Islands is recognised as one of the world's premier financial and banking
centers. The Cayman Islands is home to approximately 11,000 mutual funds registered
with the Cayman Islands Monetary Authority (“CIMA”), the jurisdiction’s primary regulator.
These funds presently hold over US$2 trillion in assets. In addition to these mutual funds,
there are a significant number of private equity and other private funds not requiring
registration with CIMA; and the value of the assets held by these entities, is also
substantial. In addition to the presence of a large number of funds and due to its high
standard of living, tax neutrality, sophisticated infrastructure and economic and political
stability, the Cayman Islands are also home to many wealthy individuals.
With such an abundance of wealth, many foreign entities seek to market and otherwise sell securities in the
Cayman Islands to Cayman Islands funds and investors. There is a general prohibition in the Cayman Islands
against foreign entities carrying on business without appropriate registration and/or licensing in place and as
such any marketing or sale of securities to Cayman Islands investors should be taken with extreme care so as
not to fall foul of Cayman Islands law.
Foreign Company Registration
Where a foreign company desires to conduct business in the Cayman Islands, in accordance with Section 184
of the Companies Law (Revised) of the Cayman Islands (the “Companies Law”) it must register as a foreign
company and file certain documentation with the Registrar of Companies. The Companies Law defines "foreign
company" to mean an overseas company which (1) establishes a place of business or (2) commences carrying
on business within the Cayman Islands. An "overseas company" is defined as a company, body corporate or
corporate entity existing under the laws of a jurisdiction outside the Cayman Islands. The Companies Law
defines "place of business" to include a share transfer or share registration office. The Companies Law does
not generally define "carrying on business"; however, in relation to the definition of foreign company, the
Companies Law specifies that it includes, without limiting the generality of the term, the sale by or on behalf of
an overseas company of its shares or debentures and offering, by electronic means, and subsequently
supplying, real or personal property, services or information from a place of business in the Cayman Islands or
through an internet service provider or other electronic service provider located in the Cayman Islands.
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The Local Companies (Control) Law (Revised) (the “LCCL”) and the Trade and
Business Licensing Law (Revised) (the “TBBL”)
The LCCL provides that no company shall carry on business in the Cayman Islands unless it is at least 60%
controlled by Caymanians or it is licensed under the LCCL and the TBBL. Any company which fails to comply
with the LCCL will be liable to criminal penalties. The LCCL defines "company" to mean a company
incorporated in the Cayman Islands by virtue of the Companies Law and also a "foreign company" registered
under that law or purporting to carry on securities investment business without a licence or a licence exemption.
Securities Investment Business Law (Revised) (the “SIBL”)
The SIBL is designed to regulate “securities investment business” and covers activities relating to the provision
of investment services and private placement of investment funds as well as other financial services. Any
person, company or partnership (whether general, limited or exempted) which is incorporated or registered in
the Cayman Islands (or which is incorporated or registered outside the Cayman Islands but has an established
place of business in the Cayman Islands) and is carrying on securities investment business must hold a licence
issued by CIMA unless they qualify for an exemption from this requirement. Exemptions fall into two categories.
The first set of exemptions lists activities which are not considered to fall within the definition of securities
investment business. These exemptions take the person carrying on such activities outside the scope of the
SIBL entirely. The second set of exemptions relates to “Excluded Persons” which, for example, includes
persons carrying on securities investment business exclusively for a sophisticated person1, a high net worth
person2 or a company, partnership or trust of which the shareholders, unit holders or limited partners are all
sophisticated persons or high net worth persons. A person who satisfies one of the second set of exemptions
may still be subject to certain provisions of the SIBL.
Mutual Funds Law (Revised) (The “Funds Law”)
The Funds Law is the primary legislation concerning mutual funds in the Cayman Islands. A mutual fund is
defined under the Funds Law as a “company or a unit trust or a partnership that issues equity interests, the
purpose or effect of which is the pooling of investor funds with the aim of spreading investment risks and
enabling investors in the mutual fund to receive profits or gains from the acquisition, holding, management or
disposal of investments.” It should be noted in this context that: (i) “company” also includes foreign companies,
“unit trust” includes a foreign unit trust and “partnership” includes foreign partnerships, general or limited, but
excludes general partnerships constituted under Cayman Islands law; (ii) to be considered an “equity interest”,
a share or unit or interest must be redeemable or repurchasable at the option of the investor and as such,
closed-end funds (i.e. private equity funds) are excluded from the definition; and (iii) “equity interest” excludes
debt and therefore a fund which only issues debt instruments would not be regarded as a mutual fund for these
purposes.
1
A “Sophisticated Person” is someone regulated by CIMA or an overseas regulatory authority recognised by CIMA or whose securities are
listed on a recognised securities exchange or who by virtue of knowledge and experience in financial and business matters is reasonably to be
regarded as capable of evaluating the merits of a proposed transaction and participates in each transaction with a value or in monetary
amounts of at least CI$80,000 (approximately US$100,000).
2
A High Net Worth Person is an individual whose net worth is at least CI$800,000 (approximately US$1,000,000) or any person that has total
assets of not less than CI$4,000,000 (approximately US$5,000,000).
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A mutual fund must not carry on or attempt to carry on business in or from the Cayman Islands without a
licence unless: (a) it is an unregulated mutual fund, (b) it is what we shall refer to as a “private” fund, or (c) it
falls within the exemptions for a licence under the regulated mutual fund provisions of the Funds Law. “To carry
on or attempt to carry on business in or from the Cayman Islands” means that the mutual fund is incorporated
or established in the Cayman Islands or, regardless of where it is incorporated or established, a mutual fund
(“Foreign Fund”) which makes an invitation to the public in the Cayman Islands to subscribe for its equity
interests. An invitation to any the following persons (which is a non-exhaustive list) may constitute an invitation
to the public in the Cayman Islands: (i) individuals who are resident in the Cayman Islands; (ii) ordinary
resident Cayman Islands’ companies, except to the extent that the investors or offer is made to such
companies exclusively outside of the Cayman Islands; (iii) the Cayman Islands’ offices of foreign companies
doing business locally in the Cayman Islands; (iv) partnerships established under Cayman Islands law and
engaged in local business in the Cayman Islands; and (v) trustees of trusts established primarily for the benefit
of individuals resident in the Cayman Islands (collectively, the “Cayman Public”).
An invitation to any the following persons will not constitute an invitation to the Cayman Public: (i)
Sophisticated Persons (as defined above); (ii) High Net Worth Persons (as defined above); (iii) the Cayman
Islands Stock Exchange, CIMA, the Cayman Islands Government and any authority created by the Cayman
Islands Government; (iv) persons carrying on securities investment business for one or more Sophisticated
Persons, High Net Worth Persons or entities where the investors are Sophisticated Persons or High Net Worth
Persons; (v) exempted or ordinary non-resident companies registered under the Companies Law; (vi) foreign
companies registered under Part IX of the Companies Law; (vii) any company listed in (v) or (vi) immediately
above that acts as general partner to a partnership registered under Section 9(1) of the Exempted Limited
Partnership Law (Revised); (viii) any director or officer of the entities listed in (v),(vi) or (vii) immediately above
acting in such capacity; and (ix) the trustee of any trust capable of registration under Section 74 of the Trusts
Law (Revised) acting in such capacity (collectively, the “Cayman Non-Public”).
Further, in the event that a Foreign Fund is making an offer of equity interests to the public in the Cayman
Islands it will not need to be registered in the Cayman Islands where they do so: (i) by or through an entity
licensed under the SIBL; and (ii) either: (a) the equity interests are listed on a stock exchange approved by
CIMA; or (b) the Foreign Fund is regulated by an overseas regulatory authority approved by CIMA.
Directors Registration and Licensing Law (Revised) Depending on the proposed scope of the activities to be conducted and therefore the licensing applicable to
the entity in question, registration and licensing of directors may also be required. Directors of (i) a company to
which paragraphs 1 and 4 of Schedule 4 of the SIBL apply; or (ii) a mutual fund regulated under the Funds Law
are required to register with CIMA prior to the registration of the mutual fund and or registration of the
applicable company under SIBL. Immigration Law (Revised) The Immigration Law provides that all non-Caymanians require a work permit in order to carry on any gainful
occupation in the Cayman Islands. A work permit is required regardless of the time period involved and,
accordingly, would be required if a representative of a foreign company came to the Cayman Islands to
conduct the business of the company irrespective of where the person was being remunerated. Activities What activities constitute the carrying on of business within the Cayman Islands and therefore require Cayman
Islands registration, license(s) and/or permissions?
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The answer to such question will depend on the applicable facts as determined on a case by case basis. By
way of example, the sale of shares of a Foreign Fund to the Cayman Public from outside the Cayman Islands
may not of itself constitute carrying on business within the Cayman Islands. Similarly, marketing and sales
through a web site would not constitute carrying on business. However, if the web site is interactive and allows
investors to conclude transactions over the internet it may be arguable that business is being conducted within
the Cayman Islands. Having company personnel visit the Cayman Islands, even for short periods, in order to
distribute marketing and promotional material may constitute carrying on business in the Cayman Islands and
a license would be required where contracts were concluded within the Cayman Islands (i.e. a subscription
agreement).
Foreign entities seeking to market and otherwise sell securities in the Cayman Islands to Cayman Islands
funds and investors should not do so without first determining whether such activities would constitute the
carrying on of business within the Cayman Islands. Determining precisely when certain activities will constitute
engaging in a trade or business in the Cayman Islands will depend upon the exact facts and circumstances of
the particular case. Factors which will play into the determination of this issue include, inter alia, the frequency
of the activities in question, their scope and overall nature and import. Where activities are determined to
constitute engaging in a trade or business in the Cayman Islands, applicable registration, licensing and
permissions will need to be sought.
Author
Global Contacts
Jonathan R. McLean
Associate
+1 345 814 7376
[email protected]
Fawaz Elmalki
Director
Dubai Office
[email protected]
Other Contact
Piers Alexander
Partner
Hong Kong Office
[email protected]
Gene A. DaCosta
Partner
+1 345 814 7765
[email protected]
Linda Martin
Director
London Office
[email protected]
Janice Oh
Director
Singapore Office
[email protected]
This article is not intended to be a substitute for legal advice or a legal opinion. It deals in broad terms only and is intended to merely provide a
brief overview and give general information.
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