Background to the law
Jersey is one of the premier offshore jurisdictions for the establishment of investment funds and is highly regarded for the quality of its regulatory regime and its legal and service providers. Investment funds contribute significantly to Jersey's finance industry and a variety of innovative products and structures is available to suit all types of investor and promoter. This Briefing provides an outline description of the range of investment funds which can be established in Jersey and the regulatory controls which may be applied to such funds by the Jersey Financial Services Commission (the "Commission").
The form which a Jersey fund takes, and the level of regulatory oversight applicable to the fund, depends, amongst other things, on how widely the fund is held, whether any formal offering document is used, the number of offers made to potential investors and the status, or sophistication, of investors.
Jersey fund structures
Jersey funds will often take the form of a Jersey incorporated company, a Jersey law unit trust, or a Jersey registered limited partnership (or a combination of these structures). Corporate vehicles are incorporated either as private or (more usually) public companies under the provisions of the Companies (Jersey) Law 1991 (the "Companies Law"). Par value and no par value companies can be incorporated, as well as protected cell companies and incorporated cell companies, which are becoming increasingly popular in the context of investment funds. Jersey law unit trusts are established against the statutory background of the Trusts (Jersey) Law 1984, although a large proportion of the administration and affairs of the unit trust will be governed by detailed provisions set out in the trust instrument of the fund. Jersey limited partnerships are governed by the provisions of the Limited Partnerships (Jersey) Law 1994, or the laws on separate and incorporated limited partnerships; in each case the administration and operation of the limited partnership will be primarily regulated by the limited partnership agreement.
Fund vehicles can be either "open-ended", meaning that shares, units or limited partnership interests (collectively referred to in this Briefing as "securities") can be continuously issued and redeemed to meet demand from investors, or "closed-ended", meaning that securities are usually offered on a single or, at least, a limited number of, occasions with investors being "locked in" for the duration of the life of the fund, unless a secondary market exists in the securities in question.
Private and public funds
The principal pieces of legislation used by the Commission to regulate the funds sector are: for public funds, the Collective Investment Funds (Jersey) Law 1988 (the "CIF Law") and, for private funds, the Control of Borrowing (Jersey) Order 1958 (the "COBO Order"). In addition, funds must comply with the requirements of the Proceeds of Crime (Jersey) Law 1999 and its subordinate orders, which apply anti-money laundering rules to all financial services businesses in Jersey. Certain providers of fund services business must also be registered pursuant to the Financial Services (Jersey) Law 1998 (the "FS Law").
The various categories of Jersey funds are set out below, categorised from unregulated to highly regulated.
Unregulated funds are a category of funds which are permitted to fall entirely outside the regulatory regime applicable to collective investment funds under the CIF Law by virtue of statutory exemption contained in the Collective Investment Funds (Unregulated Funds) (Jersey) Order 2008 (the "Unregulated Funds Order"). The Unregulated Funds Order provides for two types of unregulated fund: "Unregulated Eligible Investor Funds" and "Unregulated Exchange-Traded Funds".
Unregulated Eligible Investor Funds are suitable only for eligible investors which, among other things, include those who agree to pay a consideration of not less than US$1 million, or other currency equivalent, for the acquisition of securities in the fund. Such funds may be open- or closed-ended and may be structured as a Jersey company, Jersey registered limited partnership or a unit trust.
Unregulated Exchange-Traded Funds have no investor qualification criteria but must be listed on one of the recognised exchanges listed in the Unregulated Funds Order, within 90 days of notification of the establishment of the fund being submitted to the Commission. Such funds may only be closed-ended and may be structured as a Jersey company, a Jersey registered limited partnership or a unit trust.
Common features of both types of unregulated funds are that there are no requirements for such funds to appoint a Jersey-based manager or administrator or Jersey-resident directors. Save in the case of general partners of Jersey limited partnerships or trustees of Jersey unit trusts, any Jersey-resident services provider to the fund must be registered under the FS Law to conduct the particular class of fund services business in relation to the fund. There is no requirement to appoint a custodian in relation to the assets of an unregulated fund. The offering document relating to the fund must contain a warning to investors that the fund is not regulated. No other disclosure requirements are prescribed in the Unregulated Funds Order nor does it contain any specific investment or borrowing restrictions.
As this type of fund is unregulated, the offering of securities in the fund may commence immediately upon the execution of the fund documents. The timing for the launch of the fund is, therefore, entirely in the hands of the fund's sponsor.
For further information on Jersey unregulated funds please refer to our Briefing "Jersey Unregulated Funds".
Vehicles formed for the private investment purposes of a single corporate group or institution, or a small number of co-investors (usually, not exceeding fifteen in number), may be characterised as "private" funds or "club" arrangements.
Private funds (whether established as a company, unit trust or limited partnership) can be established within a few working days following finalisation of documentation, subject to disclosure to the Commission of the identity of the proposed beneficial owners of the fund. Such funds receive regulatory consent under the COBO Order, but are subject to little, if any, ongoing regulatory supervision. There is, accordingly, great flexibility in the way in which such private funds can be structured and operated.
Providers of services to private funds are usually eligible to benefit from statutory exemptions contained in the FS Law, thereby negating the need to be registered pursuant to the FS Law in respect of the services provided by them to the fund.
Private placement funds
The next broad category of funds covers funds where participation is restricted to a limited number of investors, but where some formal marketing is undertaken to generate investor interest. Typically, these funds will be marketed through a private placement memorandum made available on a limited basis to a predetermined category of potential investors. Provided that the number of formal offers made and the ultimate number of investors does not exceed 50 persons (and subject to compliance with certain other marketing criteria set out in the CIF Law), private placement funds are not subject to the regulatory controls imposed under the CIF Law. However, the Commission does exercise limited ongoing supervision of private placement funds by means of the conditions attached to the consent which each fund is obliged to obtain from the Commission under the COBO Order. The offering document of the fund will be reviewed by the Commission and a limited number of standard disclosures is required.
Provided that the targeted investors are professional investors or a high investment minimum amount is set for each investor (i.e. at least £250,000 or other currency equivalent), there is considerable flexibility in the way in which private placement funds can be structured and operated. The providers of services to the fund will normally be exempt from the requirement to register under the FS Law by virtue of a specific statutory exemption.
Expert funds are funds which fall within the definition of a "collective investment fund" under the CIF Law, but are subject to fewer constraints than unclassified collective investment funds (see below). An "expert fund" is one which complies with the requirements of the Jersey Expert Fund Guide issued by the Commission and is marketed to "expert investors" (as defined in the Jersey Expert Fund Guide) which, among other things, includes any person committing to invest at least US$100,000 (or its currency equivalent) in the fund.
The expert fund classification has been designed to provide a flexible, "fast track" procedure for the establishment of investment funds in Jersey aimed at sophisticated, institutional and high net worth investors and the Commission will adhere to a fast track approval process which aims to issue all regulatory approvals within three working days from the date of filing of agreed fund documents.
Expert funds can take advantage of limited disclosure requirements in their offering documents and will be subject to "self-certification" by a Jersey-based manager or administrator (the "monitoring service provider") that the fund qualifies as an Expert Fund. The monitoring service provider will be responsible for monitoring the fund's compliance with the requirements of the Jersey Expert Fund Guide and the fund's investment and borrowing restrictions. Expert Funds must appoint an investment manager or adviser which is regulated in an OECD member state or a country which has entered into a memorandum of understanding with the Commission or is otherwise approved by the Commission.
Listed funds also fall within the definition of a "collective investment fund" under the CIF Law and must comply with the requirements of the Jersey Listed Fund Guide issued by the Commission. In order to qualify as a listed fund, the fund must be a closed-ended corporate fund, listed on one of the recognised stock exchanges or markets set out in the Jersey Listed Fund Guide. Unlike expert funds, there are no minimum investment criteria attached to listed funds, but they are otherwise identical in terms of structural requirements to expert funds.
As in the case of expert funds, the listed fund classification has been designed to provide a flexible "fast track" procedure for the establishment of investment funds in Jersey which are to be listed on a recognised stock exchange or market. The Commission will adhere to a fast track approval process which aims to issue all regulatory approvals within three working days from the date of filing of agreed fund documents.
Unclassified collective investment funds
If a public offer to participate in a fund will be made (which will be the case if the fund will be offered to more than fifty potential investors) or the fund is to be listed, then, unless the fund qualifies as an unregulated, expert or listed fund, the fund will fall within the statutory definition of a "collective investment fund" for the purposes of the CIF Law and will be subject to standard supervision by the Commission under the CIF Law.
In this case, each of the fund's Jersey fund service providers will be required to be licensed under the FS Law to perform the particular category of fund services business it will be providing to the fund and to comply with any conditions contained in its licence and with the codes of practice for fund services business issued by the Commission pursuant to the FS Law. The fund itself (in the case of a corporate fund) or the general partner (in the case of a limited partnership) or the trustee (in the case of a unit trust) will be required to obtain a certificate in relation to the fund from the Commission under the CIF Law and must comply with the conditions set out in the certificate. Both the fund and the fund service providers will be subject to ongoing supervision by the Commission.
There are no detailed legislative requirements governing the constitution of such funds, their mode of operation or the investment restrictions they must follow, although certain well-established prudential standards form the basic benchmarks against which the Commission evaluates these funds and there are prescribed disclosure requirements for such funds' offering documents. There is still a large amount of flexibility with regard to how unclassified collective investment funds may be structured and operated.
This category is for funds which wish to take advantage of Jersey's Designated Territory status under the United Kingdom Financial Services and Markets Act 2000 ("FSMA") such that they may be marketed freely to the public in the United Kingdom under FSMA, subject to compliance with United Kingdom regulatory marketing requirements. The requirements for the constitutional documents of such funds, their mode of operation, the categories of investments and assets they can acquire and the investment restrictions which they must follow are very prescriptively set out in the Collective Investment Funds (Recognized Funds) (General Provisions) (Jersey) Order 1988 and the Collective Investment Funds (Recognized Funds) (Rules) (Jersey) Order 2003. Funds within this category are the most highly regulated under Jersey law and are subject to a statutory compensation scheme for the protection of investors. In terms of structure, recognized funds can only be open-ended corporate funds or unit trusts.
Authorisation procedure and timetable
The authorisation procedure and timetable for Jersey funds depend largely on their regulatory classification for Jersey purposes. Different regulatory consents are required for a company, trust or limited partnership, but each involves an application to the Commission, save, as described above, in the case of unregulated funds.
No regulatory approvals are required in relation to unregulated funds. However, with the exception of general partners of limited partnerships and trustees of unit trusts, should Jersey-based service providers who are not already licensed or exempt from the requirement to hold a licence under the FS Law be appointed in relation to such a fund, such service providers will be required to apply for a licence to conduct the particular category of fund services business in relation to the fund.
Obtaining regulatory consents for the establishment of private funds is a relatively straightforward process. Consents can usually be obtained within a few working days of application.
Private placement funds
The process for establishing a private placement fund involves two stages. The first stage is an initial review stage during which the proposal in overview is considered, the identity and standing of the promoter is assessed and an "in principle" consent is obtained. It usually takes approximately ten working days for the Commission to grant its in principle consent, although this may take longer in relation to a fund where the promoter is not known to the Commission.
Once the Commission has indicated in principle that the application may proceed, the draft fund private placement memorandum must be submitted together with the application for the relevant regulatory consent. The Commission will usually approve the private placement memorandum within ten to fifteen working days of submission and the appropriate regulatory consent is normally issued two business days thereafter.
Expert funds and listed funds
In the case of expert or listed funds, there is a "fast track" regulatory authorisation process. An expert or listed fund application form is submitted to the Commission, along with the latest draft of the prospectus or other offering document. Provided that the applicant confirms that the fund meets the Commission's published guidelines for expert or listed funds, as appropriate (or, alternatively, confirms that any derogation from the guidelines has been previously agreed with the Commission), the fund should be authorised within three working days of the application being made.
Unclassified collective investment funds
The process for establishing an unclassified collective investment fund also involves two stages. The first stage is an initial review stage during which the proposal as a whole is reviewed, the identity and standing of the promoter are considered and an "in principle" consent is obtained. It usually takes approximately ten working days to obtain in principle consent in relation to an unclassified collective investment fund, although this may take longer where the promoter is not known to the Commission.
Once the Commission has indicated in principle that the application may proceed, one proceeds to the second stage, the "documentary review" stage, at which the draft fund offering document, the draft constitutional documents for the fund and any material contracts (such as the management agreement, administration agreement and investment management agreement) must be submitted together with the application for a certificate in relation to the fund under the CIF Law. The Commission will usually indicate whether the documentation is satisfactory within fifteen working days of submission and the fund certificate will normally be issued within a matter of a few business days thereafter.
Any Jersey-based service provider, which is to provide services to the fund and is not already licensed to conduct that particular class of fund services business pursuant to the FS Law, is required to submit an application for such a licence. Such licence applications may take as long as six weeks to process in the event that the directors and major shareholders of the service provider are not known to the Commission. This additional timing will, therefore, need to be taken into account when preparing the fund's launch timetable.
In common with unclassified collective investment funds, recognized funds are subject to a two-stage regulatory approval process, comprising the "in principle" consent stage as described above, followed by the document review stage. The main differences in the approval process for recognized funds lies in the document review stage. The Commission will take between four and six weeks to review the fund documents, provide any comments and issue the recognized fund certificate in respect of the fund. During this period, it is also necessary for the Financial Services Authority in the United Kingdom to approve the fund and this approval normally takes approximately three weeks. Finally, each Jersey functionary to a recognized fund must apply for a permit under the CIF Law, to act in the relevant capacity in relation to the fund. Permit applications can take up to six weeks to process in the case of functionaries who are not already the holders of a permit in relation to a recognized fund.
Taxation of funds in Jersey
All types of investment funds established in Jersey can benefit from the absence of any Jersey income tax on non-Jersey source investment income and profits.
Since 2009 Jersey has had a general zero rate for corporate tax (subject to certain limited exceptions). As a result, funds established as companies will pay no Jersey income tax and there is no requirement to withhold tax on interest or dividends payable by such corporate funds.
In relation to unit trusts established in Jersey, no assessments to Jersey income tax are raised in respect of investment income or profits arising from non-Jersey sources or from bank deposits held by such unit trusts in Jersey.
Limited partnerships are tax transparent vehicles and are not, therefore, subject to Jersey income tax in their own names. Non-Jersey resident investors in a Jersey limited partnership do not pay any Jersey tax in respect of non-Jersey source investment income or profits, or in respect of interest on bank deposits held by the limited partnership in Jersey.