Jersey is long established as a primary centre for the establishment of offshore funds and has been at the forefront of international developments, which have attracted international sponsors, promoters, fund managers, advisors and investors. One of the key features of Jersey’s fund industry is the flexibility and range of structures and corresponding regulatory and commercial approaches that can be used for funds.
Jersey Private Funds (JPF)
The Jersey Private Fund Guide (the JPF Guide) defines a JPF as a private investment fund involving the pooling of capital raised for the fund and that operates on the principle of risk spreading. It describes certain vehicles that are not intended to fall within the scope of the JPF Guide, which broadly include holding companies, joint ventures, securitisation vehicles, family office vehicles and carry/ incentivisation vehicles. A JPF may be structured in Jersey as a company, unit trust or partnership or an equivalent vehicle overseas. It requires a consent issued under a regulation known as the Control of Borrowing (Jersey) Order 1958 (the COBO Order) and may be established using a streamlined authorisation process. The promoter of the JPF will not require the prior approval of the Jersey Financial Services Commission (the JFSC).
In terms of offering a JPF, there is no requirement for it to have an offer document but investors must acknowledge in writing a prescribed investment warning and disclosure statement. Neither the number of offers nor the number of investors can exceed 50, and each investor must be either a "professional investor" or an "eligible investor" each as defined in the JPF Guide, which includes an investor that invests a minimum of £250,000 (or currency equivalent). The JPF Guide provides guidance in relation to how offers and investors will be counted.
A requirement of the JPF Guide is that a JPF must appoint a "Designated Service Provider" (DSP), which should be an existing Jersey regulated full substance entity and as such is a role typically carried out by the JPF's administrator. The DSP must, among other duties, make all reasonable enquiries to ensure that the JPF meets all eligibility criteria, both on its establishment and on a continuing basis and ensure that all necessary due diligence on the JPF and all related parties (including the promoter and service providers) is carried out.
The JPF has replaced the three existing fund products that previously catered for private funds in Jersey, being Very Private Funds, COBO-Only Funds and Private Placement Funds. Existing Very Private Funds, COBO-Only Funds and Private Placement Funds may elect to convert into a JPF (but are not required to convert, and if they do not convert, will continue to remain subject to their current regulatory regime). It is no longer possible to launch a new fund as a Very Private Fund, COBO-Only Fund or Private Placement Fund, all of which were categories of private funds that could be launched prior to March 2017. A new private fund may only now be launched as a JPF.
Unregulated Funds are exempted from regulation as collective investment funds by virtue of an exemption order that specifies schemes or arrangements that have been established as either:
- an unregulated exchange-traded fund, being a scheme or arrangement established in Jersey, which is a closed-ended fund and which is listed on a stock exchange or market or which is applying for its shares or units to be granted such a listing; or
- an unregulated eligible investor fund, being a scheme or arrangement established in Jersey and in which only eligible investors may invest, being either an investor who makes a minimum initial investment of US$1 million or the currency equivalent (whether through the initial offering or by subsequent acquisition) or, alternatively, institutional investors or professional investors, as defined in the order. An unregulated eligible investor fund may be open or closed and transfers of interests are only possible to other eligible investors. Stock exchange listings for unregulated eligible investor funds will be possible subject to transfer restrictions, as referred to above, still applying.
It should be noted, however, that the States of Jersey and the JFSC have issued a feedback consultation and responses paper dated 15 March 2017 suggesting that unregulated exchange-traded funds may not be available in the near future.
Either type of Unregulated Fund may take any form recognised under the laws of Jersey as being a Jersey company (including a cell structure), a Jersey limited partnership having at least one Jersey corporate general partner or a unit trust having a Jersey corporate trustee or manager. Subject to the structure complying with the order, there is no regulatory review or oversight of the terms or conduct of such an Unregulated Fund and, therefore, processes for their establishment will depend only on being carried out in accordance with the exemption order.
The offer and / or listing document of an Unregulated Fund must contain a prominent statement that the fund is unregulated, together with a prescribed form of investment warning. In order to claim exemption as an Unregulated Fund, a completed notice needs to be filed with the Jersey registrar of companies.
Following implementation of the Alternative Investment Fund Managers Directive (the AIFMD) it is no longer possible to market JPFs, COBO-Only Funds, Private Placement Funds or Unregulated Funds in the EU/EEA without further regulation to ensure compliance with the AIFMD (as set out in further detail below).
Where a fund is to be regulated as a collective investment fund, which means an unlimited number of offers can be made to an unlimited number of investors, then a light level of regulation is still possible provided that all investors qualify as expert investors and expressly acknowledge an investment warning, which allows a fund to qualify as an Expert Fund under the JFSC Expert Fund Guide. Expert investors include amongst other tests any person investing at least $100,000 or currency equivalent. The approval process for seeking a permit for the fund is streamlined and allows for establishment of a fund within as little as three days of the formal filing of the application. Other necessary features of Expert Funds include the following:
- The investment manager must be established in an OECD member state or a state that is or subject to a memorandum of understanding with the JFSC or otherwise approved by the JFSC; and either be regulated in that state or satisfy certain criteria under the Expert Fund Guide.
- An Expert Fund is available only to expert investors.
- The offer document for an Expert Fund must comply with certain content requirements.
- The fund company, general partner or trustee requires at least two Jersey resident directors and the fund itself must be a Jersey company or have a Jersey general partner (if a limited partnership) or a Jersey trustee (if a unit trust).
- An Expert Fund must have a Jersey “monitoring functionary” being either an administrator or a manager in Jersey.
The JFSC Listed Fund Guide provides a fast track process, based on the success of the Expert Fund, for the establishment of corporate closed-ended funds that are listed on recognised stock exchanges or markets.
The investment manager of a Listed Fund must be established in an OECD member state or in a jurisdiction with which the JFSC has entered into a memorandum of understanding or otherwise be approved by the JFSC; and either be regulated in that state or satisfy certain criteria under the Listed Fund Guide. Other necessary features of Listed Funds include the following:
- Listed Funds must have at least two Jersey resident directors and a Jersey based monitoring functionary to ensure compliance with the Listed Fund Guide.
- Treatment as a Listed Fund is currently only available to closed-ended Jersey corporates.
- Listed Funds enjoy a fast track approval process modelled on the Expert Fund approach.
- There is no minimum subscription and listed funds are available to any investor category.
Eligible Investor Funds
Eligible Investor Funds are restricted to “eligible investors” (which, amongst other tests, includes a person committing at least US$1 million (or equivalent) to the fund). They are subject to a streamlined approval process and a relatively light degree of regulation under the Eligible Investor Fund Guide. There are also limited content requirements in respect of an Eligible Investor Fund’s offering document.
The investment manager of an Eligible Investor Fund must be of good standing, established in an OECD member state or a jurisdiction with which Jersey has entered into a memorandum of understanding or otherwise be approved by the JFSC; and either be regulated in that state or satisfy certain criteria under the Eligible Investor Fund Guide. An Eligible Investor Fund must have a Jersey based administrator, manager or (in the case of a closed-ended unit trust) trustee and at least two Jersey-resident directors. If open-ended a Jersey-resident custodian will also need to be appointed (unless it is a hedge fund in which case a prime broker with a credit rating of A1 / P1 is required).
Eligible Investor Funds are alternative investment funds (AIFs) for the purposes of the AIFMD and are therefore only available when they are to be marketed into the EU / EEA. For more information on the AIFMD please see below.
To the extent that a fund is to be offered to more than 50 investors or to be listed and the fund is not able to fall under the expedited regulatory approach offered under any of the Expert Fund Guide, the Listed Fund Guide or the Eligible Investor Fund Guide, a collective investment fund may be regulated as an Unclassified Fund. In this situation the JFSC will regulate the fund in accordance with its policy, which will need to include compliance by the promoter of the fund with the JFSC’s promoter policy. This will include an evaluation of the track record, experience and reputation of the promoter of the fund as well as of the financial resources and spread of ownership of the promoter. The JFSC will review the prospectus, constitutional documents and material agreements relating to the fund. The fund operation and investment and borrowing restrictions will need to comply with certain established standards against which the JFSC will evaluate funds of this type. Other relevant features of Unclassified Funds include the following:
- The extent of compliance with regulatory guidelines will depend on the minimum investment level and whether the fund is open-ended (more tightly regulated) or closed-ended.
- Structures of an Unclassified Fund will, for an open-ended fund, require a Jersey resident manager and custodian. For a closed-ended fund, no separate custodian is required.
- The lower the minimum investment requirement, the more closely the JFSC will regulate a fund of this type.
Recognized Funds are authorised as collective investment funds complying with a separate prescriptive Order. Funds of this type may be marketed directly to the “retail” public in the UK under the United Kingdom Financial Services & Markets Act 2000, taking advantage of Jersey’s designated territory status for the purpose of this legislation. Recognized Funds are more highly regulated and provide investors with access to a statutory compensation scheme. Recognized Funds may also be marketed to the public in a number of other territories, including Australia, Belgium, Hong Kong, the Netherlands and South Africa. Functionaries of Recognized Funds are regulated under the Collective Investment Funds Law.
Regulation of service providers to funds
The regulation of service providers to funds in Jersey is under the Financial Services (Jersey) Law, as providers of “fund services business”. Once an entity is registered for a class of funds service business it no longer needs to apply for authorisation in relation to each new fund for which it provides that class of services.
This regime has also provided significant advantages for the provision of Jersey fund services to non-Jersey domiciled funds, which means that non-Jersey domiciled funds are subject only to a notification procedure in relation to their service providers and no longer need to seek fund by fund regulation.
A separate briefing on the regulation of service providers to funds is available upon request.
The Alternative Investment Funds Directive
Since July 2013, Jersey alternative investment fund managers (AIFMs) marketing Jersey or other non-EU/EEA AIFs to investors in the EEA have been required to comply with additional disclosure, transparency and reporting requirements pursuant to the AIFMD.
In addition to the requirements summarised above for each relevant fund product, where there is to be marketing into the EU/EEA pursuant to the AIFMD then the impact of the AIFMD on Jersey AIFMs and AIF funds is as follows:
- Very Private / COBO-Only / Private Placement / Jersey Private Funds
These funds must apply to the JFSC for an AIF Certificate under Jersey’s Alternative Investment Funds (Jersey) Regulations (the AIF Regulations) and adhere to the applicable sections of the JFSC’s AIF Codes of Practice (the AIF Codes).
Jersey-based AIFMs of these funds will need to be licensed by the JFSC under the Financial Services (Jersey) Law as providers of AIF Services Business and must comply with relevant sections of the AIF Codes.
- Expert / Listed / Eligible Investor / Unclassified / Recognized Funds
These funds are already required to be regulated under the Collective Investment Funds (Jersey) Law 1988 and their service providers are required to be regulated under the Financial Services (Jersey) Law. Therefore, the only additional regulatory requirements pursuant to the Jersey AIF Regulations are compliance with applicable sections of the AIF Codes (being in relation to disclosure, reporting and asset stripping together with notification to the JFSC in advance of marketing).
- Unregulated Funds
These funds must be converted to another form of fund (such as an Eligible Investor, Listed, or Expert Fund) before they may be marketed into the EU/EEA.
Jersey offers a location for investment funds which does not impose its own tax burden on an investment fund or its investors.
Jersey domiciled investment funds may be structured as companies (including protected cell companies and incorporated cell companies), limited partnerships (including incorporated limited partnerships and separate limited partnerships) or unit trusts. They may be open- or closed-ended. A number of enhancements to Jersey’s existing company law have further developed the flexibility for funds structured as companies.
Separate briefings relating to unit trusts, companies, cell companies and limited partnerships are available upon request.