Investment Funds 2020

Last Updated November 26, 2019

Jersey

Law and Practice

Authors



Carey Olsen has one of the largest investment fund practices in the offshore world, advising clients on the laws of Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey and Jersey. The funds team comprises 22 partners and a total complement of 80 lawyers. Carey Olsen advises on all types of private, public, retail and listed funds, including open and closed-end funds, limited partnerships, unit trusts and companies. The firm has substantial experience in advising on the full spectrum of fund strategies and asset classes, including credit and debt funds, cleantech funds, real estate funds, private equity funds, venture capital funds, hedge funds, green funds, crypto funds and infrastructure funds. Carey Olsen's credentials include: advising on the SoftBank Vision Fund, the world's largest ever investment fund; being the legal adviser to over 1,400 funds across the Channel Islands, more than any other offshore law firm; and representing 10/10 of the world's top private equity firms.

Jersey is a leading finance centre and the sixth-largest centre for hedge fund management globally. Jersey offers a wide variety of regulatory options, ranging from relatively heavily regulated retail funds that may be offered to the general public, to funds with no regulatory supervision and no investment or borrowing restrictions. The regulator for financial services in Jersey is the Jersey Financial Services Commission (JFSC), which authorises and supervises regulated investment funds.

Jersey Private Funds (JPFs) are frequently used, both by first-time managers and established promoters targeting a limited number of high-value or institutional investors, due to the speed, low cost and flexibility of the JPF regime. Up to 50 offers in a JPF may be made to investors who either qualify as "professional investors" or invest at least GBP250,000 (or the currency equivalent). Two hundred and sixty-six JPFs have been established since they were launched in April 2017.

JPFs are lightly regulated, and simply require that a written consent issued by the JFSC under the Control of Borrowing (Jersey) Order 1958 (COBO) be obtained, which generally takes around 48 hours. Eligibility to secure a COBO consent as a JPF is set out in the Jersey Private Fund Guide (JPF Guide) published by the JFSC. As an additional benefit, the JPF regime provides an exemption to the Financial Services (Jersey) Law 1998 (FSJL) that permits SPV managers, general partners and other service providers to act for JPFs without becoming regulated in Jersey.

Other popular fund types in Jersey include Jersey Eligible Investor Funds (JEIFs) and Jersey Expert Funds, which may be offered to an unlimited number of qualifying investors who invest a minimum of USD1 million (in the case of a JEIF) or USD100,000 (in the case of an Expert Fund) or meet certain other criteria.

Jersey has a strong reputation as a stable and reliable location in which to establish investment funds, which inspires investor confidence. Its strengths as a jurisdiction include a wide range of flexible regulatory regimes, tax neutrality and a wealth of highly skilled service providers with ease of access to the UK markets.

As Jersey is not part of the EU, Jersey funds that will not be sold into the EU/EEA can fall entirely outside the scope of the Alternative Investment Fund Managers Directive (AIFMD). Alternatively, if marketing into the EU/EEA is required, Jersey offers an AIFMD overlay to its existing regulatory regime, which enables Jersey funds that are "alternative investment funds" for AIFMD purposes (AIFs) to comply with the AIFMD without imposing any additional Jersey-specific reporting or other requirements.

For the purposes of Section 2, the term "alternative investment funds" includes private equity, hedge, real estate and other funds that are targeted at sophisticated/expert and other non-retail investors.

Jersey Regulatory Classifications

The key features of each such category of Jersey fund are set out below. The fund type that is most suitable for a promoter will depend largely upon commercial factors, such as the types of investors sought and the level of flexibility required.

JPFs

  • Open to "professional investors" and those investing at least GBP250,000 (or currency equivalent).
  • Up to 50 investors, and must not be listed on a stock exchange.
  • No investment or borrowing restrictions.
  • No requirement for audit.
  • Able to add an AIFMD overlay.
  • No need for Jersey directors or Jersey service providers, other than a local administrator to act as "designated service provider".
  • Fast-track (48-hour) authorisation process.

Where the JPF will appoint a Jersey alternative investment fund manager (AIFM) for AIFMD purposes that is not sub-threshold, that AIFM will need to appoint two or three Jersey directors (depending upon whether the AIFM may handle client monies), who are generally provided by the JPF's Jersey "designated service provider". In that case, audit and certain regulatory and investor disclosure requirements will also apply to the JPF.

Unregulated Funds

These are suitable where a highly flexible structure that will not be sold into the EU/EEA is required (such funds do not meet the requirements of the AIFMD). There are 11 categories of eligible investors who may invest in the fund, including those investing at least USD1 million, investors with a net worth of more than USD10 million (excluding their principal place of residence), and those whose ordinary business or professional activity includes dealing in, managing, underwriting or giving advice on investments.

However, a discretionary investment manager may make investments on behalf of investors who do not qualify as "eligible investors", provided that it is satisfied that the investment is suitable for such investors and they are able to bear the economic consequences of the investment.

  • No need for JFSC approval, as Unregulated Funds are established on a "notification only" basis.
  • No need for Jersey directors or service providers.
  • No audit requirement (unless the fund is a company) and no investment or borrowing restrictions.
  • May be listed, provided that the stock exchange allows restrictions on transfers (such that only "eligible investors" may invest).

Regulated Public Funds

  • Include the categories of Expert Funds, Listed Funds and JEIFs (see below for further detail on each of those fund types).
  • Allow an unlimited number of investors and are suitable for EU marketing.
  • Three business day JFSC authorisation process (or ten business days if a new SPV service provider will be used).
  • No investment or borrowing restrictions.
  • Relatively light-touch regulatory approach.
  • Must be audited.
  • The offer document must comply with certain content requirements (please see 2.1.4 Disclosure Requirements) and investors must sign a prescribed investment warning.
  • Derogations from the relevant JFSC Guide may be sought on a "case-by-case" basis.

Expert Funds

  • A popular fund type that is frequently used in Jersey due to its relative flexibility.
  • Open only to those investing at least USD100,000 or who otherwise qualify as "expert investors" (that is, investors with a net worth of more than USD1 million (excluding their principal place of residence) or who are in the business of buying or selling investments).

Again, discretionary investment managers may invest on behalf of non-expert investors, provided that they are satisfied that the investment is suitable for them and they are able to bear the economic consequences of the investment.

  • May be open-ended (open for redemption at the option of investors) or closed-ended (no absolute investor right to redeem).
  • At least two Jersey resident directors with appropriate experience must be appointed to the fund board (or, if applicable, the board of the general partner or trustee).
  • A licensed Jersey manager or administrator that has two Jersey resident directors with appropriate experience and staff and a physical presence in Jersey is required (unless the fund is a unit trust with a Jersey trustee).
  • A Jersey custodian is needed if the fund is open-ended (or an international prime broker, in the case of a hedge fund).
  • The investment manager/adviser is to be established in an Organisation for Economic Co-operation and Development (OECD) member state or any other state or jurisdiction with which the JFSC has entered into a memorandum of understanding; regulated in its home jurisdiction (or, if not required to be so regulated, approved by the JFSC); without convictions or disciplinary sanctions; solvent; and experienced in using similar investment strategies to those adopted by the fund.

JEIFs

The structural, authorisation and ongoing regulatory requirements of JEIFs are similar to those for Expert Funds, save for the following.

  • There is a higher threshold to qualify as an "eligible investor" than as an "expert investor". The test is the same as for Unregulated Funds, above.
  • A JEIF must be an AIF for the purposes of the AIFMD.
  • Reduced requirements apply to the fund's offering document, given the sophisticated nature of investors in such funds.

Listed Funds

  • Must be a closed-ended Jersey company.
  • At least two Jersey resident directors with appropriate experience must be appointed to the fund's board. A majority of the board must be independent (in particular, independent directors should not be an employee (or recent employee) of the manager, investment manager or any of their associates).
  • No minimum investment but the fund must be listed on a recognised stock exchange; for example, London Stock Exchange (the Main Market, AIM and the Specialist Fund Market), NYSE, NASDAQ, HKEx, Euronext, Johannesburg Stock Exchange or The International Stock Exchange.
  • The investment manager/adviser will need to meet similar tests to those that apply in the context of an Expert Fund.
  • A licensed Jersey manager or administrator that has two Jersey resident directors with appropriate experience and staff and a physical presence in Jersey is required.
  • Adequate arrangements must be made for the safe custody of the fund's property. Where a hedge fund appoints a prime broker, the prime broker must be part of a group with a minimum credit rating of A1/P1 or long-term equivalent.

Please refer to 3 Retail Funds for details of Jersey regulatory classifications that are suitable for retail funds.

Jersey Legal Vehicles

Jersey funds, regardless of their regulatory classification, are usually structured as set out below.

Companies, in which investors typically hold participating shares

Hedge funds are often established as limited companies, and all Listed Funds are required to have that structure. Jersey companies are incorporated under the Companies (Jersey) Law 1991 and they have their own separate legal personality such that they may sue, and be sued, in their own name.

Cell company structures are popular for umbrella funds, as they enable multiple cells to be created with administrative ease and minimal cost while enabling each cell to be ring-fenced for liability purposes. The cells may have different capital structures, boards of directors and articles of association, but will share the same registered office and company secretary.

There are two types of cell companies in Jersey:

  • protected cell companies – the protected cell company and its cells together form a single company, but the assets of each are legally segregated; and
  • incorporated cell companies – each cell is a separate company in its own right.

Jersey is also in the process of implementing legislation to allow for the formation of limited liability companies (LLCs). It is anticipated that a Jersey LLC will be a highly flexible structure and it will be governed by the terms of the LLC agreement made between its members. The LLC will have a separate legal personality and, although a body corporate, may elect to be treated as a company or partnership for tax and accounting purposes.

Limited partnerships, in which investors hold limited partnership interests

These are most typically used for closed-ended private equity funds.

They can be established as:

  • traditional limited partnerships (similar to English limited partnerships) under the Limited Partnerships (Jersey) Law 1994;
  • separate limited partnerships under the Separate Limited Partnerships (Jersey) Law 2011, which have separate legal personality and are therefore similar to Scottish limited partnerships;
  • incorporated limited partnerships under the Incorporated Limited Partnerships (Jersey) Law 2011, which have separate legal personality and are bodies corporate; and
  • limited liability partnerships (LLPs) under the Limited Liability Partnerships (Jersey) Law 2017, whereby a partner of the LLP is generally not liable for the LLP's debts or losses (including those caused by another partner).

Limited partnerships generally consist of one or more general partners who are jointly and severally liable for the partnership's debts and one or more limited partners who are only liable to the partnership to the extent of their agreed contribution.

Some of the key advantages of a limited partnership are as follows:

  • publicly available information is limited and does not include the identity of the limited partners;
  • it is treated as transparent for UK tax purposes;
  • there is a large amount of flexibility in determining limited partners' rights, and they may have greater involvement in the management of the partnership (without losing their liability) than in some other jurisdictions; and
  • limited partnerships are stackable, such that they may act as a general or limited partner to another limited partnership without impacting upon the limited liability of its own limited partners. This is particularly useful in the context of carried interest structures.

Unit trusts, in which investors hold units

Unit trusts are a highly flexible structure and are, in practice, commonly used for JPFs (and, in the context of retail funds, open-ended collective investment funds, or OCIFs, as described in 3 Retail Funds).

They have no separate legal personality and are constituted by a trust instrument entered into by the trustee (and the manager, if one has been appointed). In addition to preserving confidentiality, there can be significant tax advantages where a unit trust structure is used.

JFSC Requirements and Derogations

The JFSC has published guides (together, the JFSC Guides) in relation to a number of types of Jersey fund, setting out the structural and ongoing requirements applicable to the relevant fund type. A summary of each fund type and, where relevant, indicative application timescales is set out in 2.1.1 Fund Structures.

However, derogations from the requirements of the JFSC Guides may be sought on a case-by-case basis.

Where the fund is a collective investment fund (CIF) within the meaning of the Collective Investment Funds (Jersey) Law 1988 (the Funds Law), each of its Jersey service providers will need to hold a licence to conduct the relevant class(es) of fund services business under the FSJL (FSB Licence). Therefore if any SPV service providers, such as a general partner or manager, will be established to act for the fund, an FSB Licence will need to be sought for each such entity.

Funds and their service providers are also required to comply with the codes of practice issued by the JFSC that cover CIFs, fund services businesses and AIFs (including their AIFMs and depositaries, where these are Jersey entities).

The Application Process

In the case of a CIF, personal questionnaires in respect of each of its directors should be submitted to the JFSC well in advance of the fund application, as the JFSC's regulatory checks typically take four to six weeks where the proposed director is not already known to them.

Personal questionnaires should also be submitted for the directors and 10%-plus beneficial owners of any new service providers that are seeking an FSB Licence (the processing time for which is as set out above).

A formal application to the JFSC enclosing (among other things) the fund's offering document and the relevant JFSC application forms would follow.

The cost of the application will vary according to the number of pools of assets (if the fund is an umbrella fund) and the fund's intended Jersey service providers.

The requirement for personal questionnaires does not apply to JPFs, which are subject to a fast-track process whereby the JPF's proposed "designated service provider" makes an application via the JFSC's online portal.

Core Documents

The core documents for a Jersey fund are as follows:

  • offering document;
  • constitutional documents (eg, memorandum and articles of association/limited partnership agreement/trust instrument);
  • fund rules, in the case of umbrella funds;
  • any side letters; and
  • material contracts appointing the fund service providers; eg, management agreement, administration agreement, custody agreement and investment management/advisory agreement.

Private equity funds in Jersey are typically structured as limited partnerships. The liability of limited partners for the debts of the fund shall not extend beyond their agreed capital contributions, provided that they do not participate in the management of the limited partnership for the purposes of the Limited Partnerships (Jersey) Law 1994 (the LP Law).

The LP Law expressly provides for "safe harbours" for a number of specific activities that may otherwise constitute management by a limited partner, including consulting with and advising a general partner with respect to the activities of the limited partnership and voting on, or otherwise signifying approval or disapproval of, such matters as the dissolution and winding up of the limited partnership, the purchase, sale or other dealing in any asset by or of the limited partnership, the creation or renewal of an obligation by the limited partnership, or a change in the nature of the activities of the limited partnership.

Hedge funds are often structured as limited companies, which have a separate legal personality from their shareholders. The circumstances in which the courts may "pierce the corporate veil" and have recourse to shareholders are broadly the same in Jersey as in England: for instance, where a person who is subject to an existing legal obligation deliberately attempts to evade that obligation by interposing a company under his control.

Jersey legal opinions usually focus on matters such as the fact that a company or limited partnership is duly incorporated or established (as applicable) and validly existing under Jersey law and the power of the company or general partner of the limited partnership to enter into certain documents, rather than addressing investor liability issues.

A private placement memorandum or other offering document (PPM) is required to be issued in relation to CIFs. The PPM will need to contain the disclosures set out in:

  • the Collective Investment Funds (Certified Funds – Prospectuses) (Jersey) Order 2012 (unless the fund is a JEIF);
  • the relevant JFSC Guide; and
  • if the fund is an AIF that is not sub-threshold, the Code of Practice for Alternative Investment Funds and AIF Services Business published by the JFSC (AIF Code).

A PPM is not required for JPFs (although certain AIF Code investor disclosures need to be made if relevant). However, a PPM may be issued provided that document contains a directors' responsibility statement, together with all of the material information that investors and their professional investors would reasonably require to make an informed judgement about the merits of investing in the fund and the nature and the level of the risks accepted by so investing.

There are also ongoing investor notification requirements. Under the AIF Code, all AIFMs of Jersey AIFs (other than those that are sub-threshold) are required to periodically disclose matters such as the fund's liquidity arrangements (including special arrangements such as side pockets) and risk profile and risk management systems of the fund to investors and the JFSC. The Jersey requirements mirror those that apply under the AIFMD.

Public fund companies (of any regulatory classification) must file and send to investors annual audited financial statements, and regulated public funds of all structures must file audited accounts with the JFSC. Investors should also be notified of any material changes that may affect their investment. Additional reporting requirements apply in the case of OCIFs (please refer to 3.1.4 Disclosure Requirements). 

Finally, the JFSC Guides and codes of practice set out details of matters that need to be notified to the JFSC or that require its prior consent.

There are a number of family offices and funds of funds established in Jersey. Otherwise, Jersey investors, and non-Jersey investors investing in Jersey funds, are often sophisticated and fall within the institutional or high net worth categories.

Please refer to 2.2.3 Restrictions on Investors for further detail on the types of fund into which Jersey-resident investors may invest.

A fund manager's choice of legal structure will be primarily informed by the nature of the investor and the assets in which they wish to invest. JPFs are a frequently selected structure, and are becoming increasingly popular, but they are not typically used when targeting investors from Jersey.

Jersey residents may invest in any type of Jersey fund, subject to meeting the relevant investor eligibility criteria (please see 2.1.1 Fund Structures).

There are no Jersey-specific restrictions upon a Jersey resident investing in non-domiciled funds of any classification.

The board of directors of a fund company, the general partner of a limited partnership or the trustee of a unit trust (as applicable) is ultimately responsible for the management and control of a Jersey fund. General partners and trustees of public Jersey funds are normally appropriately licensed Jersey entities and this is also a requirement under a number of the JFSC Guides.

Any type of CIF may also appoint a separate manager, which is generally expected to have staff and a physical presence in Jersey (unless an administrator meeting those criteria has also been appointed to the fund). This requirement does not apply to JPFs. It is typical for the fund's non-Jersey promoter or a company within the same group to also act as its investment manager or investment adviser.

Please refer to 2.1.1 Fund Structures: details of the regulatory classification of a Jersey fund will determine which investment limitations or other restrictions, if any, will apply to it.

The FSJL applies to companies incorporated in Jersey carrying out financial services business anywhere in the world, and all persons carrying out financial services business in or from within Jersey.

Accordingly, non-Jersey managers or investment managers/advisers of a Jersey fund are not required to become regulated under the FSJL, provided that their functions are not carried out in or from within Jersey.

However, the JFSC's prior approval is needed for the appointment of any service providers to a CIF of any category. An investment manager/adviser of a JEIF, Expert Fund or Listed Fund is required to provide a confirmation to the JFSC regarding various matters, including that it is regulated in its home jurisdiction (or approved by the JFSC); without convictions or disciplinary sanctions; solvent; and experienced in using similar investment strategies to those adopted by the fund.

Please refer to 2.1.2 Common Process for Setting up Investment Funds regarding the requirement for arranging for a Jersey SPV manager or other service provider to become licensed.

Please refer to 2.3.2 Requirements for Non-local Service Providers.

A manager registered in another jurisdiction may, in principle, provide services to a Jersey fund, provided that the requirements of the relevant JFSC Guide are met (for example, a manager who retains the investment management function must be able to provide the confirmations referred to in 2.1.1 Fund Structures if acting for a JEIF, Expert Fund or Listed Fund).

However, certain fund types must have a Jersey manager or administrator with two appropriately experienced directors, staff and a physical presence in Jersey, unless a derogation from the relevant JFSC Guide is obtained (please see 2.1.1 Fund Structures for further information on this point).

Please refer to 2.1.1 Fund Structures for details of the approximate lead time for obtaining regulatory approval for a given category of fund, together with details of which such categories have a fast-track authorisation process.

Retail funds (as referred to in 3 Retail Funds) are more heavily regulated in Jersey, and this is reflected in the time it typically takes to obtain regulatory approval for such funds.

Marketing Jersey Funds to Jersey Investors

There are no marketing restrictions upon promoting a Jersey fund to Jersey investors, provided that where relevant (for example, in relation to an Expert Fund or JEIF), those persons meet the investor eligibility criteria.

Any marketing of the fund should be undertaken by a distributor that holds a fund services business licence under the FSJL or by the fund itself (if a company). Otherwise, any marketing activities in Jersey should be minimal, such that they fall outside the scope of the FSJL.

Marketing Non-domiciled Funds to Jersey Investors

Jersey funds are generally used to raise capital from investors internationally. However, a large number of new non-domiciled funds are marketed to Jersey investors each year, and such funds are required to obtain a COBO consent in relation to the circulation of their offering documents in Jersey (subject to certain exemptions that are available to funds structured as companies or unit trusts).

Circulating the Offering Document of a Non-domiciled Fund in Jersey

It will generally be necessary to obtain a COBO consent from the JFSC for the circulation of an offering document for a non-domiciled fund in Jersey. The processing time for an application for a COBO consent is usually around five working days and a statutory fee is payable (currently GBP440).

However, there is an exemption for funds structured as companies or unit trusts where the fund:

  • has no "relevant connection" with Jersey (for example, by way of the management or administration of the fund being carried on in Jersey); and
  • the offer is not an offer to the public (it must be made personally to a maximum of 50 persons in Jersey); or
  • the offer is valid in the United Kingdom or Guernsey. In summary, this test requires that (i) the offer complies with the Financial Services and Markets Act 2000 in the UK (FSMA) or the fund is authorised under the Protection of Investors (Bailiwick of Guernsey) Law 1987 in Guernsey, and (ii) the offer is made to a similar type of investor and in a similar manner in Jersey as in the UK or Guernsey (as applicable).

Persons Permitted to Market Non-domiciled Funds into Jersey

The considerations set out above in relation to Jersey funds apply.

There is also an "overseas distributors" exemption that applies to regulated, non-Jersey distributors that wish to market certain fund categories (such as a UCITS fund, an authorised unit trust or an authorised open-end investment company within the meaning of FSMA) in Jersey. Such marketing must take place on a reverse solicitation basis or by way of advertisements meeting certain content requirements.

Please refer to 2.3.5 Rules Concerning Marketing of Alternative Funds.

Please refer to 2.1.1 Fund Structures. Any ownership and other restrictions imposed on funds will depend upon the regulatory classification of the fund, rather than its structure.

The JFSC Guides and codes of practice set out details of matters that need to be notified to the JFSC or that require its prior consent. The JFSC Guides relating to funds that target retail investors naturally contain more stringent structural and other restrictions than those aimed at sophisticated or expert investors, for investor protection reasons.

The JFSC takes a pragmatic and co-operative approach, and this firm works closely with its Policy and Fund Authorisations teams to resolve any regulatory questions or issues as and when they arise. Guidance is generally published whenever a new policy is implemented and the JFSC tends to be punctual in processing applications, particularly where a degree of commercial urgency is involved.

The JFSC has a large and proactive enforcement team whose focus tends to be on those conducting unauthorised fund services business or, in the case of local businesses, failure to comply with the JFSC Guides and codes of practice. The JFSC publishes public statements on its website and, occasionally, in the local media, setting out its findings.

Please refer to 2.1.1 Fund Structures for details of investment restrictions and any specific requirements relating to the custodian.

Any restrictions are generally contained in the relevant JFSC Guide, although the JFSC's Sound Business Practice Policy also sets out principles regarding the activities that the JFSC considers sensitive (which includes, for example, investments in certain goods or services that require payment in advance and pose a risk of fraud or in weapons, mining or certain crypto assets).

As mentioned above, Jersey fund service providers are required to be licensed under the FSJL, which makes provision regarding matters such as insider dealing, market manipulation and the provision of misleading information to persons for the purpose of inducing them to enter into an agreement the performance of which may constitute financial services business under the FSJL.

Access to Fund Finance

There are generally no restrictions in this regard (please refer to "Borrowing Restrictions/Requirements", regarding borrowings).

Borrowing Restrictions/Requirements

From a regulatory perspective, there are generally no restrictions in the context of non-retail funds. However, the JFSC may undertake additional scrutiny where the permitted borrowing level is high; for example, where an Expert Fund or a Listed Fund is permitted to borrow more than 200% of the fund's net asset value (NAV).

A full review of the limited partnership agreement (LPA) (or other constitutional documents) of the fund would be required to ensure that there were no restrictions on borrowing or granting security and, in the case of a feeder fund or parallel fund, that there were no restrictions on that fund granting security to secure the borrowings of the main fund.

It is now common for LPAs, and constitutional documents of Jersey funds structured as companies and unit trusts, to contain provisions permitting borrowing (albeit, in some cases, with restrictions; for example, as to amount or term), the granting of security, and the provision of guarantees in respect of borrowings.

Securing Finance

A typical security package would consist of the grant of a security interest over the general partner's right to issue call notices to investors in respect of undrawn capital contributions, and the proceeds of the issue of such call notices; and the bank account(s) into which capital call proceeds are paid.

The security interest agreement would include the grant of a power of attorney from the general partner or manager of the fund so that the secured party could step into the shoes of the general partner to issue capital call notices to investors on an enforcement of the security, in the event that the general partner or manager failed to do so.

A financing statement in respect of the security would be registered on the Jersey Security Interests Register.

Common Issues in Relation to Fund Finance

Lenders will usually require a review of any side letters entered into with investors to ensure that there are no provisions that may cut across any security that may be granted or that could affect the general partner's rights to make capital calls from investors.

It is not technically necessary, in order to perfect any capital call security, that notice of such security be provided to investors. However, there remain advantages to electing to give notice to investors.

Any other relevant regulatory issues should be considered; for example, where a fund is an AIF, the AIFMD analysis may require that the fund is unleveraged or that leverage is kept to below a certain level.

Tax Framework

Jersey funds (regardless of their structure) are not generally subject to any Jersey tax. There are no capital gains, capital transfer, wealth or inheritance taxes that are payable in relation to the issue or realisation of investments in a Jersey fund (assuming that the fund does not invest in Jersey property or buildings). Additionally, no corporation tax, profits tax or stamp duty is payable, and distributions may be made without withholding or deduction for payment of Jersey income tax.

It is proposed that self-managed Jersey fund companies will, in future, become subject to Jersey's economic substance legislation (which already applies to Jersey tax resident fund managers). Please refer to 4 Legal, Regulatory or Tax Changes for further details.

Tax Treaty Network

Please refer to the Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard (CRS) regimes for details of the information exchange arrangements relating to FATCA and CRS. The main impact of those arrangements are that certain information regarding funds' investors is required to be collected and reported by Jersey funds and that information may, in turn, be shared between the Jersey and other countries' taxation authorities.

Jersey also has information exchange and/or double taxation agreements with a number of countries and is able to comply with all required international reporting and transparency requirements.

FATCA and CRS Regimes

Jersey has concluded an intergovernmental agreement (IGA) with the USA to implement FATCA. Jersey funds are generally foreign (non-US) financial institutions for these purposes and will need to provide information about the identity of limited partners who are US persons or limited partners with beneficial owners who are US persons to the Comptroller of Taxes in Jersey, who will then forward that information to the competent authority in the USA. Provided that a fund complies with its obligations, it should not suffer any FATCA withholding taxes.

In addition to the IGA entered into with the USA, the States of Jersey and the government of the United Kingdom have entered into an inter-governmental agreement (UK IGA, and together with the US IGA, the IGAs) for the implementation of information exchange arrangements, based on FATCA, whereby relevant information reported to the Jersey authorities in respect of a person or entity who is resident in the UK for tax purposes is shared with the UK's HMRC. Under the UK IGA, Jersey funds may be required to provide information to the Jersey authorities about their investors and such person's beneficial owners and interests in the fund in order to fully discharge their reporting obligations and in the event of any failure or inability to comply with the proposed arrangements, they may suffer a financial penalty or other sanction under Jersey law.

The OECD has since released the Standard for Automatic Exchange of Financial Account Information in Tax Matters (CRS), following approval by the OECD Council. This includes a model regime to serve as the common standard on reporting and due diligence for financial account information. Like FATCA and the IGAs, the CRS requires financial institutions in participating jurisdictions to follow common due diligence procedures and to report specified financial information to their tax authorities that is then automatically exchanged with other participating jurisdictions. Jersey is committed to domestic implementation of the CRS and Jersey funds are usually expected to be financial institutions for CRS purposes.

Tax Structuring Preferences of Investors

Please refer to "Tax Framework" above for details of the tax regime applicable to Jersey funds. There is no distinction between the types of investor for tax purposes.

If distributions are of an income nature, investors who are Jersey resident individuals will need to declare and pay Jersey income tax in the usual manner (this is the case regardless of whether the fund is domiciled in Jersey or elsewhere), but there is no capital gains tax in Jersey. Non-Jersey investors should seek taxation advice in their own countries of residence to ensure that an investment is suitable for them.

Jersey Regulatory Classifications

OCIFs

Funds that do not fall into any of the regulatory classifications referred to in 2.1.1 Fund Structures and that may be offered to retail investors (OCIFs) can be established under the JFSC's OCIF Guide.

This is a more heavily regulated category of fund that contains additional investor protections, such as:

  • criteria applicable to the promoter;
  • investment restrictions (which vary according to the fund type; for example, special rules apply to feeder funds and funds of funds); and
  • a requirement for the JFSC to approve all of the material fund documentation.

Derogations may be sought from the OCIF Guide, but the JFSC will have regard to matters such as minimum investment when deciding whether to grant these.

Recognised Funds

Recognised Funds are rarely established in Jersey, and a number of prescriptive rules apply to them. This category of fund is intended to be freely marketable to retail investors in the UK and elsewhere.

Given the rarity of Recognised Funds in Jersey, the authors have not considered this regulatory category further in this section, which focuses on OCIFs.

Jersey Legal Vehicles

Please refer to 2.1.1 Fund Structures. The same types of legal vehicles are available to retail funds and, in the authors' experience, OCIFs are typically established as unit trusts or companies.

Please refer to 2.1.2 Common Process for Setting up Investment Funds.

As may be expected, applications to authorise new OCIFs are a more involved process than that for non-retail funds, given the additional requirements that apply to OCIFs.

The authors would recommend that preliminary discussions are held with the JFSC prior to making a formal application, particularly where there are novel features or significant variations from the characteristics presented in the OCIF Guide.

The application itself will involve the same basic requirements as for non-retail funds regarding matters such as personal questionnaires for directors (and directors and 10%-plus owners of any SPV service providers). Additionally, the JFSC will wish to review the agreements appointing the fund's service providers and it will require an initial review checklist to be prepared setting out information regarding matters such as the promoter(s), the fund service providers and an outline of the key features of the OCIF.

Please refer to 2.1.3 Limited Liability.

Please refer to 2.1.4 Disclosure Requirements. The fund documents should be carefully checked against the OCIF Guide to ensure compliance with the various requirements set out therein (which cover, among other things, the matters referred to in 3.4 Operational Requirements).

Various investor reporting requirements are also contained in the OCIF Guide, including that at least two reports must be published and sent to investors each year. Investors must be notified of all changes to the fund's constitutive documents, unless the trustee or custodian certifies that in its opinion the changes will not prejudice investors' interests and files that certification with the JFSC.

The latest available selling and redemption prices or NAV must be available to all investors.

The market in Jersey generally targets sophisticated investors who fall into the institutional or high net worth categories (in the authors' experience, there is currently less investor appetite for Jersey retail funds than for non-retail options).

Please refer to 3.1.1 Fund Structures.

Please refer to 2.2.3 Restrictions on Investors. OCIFs are available to a broad range of potential investors.

The OCIF Guide contains a number of investment and borrowing restrictions that vary according to the type of fund; for example, whether it is a general securities fund, a fund of funds or a feeder fund. However, this firm has successfully obtained derogations from certain investment restrictions set out in the OCIF Guide (noting that such derogations must be applied for on a "case-by-case" basis and are not available in every instance).

Where the OCIF is an umbrella fund, each of its sub-funds will be treated separately for the purposes of determining which restrictions will apply to that sub-fund.

Please refer to 2.3.2 Requirements for Non-local Service Providers.

The OCIF Guide sets out specific requirements regarding service providers such as the manager (see 3.3.3 Local Regulatory Requirements for Non-local Managers) and the trustee/custodian, which must be a company that is a member of a major banking or insurance group of companies or an institution that is acceptable to the JFSC.

The OCIF Guide also contains the requirement that certain service providers, including the manager/administrator and trustee or custodian, must be an appropriately licensed Jersey company with staff and premises in Jersey. Again, it is possible to seek a derogation from such requirements.

Please refer to 2.3.3 Local Regulatory Requirements for Non-local Managers.

A manager of an OCIF is required to be engaged primarily in the business of fund management; and have sufficient financial resources at its disposal to enable it to conduct its business effectively and meet its liabilities; in particular, it must be in compliance with the financial resource requirements of the relevant codes of practice.

As mentioned above, the manager is required to be a company incorporated and resident in Jersey. It is not, however, essential for the manager to have staff and premises in the Island if a Jersey incorporated company that does have staff and premises in the Island is appointed as administrator.

Retail funds are more heavily regulated in Jersey, and this is reflected in the time it typically takes to obtain regulatory approval in relation to them.

There is a two-stage JFSC review process and an application generally takes a matter of weeks to process.

Please refer to 2.3.5 Rules Concerning Marketing of Alternative Funds.

There are no specific restrictions. The OCIF Guide seeks to contain the criteria that the JFSC would expect to be met in relation to an OCIF that is to be marketed to members of the general public who might be regarded as inexperienced in matters of investment and least able to bear the consequences of any loss of their investments.

Please refer to 2.3.7 Investor Protection Rules and 3.4 Operational Requirements. Given the nature of an OCIF's potential investors, the OCIF Guide is more prescriptive in terms of structural and investment restrictions than is the case for non-retail funds (for example, an OCIF may not lend, guarantee or otherwise become liable for any obligations or indebtedness of any person without the prior, written consent of its trustee or custodian).

The JFSC's prior consent is typically required to any material changes to the fund documents.

Please refer to 2.3.8 Approach of the Regulator. The JFSC typically takes a more stringent approach when considering issues that arise or material changes in the context of an OCIF.

Please refer to 2.4 Operational Requirements and 3.3.2 Requirements for Non-local Service Providers.

The OCIF Guide contains specific requirements in relation to the valuation and pricing of an OCIF's assets and matters such as meetings, charges and fees, investment limits, borrowing powers, the frequency of dealing and redemptions. Additionally, the OCIF Guide applies safeguards in certain cases; for example, where an OCIF permits the issue of units to investors for assets other than cash.

Please refer to 2.5 Fund Finance. In the case of an OCIF, there are certain additional restrictions (for example, a feeder fund or a fund of funds may only borrow up to 10% of its NAV on a temporary basis for the purposes of meeting redemption requests or defraying operating expenses).

Please refer to 2.6 Tax Regime.

Jersey has recently implemented economic substance legislation, whereby any company that is resident in Jersey for tax purposes and that receives income from activities such as fund management in Jersey is required to meet an economic substance test. The test therefore applies to Jersey fund managers (and general partners if the fund has not appointed a separate manager).

Jersey funds themselves are exempt from the requirements of the new economic substance rules, although it is expected that self-managed funds (ie, that have not appointed a separate manager) will be brought within scope.

The background to the changes is that the OECD's Global Forum on Transparency and Exchange of Information on Tax Matters recently assessed Jersey for compliance with global standards on tax transparency and information exchange, including the requirements regarding BEPS (base erosion and profit shifting). Although Jersey received the highest possible rating in all ten areas assessed and was confirmed as a co-operative tax jurisdiction, the Code Group expressed concern that the absence of a statutory substance requirement increased the risk of profits being registered in Jersey that do not reflect real economic activity in the jurisdiction. The new law addresses such concerns and therefore cements Jersey's reputation as a well-regulated and transparent jurisdiction.

The economic substance test is met if:

  • the company is directed and managed in Jersey (for example, most board meetings are held in Jersey and the quorum is met by those physically present at the meeting);
  • core-income generating activity (for example, taking decisions on the holding and selling of investments, calculating risks and reserves and/or preparing reports and returns to investors and the JFSC) in relation to the fund management is principally carried out in Jersey; and
  • there are adequate employees and physical assets, and an adequate level of expenditure is incurred, in Jersey.

As most fund managers in Jersey already meet the above requirements, it is not expected that the economic substance law will have a substantial impact upon the funds industry in Jersey.

Carey Olsen Jersey LLP

47 Esplanade
St Helier
Jersey JE1 0BD
Channel Islands

+44 (0)1534 888 900

+44 (0)1534 887 744

jerseyco@careyolsen.com www.careyolsen.com
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Law and Practice

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Carey Olsen has one of the largest investment fund practices in the offshore world, advising clients on the laws of Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey and Jersey. The funds team comprises 22 partners and a total complement of 80 lawyers. Carey Olsen advises on all types of private, public, retail and listed funds, including open and closed-end funds, limited partnerships, unit trusts and companies. The firm has substantial experience in advising on the full spectrum of fund strategies and asset classes, including credit and debt funds, cleantech funds, real estate funds, private equity funds, venture capital funds, hedge funds, green funds, crypto funds and infrastructure funds. Carey Olsen's credentials include: advising on the SoftBank Vision Fund, the world's largest ever investment fund; being the legal adviser to over 1,400 funds across the Channel Islands, more than any other offshore law firm; and representing 10/10 of the world's top private equity firms.

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