Jersey private funds23 May 2019
A leading product in the Jersey funds range is the Jersey private fund - a regulatory classification offering certainty, flexibility and speed to promoters of investment funds.
Under the Jersey private funds regime:
- all funds with up to 50 investors are regulated under one simple regime;
- a fast track 48-hour regulatory approval process applies, with no prior approval of promoters or key persons being required;
- the features and operation of private funds are relatively unconstrained, with a variety of legal vehicles being able to be used, with funds being able to be closed- or open-ended, requirements for Jersey connections being relaxed, and offering documents being permitted, but not required; and
- private funds are able to be promoted to "professional" and other "eligible" investors, with the eligibility criteria being both straightforward and relatively broad: for example including those whose ordinary business is managing, holding or advising on investments, as well as persons who can meet certain asset or investment thresholds (such as making an investment of at least £250,000 (or currency equivalent)).
Alongside the various elements of flexibility, appropriate regulatory oversight is still maintained. This is achieved through a requirement for a Jersey-regulated 'Designated Service Provider' to be appointed to all Jersey private funds, following the regulatory trend of focusing on regulating a key service provider, rather than the product.
The private funds regime applies to all 'private funds'. A 'private fund', for the purposes of the Jersey regime, is defined by reference to the number and type of investors.
Maximum of 50 investors
A fund is considered to be a vehicle involving the pooling of capital and which operates on the principle of risk spreading and a Jersey 'private fund' ("JPF") is defined as a fund with no more than 50 investors.
In addition to the 50 investor limit, the regime prescribes that a JPF cannot be formally offered to more than 50 prospective investors. In this regard, there is some helpful guidance making it clear that the limit applies to formal offers, rather than, for example, the dissemination of pre-marketing material (e.g. that containing so-called 'red-herring' language).
Helpfully, it is clear that when calculating the number of investors there is no need to 'look through' to the number of underlying investors if a discretionary investment manager is investing in the JPF on behalf of such investors. However, it is also made clear that one would look through a dedicated feeder vehicle deliberately structuring to circumvent the 50 investor limit.
Type of investors
Both professional and other eligible investors are able to invest in a JPF. These categories are relatively broad, and include, for example:
- any person investing or committing £250,000 (or currency equivalent) or more;
- a person whose ordinary business is acquiring, managing, holding or advising on investments;
- persons with investible assets of at least US$1m (or currency equivalent);
- persons with relevant financial services industry experience; and
- professional clients, as defined under MiFID.
Retail investors cannot invest in a JPF, although a discretionary investment manager can make an investment on their behalf, provided that they are satisfied as to the suitability of the investment to the investor. Provision is also made for investment in a JPF by the promoter and other related persons by way of founder interests and for the purposes of carried interest participation.
Out of scope
Certain vehicles which may involve the pooling of capital, or the spreading of risk, remain expressly out of scope of the private funds regime. The rules in respect of such vehicles (which in a number of instances are the rules that apply to forming a private company in Jersey) are unaffected by the JPF regime. Vehicles which are out of scope include holding companies, joint venture arrangements, special purpose and securitisation schemes, and vehicles with a relevant family or employment connection.
The features of the regime
The Jersey private funds regime has a number of beneficial features, as follows:
- a JPF can be established as any type of vehicle: as a company (including cell companies); as a partnership (including limited partnerships, separate and limited liability partnerships); or as a unit trust;
- a JPF can be closed- or open-ended;
- both Jersey and non-Jersey vehicles can be established under the Jersey private funds regime (provided any non-Jersey vehicle has a relevant connection to Jersey);
- there are no restrictions on the investment or borrowing policies of a JPF;
- no offering document is required to be produced for a JPF;
- a JPF is not required to have any Jersey directors, a Jersey general partner or Jersey trustee (as applicable); and
- a JPF is not required to be audited.
There are some conditions to be met, as follows:
- if an offering document is produced, it must contain all material information an investor would reasonably require as to the merits and risk of the investment;
- a JPF cannot be listed on a stock exchange;
- a prescribed investment warning is required, which must be acknowledged by investors;
- although there is no requirement for Jersey directors or for management and control of the JPF to be in Jersey, there is an expectation that in a majority of cases that one or more Jersey persons would participate in the management of the JPF; and
- a JPF must appoint a Designated Service Provider in Jersey (as to which, see below).
Process and regulation
A fast track 48-hour regulatory approval process applies in respect of JPFs.
No prior approval of the promoters of JPFs is required and Jersey's promoter policy, which applies to more widely marketed funds and those promoted to retail investors, does not apply. In addition, the individual regulatory approval process in respect of key persons connected with the fund, which can apply to other fund types in Jersey, does not apply. Similarly, other aspects of Jersey's regulatory framework which govern the ongoing activities of the fund are also relaxed for JPFs, including the fund codes of practice and outsourcing policy, all in an effort to streamline the operational efficiency of JPFs.
Certain core regulatory rules continue to apply, however, such as AML rules, the sound business practice policy and, if marketing in the EEA, relevant marketing rules. In addition, and in order to ensure effective but proportionate regulation, certain reliance is placed on the Designated Service Provider in Jersey in respect of oversight and reporting.
Designated Service Provider
In overview, the JPF regime provides flexibility and ease for those structuring private funds through Jersey, but with some constraints so as to ensure that there is an appropriate degree of regulation. In large part, this is achieved through the requirement that every JPF must appoint a Designated Service Provider in Jersey. The Designated Service Provider must be a regulated Jersey business with substance in Jersey. This function will ordinarily be undertaken by the fund administrator appointed by the JPF but may also be undertaken by a Jersey manager, investment manager or trustee. The Designated Service Provider will have certain due diligence, compliance, monitoring and reporting obligations in respect of the JPF. In keeping with regulatory trends, the principle behind the requirement is for regulation to be focussed on a key service provider rather than on the JPF as the product.
International recognition and marketing
Jersey's reputation as a well-regulated international finance centre provides reassurance to both investors and overseas regulators who may be assessing funds structured as JPFs. There are no restrictions in Jersey as to countries in which JPFs can be marketed but, as is the case with the marketing of any fund or other financial product, any local marketing rules will need to be adhered to.
Within the EU, Jersey offers easy and cost-effective marketing through the National Private Placement Regimes ("NPPRs"), providing non-EU managers with an attractive alternative to the AIFMD passport. As the EU fund market is still predominantly a national market (with only 3% of EU funds being registered for sale in more than 3 member states), NPPR works well. Crucially, NPPR offers a lighter regulatory burden and a lower cost to non-EU managers than an AIFMD passport.
The objective of the Jersey private funds regime is clear: a simplified and streamlined regime allowing Jersey to compete in the fast-evolving international funds landscape, but with an appropriate regulatory environment being maintained. With the number of Jersey private funds having grown strongly since inception, it is evident that fund promoters have recognised the JPF as a well-regulated but flexible solution for structuring private funds.