Jersey unregulated funds11 Jul 2012
Funds established in Jersey are generally subject to regulation by the Jersey Financial Services Commission ("JFSC"). The degree of regulation varies depending upon the type of fund.
Investment funds which are offered to the public, for example, are regulated pursuant to the Collective Investment Funds (Jersey) Law 1988 (the "CIF Law") and must obtain a certificate from the JFSC, which will only be granted following an approval process involving scrutiny of all the documentation and key parties associated with the fund. Funds offered to more sophisticated investors, such as professional investor regulated schemes, Jersey expert funds or listed funds, are subject to lighter regulation. New codes of practice for certified funds (the "Certified Funds Codes") were introduced by the JFSC in April 2012 and apply to all unclassified funds which have been issued with a certificate pursuant to the CIF Law.
Unregulated funds are a further category of funds, introduced in February 2008. Unregulated funds, by virtue of statutory exemption set out in the Collective Investment Funds (Unregulated Funds) (Jersey) Order 2008 (the "Order"), are permitted to fall entirely outside the regulatory regime applicable to investment funds under the CIF Law and the requirements of the Certified Funds Codes, on the basis that they comply with the criteria set out in the Order. Funds in existence before the Order came into force cannot convert to become unregulated funds.
There are two types of unregulated fund: "Unregulated Eligible Investor Funds" and "Unregulated Exchange-Traded Funds".
Unregulated Eligible Investor Funds
The defining feature of an Unregulated Eligible Investor Fund is that all investors in the fund must qualify as eligible investors.
The term "eligible investor" is defined in the Order and includes:
- a person who has agreed to pay consideration of not less that US$1 million (or the equivalent in another currency), for the subscription, purchase, exchange or acquisition;
- a person whose ordinary business or professional activity includes the acquisition, underwriting, management, holding or disposal of investments, whether as principal or agent, or the giving of advice on investments (or an employee, director or shareholder of or consultant to such person);
- a service provider, or an associate of a service provider to the fund (or an employee, director or shareholder of or consultant to such service provider or associate who is acquiring the investment as remuneration or reward); or
- a person whose property has a total market value of not less than US$10 million (or the equivalent in another currency).
An Unregulated Eligible Investor Fund may be structured as a Jersey company, a Jersey limited partnership or a unit trust and may be open- or closed-ended.
An Unregulated Eligible Investor Fund may be listed, but only on a stock market or stock exchange which permits restrictions on transfer. This is to ensure that only eligible investors are able to acquire units in the fund.
Unregulated Exchange-Traded Funds
The defining feature of an Unregulated Exchange-Traded Fund is that units in the fund must be listed on one or more of the 54 exchanges listed in the Order within 90 days of notice of the establishment of the fund being given to the registrar of companies in Jersey (the "Registrar"). The list of exchanges set out in the Order includes the London Stock Exchange, the Alternative Investment Market (AIM), NASDAQ, the Irish Stock Exchange, the French and Dutch Euronext exchanges and the Channel Islands Stock Exchange LBG (the "CISX"). The CISX has recently re-defined its policy in relation to unregulated funds to permit the listing on the CISX of unregulated closed-ended investment funds in specific circumstances.
Unlike Unregulated Eligible Investor Funds, there are no eligibility criteria for investors subscribing for units in an Unregulated Exchange-Traded Fund.
An Unregulated Exchange-Traded Fund must be closed-ended but may be structured as a Jersey company, a Jersey limited partnership or a unit trust.
The following features are common to both types of unregulated fund:
Service providers, directors and officers
An unregulated fund which is structured as:
- a company: must be incorporated under the Companies (Jersey) Law 1991 (the "Companies Law") and have its registered office in Jersey;
- a limited partnership: must be registered pursuant to the Limited Partnerships (Jersey) Law 1994 (the "Limited Partnerships Law") and must appoint at least one general partner which is a Jersey company;
- a unit trust: must appoint at least one Jersey company as its trustee or manager.
There is no requirement for an unregulated fund to appoint Jersey fund service providers or Jersey-resident directors or other officers.
Any Jersey company providing a service to an unregulated fund must be regulated by the JFSC to carry on "fund services business" pursuant to the Financial Services (Jersey) Law 1998 (the "FSJ Law"). However, by way of specific exemption to the FSJ Law, in the case of unregulated funds structured as limited partnerships or unit trusts, the general partner or trustee of such funds, respectively, is exempt from this requirement provided that: (a) the only activity of such company is acting as a general partner or a trustee, respectively, to the limited partnership or unit trust, as applicable, (b) its registered office is provided by a person regulated under the FSJ Law to carry on fund services business, including at least the class of "manager of a managed entity", and (c) its name is notified to the JFSC. The JFSC will not register an entity for fund services business pursuant to the FSJ Law where its only activity is to act for unregulated funds.
Unregulated funds must have an offering document containing a prominent warning (in the form prescribed in the Order) that the fund is unregulated. In the case of Unregulated Eligible Investor Funds, the warning must be acknowledged by a declaration in writing by investors, before the subscription, purchase or exchange of units in the fund is completed. There are no other requirements as to the contents of the offering document, aside from the general principle that investors should have disclosed to them all the information that they would reasonably require and would reasonably expect to have brought fairly to their attention for the purpose of making an informed judgment about the merits and risks of participating in the fund.
Formalities and timescale
The only Jersey regulatory formality following the establishment of an unregulated fund is for written notice, confirming that the fund has been established and that the necessary conditions set out in the Order have been met, to be given to the Registrar. The fund may be launched immediately following the filing of such notice.
There are no statutory or regulatory fees payable in relation to an unregulated fund, save for those payable upon its incorporation (where the fund is structured as a company) or its registration (where the fund is structured as a limited partnership).
There are no requirements as to the standing or track record of any investment manager or distributor appointed in relation to an unregulated fund.
There is no requirement for a custodian or prime broker to be appointed in relation to an unregulated fund.
Borrowing and gearing
There are no restrictions, imposed under the Order, upon the level of borrowing or gearing which may be entered into by an unregulated fund.
Ongoing requirements: continuing observance of conditions
There are minimal ongoing requirements imposed on unregulated funds. Procedures must be put in place to ensure that the requirements of the Order which are applicable to Unregulated Eligible Investor Funds continue to be satisfied in relation to the fund, but there is no requirement to file, for example, details of changes of the service providers or directors of the fund. Unregulated funds which are companies, however, will continue to be subject to the provisions of the Companies Law. This means that an annual return (including details of the directors and shareholders of the company) and audited accounts will need to be filed with the Registrar. Furthermore, unregulated funds which are limited partnerships will continue to be subject to the provisions of the Limited Partnerships Law and will, therefore, be required to notify the registrar of limited partnerships in Jersey of changes to the particulars contained in the declaration made by the limited partnership upon its registration.