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Investment Funds

Introduction

Gibraltar is an ideal location to set up investment funds. They are normally set up as limited liability companies with their articles of association structured and tailored to the requirements of an investment fund.

It has a high quality infrastructure in that it has major international banks, accountancy firms and skilled financial services professionals and lawyers who are able to service the funds industry. Gibraltar offers very high standards, and being a small jurisdiction, it is able to provide such services at competitive rates.

The regulatory regime and tax benefits enjoyed by funds in Gibraltar place it in a unique position to service the funds industry, particularly regarding the efficient and cost-effective way in which funds can be set up in Gibraltar.

This page provides further information on:

  • Private Funds;
  • Experienced Investor Funds;
  • Crypto Investment Funds; and
  • Protected Cell Company Funds.

Private Funds

Private Funds are permitted under section 294(4)(b) of the Financial Services Act 2019 at Schedule 24, Part 2, Sections 3 and 4 thereto. This refers to private funds as “private schemes”. In essence, these are collective investment schemes that are not listed on a stock exchange and are limited to no more than 50 participants.

The main advantages of Private Funds are that they:

  • are fast to set up;
  • do not need to apply for authorisation to the Gibraltar Financial Services Commission (www.fsc.gi)(“GFSC”) to commence its investment activities;
  • do not require a Fund Administrator (although in most cases this is desirable);
  • do not require a custodian/depositary; and
  • do not require an audit (although in most cases this is also desirable).

This allows Private Funds to be set up relatively cost-effectively and quickly.

Private Funds do not pay any corporation tax as investment income is not taxable in Gibraltar. Also, there is no tax on interest or dividends and no capital gains tax.

The requirements for a collective investment scheme to be classed as a Gibraltar Private Fund can be summarised as follows:

  • they cannot be listed and are limited to no more than 50 participants;
  • the offer to invest must only be communicated to an identifiable category of persons (and to less than 50 in number), for example, to family and friends, to employees of a particular company or to the client of an investment manager; and
  • after the offer is first communicated to a participant, it must remain as a Private Fund for at least 12 months after that date.
Executive Summary

1. Gibraltar law permits the pooling of monies in a Private Fund without a financial services licence. The key to lawfully doing so is to:

(a) make offers to invest only to an identifiable category of persons; and
(b) make less than 50 offers to invest;
(c) have less than 50 investors.

2. A Private Fund would ordinarily be set up as a limited company with two classes of shares:

(a) Ordinary shares with all voting rights – Normally held by the Promoter or Investment Manager.
(b) Redeemable preference shares which carry economic rights but no voting power – These are the shares investors would subscribe to.

3. It is a flexible structure as investors can come in and out periodically by subscribing to redeemable preference shares or redeeming the same; thereby increasing or decreasing the size of their investments.

4. There is no tax on the profits of a Private Fund and no capital gains tax. Also, there is no tax on dividends paid out and no tax when shares are redeemed.

5. There will normally be two sources of income for the investors: (a) capital gains when they redeem their preference shares and (b) dividends. Investors may need to pay tax upon receipt of the capital gains or dividends in accordance with the laws of their country of residence.

6. An investment prospectus would need to be drawn up in the form of a Private Placement Memorandum.

7. A Fund Administrator is not required by law but one should be appointed to do the ongoing fund accounting and to periodically calculate the Net Asset Value. The frequency will depend upon how often subscriptions and redemptions are permitted and the nature of the Fund’s investments. Investors would redeem and subscribe to redeemable preference shares at the NAV as at the dates when this is calculated.

8. Bank and broker accounts can be held in any part of the world. It is possible to open bank accounts in Gibraltar which would normally be operated jointly by the directors and the Fund Administrator.

9. We have banking contacts in Gibraltar and elsewhere for the Private Fund’s accounts.

10. A separate Investment Manager may be appointed to manage all investments of a Private Fund.

11. A Private Fund can be set up in a matter of weeks.

Timing

A Private Fund can be set up relatively quickly; usually within a few weeks. Crucially, there is no need to wait for authorisation from the GFSC before a Private Fund can be launched.

Basic Structure

A Gibraltar Private Fund is normally set up as a limited company.

Shares

A Private Fund will usually contain two classes of shares: (a) ordinary shares which will belong to the promoter of a Private Fund and (b) preference shares which investors can subscribe to and, in this way, invest in a Private Fund.

The ordinary shares will normally have all of the voting rights and, as such, the promoter/investment manager can control a Private Fund. It also entitles the holder of these shares to charge management and performance fees. They would not, however, normally carry an entitlement to dividends or profits.

The preference shares can be redeemable shares which will entitle the investor to redeem his shares at the Net Asset Value (“NAV”) and, in such case, a Private Fund would be an open-ended scheme. Alternatively, the shares need not be redeemable and investors could then only withdraw their investments by selling their shares to other investors. This would be a closed ended fund.

Having said that, a Private Fund can be structured in any way which the client requires. For example, it is not a requirement to calculate the NAV periodically. There must be a mechanism for valuing the shares but, if appropriate, a Private Fund can be structured in such a way so that it is as simple as possible to manage.

Directors & Ensuring Management & Control is in Gibraltar

There is no need to have Gibraltar-licensed Directors.

However, it may be advisable to have a majority of Gibraltar-resident directors in order to provide enough substance here. In such a case, all board meetings should be held in Gibraltar and all strategic decisions taken here. Major contracts should also be signed in Gibraltar.

In essence, management and control of a Private Fund should be in Gibraltar as this will ensure that Gibraltar regulatory and tax laws are applicable.

Day to day operations can, though, be conducted outside Gibraltar. For example, it is legitimate for the investment management to be carried out by and Investment Manager from outside Gibraltar. From a Gibraltar law perspective, this will not affect its status as a Private Fund to which Gibraltar law is fully applicable.

It is possible to have directors from another jurisdiction. In those circumstances, however, a Private Fund may become subject to the regulatory and tax laws of the country or countries where the directors manage and control its business.

Fund Administrator

There is no need to have a Fund Administrator, however, it is normally advisable to have one. We have strong relationships with fund administrators in Gibraltar and will be happy to make introductions.

They will have all of the duties you would expect including opening the bank accounts, compiling due diligence on investors in accordance with our anti-money laundering laws, processing subscriptions and redemptions, keeping management accounts and calculating the NAV.

Auditor

It is not a requirement to have a Gibraltar auditor. However, it is advisable to have one. We have the big four accountancy in Gibraltar as well as some of the mid-size ones.

Bankers

A Private Fund will need banking facilities. In Gibraltar, these services can be provided by a range of banks we can make an introduction to.

Private Placement Memorandum (“PPM”)

The PPM is the detailed offering document/prospectus of a Private Fund which we will draw this up. This will be the offer document to be communicated to the identifiable category of investors.

Experienced Investor Funds

Experienced Investor Funds (“EIFs” and each an “EIF”) are designed for sophisticated investors and they are very fast to set up. It is easy to qualify to invest in an EIF as a minimum investment of EUROS 100,000 will automatically be enough.

A lesser investment of EUROS 50,000 can also be enough provided that an investor has received investment advice from a regulated professional. The EIF itself does not need to be licensed by our financial services regulator, the Gibraltar Financial Services Commission (“GFSC”).

It needs Gibraltar resident directors and they are the ones who are licensed and regulated. Therefore, there is no need to seek prior permission to launch an EIF and there is no delay caused by the regulatory authorities.

Tax

EIFs pay no tax in Gibraltar and they are able to pay investors their profits free of Gibraltar tax.

Timing

The EIF can be set up relatively quickly. If all persons involved work hard, there is no reason why it cannot be done in a couple of months. Crucially, there is no need to wait for authorisation from the Authorities (as with some other jurisdictions) before the EIF can be launched.

Basic Structure

The EIF would be set up as a Gibraltar limited liability company. Its constitutional documents are based on the English law model and would consist of a certificate of incorporation and tailor-made Articles and Memorandum of Association.

Shares

The EIF will normally contain two classes of shares: (a) ordinary/management shares which will belong to the promoter of the EIF and (b) redeemable preference shares which investors can subscribe to and, in this way, invest in the EIF.

The ordinary/management shares will have all of the voting rights and, as such, the promoter can control the EIF. It also entitles the holder of these shares to charge management and performance fees. It does not, however, carry an entitlement to dividends or profits.

The preference shares can be redeemable shares which will entitle the investor to redeem his shares at the Net Asset Value (“NAV”).

Private Placement Memorandum (“PPM”)

The PPM is the detailed offering document/prospectus of the EIF and we will draw this up. This will contain, amongst other things, the investment strategy, fees and expenses charged by the investment manager, valuation method, details of principal contracts entered into, subscription process and form and redemption process.

Directors & Ensuring Management & Control is in Gibraltar

The EIF is required to have at least two resident Gibraltar directors. These need to be licensed by the GFSC as EIF Directors. We have practitioners with such a licence. It is now possible, however, to have a suitably-qualified non-Gibraltar resident approved as an EIF Director.

The client can also be appointed as the Investment Director of the EIF. The Board can delegate all investment functions to such director. The Investment Director is, in effect, the investment manager and adviser to the EIF. In addition to having its normal duties as a director, it will have these additional responsibilities. The GFSC do not require such an investment manager to be licensed as it is providing services to its own company.

It is advisable to have a majority of Gibraltar-resident directors in order to provide enough substance here. In such a case, all board meetings should be held in Gibraltar and all strategic decisions taken here. Major contracts should also be signed in Gibraltar.

In essence, management and control of a Private Fund should be in Gibraltar as this will ensure that Gibraltar regulatory and tax laws are applicable.

Day to day operations can, though, be conducted outside Gibraltar. For example, it is legitimate for the investment management to be carried out by and Investment Manager from outside Gibraltar.

Investment Manager

An independent licensed investment manager can be appointed. Alternatively an Investment Director can be appointed which will also hold the ordinary shares in the EIF.

Fund Administrator

The EIF is required to have a Gibraltar Fund Administrator. They have all of the duties you would expect including opening the bank accounts, compiling due diligence on investors in accordance with our anti-money laundering laws, processing subscriptions and redemptions, keeping management accounts and calculating the NAV.

Auditor

It is a requirement to have a Gibraltar auditor. We have a range of well-known international firms in Gibraltar which can do this.

Banking & Custodian

Provided that the EIF has assets under management of less than EUR 100m, there is no restriction as to where the EIF establishes its bank account and custodian/depositary.

Deemed authorisation

There is no need to wait for approval from the GFSC before launching the EIF (or any of the sub-funds comprised by different cells). Once the EIF is ready it can start receiving subscriptions and commence its trading activities immediately. The only requirement is that the Fund Administrator and the EIF’s lawyer, submit various documents to the GFSC within 14 days of launch. Provided that this is done, the EIF is deemed to be authorised under Gibraltar law and it does not need to wait for a licence or for any permission from the GFSC.

Crypto Investment Funds

Crypto-Friendly Jurisdiction

Gibraltar is a crypto-friendly jurisdiction. We were a first mover when we introduced a law to regulate crypto and blockchain businesses; the Financial Services (Distributed Ledger Technology Providers) Regulations 2017.

As a result, we have banks and regulated blockchain financial services companies which truly understands the crypto world and will accept money from crypto-trading. This combination provides a safe and regulated bridge between fiat and crypto. This is a very attractive proposition as many people experience problems in sending fiat derived from crypto trading as many banks do not understand this world and consider it very high risk.

Setting up crypto funds as Experienced Investor Funds

Gibraltar is increasingly becoming a jurisdiction of choice to set up crypto funds. These are set up as Experienced Investor Funds and more detailed information can be found here.

Protected Cell Company Funds

Protected cell companies

Under the Protected Cell Companies Act 2001 (“PCC Act”) one company may segregate its assets and liabilities in different cells. These are known as a protected cell companies (“PCCs” or “PCC”). A PCC remains a single legal entity and the liability of the company in respect of each cell is limited to the assets attributable to the relevant cell, not for the debts of any other cell.

The PCC Act states that a protected cell company is a single legal person and that the creation by a PCC of a cell does not create, in respect of that cell, a legal person separate from the company.

A PCC may create and issue cell shares in respect of any of its cells. The proceeds of the issue are comprised in the cellular assets attributable to the cell in respect of which the cell shares are issued. A PCC may pay a cellular dividend.

The rights of creditors are limited to the assets of the cell of which they are creditors. In the winding up of a PCC, the assets forming part of the estate shall only be the non-cellular assets. The winding up shall not terminate any agency, or in any way whatsoever affect the authority or power of any officer, receiver, administrator, servant or agent of the PCC in respect of the cellular assets.

Any liquidator of a PCC has a duty to keep cellular assets separate and separately identifiable from non-cellular assets. The liquidator must also keep cellular assets attributable to each cell separate and separately identifiable from those assets attributable to other cells.

Setting up Experienced Investor Funds as Protected Cell Companies

Many Experienced Investor Funds are set up as PCCs as they can, for example, allow sub-funds to pursue different investment strategies and allow sub funds to be created for different clients.

This allows there to be one board of directors managing multiple sub-funds via distinct Cells following different investment strategies having ring-fenced assets and liabilities. In this way, the profits of one sub-fund will not benefit another and, equally, its liabilities will not cross-contaminate another sub-fund.

Detailed information on Experienced Investor Funds can be found here.

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