By James G. Lasry, Gibraltar Funds and Investments Association
The emergence of Gibraltar as the “Crypto Rock,” the advent of legislation allowing for a Dual AIFM Regime and the incorporation of Protected Cell Limited Partnership (PCLP) funds have, possibly inadvertently, brought about a renaissance in the funds industry. Discerning legal and regulatory analysts have long known that the fund legislation with its pre-authorisation launch and its flexibility with respect to service providers is the most fit-for-purpose regime on this side of the Atlantic Ocean. However, much of the general industry continues to herd to the more well-known havens despite some being tainted by negative OECD reports, less ease of operations and higher costs. As fund promoters use Gibraltar for crypto funds in droves simply because it is so difficult to establish these funds in other jurisdictions, they are fast realising that the benefits of Gibraltar’s funds regime extend far beyond the crypto sphere.
In 2021, PwC issued a report listing Gibraltar as the third crypto funds jurisdiction in the world. This has been a huge vindication of our funds regime as it proved not only that the regime can work for crypto funds but that the regime itself works perfectly well.
Promoters come to Gibraltar to establish their crypto fund structures because of the expertise that has developed, following the four years of consultation before the 2018 Distributed Ledger Technology Regulations and the experience in dealing with crypto and blockchain since then. Gibraltar fund administrators, auditors and directors are happy to entertain applications from crypto funds where many others have been hesitant. The Regulatory regime is agnostic as to the asset class, so long as the proper disclosures are made within the offering document and so long as the proper governance systems are in place. The Gibraltar Financial Services Commission (GFSC) issued a statement confirming that Experienced Investor Funds (EIFs) may indeed be used for crypto funds. However, probably the most helpful element in establishing itself as a crypto funds jurisdiction is the fact that there are banking institutions in Gibraltar that are willing to deal with crypto and blockchain businesses. The debt of the funds industry to the crypto friendly banks scan not be underestimated. As crypto becomes more of a mainstream asset class, there are more service providers internationally who are willing to deal with it – but we clearly have the prime mover advantage.
Protected Cell Limited Partnerships
In 2019 and 2020, the Gibraltar Funds and Investment Association (GFIA) went out to its members to ask how it could improve funds offering for them. As a result of this consultation, the Government of Gibraltar enacted the Protected Cell Limited Partnerships (PCLP) Act 2021 and it updated its limited partnerships legislation with the Limited Partnerships Act 2021. These two new pieces of legislation mean that we can capitalise on its experience as one of the first jurisdictions to enact Protected Cell Companies legislation in 1991, in the context of limited partnerships as well. Many funds prefer to be structured as limited partnerships for reasons of tax transparency and flexibility of governance, but they were constrained by having to set up new partnership funds for new strategies. It is now possible as with a Protected Cell Company in the corporate context, to set up a PCLP Fund that can have several cells that each trade as funds but are statutorily segregated from each other. This structure has become very useful for crypto funds which attract US and Israeli investors for whom it is often more beneficial to invest as limited partners than as shareholders.
New and Improved Limited Partnerships
Other amendments allow for a Limited Partnership to choose whether it will possess a legal personality or not. Limited Partnerships under the English Limited Partnerships Act, 1907 do not have a legal personality and must therefore trade through their general partners. The Gibraltar Limited Partnerships Act 2021 was amended such that a limited partnership does have legal personality and can thus own assets in its own right. It can have a bank account in its own name rather than in the name of its general partner. The default position is that a newly incorporated Limited Partnership will have legal personality, but within three months of incorporation it may elect to do away with its legal personality. Until now, complex private equity and real estate fund structures require the use of several jurisdictions in order to accommodate structures such as UBTI blockers that needed to be entities with corporate personality. Now this can be done in Gibraltar all within the same jurisdiction.
Under the new Limited Partnerships Act 2021, there are safe haven guidelines for involvement of limited partners in the management of the Limited Partnership without their running the risk of losing the limitation on their liability. This was important in structuring funds where partners wished to have some involvement in the management of the fund by acting on advisory investor committees, but they were reluctant to do so. They may now do so in confidence within certain parameters. Finally, there is greater flexibility as to the types of interests that can be issued by Gibraltar Limited Partnerships. The interests can be issued as simple partnership interests or shares, units or even notes. This can be particularly helpful in the structuring of debt funds.
The Impromptu Renaissance
As mentioned, the innovations and the success of funds in the crypto space have made the general industry aware of the benefits of the Gibraltar EIF regime. Principally within those benefits is the pre-authorisation launch. This means that after the appointment of an appropriate fund administrator, auditor, two authorised directors and preparation of a suitable offering document, the fund can, on the basis of a legal opinion from a senior Gibraltar lawyer, launch and begin trading so long as within 10 business days it notifies the GFSC along with copies of the documents and the regulatory fees. This means that there is no regulatory downtime for the launch of funds as there is in most other jurisdictions on this side of the pond. Several jurisdictions have established Reserved Alternative Investment Fund (RAIF) regimes to address this issue and these funds can indeed launch immediately. However, this is somewhat misleading because those RAIFs must already have appointed an Alternative Investment Fund Manager (AIFM) and AIFM Depository. This means that the RAIF option is only really open to larger funds that can bear the costs of such service providers. The pre-authorisation launch of EIFs is available to all funds including smaller funds that are below the threshold of the EU Alternative Investment Fund Managers Directive (AIFMD).
The enactment of the Dual Regime for funds will allow Gibraltar funds to “opt out” of the AIFMD requirements of appointing an AIFM and AIFM Depository on funds over certain thresholds is imminent and should be accepted into law in Q1 2022. Gibraltar funds that elect to comply with AIFMD can still use the marketing passport with the UK in order to market to UK-based professional investors. As a result of Brexit, Gibraltar remains the only jurisdiction to retain its marketing passport for funds and certain other financial services businesses with the UK. However, neither the UK nor Gibraltar have retained passporting rights with the EU.
Flexibility with Service Providers
The EIF regime does not require the use of Gibraltar-based depositories and banks for sub-threshold schemes or for larger schemes that will have opted out of AIFMD under the Dual Regime. Furthermore, although normally a Gibraltar fund administrator is used, there is an option under the Financial Services (Experienced Investor Funds) Regulations 2020 to use a foreign administrator that is resident in a jurisdiction that has an equivalent level of regulation for fund administration. These foreign administrators need to be “approved” but not “authorised” meaning that the GFSC needs to carry a regulatory check on them to ensure that they are in good standing with their home regulators. They do not however need to establish a new entity, nor are they required to have any physical presence in Gibraltar other than a simple agent who is entitled to accept documents on their behalf. Once their regulatory check has been done, the Minister for Digital and Financial Services also is required under the law to confirm their approval. Indeed, administrators from several jurisdictions have and are considering getting approved in Gibraltar especially in order to service crypto funds as the regulatory regimes in their home jurisdictions are difficult or unsuitable for those asset classes.
In an interesting twist of fate, the success that Gibraltar is having with crypto funds has highlighted the ease of use and speed to market of Gibraltar’s EIF regime. In fact, promoters are also establishing traditional securities funds, energy funds, algorithm trading funds and even SPAC and trade finance funds. Gibraltar’s powerful partnership between Government, regulator and industry have again proven to be an effective triumvirate for the development and continued success of Gibraltar’s funds and investment industries.