Experienced Investor Funds
By James Lasry, GFIA
The Experienced Investor Fund (EIF) regime is Gibraltar’s flagship fund product. It has proven to be an extremely versatile way of setting up a fund that is fully regulated and yet may be established quickly and without having to wait for regulatory approval
Authorisation and regulatory requirements
One of the key points of the EIF is the authorisation process, which may be via a notification or prior approval procedure. Under the notification procedure, there is no regulatory pre-approval necessary for launch. It is sufficient for the fund to be incorporated, appoint its service providers, produce its offering document and hold a board meeting to launch itself as a fund. Within 10 days of launch, the EIF must notify the Gibraltar Financial Services Commission (GFSC) of the launch and provide them with a copy of the offering document, the constitution documents, a legal opinion from senior Gibraltar counsel stating that the fund was established in accordance with the Financial Services (Experienced Investor Funds) Regulations 2020 (the EIF Regulations) and other relevant legislation, a form signed by the administrator and the registration fee. This is very significant as it means that effectively there is no regulatory downtime and the fund may be launched as quickly as necessary. Furthermore, there is regulatory certainty. If there are comments or questions from the regulator, those can be addressed while the fund continues trading.
An open ended EIF must generally have a depositary. The fund may also appoint brokers to assist with their trading activity. Neither the depositary nor the brokers need be in Gibraltar. EIFs must appoint a fund administrator that is licensed in Gibraltar or that is licensed abroad but has received Gibraltar regulatory permission to administer EIFs. A Gibraltar auditor must be appointed and annual audited financial statements as well as a regulatory return are annually submitted to the regulator.
An EIF must issue an offering document that complies with the EIF Regulations. These are consistent with industry standards and allow an investor to make an informed investment decision. The offering document must state the fees that are chargeable out of the property of the fund, the investment objectives, borrowing or investment restrictions if any, and the risks associated with such investment.
There are no restrictions on borrowing or owning investments. A fund may invest in any class of investment and at any percentage given that this is a fund that is targeted to experienced investors who are informed and are able to bear the risks of such investments. The fund may, however, impose certain restrictions on itself and these must be reflected in its offering document.
Management
The EIF Regulations require a fund board to include two GFSC-authorised directors, at least one of whom is resident in Gibraltar (unless regulatory dispensation is obtained in which case neither need be Gibraltar resident).
The fund may be managed by a manager in any jurisdiction provided that manager is entitled in that jurisdiction to manage funds. Many funds in Gibraltar do not have external investment managers and are managed by their boards of directors.
The AIFMD was transposed into Gibraltar legislation via the Financial Services (Alternative Investment Fund Managers) Regulations (AIFM Regulations). However, as mentioned, these obligations relating to the AIFMD shall only remain obligatory up to and until the end of the Brexit transition period (due to end on 31 December 2020). Going forward, managers of EIFs will be at liberty to opt out of the AIFMD regime altogether.
Marketing and distribution
EIFs are typically marketed in jurisdictions on a private basis under national private placement regimes. A private placement is a private offering of securities to a select group of investors without requirements to register the product with the national regulatory authority or undergo disclosure requirements common when financial products are offered to the retail market. Each jurisdiction will generally have proprietary private placement regulations that may differ significantly between one jurisdiction and the next. EIFs have no minimum requirements governing the invested capital.
In general, EIFs have no legislative restrictions on accepting US investors, provided that the fund and its manager adhere to the relevant US securities laws. Since Gibraltar funds can trade as private companies, they are eligible under US law to make a “tick the box” election and thereby be treated, for US tax purposes, as partnerships. In some cases, this obviates the need to set up a US feeder fund structure for US investors.
Taxation
Gibraltar has a territorial basis system of taxation. Companies are only taxed on profits accruing in or deriving from Gibraltar, meaning the location of the activities that give rise to the profits. The corporate tax rate for taxable profits is 10%. There is no capital gains tax, inheritance tax, value added tax or wealth tax in Gibraltar. There also is no withholding tax on dividends from a Gibraltar fund to its non-Gibraltar-based investors. Interest income, however, is charged at 10% for sums over £100,000. It is generally possible to structure funds in Gibraltar so that they do not suffer any Gibraltar taxation.
Conclusion
The quick and easy regulatory notification process, the possibility of setting up funds under the PCC or PCLP structure and a tax-neutral environment are all factors that are certain to make Gibraltar a very interesting and competitive jurisdiction for the setting up of funds.