By James Lasry, Head of Financial Services and Miriam Bayles, Paralegal, Financial Services, Hassans

Gibraltar has established itself as a dynamic and innovative financial centre, renowned for its robust regulatory framework and its strategic geographical location. This jurisdiction has consistently demonstrated its commitment to enhancing its financial services landscape and in particular its funds and DLT frameworks. One of the most significant developments in this regard in recent years was the introduction of Protected Cell Limited Partnerships (PCLPs), a flexible structure that offers enhanced protection for both investors and fund managers.

The establishment of PCLPs in Gibraltar, formed a part of the progressive legislative measures that Gibraltar took to bolster the funds industry with the enactment of the Limited Partnerships Act 2021 and the Protected Cell Limited Partnerships Act 2021. These Acts were the result of collaborative efforts between Her Majesty’s Government of Gibraltar, the Gibraltar Funds and Investments Association, and the Gibraltar Financial Services Commission with expert guidance from legal professionals. This new statutory framework enhanced the existing legislation by providing a solid foundation upon which Limited Partnerships (LPs) could operate as well as innovatively incorporating the concept of protected cells within those partnerships.

PCLPs are unique

PCLPs combine the traditional features of LPs with the protective benefits of segregated cells as are seen in Protected Cell Companies (PCCs). A PCLP allows for the creation of multiple cells within a single LP, each with its own distinct assets and liabilities. This structure differs from traditional LPs where assets and liabilities are pooled, and PCCs which, whilst offering segregation, do not provide the tax transparency benefits inherent in partnerships. PCLPs are therefore unique in the sense that they are able to provide statutory segregation of assets and liabilities between cells, tax transparency, as well as enhanced investor protection and operational flexibility.

The availability of PCLPs presents several compelling advantages in fund structuring. Fund managers are able to implement multiple investment strategies within a single legal entity, each housed in its own protected cell. This arrangement streamlines administrative processes and reduces costs associated with establishing separate entities for different strategies. As funds structured as PCLPs maintain the tax transparency characteristics of LPs too, income is therefore taxed at the investor level, aligning the economic objectives of many investment structures.

Funds industry and investors

The successful introduction of PCLPs has been a testament to the collaborative efforts between the Gibraltar Government, the Regulator and industry bodies. This partnership ensured that the legislation was meticulously crafted with the funds industry and investors in mind whilst maintaining the integrity and robustness of Gibraltar’s regulatory and legislative environment. The work that went into advancing the framework has been recognised by stakeholders as highlighting Gibraltar’s ongoing commitment and proactive approach to providing innovative and viable legislative solutions to the local financial services sector. The Gibraltar PCLP is an outstanding addition to Gibraltar’s range of fund products. Gibraltar’s size and proactivity have allowed it to come up with a piece of legislation that the vast majority of fund jurisdictions have yet to acquire.

It came as no coincidence that the first PCLP launched in Gibraltar, almost a year after the PCLP Act came into force was a crypto fund; crypto funds operate in an environment that is defined by rapid innovation, significant market volatility and evolving and uncertain regulatory frameworks. They therefore carry unique risks. For these funds, PCLPs offer an equally unique structure with more effective risk management and flexibility:

1. Risk Management

Each cell functions as a separate legal entity, meaning any unexpected losses or liabilities, whether from market swings or security breaches, are contained within the individual cell and do not impact the entire fund.

2. Operational Flexibility

Crypto investment strategies can vary widely and may range from direct asset holdings to lending or staking activities. Within the PCLP framework, funds can operate multiple specialised cells under one umbrella which reduces administrative workload and enables fund managers to tailor operational strategies to the specific requirements of each cell’s activity.

3. Enhanced Investor Protection

If one of the fund’s cells or strategies encounters difficulties or losses, investors in other cells remain insulated from these issues. This builds investor confidence in a market where unexpected disruptions are rampant.

4. Tax Transparency

The economic and tax environment associated with crypto assets is often complex. As PCLPs are tax transparent, gains and losses pass directly through investors, simplifying tax reporting and providing further clarity.

5. Regulatory Compliance

The adaptable nature of PCLPs is increasingly valuable in the crypto sector. Fund managers are able to address new compliance requirements on a cell-by-cell basis in response to changing market conditions or legal frameworks rather than restructuring the entire fund.

PCLPs are likewise ideal for less liquid asset classes such as real estate, private equity, venture capital and token projects as they allow each investment strategy to be compartmentalised into separate cells. As in crypto funds, this segregation means that the risks, liabilities and performance of one cell does not impact the others which is crucial when assets are not easily traded or quickly liquidated. This adds a more nuanced approach for fund managers where each cell can be designed with more operational flexibility. The tax transparency that is afforded through a partnership structure is also especially important for less liquid asset classes where cash flows are irregular, and risks can vary significantly. This allows investors to manage tax implications and risk more effectively as profits and losses pass directly to investors.

The continued use of PCLPs is expected to have a long-term impact on Gibraltar’s funds industry. By offering a flexible and protective structure, PCLPs remain an attractive and ideal option for fund managers and investors considering Gibraltar as a domicile and presents an opportunity for those seeking a jurisdiction that supports innovative investment vehicles. It is a testament that Gibraltar remains committed to enhancing and refining its legislation and maintaining its reputation and position at the forefront of the global funds industry.

The post Redefining investment structures and Gibraltar’s PCLP advantage appeared first on Gibraltar International Magazine.

By Heather Adamson, Gibraltar Funds and Investments Association

For the past five years Gibraltar has positioned itself as a hub for crypto funds, and has been ranked 3rd in the world for crypto fund domicile in both 2021 and 2022 by PwC.

This success is in part due to existing regulations in the form the Financial Services Act and Experienced Investor Fund Regulations not being restrictive on asset class but also due to the development of new regulations:

• the creation of a ‘dual regime’ which allows experienced investor funds to opt out of the AIFMD requirements, including a regulated AIFM and AIFM depositary; and
• the establishment of protected cell limited partnerships allowing funds to be established as limited partnerships which benefit from tax transparency and flexible governance arrangements but still use segregated portfolios and therefore avoiding having to establish a new structure for each new strategy.

Is a supportive regulatory regime enough?

Crypto funds, and the wider crypto sector, have faced multiple challenges recently, from the collapse of FTX to the closure of crypto friendly banks Silicon Valley Bank and Signature Bank. It is clear a supportive regulatory regime is not all that is required for the development of a strong crypto fund sector.

Counterparty risk is high and the recent market events have jolted both market participants and regulators.

The eyes of regulators globally are now focused on crypto and while it will take some time for multi-jurisdictional regulation to be negotiated and agreed, crypto funds continue to seek trading venues, banking and payment solutions.

While Gibraltar’s regulatory regime sets out the general arrangements for safe custody of assets and delegation of functions for all investment funds (without being specifically restricted for crypto funds), it is the ecosystem of experienced market participants and consultative approach that has defined what and how these aspects should be considered.

The crypto code of conduct

Gibraltar’s Funds and Investments Association first published their Crypto Code of Conduct in October 2018 and this was subsequently updated and revised in March 2022. The code is published as an addendum to the wider Code of Conduct for investment funds.

The code sets out matters of best practice in relation to corporate governance and tackles the specific nuances of crypto funds. Funds are required to apply for the code on a comply or explain basis, meaning the code does not become obsolete due to technological changes or advances and instead focuses on the principals.

Corporate Governance

A crypto fund’s control environment should consist of appropriate governance and management functions taking in consideration attitudes, awareness, and experience of the board. This wide focus on the responsibilities being that of the whole board ensures independent directors are actively involved, invested, and can seek to integrate lessons learned quickly across the industry.

Risk Management

The board is responsible for the application of appropriate risk management practices, including setting risk appetite, tolerance levels, quantifying and monitoring. Risk management must address custody of digital assets, misappropriation or theft, liquidity, counterparty, and money laundering risk. The clear requirement to establish a framework
means funds are focusing on analysing their risk exposure from day one and thinking cannot be left to one key man in a siloed capacity.

Valuation

While there is still a lack of formal standards specific to digital assets and debate as to whether these are required, the code ensures funds are considering the various classification options in advance. The focus on disclosure, handling conflicts of interest and discussion with the fund’s auditor are top priorities and Gibraltar’s accountants and auditors have taken a key role in discussions.

Safekeeping and Security

Traditional funds deposit assets with regulated banks and custodians; however, these options are not yet available to crypto funds. While there is rapid development of custodian services, the counterparties are still in their infancy and do not always handle the broad range of different digital assets that funds are seeking to engage with.

The code requires funds to develop a written policy on their safekeeping arrangements that seeks to replicate the safeguards in place in traditional finance where possible but also understands the limitations of current offerings and technologies. Crypto funds are required to consider risk, controls, and mitigating practices.

Trading

The code encourages use of regulated exchanges and markets with funds being required to undertake due diligence on the venue before engaging. A focus on independent or external comfort such SOC 1 or SOC 2 type reports is encouraged.

Anti money laundering

Gibraltar funds are covered by the Proceeds of Crime Act and are required to undertake due diligence on all investors; however, the code highlights the importance of considering the unique set of risks relating to digital assets including verification of ownership and risk screening of wallet addresses.

Regulation plus best practice

Although the crypto bear market has been a difficult time for many participants, Gibraltar’s decision to embrace crypto and the wider DLT sector early with regulation and support, and the resulting growth of an experienced and strong service provider sector has positioned the jurisdiction well to weather these tough times and prepare for the future growth.

The post Crypto funds and the importance of the ecosystem appeared first on Gibraltar International Magazine.

Recently the regulations surrounding Experienced Investor Funds (EIF’s) in the jurisdiction changed – and for the better as well.

Experienced Investor Funds are specialist funds designed for high net worth, professional, or experienced investors. Experienced Investor Funds are highly versatile vehicles suited to holding assets in numerous sectors, traditionally, these funds face a lower regulatory burden compared to other fund structures thanks to their use by more experienced investors. However, the Gibraltar Financial Services Commission (GFSC) maintains the right level of oversight to protect both investors and the reputation of the sector in Gibraltar.

An increased pool of directors

The Government of Gibraltar has evolved the regulations in the Financial Services (Experienced Investor Funds) Regulations 2020 by removing the local residency obligation for certain directors and other controllers of Experienced Investor Funds. The move will add to the talent pool that can already be accessed locally to act as directors of funds choosing to domicile on The Rock. With an increased pool of directors and abilities to draw from, it is expected that more funds may seek to domicile in Gibraltar. The new increased flexibility to hire foreign directors will also bring new perspectives to Gibraltar business and further broaden the expertise of the industry in the jurisdiction. The changes to the regulations came into force on the 1st of September 2022.

The previous regulations, enacted in 2020, meant that it was necessary for at least one director of Experienced Investor Funds to be a Gibraltar resident. The new law removes the residency requirement altogether, but two directors are still required to be appointed. To protect investors and the financial system, the GFSC will still apply the same rigorous criteria for anyone wishing to serve as a director.

“The move will add to the talent pool
that can already be accessed locally
to act as directors of funds choosing
to domicile on The Rock”

Policy Statement

In order to become a director of an Experienced Investor Fund, it must be demonstrated to the GFSC that the proposed individual has at least five years of relevant experience in providing services to investment funds and has the ability to ensure that that Experienced Investor Fund will be governed, controlled and monitored effectively having regard to a Policy Statement issued by the GFSC outlining its expectations. The success of the Experienced Investor Fund regime is reliant upon its directors understanding and complying with their obligations and responsibilities as directors, and the importance of this cannot be understated.

The changes to the regime come as Gibraltar maintains its position as a top destination for cryptocurrency hedge funds. In the fourth annual report compiled by PwC and Elwood Asset Management, the jurisdiction was named the third preferred choice for managers globally, behind only the Cayman Islands and the British Virgin Islands – and ahead of the United States.

Gibraltar welcomes the change in regulation. We believe that it is a further signal to the international business community that Gibraltar is an evolving and modern jurisdiction.

Right touch, not light touch

We believe the changes underscore the reason for international investors to do business in Gibraltar. Removing the need for a director to be a Gibraltar resident brings us in line with many of our international competitors, which, when viewed alongside our common law legal system, favourable tax system and ‘right touch, not light touch’ regulator reinforces our position as a major jurisdiction in the industry.

Peter Isola, Senior Partner at ISOLAS commented: “…changes to the EIF regulations showcase Gibraltar’s innovative, vibrant, and robust financial services system, giving businesses the confidence and security, they need to invest and grow.”

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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.

Crypto Funds

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).

Dual Regime

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.

Conclusion

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.

The post Crypto and the renaissance of Gibraltar funds appeared first on Gibraltar International Magazine.

By Jay Gomez, Director, and Javier E. Triay, Senior Associate, Triay Lawyers

The build-up to Brexit was not easy for anyone living and breathing financial services in Gibraltar. Although we took comfort in the ongoing access to our primary market, the United Kingdom, negativity and pessimism reigned for what looked like an uncertain future.

As a result, Gibraltar featured heavily in the international media. The question primarily being asked centred around the impact on day-to-day lives and primarily the question of fluidity at the frontier with Spain. The loss of access to the EU market was largely suffered in silence.

During 2020, Gibraltar continued to feature in the international media when along came COVID-19 and the spotlight was then on the efficiency of Gibraltar’s vaccination programme, and then the New Years Eve ‘In-Principle’ Agreement with Spain. Then followed the positive impact of the vaccination programme on limiting community transmission of the virus and the hotly contested abortion referendum. For the past 12-24 months Gibraltar has been plastered all over the international media. This looks set to continue as the negotiations ramp up in respect of our future relationship with the EU.

Self-criticism is engrained in all Gibraltarians and for years we have believed that our ability to market ourselves as a jurisdiction has not been as successful as that of our main competitors. Perhaps our size has something to do with that?

Whilst some may have not realised, the past 12-24 months has created more publicity for Gibraltar than any of us could have ever hoped for or dreamed of. Overall, that publicity has also conveniently been positive and has shown Gibraltar in great light and on many occasions as a leader and a beacon of hope: the success of the vaccination programme being a perfect example.

Why does this matter for financial services and specifically the funds sector? The answer is simple: post-Brexit our competitor jurisdictions have shifted from being EU fund domiciles to non-EU fund domiciles and it seems the time Gibraltar has spent in the news has also sparked interest from prospective clients in what Gibraltar can offer for financial services.

Gibraltar Funds & Investments Association (GFIA)

The timing has been superb as since the result of the Brexit referendum our funds products have been carefully refined to make them as competitive and attractive to prospective clients as they possibly can be. They are now at least on par with our non-EU competitor jurisdictions and the work continues in partnership between the industry, driven by the Gibraltar Funds & Investments Association (GFIA) the Gibraltar Financial Services Commission (GFSC) and Minister Isola and his team at the Gibraltar Finance Centre.

The work now centres primarily on creating a dual regime for investment funds and managers that are now not able to take advantage of the benefits of the passporting permissions under EU Directives. The aim being to give investment funds and their managers the ability to opt-out of those regimes: the Alternative Investment Fund Managers Directive (AIFMD) being a perfect example.

This ongoing work shines a light on the competitiveness of Gibraltar’s experienced investor fund and private fund regimes and the advantage of a jurisdiction where industry and policymakers work side-by-side in the best interests of the jurisdiction.

FATF grey-listings

The industry is reporting a common trend, a marked increase in enquiries for domiciliation of funds in Gibraltar and most importantly those funds making Gibraltar their home. Perhaps this is down to the increased media attention surrounding Gibraltar? The trend may have also been aided by the FATF grey-listings and other reputational issues that have plagued some of our non-EU competitor jurisdictions. Perhaps the herd mentality of funds drifting to some competitor jurisdictions has been broken. Gibraltar’s position in the market was recently recognised in a report published by PwC and Elwood Asset Management which ranked Gibraltar as the 3rd most popular jurisdiction for the domiciliation of crypto funds. This report may have also created even more interest in Gibraltar.

Gibraltar is also able to provide something that no other jurisdiction can: access to the UK financial services market. This is particularly important in the retail funds space. Historically, Undertakings for Collective Investment in Transferrable Securities (UCITS) managed by UK managers had been domiciled in a handful of EU jurisdictions and then have been promoted back into the UK to retail investors on the basis of the EU’s passporting regime. Due to Brexit, this is no longer possible and is set to be replaced with the UK’s Overseas Funds Regime. This is dependant on equivalence and it remains to be seen how it will work in practice. It is also unlikely that UK managers will be able to manage a UCITS domiciled in the EU.

UK’s Overseas Fund Regime

Gibraltar has had re-domiciliation legislation since 1996. The process has been tried and tested over the last 25 years and has been proven to be an effective tool in the re-domiciliation of companies and funds alike. If those UCITS were to redomicile and make Gibraltar their home, on the basis of the single market created as between Gibraltar/UK.

UK managers could continue to manage their UCITS, they could continue to enjoy the unfettered access they have enjoyed to the UK without the worry of what the UK’s Overseas Fund Regime might look like and the UCITS would be regulated by the GFSC, a regulator which prides itself on its pragmatism and approachability.

It does seem like the stars have aligned for Gibraltar’s fund industry.

The post Are the stars aligning for Gibraltar’s investment funds sector? appeared first on Gibraltar International Magazine.

By James G Lasry, Deputy Chairman, Gibraltar Funds and Investments Association

What a whirlwind 2020 was! The United Kingdom and Gibraltar separated from the European Union (despite the fact that Gibraltar firmly voted to remain within); the world has experienced a profound health crisis the likes of which have not been seen in a century. Nevertheless, Gibraltar’s ability to be innovative and nimble is helping to forge a new path for its developing funds industry.

While Gibraltar was within the European Union, it had an obligation to transpose all EU legislation. This affected the funds industry in 2013 when it transposed the Alternative Investment Fund Managers Directive (AIFMD). The AIFMD unfortunately served as a barrier to funds establishing themselves in the EU. Indeed, this drove many funds out of Europe. Now that Gibraltar and the UK have left the EU and will no longer have access to the European passport, GFIA, together with HM government of Gibraltar, in consultation with the GFSC, has proposed legislation that would make compliance with the onerous requirements of AIFMD optional.

The Limited Partnerships Act 1927

The rules will still remain as part of Gibraltar’s legislation, but funds will be able to opt out of the regime, the logic being that if funds can no longer benefit from the passport, they shall no longer be burdened with the AIFMD. What this means for Gibraltar is that large funds that either do not plan on marketing in the EU, or who are able to use the national private placement regimes in the various member states, can establish themselves in Gibraltar without having to comply with AIFMD. Those funds who wish to remain compliant may certainly do so; in fact, many Gibraltar funds will.

Another one of GFIA’s legislative proposals has been to replace The Limited Partnerships Act 1927 with a new Limited Partnerships Bill, and to enact the Protected Cell Limited Partnership Bill. This is important for private equity, real estate and debt funds that often prefer to be established as limited partnerships because of the tax transparency that those structures afford. The new legislation is probably the most innovative and up to date partnerships legislation in the world. The most important element of the reform is that limited partnerships can now create protected cells that are statutorily segregated from each other. Previously, it was (and remains) possible to establish a protected cell company which could create such cells, but if one wished to establish a fund structure with several different strategies or investment classes as a partnership, one would have to establish several funds. This is unlike a protected cell company, where it is possible to establish those all under the same corporate entity. The economies of scale previously available only to companies will now be available to limited partnerships.

Some partnerships, such as English limited partnerships, do not possess a legal personality; others such as Scottish partnerships do. They can hold property, sue and be sued in their own name as opposed to English limited partnerships in which the general partner must act on behalf of the limited partnership. Under the new Limited Partnerships Bill, the default will be that the partnership possesses a legal personality but the general partner may elect not to have any separate legal personality. This flexibility will allow complex fund structures, that previously would have had to go to several jurisdictions in order to accommodate different types of investors, to remain within the same jurisdiction and save costs.

Corporate funds

A classic difficulty with limited partnership funds was always that the limited partners may not be involved in the management of the fund on pain of losing their limited liability status. Limited partners have, for this reason, been hesitant to participate in investor committees or advisory boards, when commercially they would have preferred to do so (as they could in corporate funds). The new Limited Partnerships Bill creates safe harbour rules providing for limited partners to become involved without fear of losing the limitation on their liability.

The new Limited Partnerships Bill also allows partnership interests to be expressed as equity, notes, loans or any other instrument that is issued by the limited partnership.

Although 2020 was indeed difficult, there is every reason to hope that 2021 will be better. That is certainly true for Gibraltar’s fund industry that has managed to capitalise on the strong relationships with the GFSC, HM Government of Gibraltar and industry.

The post Brexit, Limited Partnerships and the new opportunities for Gibraltar Funds appeared first on Gibraltar International Magazine.

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.

The post Experienced Investor Funds appeared first on Gibraltar International Magazine.

By Jay J. Gomez, Senior Associate, Triay & Triay

Even before the referendum in June 2016 there were numerous articles on the likely impact Brexit would have on the financial markets generally. From the Gibraltar funds industry perspective, Brexit is likely to have little negative impact and if promoted effectively could in fact improve Gibraltar’s rankings in the international arena.

Gibraltar’s primary fund products are the experienced investor fund (EIF) and the private scheme (private fund). Both products are born out of domestic legislation, fall within the alternatives space, pre-date EU legislation on alternative investment funds (Alternative Investment Fund Managers Directive 2011/61/EU)(AIFMD) and most importantly, will remain unchanged post-Brexit. The large majority of the EIFs and private funds established to date remain out of scope of AIFMD: primarily by ensuring that their assets under management do not exceed €100M or €500M in the case of certain closed-ended funds. This is commonly referred to as the de minimus threshold or a small AIFM.

With the exception of the pan-European marketing passport and the ability for a fund manager to manage funds domiciled in any EU jurisdiction, AIFMD has, since its inception, rightly or wrongly, been perceived quite negatively by the global asset management sector for a whole host of reasons. Whilst of course consumer protection is at the core of every regulator’s objective, the industry’s main issue with the AIFMD has been the perception that it was one of the EU’s knee-jerk reactions to the 2008 financial crisis and has substantially increased their cost ratios.

The global industry’s primarily negative perception of AIFMD has resulted in a trend which was quite contrary to what many thought the AIFMD would achieve: in the build-up to the transposition date, many believed AIFMD would result in a mass exodus of funds from traditional offshore jurisdictions into EU jurisdictions in order to seek a higher level of regulation and compliance. Following the transposition date, the reality was that many managers continued to domicile their funds in the Channel Islands and the Caribbean and neither was the momentum broken by investors only seeking to invest in AIFMD compliant funds. Investments into non-AIFMD compliant funds continued and, in many ways, the status quo was maintained.

AIFMD applies to:

– EU fund managers that manage a fund (EU or non-EU);

– Non-EU fund managers that manage an EU fund; or

– Non-EU fund managers that market their fund (EU or non-EU) in the EU.

As we all now know, notwithstanding the results of the referendum in Gibraltar (95.9% remain), Brexit = Gibexit.

Post Brexit it is likely that a Gibraltar fund will never fall within the scope of AIFMD unless it purposely structures itself to access the EU market (e.g. by appointing an EU fund manager or marketing itself in the EU). This puts Gibraltar’s fund products back on a level playing field with the likes of the Channel Islands and the Caribbean but with the added benefit of a well-regulated EIF regime, a very competitive private fund product, a professional services sector that understands the industry and an appealing tax regime which stems from domestic law and will remain unchanged by Brexit. The Gibraltar fund proposition suddenly becomes very strong and far more convenient from a practical and travel perspective for those based on the European continent.

As they currently do now, post Brexit, EIFs and private funds may wish to promote in the EU using the national private placement regimes available for funds that are out of scope of AIFMD. Brexit does not change this.

Post Brexit, access to the UK from most jurisdictions is likely to be more cumbersome. On the other hand, from Gibraltar, the self-styled single market to be created between Gibraltar and the UK, puts the Gibraltar product at a huge advantage when compared to any other jurisdiction if access to the UK is a must. Gibraltar could become the gateway to the UK market for funds offerings.

Although at the point of writing this article it seems unlikely, if we do retain some form of EU market access, the ground work to Gibraltar’s legislative framework has already been undertaken to ensure that EIFs and private funds can avail themselves of EU market access benefits if they so wish. The Gibraltar Funds and Investments Association in conjunction with HM Government of Gibraltar has worked very hard to ensure that our legislation is fit for purpose. This would result in EIFs and private funds complying with AIFMD only if they so wish to take advantage of the benefits and this is what we commonly refer to as the “dual regime”.

Finally, in the retail funds space, the directives on undertakings for collective investments in transferrable securities (UCITS) has had a very different industry adoption and has become the benchmark for retail funds on a global scale. A small number of EU jurisdictions have become the “go-to” for the domiciliation of UCITS. There is a very large number of UCITS domiciled in those jurisdictions which are in-turn UK facing and thereby raise investment in the UK. If we assume a hard-Brexit, it will no longer be possible for those UCITS to market themselves in the UK. On the other hand, a Gibraltar UCITS post-Brexit will have UK access under the Gib-UK self-styled single market and this, if promoted effectively, represents a huge opportunity for Gibraltar.

Gibraltar could become a unique proposition for both the alternatives and retail fund markets.

The post Brexit and the Gibraltar Funds Industry appeared first on Gibraltar International Magazine.

By James Lasry, Chairman, GFIA and Head of Funds at Hassans, advising a range of international groups on fund structuring, as well as assisting with fund-related disputes

Gibraltar is now considered the ‘go-to’ place for anything involving crypto currency or blockchain technology as a result of the DLT legislation and the upcoming ICO regulations. Gibraltar is one of the few jurisdictions in the world where it is possible to open a bank account for such activities. Entrepreneurs wishing to establish funds for investing into crypto currencies naturally are considering Gibraltar as a jurisdiction in which to domicile their funds.

Establishing crypto funds presents a whole new set of challenges, not the least of which is the volatility of the crypto currencies themselves. Making investors likely to lose fortunes as they are to make them by investing in this asset class. However, there is a demand amongst investor communities to have exposure to this new asset class to be placed amongst the riskier end of their asset allocation. The Gibraltar Funds and Investments Association (GFIA) has created a crypto fund committee to deal with many of these issues.

EIFs

The first resolution of the committee was to encourage the industry of Gibraltar to use Experienced Investor Funds (EIFs) as the regulatory regime for crypto funds. In recent years some service providers have used the private funds regime as a means of cutting costs. GIFA wishes to ensure that these practices are not done in the realm of crypto funds other than in the very limited cases where the fund includes only the money of one person and that is of the promoter.

The industry feels that investors in crypto funds should be afforded the regulatory infrastructure and the protections that the EIFs regulations offer along with the support of experienced EIF directors, fund administrators and auditors, many of whom are notably absent in the establishment of some private funds. To date there has been remarkable consensus from the industry and many private crypto fund projects have been either upgraded to EIFs or discarded entirely. This is a good example of the maturity and conscientiousness of Gibraltar’s funds industry.

GIFA Code of Conduct

The crypto committee is also working on an extension of the GIFA Code of Conduct to include elements that should be considered by practitioners when they are establishing crypto funds. Among other topics, the code will deal with custody of crypto assets, valuation, corporate governance and, of course, security.

While it may be inevitable that some funds decrease in value as a result of fluctuations in the underlining crypto currencies, GIFA wishes to ensure that investors in Gibraltar crypto funds will be protected, in as much as they reasonably can be, from being hacked, and from risks associated with sub-effective corporate governance.

Although most of the principles that relate to the protection of investors in crypto funds can be gleaned from the current Code of Conduct, which was issued in conjunction with the Gibraltar Financial Services Commission several years ago, the new code will serve to help practitioners apply these principles to crypto assets. A notable example is that crypto currencies should be kept in digital wallets that have multi-signatory capability. It should never be acceptable that one person be able to transfer funds without the benefit of a second approval.

GFIA believes that some of these principles should be enshrined in crypto fund regulations as well. The principle with the Code of Conduct, as it is with many such codes, most notably the Irish Funds and Investments Association Code of Conduct is ‘comply or explain’. In other words, the code recognises that there may be instances in which the principles that it sets out are not applicable to a specific situation and so in that situation, an explanation should be provided to why the principles of the code are not adhered to.

The interest in Gibraltar funds has been sparked in other areas as well. Traditional securities funds and algorithm funds are also being established. But the funds industry has not really been that quiet as they are those often those who have the best skills to deal with ICO and DLT work. In short, well done Government of Gibraltar for laying the regulatory infrastructure for this important new area.

The post Gibraltar: A safe haven for crypto funds appeared first on Gibraltar International Magazine.

By Jay Gomez, Senior Associate and Javi Triay, Associate,Triay & Triay Financial Services Team

It has now been just over a year since the United Kingdom voted to leave the European Union. The Gibraltar funds industry however, is adamant that the infamous vote, which brought with it a heavy dose of pessimism and uncertainty, can instead be good news for Gibraltar in furthering its offering as an emerging and growing hub for investment funds and managers.

Following extensive consultation between the Gibraltar Funds and Investments Association (GFIA) and its members, the Gibraltar Financial Service Commission (GFSC) and the Minister with responsibility for Financial Services, the new legislative framework for investments funds has been drawn up.

The new legislative framework creates Gibraltar’s dual-fund regime which maintains the status quo (i.e. EU access pre-Brexit) and provides a duality so that the necessary vehicles post-Brexit are permitted and clients may continue operating outside of the EU and, subject to the Brexit deal agreed between the UK with the EU, a vehicle which will allow access to the EU’s single market on the basis of reciprocity and/or equivalence.

Some of the key changes include:

Private Schemes

‑ Private schemes that are not structured as family offices and/or not managed by an authorised firm will have a maximum number of 15 investors.

‑ Continues to be a vehicle for a small group of investors, and as such will require an investor acknowledgement concerning the fund’s status (i.e. not regulated by the GFSC).

‑ Private schemes structured as a family office can have a maximum number of 50 investors.

‑ Private schemes managed by an authorised firm (either an EU regulated firm or firm which the GFSC has consented to) can have a maximum number of 50 investors.

‑ On establishing a private scheme, a legal opinion will be required to confirm that it complies with the Financial Services (Collective Investment Schemes) Act and Financial Services (Collective Investment Schemes) Regulations.

‑ The requirement for an annual audit may now be waived, but must be waived by all investors. Where the requirement is not waived, audited financial statements should be prepared within 6 months of the year end or, in the case of closed-ended schemes, within 9 months of the year end.

‑ Private schemes are now eligible for ‘upgrading’ to an Experienced Investor Fund whenever it deems it appropriate.

Experienced Investor Funds (EIF)

‑ Every EIF will require a minimum of 2 EIF directors. At least 1 EIF director has to be resident in Gibraltar but the GFSC will now have the power to dispense with this requirement. Any EIF director not being ordinarily resident in Gibraltar has to be approved by the GFSC – this does not,

however, mean that the EIF director will need to be licensed by the GFSC.

‑ The new regulations further clarify the term “Experienced Investor” to include, amongst others, persons who invest €100k into an existing EIF. The lower threshold of €50,000 on the basis of having been advised by a professional advisor has been left unchanged.

‑ The EIF’s unique deemed authorisation route clarified – i.e. if the board resolves to become an EIF and a notification is submitted to the GFSC with all the required documents as stipulated by the Regulations within the 10 days. Once that is completed, the EIF is deemed to be authorised by the GFSC from the date of the board resolution. With this clarification, the EIF continues to be the funds vehicle with the best speed to market on the European continent.

‑ The controllers of the EIF are responsible for ensuring that arrangements are in place with a bank and/or broker to keep the relevant assets of the EIF safe and accounted for.

‑ For closed-ended EIFs, the submission date to the GFSC for audited accounts has been extended to 9 months from the year end. This change has been brought about to allow greater flexibility to, for example, private equity funds.

‑ Clarification on the ability of promoters of EIFs (which are in the process of being established) being able to discuss the investment with potential investors before the EIF is established.

‑ The requirement to disclose service providers in the private placement memorandum has been clarified to include material service providers: directors, investment managers, investment advisors, legal, administrator, secretary, bank, broker and auditor.

Gibraltar Alternative Investment Fund (Gibraltar AIF)

Under the new framework, EIF’s which are “in-scope” or have opted-in to the Alternative Investment Fund Manager Directive (AIFMD), have to rebrand and become a Gibraltar AIF. It would also be required to comply with the Financial Services (Experienced Investor Funds) Regulations and the Financial Services (Alternative Investment Fund Managers) Regulations. This has effectively created a new product that is part of a ‘dual-regime’ offering the opportunity to be an EU compliant AIF.

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