The Alternative Investment Management Association

Alternative Investment Management Association Representing the global hedge fund industry

Jersey's new Unregulated Funds regime: speed and flexibility for alternative investment funds

Daniel O'Connor & Robert Milner

Carey Olsen

Q2 2008


1. Introduction

Jersey is further widening its capabilities as an offshore funds jurisdiction. The introduction of a new Unregulated Funds Regime (which commenced on 19 February 2008) will create two classes of investment fund which can be established without regulatory approval under Jersey's funds legislation.

Key features of the new unregulated funds include:
• no audit requirement, no limit on the number of investors, no investment or borrowing restrictions and no need for Jersey service-providers; and
• a choice of fund vehicle (company, unit trust or limited partnership).
There will be two categories of unregulated funds:
• Unregulated Eligible Investor Funds, which may be open or closed ended and are restricted to sophisticated investors (including those investing $US 1 million); and
• Unregulated Exchange Traded Funds, which must be listed on an approved stock exchange (the 50 pre-approved exchanges includes AIM, NASDAQ, Euronext and the CISX).

Jersey has also made key improvements to its companies law, including simplification of the return of capital provisions, introducing corporate directors and introducing treasury shares. These changes will be of particular benefit to investment funds structured as Jersey companies and which build on other recent changes introducing protected and incorporated cell companies and relating to the merger of companies and the migration of companies to Jersey from other jurisdictions.

The Unregulated Funds Regime provides fund promoters with certainty, flexibility and speed when establishing new funds and is expected to draw an immediate influx of new funds to Jersey. It provides a flexible regulatory regime to rival the Cayman Islands and combined with Jersey's convenient time zone and strong international reputation, is expected to be particularly attractive to European fund managers and promoters.

2. Background

Jersey has been experiencing record growth in fund assets under administration and, in particular, has recently attracted considerable new business in the alternative funds sector. Recent figures show that more than half the industry's assets are invested in the alternative market. A key contributor to this growth has been the introduction of "fast-track" regulatory regimes, such as:

Expert Fund: introduced in 2004 and updated in 2007, the introduction of this streamlined 3 day approval process for expert funds has been hugely successful.
Listed Fund: launched in early 2007, created a simplified 3 day approval process for closed-ended funds which are listed on recognised stock exchanges or markets.

Under these regimes, the rapid turn-around times for approval applications have been achieved by shifting a significant part of the due diligence burden away from the industry regulator, the Jersey Financial Services Commission (Jersey FSC), and onto the fund's service providers, who are required to certify compliance with relevant regulatory requirements.

The introduction of these streamlined approval processes for investments funds has been part of a broader initiative by the Jersey FSC and industry bodies to simplify the regulatory framework. Under changes introduced late in 2007, appropriately registered service providers no longer require any regulatory approval before starting work for a new fund. These changes now make it even easier (for both non-Jersey funds and Jersey funds) to engage Jersey administrators, investment managers and custodians.

3. Rationale for an unregulated regime

Jersey has introduced "unregulated" funds, rather than engaging in a competition with other jurisdictions to devise the least onerous regime for funds that purport to be regulated. This decision, made after considerable consultation and with industry support, is preferable for the following reasons:

• The practice in other jurisdictions of requiring regulatory approval with an ultra-light level of regulation carries a dual risk that such minimal controls will ultimately prove ineffective in protecting investors and that investors could be misled as to the level of comfort they should take from the fund's "regulated" status.
• Appropriate safeguards are already in place for funds that qualify for unregulated status. Unregulated Eligible Investor Funds are restricted to high net-worth and other sophisticated investors, who must sign a declaration that an investment warning has been given and accepted. In the case of Unregulated Exchange Traded Funds, which must be listed on one or more approved stock exchanges, additional supervision by the Jersey FSC was considered superfluous.
• Jersey businesses providing regulated services, including to unregulated funds, will continue to be regulated directly by the Jersey FSC.

While the absence of any requirement on unregulated funds to use any Jersey-based service providers clearly creates potential benefits for investors, it is also expected to benefit Jersey's industry generally, both by promoting international competition within the industry and by attracting more specialist funds to the island.

Regulated Jersey funds which were launched before 19 February 2008 will not be able to convert to the new regime.

4. Qualification requirements for unregulated status

Once the fund vehicle is established in the usual way, no further regulatory approvals of any kind will be required if the fund meets the requirements for qualifying as an unregulated fund. A summary of these requirements in relation to each of the two unregulated fund categories is set out below:

4.1. Unregulated Eligible Investor Funds

This category is a logical step on from the existing Expert Fund regime and recognizes that high net-worth, institutional and other sophisticated investors are likely to be able to make an adequate assessment of the risks involved in investing in an unregulated fund. An Unregulated Eligible Investor Fund:

• may be sold to or held by an unlimited number of "eligible investors" (see below);
• has no obligation to have any Jersey resident directors or any Jersey based administrator, custodian or other service providers;
• does not need to produce audited accounts;
• may be listed, provided that the exchange permits transfer restrictions (to ensure that only eligible investors are allowed to invest in the fund);
• can be open or closed-ended and can be established as a Jersey company, protected cell company or incorporated cell company, as a limited partnership with at least one general partner which is a Jersey company or as a unit trust with at least one trustee or manager which is a Jersey company;
• must obtain a written acknowledgement from each investor confirming their acceptance of the risks involved in the fund (typically dealt with on the application form); and
• must file a notice with the Jersey FSC confirming that the eligibility requirements are met.

For this purpose, "eligible investors" include those:

• who make a minimum initial investment or commitment of US $1,000,000 (or equivalent);
• whose ordinary business or professional activity includes dealing in, managing, underwriting or giving advice on investments (or an employee, director, consultant or shareholder of such a person);
• who is an individual with a net worth of over US $10,000,000 or equivalent (calculated alone or jointly with their spouse and excluding a principal place of residence);
• which is a company, limited partnership, trust or other unincorporated association and which either (i) has a market value of US $10,000,000 or equivalent (calculated either alone or together with its associates), or (ii) has only "eligible investors" as members, partners or beneficiaries;
• which is, or acts for, a public sector body;
• which is the trustee of a trust which either (i) was established by an "eligible investor", or (ii) is established for the benefit of one or more eligible investors; or
• which is, or is an associate of, a service-provider to the fund (or an employee, director, consultant or shareholder of such a service-provider or associate and who acquires the investment as remuneration or reward).

The regime also expressly recognises that a discretionary investment manager may make investments on behalf of investors who do not qualify as "eligible investors", provided that it is satisfied that the investment is suitable and the underlying investor is able to bear the economic consequences of the investment.

4.2. Unregulated Exchange Traded Funds

Achieving listing on an approved exchange is the only substantive requirement for an investment fund to qualify for unregulated status in this category. This route is expected to be particularly attractive, as a "technical" listing may not be overly onerous to achieve and may expand the fund's potential investor base. An Unregulated Exchange Traded Fund:

• must be listed on any one or more approved stock exchanges (initially comprising 50 exchanges in over 40 countries and which include the London, New York, Irish and Channel Islands stock exchanges, as well as AIM, Euronext and NASDAQ) and will be subject to the rules of any exchange on which it lists;
• has no obligation to have any Jersey resident directors or any Jersey based administrator, custodian or other service providers;
• has no minimum investment level and no limit on the number of investors;
• does not need to produce audited accounts;
• can be established as closed-ended as a Jersey company, protected cell company or incorporated cell company, as a limited partnership with at least one general partner which is a Jersey company or as a unit trust with at least one trustee or manager which is a Jersey company;
• must include a specified investment warning in its offer documents notifying investors that the fund is not regulated in Jersey; and
• must file a notice with the Jersey FSC confirming that the eligibility requirements are met.

5. Conclusion

The Unregulated Funds Regime complements the range of existing regulated fund regimes already available from Jersey. Its arrival marks another important element in the finance industry's toolkit and ensures the jurisdiction remains current and competitive.

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