Gibraltar: An Alternative
Fund Jurisdiction In The European Union
by
James G Lasry LLB, Hassans, Gibraltar
email: info@hassans.gi
Introduction
The significant global expansion in funds has put considerable
pressure on established fund centres such as Dublin,
Luxembourg and the Caribbean. These pressures have given
rise to delays in fund establishment and greater selectivity
by fund administrators creating a healthy overspill
to other jurisdictions which had previously been unexploited.
Funds are a creative form of investment. Independent
asset managers may wish to pool assets and streamline
administration and are increasingly using collective
investment vehicles. Funds are also becoming the preferred
investment structure for family estates and trusts.
They offer professionally managed investment structures,
tailor-made to the family’s profile and objectives.
There are a number of funds currently domiciled in Gibraltar
and others that are administered from Gibraltar. A significant
number of these are hedge funds registered in the Caribbean
where the promoters require the administration to be
carried out in the European time zone. Gibraltar has
the major names in accounting services to provide audit
and other support services as well as banks to provide
custody services.
High regulatory standards combined with the flexibility
of a small jurisdiction and the availability of a quality
infrastructure at low cost is increasingly making Gibraltar
an attractive fund location.
Gibraltar is part of the European Union by virtue of
its relationship with the United Kingdom. Gibraltar
has transposed all relevant EU Banking Directives and
most of the Financial Services Directives so that its
financial services sector is firmly within the integrated
structured financial services system contemplated by
the EU. ‘Passporting’ of banking and insurance
services has been in place in Gibraltar for some years
and financial services passporting was brought in to
effect in July 2003. This allows financial services
firms and certain funds to offer their services and
products throughout Europe on the basis of their Gibraltar
licence.
The Gibraltar Regulatory Regime
The Financial Services Ordinance, 1989, the Financial
Services Ordinance (Collective Investment Schemes) Regulations,
1991, the Financial Services (Collective Investment
Schemes) Ordinance, 2005* and the Financial Services
(Experienced Investor Funds) Regulations, 2005 effectively
divide the types of licensing requirements on funds
that may be incorporated in Gibraltar into three categories:
Experienced Investor Funds, Non-UCITS Retail Funds and
UCITS Funds.
(*The
Financial Services (Collective Investment Schemes) Ordinance,
2005 purports to transcribe the UCITS II and III directives
to Gibraltar law but is currently in force only with
regard to the enactment of the Financial Services (Experienced
Investor Funds) Regulations, 2005.)
a.
Experienced Investor Funds
Experienced Investor Funds (“EIFs”) under
the Financial Services (Experienced Investor Funds)
Regulations, 2005 (“the EIF Regulations”)
are funds designed for professional, high net worth
or experienced investors. Investors in these funds must
have a net worth in excess of €1,000,000 or invest
a minimum of €100,000. An EIF may be set up in
a matter of days. For authorisation to trade, it need
only notify the Financial Services Commission (“FSC”)
within 14 days of establishment. The notification is
made by the administrator and is accompanied by the
fund’s offering documents and an opinion from
counsel that the fund complies with the EIF Regulations.
An EIF must have two Gibraltar-resident directors who
are pre-approved by the FSC, a custodian or prime broker
and a Gibraltar-based administrator. EIFs must also
produce annual audited accounts.
This is a niche area for funds currently in Gibraltar.
EIFs do not have to go through the regular procedure
for regulation and licensing but are structured both
to ensure adequate investor protection and comfort and
to allow for expansion. Set-up time and costs are quite
competitive.
b.
Non-UCITS Retail Funds
The second category is the Non-UCITS compliant public
fund. These funds are licensed by the FSC. The licensing
procedure which normally takes about two months, involves
the submission of the formation documents of the fund
and its prospectus to the FSC along with application
forms on the fund and its directors or investment manager.
It is possible to structure these funds (as well as
EIFs) as umbrella funds, hedge funds, feeder funds,
funds of funds and mutual funds.
The requirements for licensing under the Financial Services
Ordinances are basically that the company must have
a paid up share capital of at least £50,000 and
it must have at least two Gibraltar resident directors.
The directors and managers must be ‘fit and proper
persons’ and must have adequate investment experience
in order for the FSC to consent to grant them a licence.
We recommend a face-to-face meeting between the directors
or promoters and the Investment Services Supervisor
of the FSC. Unlike with EIFs, all of the directors and
managers must be approved by the FSC and not solely
the Gibraltar-resident directors.
There are also various restrictions on the types of
investments, however, it is possible (in the case of
non-UCITS funds) to obtain derogations from these regulations
by making a case before the Commissioner of the FSC.
The end result is that these funds may, with consent
from the FSC, invest in almost any type of investment
including hedge funds, real property and even private
equity. The advent of the Financial Services (Experienced
Investor Funds) Regulations, 2005 will probably lessen
the use of this category of fund, which heretofore was
used for both retail and experienced investor funds,
as most of the uses of this type of fund can be attained
through the EIF regime, save for the fact that EIFs
are restricted to experienced investors.
c.
Public Funds (UCITS)
Where the intention of a public fund is to invest solely
in “transferable securities” namely stocks
and bonds listed on a recognised European Community
or other recognised stock exchange, a fund may be licensed
in compliance with the European directives on Undertakings
in Collective Investment in Transferable Securities
(“UCITS”). These funds are generally meant
for retail investors. Since Gibraltar is in the European
Union by virtue of Article 299(4) of the Treaty of Rome,
it has been given the right to passport its financial
services throughout Europe. Gibraltar UCITS funds may
therefore passport their services within the European
Union on the basis of their Gibraltar license. Unlike
EIFs and non-UCITS retail funds, they must comply with
the Financial Services Ordinance (Collective Investment
Schemes) Regulations, 1991 with regard to investment
restrictions and structure. For example, no more than
10% of the fund’s assets may be invested in the
securities of any one issuer and the fund can invest
only up to a total of 10% of the share capital of any
one entity. Such funds must also engage European-licensed
custodians and administrators.
Protected Cell Companies
Gibraltar has implemented the Protected Cell Company
Ordinance, 2001 which allows for the incorporation of
protected cell companies (“PCCs”). PCCs
enable the statutory segregation of assets and liabilities
in different cells. Long used captive cell insurance
companies, the PCC legislation allows a fund to be set
up so that there is segregation of assets and liabilities
in an umbrella structure (i.e. that includes different
sub-funds) where it is essential to ensure that there
is no liability contamination between sub-funds. Instead
of the client relying on a purely contractual arrangement
between shareholders, the legislative regime gives statutory
basis for the segregation of assets that binds third
parties as well. Sub-funds or cells can be used by separate
clients or by one client wishing to promote several
investment strategies. PCCs may be licensed as either
EIFs for professional investors or as non-UCITS funds
for retail investors.
Legal Structure
Funds
in Gibraltar are usually structured as open-ended investment
companies (“OEICs”) to allow investors to
exit the investment and redeem their shares at any time
(presumably on certain conditions of liquidity being
satisfied). Investors are issued redeemable preference
shares which they can redeem subject to certain conditions
(determined in advance by the fund) being satisfied.
The fund’s Memorandum and Articles must be drafted
to allow redemptions of shares at the prevailing Net
Asset Value (“NAV”) if the fund is to be
open-ended. Typically, the fund will have ordinary shares
that carry most voting rights and participation shares
that carry economic rights. Participation shares are
the units purchased by investors at the NAV. Although
they usually do not have any voting rights, but they
may have if desired by the promoters of the fund. The
ordinary shares are normally issued to the investment
manager or to the directors, depending on who manages
the fund.
The fund can be managed by its directors or by investment
managers. nvestment managers that manage funds in Gibraltar
may require a licence from the FSC in Gibraltar to do
so. Directors who manage a fund do not require any specific
licensing, save for the Gibraltar resident directors
in EIFs who must be approved to act as directors of
such funds. Most funds have personal rather than corporate
directors who hold regular board meetings in order to
ensure that management and control is fully exercised
in Gibraltar.
Gibraltar funds can be structured as closed funds as
well. These are usually used for private equity or property
funds. Whether open-ended or closed, funds may take
the form of a corporate vehicle or a unit trust, although
the latter has become less common in recent years.
Taxation & Confidentiality
Licensed funds in Gibraltar (including EIFs) are exempt
from income and company tax in Gibraltar upon receipt
of a certificate from the Commissioner of Income tax.
There are no capital gains, gift or wealth taxes in
Gibraltar. Stamp duty of £10 is payable on the
increase of capital and on the transfer of shares.
Gibraltar is committed to preventing money laundering
and it was the first jurisdiction to implement an anti
money-laundering regime for all crimes. As with any
regulated entity, the fund must know the identity of
each investor by obtaining a passport copy and utility
bills showing his/her residential address along with
a supporting reference from a lawyer, accountant or
banker. This information is protected by common law
confidentiality. As regards third parties, it is possible
for the shareholder to remain anonymous on the corporate
register by registering the shares in the name of a
nominee. The nominee will then hold the shares in trust
for and under the direction of any particular investor
and his/her name will not be disclosed in any public
register.
Custodians, Fund Administrators and NAVs
Investments may be made by the fund’s custodian
or, in some cases, directly by the fund. EIF closed
funds and hedge funds with a prime broker of a P1/A1
rating do not require custodians. Several banks in Gibraltar
have ample experience and capabilities in providing
this service.
The fund must be administered by a professional fund
administrator. In the case of an EIF, the administrator
must be Gibraltar-based. Subscriptions and redemptions
are typically made directly through the administrator
with the consent of the directors.
Where the assets of the fund are publicly traded securities,
the administrator can usually produce the NAV of the
fund and distribute it to shareholders. The NAV will
be the figure at which shares are purchased and redeemed
by shareholders.
Where the fund holds private equity such as shares in
private companies, real estate or chattels, an NAV must
be compiled by competent valuers such as accountants
or valuation firms. Redemptions of shares in such funds
are often restricted in time and scope so that the directors
or managers may have ample opportunity to properly dispose
of any such assets in order to redeem shares.
Auditors
Fund administrators can usually provide management accounts
as part of their package of services. EIFs and public
funds must be audited by an auditor registered in Gibraltar.
Although UK GAAP is often used as the accounting standard
for funds, there is a movement in the industry toward
International Financial Reporting Standards (“IFRS”).
This will eventually become mandatory.
Conclusion
Although Gibraltar has been used in recent years as
a fund jurisdiction on a modest scale, it is in the
process of revamping its legislation to provide competitive
alternatives. The advent of the EIF Regulations has
given a tremendous boost to the Gibraltar funds industry
as it is now possible to set up a fund, be it a hedge
fund, a property fund or even a fund of funds, for professional
or experienced investors quickly and efficiently. EIFs
can even be set up as PCCs. The coming reform in retail
fund legislation that implements the UCITS II and III
directives is likely to attract retail funds that can
be passported throughout Europe while remaining in a
fiscally efficient jurisdiction. Gibraltar’s effective
and efficient regulatory regime, its position in the
European Union and its favourable fiscal treatment of
funds make it a competitive alternative fund jurisdiction.
For further information, please contact James Lasry
at +350-79000 or at
James.Lasry@hassans.gi.
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