Guide to Cayman Islands private funds: structure, registration and regulation

Why Choose the Cayman Islands for Private Funds?

The Cayman Islands is a leading jurisdiction for private funds, particularly private equity, venture capital, real estate, infrastructure and credit strategies. Over the past 25 years, the Cayman Islands have established themselves as a leading jurisdiction for alternative investment funds, with more than 13,000 regulated open-ended funds and over 18,000 regulated closed-ended funds. This is due to a combination of its tax neutrality, a flexible legal and regulatory framework, proximity to the United States and a judicial system based on English common law.

Tax neutrality is one of the most significant advantages. The Cayman Islands does not impose corporate, income, capital gains or withholding taxes on investment funds or their investors, allowing investors to manage their tax obligations in their home jurisdictions.

The jurisdiction maintains high international regulatory standards, including compliance with the OECD's common reporting standard and the requirements set by the Financial Action Task Force. It has established a robust framework to combat money laundering, terrorist financing and proliferation financing.

Most Cayman funds are regulated by the Cayman Islands Monetary Authority ("CIMA"), which oversees a business-friendly regime that combines investor protection with flexibility for innovative fund structures. The jurisdiction is also supported by a sophisticated network of lawyers, accountants, auditors, administrators and other service providers.

For all these reasons, the Cayman Islands remain a popular choice for investment funds.

What is a Cayman Islands Private Fund?

The Private Funds Act (as revised) ("Private Funds Act") defines a private fund as an entity that offers, issues or has issued equity interests to investors, pooling investor funds with the aim of enabling investors to receive profits or gains from such entity’s acquisition, holding, management or disposal of investments, where: (i) investors have no day-to-day control over making, holding or disposing of investments; and (ii) investments are managed by or on behalf of the fund’s operator (meaning its directors, general partners or trustees, as applicable). The definition excludes certain licensed banks and insurance companies, along with non-fund arrangements listed in a schedule (such as proprietary vehicles, securitisation vehicles, joint ventures and holding vehicles).

Private Funds vs Mutual Funds

Private funds and mutual funds both issue participating equity interests to investors, pool investor funds with the aim of such investors receiving profits or gains from the making, holding or disposal of investments. The key distinguishing feature between the two, is that equity interests of a private fund are not redeemable at the option of the holder whereas the equity interests of a mutual fund are redeemable at the option of the investor. Private funds are generally closed-ended with investors committing capital by a fixed date and the fund deploying such capital over a fixed or long-term investment period and investors then receiving distributions as investments are realised. Whereas mutual funds are generally open-ended, investors can subscribe for interests at various times throughout the year and at their election can redeem their interests on the applicable redemption date.

Alternative Investment Vehicles

Alternative investment vehicles ("AIVs") are commonly used by private funds to facilitate particular investments, accommodate tax or regulatory considerations, address investor-specific requirements or invest through a structure that is more appropriate for a particular asset or jurisdiction.

The definition of “alternative investment vehicle” in the Private Funds Regulations (as revised) outlines that an AIV is a vehicle/entity formed in accordance with the constitutional documents of a private fund (as defined in the Private Funds Act). A Cayman Islands domiciled AIV that meets the definition of a private fund under the Private Funds Act will be required to register with CIMA. An AIV of a private fund that is not domiciled in the Cayman Islands will require its own registration provided it meets the definition of a private fund.

Exclusions and Exempted Arrangements

Funds with only one investor would not fall into the definition of a private fund under the Private Funds Act as there is no pooling of investor funds.

Additionally, "non-fund arrangements" are excluded from the definition of a private fund under the Private Funds Act, these include pension funds, securitisation special purpose vehicles, joint ventures, proprietary vehicles, holding vehicles, debt issuing vehicles, preferred equity finance vehicles and certain other non-fund arrangements. It is not always easy to distinguish between a private fund and a non-fund arrangement, such as a joint venture. CIMA has issued guidance to assist with the analysis, which essentially hinges on whether the vehicle is investing with a view to disposal of the investment at a profit or with a view to long-term appreciation in the value of the underlying business.

Entities not falling into the definition of a private fund will not be required to register with CIMA under the Private Funds Act.

Cayman Islands Private Funds Act

The Private Funds Act is the principal Cayman Islands legislation regulating private funds. It requires in-scope private funds to register with CIMA and to comply with ongoing operating requirements relating to audit, annual returns, record keeping, valuation, custody, cash monitoring and title verification.

When a Private Fund Must Register with CIMA

A private fund is required to register with CIMA within 21 days of admitting any investors and in any event prior to accepting any capital contributions from investors.

Registering a Private Fund with CIMA

Regulatory applications and filings are made through CIMA’s secure Regulatory Enhanced Electronic Forms Submission (REEFS) web portal, which is only accessible to authorised service providers, such as Carey Olsen.

Registration as a private fund requires submission to CIMA of the following:

• Application form (APP-101-77)
• Certificate of incorporation/registration
• Constitutional documents
• Offering memorandum/summary of terms/other marketing materials
• Consent letter from an approved local auditor and an administrator (if applicable)
• Structure chart
• Application and registration fees

Registration will be effective from the date the completed application is filed, but confirmation of registration may take 2 to 4 weeks to receive.

CIMA Fees

To register a private fund, an application fee of CI$300 (US$366) and a registration fee of CI$4,125 (US$5,030) are payable to CIMA when submitting the application. Once registered a private fund will need to pay annual fees to CIMA by 15 January each year of CI$4,125 (US$5,030). Failure to pay the annual fees by 15 January will result in CIMA applying a penalty of 1/12th of the annual fee for each month or part of a month during which the annual fees and penalty remains unpaid.

Depending on the structure of the private fund additional CIMA fees may be payable for any AIVs, sub-funds and segregated portfolios.

Other Fees

Private funds will also incur incorporation/formation, registered office, professional adviser, audit and administration fees. These fees vary depending on the fund structure and service providers used.

Role of CIMA

CIMA is the primary regulator responsible for the regulation and supervision of financial services entities operating in and from the Cayman Islands including private funds. CIMA may request information, impose conditions, conduct supervisory reviews and take enforcement action where a fund or its operator fails to comply with applicable legal or regulatory requirements.

Private Fund Structures and Vehicles

The Cayman Islands has the following range of vehicles that are typically used as investment funds:

• Exempted company
• Segregated portfolio company
• Limited liability company
• Exempted limited partnership
• Unit trust

Exempted companies and segregated portfolio companies are commonly used as open-ended funds, while closed- ended funds are typically structured as exempted limited partnerships. Limited liability companies are a relatively recent innovation, ideal for parallel funds that wish to replicate the terms of a U.S. LLC; while unit trusts are primarily used for investors in particular jurisdictions where other types of vehicle suffer tax or regulatory disadvantages.

Exempted Limited Partnership ("ELP")

An ELP is the most common entity used for closed-ended funds. It provides contractual flexibility through the limited partnership agreement, limited liability for limited partners and a familiar structure for institutional investors. The Exempted Limited Partnership Act (as revised) provides for an ELP structure that is very similar to its Delaware counterpart which also makes it popular with U.S. managers.

An ELP does not have separate legal personality and the general partner acts on behalf of the ELP and is responsible for the conduct of business of the ELP.

Exempted Company

An exempted company has separate legal personality with a board of directors and an authorised share capital. It is less commonly used for closed-ended funds and used for open-ended vehicles that issue and redeem shares on a regular basis.

Segregated Portfolio Company

A Segregated Portfolio Company ("SPC") is a type of exempted company that is a single legal entity that may create segregated portfolios often known as cells. The assets and liabilities of each segregated portfolio are legally segregated from the assets and liabilities of any other segregated portfolio and the general assets of the SPC.

SPCs are generally used for investment funds that want to legally segregate the assets and liabilities of different strategies.

Limited Liability Company ("LLC")

An LLC is a hybrid between an exempted company and an exempted limited partnership. They are not used that frequently for investment funds but may be useful where a corporate entity is required with the flexibility of a limited partnership.

Unit Trust

A unit trust has no separate legal personality and is governed by its trust instrument pursuant to which the trustee declares that it holds the trust fund for the benefit of the unitholders and will conduct the business of the unit trust in accordance with the terms of the trust instrument.

Unit trusts tend to be used by Japanese fund managers and/or funds with Japanese investors for domestic tax reasons and because they offer similarities to a Japanese domestic trust.

Private Fund Structures

Standalone Cayman Islands funds are most often used for non-U.S. investors where the fund has no U.S. presence.

Where an investment manager has a U.S. presence and wishes to admit U.S. investors as well as non-U.S. investors and U.S. tax exempt investors a standalone fund is not generally sufficient. Non-U.S. investors investing directly into a U.S. fund may risk having to pay U.S. tax and file U.S. tax returns as such they are usually segregated into an offshore vehicle.

The most common structure in this situation is known as a master-feeder structure. The master fund is typically established offshore as either an exempted limited partnership or a company that elects to be treated as a partnership for U.S. federal income tax purposes by making a 'check-the-box' election. Feeder funds are established to invest substantially all their assets into the master fund which conducts the trading activity. A typical structure would have a U.S. feeder for U.S. taxable investors and a Cayman Islands feeder for non-U.S. investors and U.S. tax exempt investors.

A master-feeder structure can be cost-prohibitive for emerging managers, so they often start with a mini-master structure. A mini-master structure consists of two vehicles rather than three saving some of the entity costs. A U.S. entity is the master fund and accepts U.S. investors directly and a Cayman Islands feeder is established to accept non-U.S. investors and U.S. tax exempt investors.

Parallel fund structures are often used where managers are raising money from European investors. As the name suggests two separate funds are established which invest parallel to each other, but each vehicle operates within its own legal framework. Administration of such funds can be burdensome but is often required for regulatory, legal and/or tax reasons.  

Ultimately the final fund structure will depend on the fund strategy, the type of underlying assets the fund will hold, investor base, tax considerations and manager location.

Ongoing Regulatory Requirements

The principal ongoing regulatory obligations for private funds are:

• Pay annual registration fees to CIMA by 15 January in each year
• File audited financial statements with CIMA within 6 months of the financial year end, together with a fund annual return
• Comply with the operating requirements in the Private Funds Act relating to: (i) valuations; (ii) title verification; and (iii) cash monitoring
• Keep a record of the identification codes of any securities traded or held by the fund
• Keep the fund’s assets segregated and accounted for separately from the assets of any other person
• Update CIMA within 21 days of becoming aware of any material change to any information provided to CIMA upon registration or otherwise
• Comply with the AML Regulations, including the requirement to have anti-money laundering officers (see section Additional Regulatory Obligations below)
• Comply with FATCA/CRS notification, due diligence and reporting obligations (see section Additional Regulatory Obligations below)
• Comply with CIMA’s Governance Rule including the requirement to hold meetings of the fund's governing body at appropriate intervals which, at a minimum is annually. Please reach out to your usual Carey Olsen contact for further advice regarding the governance rule
• Appoint a Contact Person under the alternative route to compliance or maintain a register of beneficial owners pursuant to the BO Regime (see section Additional Regulatory Obligations below)

Valuation Requirements

Private funds must adopt appropriate and consistent procedures for proper valuation of assets, with valuations to be carried out at least annually in accordance with the accounting standards adopted by the fund.

Valuations can be carried out by:

• the fund’s administrator or another appropriately qualified independent third party; or
• the fund’s manager or operator, provided: (i) the valuation function is independent of the portfolio management function; or (ii) potential conflicts of interest are properly identified, managed, monitored and disclosed to investors.

The fund’s written valuation policy, including details of the person responsible for valuations must be disclosed to investors. Further details of the requirements are linked here. 

Where valuations are not carried out by an independent third party, CIMA may require the fund to have its valuations verified by an auditor or other independent third party.

Title Verification

Private funds are required to appoint a custodian for their assets, except where it is neither practical nor proportionate to do so. In practice, this is often the case, except where the private fund is trading publicly listed securities.

In respect of any assets of a private fund not held by a custodian, the private fund is required to appoint one of the following to perform title verification:

• the fund’s administrator or another independent third party; or
• the fund’s manager or operator, provided: (i) the title verification function is independent of the portfolio management function; or (ii) potential conflicts of interest are properly identified, managed, monitored and disclosed to investors.

Where title verification is not carried out by an independent third party, CIMA may require the fund to have its title verification verified by an appropriately qualified independent third party.

Cash Monitoring

Private funds must appoint a person to monitor cash flows, ensure cash has been booked in appropriate cash accounts and ensure all payments made by investors have been received. The appointed person may be:

• the fund’s administrator, custodian or another independent third party; or
• the fund’s manager or operator, provided: (i) the cash monitoring function is independent of the portfolio management function; or (ii) potential conflicts of interest are properly identified, managed, monitored and disclosed to investors.

Where cash monitoring is not carried out by an independent third party, CIMA may require the fund to have its cash monitoring verified by an independent third party.

Additional Regulatory Obligations

Anti-Money Laundering (AML)

Cayman Islands investment funds are required to comply with the anti-money laundering, countering the financing of terrorism and countering proliferation financing regime contained primarily in:

• Proceeds of Crime Act (as revised)
• Terrorism Act (as revised)
• Proliferation Financing (Prohibition) Act (as revised)
• Anti-Money Laundering Regulations (as revised) ("AML Regulations")

CIMA has issued Guidance Notes on the Prevention and Detection of Money Laundering and Terrorist Financing in the Cayman Islands ("CIMA Guidance Notes"). Although the CIMA Guidance Notes do not themselves have the force of law, a Court will take them into account when determining if a fund has breached any of the primary laws or the AML Regulations listed above.

Under the AML Regulations and CIMA Guidance Notes, all Cayman funds are required to appoint an AML compliance officer ("AMLCO"), with overall responsibility for the fund’s AML compliance, as well as a money laundering reporting officer ("MLRO") and deputy ("DMLRO"), with specific obligations for reporting suspicions of money laundering to the Cayman authorities. Cayman funds must identify their AMLCO, MLRO and DMLRO to CIMA when they register and notify CIMA of any changes. As most Cayman funds are unstaffed, it is common practice to outsource provision of these officers and AML compliance generally, to third party service providers.

FATCA/CRS

Cayman Islands investment funds will be investment entities and therefore generally required to register and report as financial institutions under the Cayman Islands legislation implementing the Foreign Account Tax Compliance Act of the United States (''FATCA'') and the OECD’s equivalent scheme, the Common Reporting Standard (''CRS''). These regimes are intended to facilitate onshore tax compliance by requiring the automatic exchange of information for tax purposes (''AEOI''). Exceptions include funds that invest in non-financial assets, such as real estate and certain pension funds.

Cayman funds that are not exempted from AEOI reporting are required to obtain a GIIN for FATCA purposes by registering on the IRS web portal within 30 days of commencing business.

They must then register on the web portal of the Department of International Tax Co-operation of the Cayman Islands Government (''DITC'') at DITC Portal for FATCA and CRS reporting by the end of January for any entities that became financial institutions in the prior year and report on any reportable accounts by the end of June in each calendar year-end.

Cayman funds must collect due diligence on investors for purposes of AEOI reporting, which is generally satisfied by requiring investors to provide a self-certification with their subscription, and to update any information that later changes. For CRS purposes, funds must maintain a written compliance policy and file a CRS compliance form with DITC in respect of each reporting year.

Beneficial Ownership

The Cayman Islands Beneficial Ownership Transparency Act, 2023 (''BO Act''), the accompanying Beneficial Ownership Transparency Regulations, 2024 (''BO Regulations'') and the Guidance on Complying with Beneficial Ownership Obligations in the Cayman Islands (BO Guidance Notes, together with the BO Act and BO Regulations, the BO Regime) extended the scope of entities required to maintain a beneficial ownership register (''BO Register'').

Under the BO Regime, investment funds registered under the Private Funds Act need to elect a Contact Person as an alternative route to compliance or maintain a BO Register. 

By selecting the alternative route to compliance, an investment fund must nominate a Contact Person to hold up to date information on their beneficial owners that can be provided to the relevant Cayman Islands authorities within 24 hours of any request. The Contact Person must be a Cayman Islands fund administrator or other entity licensed by CIMA.  

Any investment entity or other vehicle within a fund structure that is not registered under the Private Funds Act will be required to maintain a BO Register.

For more information on this subject, please refer to our legal guide linked here.

Taxation and Economic Substance

The Cayman Islands do not currently impose income, inheritance, gift, withholding, corporate or capital gains tax on investment funds or their investors. As a result, there is no additional layer of taxation on Cayman Islands private funds and their investors.

Private funds can also apply to the Cayman Islands Government for a written undertaking that they will not be subject to taxation, should any tax on profits, income, gains or appreciations be introduced, for a given period. Such period is up to 50 years for a limited partnership, LLC and unit trust and up to 30 years for exempted companies.

The International Tax Co-operation (Economic Substance) Act (as revised) (''ES Act'') applies to relevant Cayman Islands entities within the meaning of the ES Act. Investment funds and vehicles through which an investment fund invests are not relevant entities. Entities that are not relevant entities are not required to meet an economic substance test in the Cayman Islands but are required to file an economic substance notice each year notifying the Tax Information Authority of their classification.

Penalties

Criminal

Breaches of the Private Funds Act and the anti-money laundering regime of the Cayman Islands will in many cases constitute criminal offences, punishable by terms of imprisonment and/or substantial fines. For example, a failure to register under the Private Funds Act when required to do so, is an offence punishable by a fine of up to CI$100,000 (approx. US$120,000). Making dishonest or intentionally misleading statements in a Cayman fund’s marketing materials could constitute one of several offences under the Penal Code carrying terms of imprisonment of up to ten years.

Civil

If a Cayman fund breaches the terms of its investment contract with any investors (for example, by breaching agreed investment restrictions) it could be liable to the investor for any resulting losses. Similarly, where a fund’s marketing materials contain misstatements or misrepresentations, the fund may be liable for any loss incurred by an investor that invested on the basis of that misstatement or misrepresentation and/or the investor may be entitled to rescind its investment contract.

Administrative

CIMA has the power under the Monetary Authority (Administrative Fines) Regulations to impose administrative penalties for breaches of regulatory laws, including the Private Funds Act and the AML Regulations. These regulations classify breaches of specific sections of the regulatory laws as either minor, serious or very serious. Minor breaches can result in a CI$5,000 (approx. US$6,000) fine, while serious and very serious breaches can result in discretionary fines of up to CI$100,000 (approx. US$120,000) and CI$1,000,000 (approx. US$1,200,000) respectively. A Cayman fund’s officers or managers that are complicit in any breach may also be liable to fines of up to CI$100,000 (approx. US$120,000).

Carey Olsen's Cayman Islands Funds Team

Please get in touch with one of the partners listed above if you require further assistance regarding your private fund. Our team has extensive experience advising private funds across their lifecycle and would be pleased to help with any questions you may have.