Cayman Islands to Begin Regulating Israeli Venture Capital and Private Equity Funds
On February 7, 2020, the Cayman Islands adopted the Private Funds Law, 2020 (“PF Law“) establishing a new registration and regulatory regime governing Cayman Islands closed ended funds. The PF Law represents a break from the Cayman Islands’ long-standing tradition of not regulating closed ended funds and will impact many Israeli venture capital and private equity funds that employ Cayman Islands structures.
Is The PF Law Really A Radical Departure From Current Practice?
Yes, the adoption of the PF Law will radically change the regulatory landscape for Israeli venture capital and private equity funds which employ Cayman Islands limited partnerships. While the Cayman Islands has a long history of regulating open ended funds (i.e. funds that permit redemptions) under the Cayman Islands Mutual Funds Law, until the adoption of the PF Law closed ended funds (i.e. funds that do not permit redemption) were not regulated by the Cayman Islands and were not required to register with the Cayman Islands Monetary Authority (“CIMA“). So, while Cayman Islands’ hedge funds have extensive experience with CIMA compliance, the venture capital and private equity industries were not until now subject to Cayman Islands’ regulatory or registration requirements. All of that is about to change. Commencing on August 7, 2020 all existing and new Cayman Islands private funds will need to comply with the provisions of the PF Law and file with CIMA. Since many Israeli venture capital and private equity funds employ Cayman Islands limited partnerships, the importance of the change to the Israeli venture capital and private equity industries cannot be underestimated.
When Do Private Funds Need To Register?
Existing private funds and new private funds established before August 7, 2020 must register with CIMA by August 7, 2020.
After August 7, 2020, private funds will be required to file a registration application with CIMA within 21 days of accepting capital commitments from investors and may not accept capital contributions from investors prior to its registration by CIMA. So, while previously private funds would often accept their initial subscriptions immediately before conducting their initial closings, the new regulatory scheme will require private funds to pay careful attention to the timing of acceptance of subscriptions, registration filings, registration completion and initial closing to ensure compliance with the PF Law.
What Are The Registration Requirements?
The PF Law does not require private funds to prepare or file detailed offering documents like an offering memorandum or private placement memorandum. The registration application will require private funds to file an application form with CIMA through its internet portal containing prescribed details regarding the fund and its service providers.
What Are The PF Law’s Operational Requirements?
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- Audit. Private funds will be required to prepare annual financial reports prepared in accordance with IFRS or GAAP approved by a Cayman Islands’ audit firm and file those reports within six months of the end of their financial year.
- Annual Report. Private funds are required to file an annual return in a form prescribed by CIMA.
- Valuation. Private funds must adopt appropriate and consistent procedures for the proper valuation of their assets and valuations must be carried out at least annually. Valuations of private fund assets may be conducted either by (i) an independent third party that is professionally qualified to conduct valuations; (ii) the manager or operator of the private fund, or a person with a control relationship with the manager, provided that (a) the valuation function is independent from the portfolio management function; or (b) potential conflicts of interest are properly identified and disclosed to the investors of the private fund; or (iii) an administrator not meeting the requirements set out in (i) above who is appointed by the private fund. Where the valuation is not carried out by a qualified independent third party, CIMA may require the private fund to have its valuations verified by an auditor or independent third party.
- Safekeeping of Fund Assets. Unless the private fund notifies CIMA that it is neither practical nor proportionate to do so, private funds must appoint a custodian who will: (i) hold private fund assets that are capable of being physically delivered or capable of registration in an account in segregated accounts in the name, or for the account, of the private fund; and (ii) undertake title verification of any other private fund assets. Where the private fund does not appoint a custodian pursuant to the “neither practical nor proportionate” exemption, the title verification function must be performed either by (i) an administrator or other independent third party; or (ii) the manager or operator of the private fund (or another person with a control relationship with the manager) provided that (a) the title verification function is independent from the portfolio management function; or (b) potential conflicts of interest are properly identified and disclosed to the investors of the private fund. Where the title verification function is not performed by a custodian, administrator or other independent third party, CIMA may require the private fund to have its title verification verified by a professionally qualified independent third party.
- Cash Monitoring. Private funds must appoint a person to monitor cash flows, ensure that all cash has been booked in proper cash accounts, and ensure that all payments made by the private fund’s investors to the fund have been received. The person appointed by the private fund to monitor cash flows must be either (i) an administrator, custodian or other independent third party; or (ii) the manager or operator of the private fund (or another person with a control relationship with the manager) provided that (a) the cash monitoring function is independent from the portfolio management function; or (b) potential conflicts of interest are properly identified and disclosed to the investors of the private fund. Where the cash monitoring function is not performed by a custodian, administrator or other independent third party, CIMA may require the private fund to have its cash monitoring verified by an independent third party.
- Identification of Securities. Private funds that regularly trade securities or hold securities on a consistent basis are required to maintain a record of the identification codes of the securities in trades and holds and make the record available to CIMA upon request.
Conclusion
While the PF Law does impose new regulatory burdens and costs on closed ended funds employing Cayman Islands structures, including the costs of service providers and an annual fee paid to CIMA, it’s notable that the Cayman Islands’ legislature did not impose an obligation on private funds to prepare and file detailed offering documents (offering memorandum). In addition, the PF Law appears to attempt to strikes a balance between the ideal of having key oversight functions carried out by independent third parties and the realities faced by those private funds for whom the cost of using outside service providers would be prohibitive or doing so would be impractical.
At GKH we are proud to have the leading Venture Capital and Private Equity practice in Israel. Many of our Venture Capital and Private Equity clients were incorporated in the Cayman Islands which has been the jurisdiction of choice for such funds for many years. We bring this alert to notify our clients and friends about this major change in Cayman Islands’ law. However, we are not qualified to practice law in the Cayman Islands and do not purport to be experts in Cayman Islands’ law. This memo does not replace detailed and personal consultation with each fund’s Cayman counsel. In the coming months when the new regime becomes clearer and issues addressed by CIMA we will provide an updated client memo and also seek to host leading Cayman practitioners to discuss this very important change.
For more information please contact your GKH attorney or Adv. Dr. Ayal Shenhav (ayal@gkh-law.com) or Adv. Eli Barasch (elib@gkh-law.com) or Adv. Layla Chertow (lc@gkh-law.com).
