Europe’s role in the global investment fund market has become increasingly prominent. The introduction of alternative investment strategies has created a more competitive arena. As a result, jurisdictions closer to the European market are becoming a more attractive platform for offshore investments and a A simple plan.
The Guernsey regulator — the Guernsey Financial Services Commission (GFSC) — has always adopted a flexible approach to the authorisation of investment funds on the island. Recent regulatory changes are further easing the requirements for establishing hedge funds in Guernsey, by allowing certain funds that qualify to benefit from a quasi ‘self-certificated’ process.
In February 2005, the GFSC announced the introduction of the Qualifying Investor Funds (QIFs) regime to complement the existing fund approval procedure, which will remain unaltered.
The effect of the regime is that the GFSC will grant the required fund approval within three working days of receipt of various documentation, including the prospectus, provided an appropriately licensed Guernsey applicant — it is thought this will usually be the Guernsey fund administrator — has certified to the GFSC that:
- the fund will be restricted to professional, experienced and knowledgeable investors (these are the ‘qualified investors’ referred to);
- the applicant has conducted due diligence on the promoter and associated parties, and has found them to be fit and proper; and
- the applicant is satisfied as to the fund’s economic rationale and the disclosure in a prospectus of any risks associated with the investment vehicle.
Who/what will the QIF regime apply to?
A QIF can either be an open-ended collective investment scheme or a closed-ended investment fund. Only qualified backers will be permitted to invest in a QIF.
Funds that are approved as QIFs must have in place measures to ensure they are only available to investors who fall within the definitions. In this respect, the GFSC will assess licensees’ systems and controls as part of its monitoring of licensees.
The GFSC has deliberately tried not to proscribe the exact requirements relating to the content of warranties to be obtained from potential investors or disclosures to be made in offering documents. However, it does provide a suggested minimum wording in relation to such warranties or disclaimers.
Definition of qualified investors
As stated above, only qualified investors will be entitled to participate in QIFs. Such investors will be deemed able to evaluate the risks and strategy of investing in a QIF, and to bear the economic consequences of such investment, including the possibility of any loss arising.
Qualified investors fall within three categories: professional investors, experienced investors and/or knowledgeable employees.
A professional investor is a government, local authority, public authority or supra-national body, or a person or entity whose ordinary business includes acquiring, underwriting, managing, holding or disposing of investments, whether as principal or agent. This category also includes those who give advice on investments, or affiliates (or an associate of that affiliate) of the QIF.
An experienced investor is a person or entity that has, in any period of 12 months, frequently entered into transactions in connection with funds and/or general securities and derivatives of substantial size, with reputable persons who carry on investment business. Such parties can reasonably be expected to understand the nature of, and the risks involved in, transactions of this description. This includes a person or entity that provides a certificate from an appropriately qualified investment advisor, confirming the investor has obtained independent advice.
A knowledgeable employee is a person who is, or in the last three years has been, an employee, director, or shareholder of an affiliate appointed by the QIF to advise, manage or administer its investment activities.
Such a person must also be acquiring an investment in the QIF as part of their remuneration as an incentive arrangement, or by way of co-investment, either directly or indirectly.
Due diligence
The locally-based licensee who administers the QIF will need to conduct due diligence on the promoter or investment manager in order to ensure it is in “good standing”. The Guernsey licensed service provider will also need to consider the track record and experience of the directors, controllers and management of the promoter or investment manager.
Of course, the GFSC also expects each Guernsey licensee to ensure that its due diligence, in respect of the promoter or investment manager and associated parties, is updated on a regular basis. The promoter or investment managers must also be fit and proper.
Non-Guernsey schemes
At the same time and as part of the QIF regime, the GFSC has taken the opportunity to allow the Licensees (Conduct of Business and Notification) (Non-Guernsey Schemes) Rules 1994 — the FNCC rules — to have a similar fast track, again to complement the existing approval procedure.
The FNCC rules require Guernsey licensees wishing to undertake the restricted activities of management, administration or custody — in relation to non-Guernsey regulated collective investment Schemes — to provide prior written notice to the GFSC of such proposals, and to obtain formal approval before the licensee can act.
Under the new regime, the GFSC will issue the necessary approval according to the Non-Guernsey Scheme Rules, within three working days — provided similar confirmations to those stated above are given by the proposed designated manager or administrator.
By Gavin Farrell
[box]Gavin Farrell is a partner in Ozannes corporate department.[/box]
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