Since 2020, the British Cayman Islands ("Cayman") have enacted a number of bills on private equity funds, including the Private Funds Law, as recently amended on 19 February 2021 (the "Private Funds Law"). The Private Funds Regulations add and supplement a number of regulatory gaps in the previous private fund field, put forward pre-registration requirements for Cayman private equity funds, and put forward multi-faceted regulatory requirements for fund audit, valuation, property security custody, cash supervision and other daily operations. This article provides a brief introduction to the common forms of Cayman private equity funds, as well as regulatory and compliance requirements. 

Profiles of common Cayman private equity funds

Legal regulation is different – mutual funds and private equity funds

According to the different laws governing cayman investment funds, Cayman distinguishes investment funds into mutual funds and private funds, and the biggest difference between mutual funds and private funds is whether investors have the right to actively redeem the rights and interests of the fund, investors in mutual funds have the right to actively redeem fund shares, and investors in private funds cannot actively redeem fund shares.

In terms of legal regulation, mutual funds are mainly regulated by the Mutual Funds Act, while private funds are mainly regulated by the Private Funds Act. Prior to the entry into force of the Private Funds Act, there were significant differences in the regulatory requirements of the two, with Cayman's legal regulatory areas for private funds scattered among fragmented laws and regulations, while mutual funds were required to register, register or apply for a licence with the Cayman Islands Monetary Authority ("CIMA") to meet ongoing compliance requirements compared to private funds；After the private fund law came into effect, the two also gradually converged in terms of regulatory requirements, and private funds also need to register with CIMA and meet ongoing compliance requirements.

In regulatory law, the Mutual Funds Act clearly defines the equity interest of mutual funds as eligible for redemption or repurchase by investors

[1]，The Private Equity Fund Law clearly defines that the investment interest of a private fund cannot be redeemed or repurchased by investors

[2]。Based on the discrepancies as stated, mutual funds have higher liquidity and valuation requirements for investment assets, while private equity funds are suitable for assets with lower liquidity, a certain holding period and long-term appreciation value; Mutual funds and private funds may set a certain closed period in practice, but after the closure period ends, the redemption of the rights and interests of the private fund is still decided by the investment manager or director or other decision-making body of the private fund. As a result, the industry often refers to mutual funds as Open-end Funds and private equity funds as Closed end Funds.；To avoid confusion of concepts, the following will only refer to the concept of the term "private equity fund" under Cayman regulatory law.

Formation of private equity fund organization

Common forms of organization for investment funds initiated in Cayman include exempted companies, exempted limited partnerships ("limited partnerships" or "ELPs"), and limited liability Company) and unit trusts, etc.; Among them, limited partnerships and segregated Portfolio Companies (hereinafter referred to as "SPC") are the more common forms of private fund organizations in practice. 

Exempted limited partnership (ELP)

ELPs, similar to partnerships in China, do not have their own independent legal personality, and ELP's general partners ("GPs") have natural management authority over ELPs and assume unlimited liability for their debts. 

Investors invest in ELP-form funds by subscribing to a limited partnership share of ELP and becoming a limited partner of ELP, and the investor as a limited partner assumes limited liability for the debts of ELP only on the basis of his contribution；ELP operates primarily on limited partnership agreements and the administration of GPs, and Cayman's Exempted Limited Partnership Act gives limited partnership agreements greater freedom of contract, but the GP is still required to act in good faith for the benefit of ELP, an obligation that may not be limited or modified through a partnership agreement.

Segregated Portfolio Company (SPC)

A SPC is essentially a corporate entity with separate legal personality and is a special form of exempt limited company, but it is special，The SPC may have one or more Segregated Portfolios ("SP") under it. The SP under it is an independent fund but does not have independent legal personality，Assets and liabilities are isolated between different SP and between SP and SPCs，An investor or creditor of an SP claims to the SP property can only be recovered to the assets of that particular SP, and the relative independence of the SPs makes the assets of one SP unaffected by the liabilities of the other SP.

SPC shares are usually divided into management shares and participating shares, investors in the form of SPC funds are usually invested in the SPC form of funds to subscribe to the SPC under a certain SP participating shares, and become SPC participating shareholders, participating shareholders do not enjoy the voting rights of ordinary company shareholders, but only dividend rights；Shareholders who have the right to manage and control the SPC usually subscribe for and hold the management shares when the SPC is established, and the authority of the management shareholders over the SPC is basically the same as that of the shareholders of the company. Mainly to make decisions on SPC affairs and exercise voting rights (including the appointment and removal of directors, etc.) within the authority of shareholders, however, compared to a fund in the form of a Cayman limited partnership, the managing shareholders do not naturally have management authority over the specific investment matters of the SPC or any SP.SPC and SP operate primarily on the basis of their bylaws, the Private Placement Memorandum, the SP's Supplement/Appendix, and the agreements of appointed third-party service providers (e.g., investment managers, administrators, investment advisers, etc.).

This article will mainly take the mainstream ELPs and SPC forms of private equity funds as an example to sort out and discuss the regulatory laws, regulations and compliance requirements of private funds.

Cayman Private Equity Regulatory Framework

The financial regulator of the Cayman Islands is the Cayman Islands Monetary Authority (cima). CIMA is primarily responsible for managing and supervising Cayman's monetary and financial industries; the compliance of private funds is mainly regulated by CIMA, including the need for private funds to register with CIMA in accordance with the Private Fund Law, the filing of private fund operations with CIMA on schedule, the response to CIMA's inquiries from time to time, and the assurance of compliance in audits, data protection, anti-money laundering, etc. 

The Cayman Islands' tax regulator is the Cayman Information Authority ("TIA"), and the Cayman Islands has no tax at all, and is not taxed on individuals, companies or the trust industry, but is subject to the Economic Substance Law and the Foreign Account Tax Compliance Act ("FATCA") and the Standard for Automatic Exchange of Financial Account Information in Tax Matters (hereinafter referred to as "AEOI." AEOI's information standard is the Common Reporting Standard ("CRS"). As a financial institution established in the Cayman Islands, private equity funds are also subject to the above regulatory requirements. 

Private equity funds, which exist as Cayman Islands entities, are also regulated by regular regulators such as the Cayman Islands General Registry.

In summary, the above institutions together constitute the regulatory system for Cayman private equity funds, and Cayman private equity funds also apply the supervision of corresponding laws and regulations in the following aspects:

The main regulatory requirements of the Private Fund Law on private funds

Registration ICP Filing Requirements

Since the Private Fund Law came into effect in February 2020, private funds have been included in the registration and supervision system by CIMA, and except for the specific exemptions described below, private funds shall submit an application for registration to CIMA within 21 days after they accept investors' investment commitments for investment purposes, and private funds that have not completed registration shall not accept investors' investment contributions.

For exemptions, according to the definition of private funds in the Private Equity Law, relevant licensed or registered entities that have been regulated by other laws, pension funds, holding vehicles, joint ventures, individual investment management arrangements, and individual investment management arrangements are excluded. Non-fund arrangements such as single-family offices, therefore, entities similar in form to funds are not subject to CIMA registration required under the Private Funds Law; and based on the exclusion of single investors based on the above definition, the CIMA website replies that "if a private fund only accepts subscriptions and contributions from a single investor, the private fund does not need to register with CIMA".

In addition, private funds should pay an annual registration fee to CIMA on or before January 15 of each year, and the unpaid annual registration fee may be liable by the government, and the government may require and be ordered by the court to pay the corresponding fines arising from the delay in payment of the related fees.

If there is any significant impact on the information submitted by a private fund to CIMA, or if there is a change in its registered office or main office, it should submit the details of the change to CIMA within 21 days of the change occurring or becoming aware of the change. Private equity funds that fail to fulfill their obligation to notify of changes in information that materially affect may be subject to relevant fines.

Audit requirements

According to the Provisions of the Private Funds Act, the accounts of a private fund shall be audited annually by an auditor approved by the Authority[3] and an audit report shall be submitted to CIMA within 6 months of the end of each fiscal year. Annual audits of private equity funds are usually conducted in accordance with international auditing standards or generally accepted accounting standards in the United States, Japan, Switzerland or other non-high-risk jurisdictional areas.

In practice, the materials submitted by a private fund applying for CIMA registration include a letter of consent from the auditor, that is, the private fund needs to confirm and hire an auditor before applying for CIMA registration.

Fund property requirements

In terms of the valuation of fund assets, the Private Fund Law requires private funds to value their assets in accordance with certain procedures, at least once a year; this is a statutory requirement, and even if investors do not have valuation needs, private funds should also perform valuation obligations.

With regard to the safekeeping of fund assets, the Private Fund Law requires private funds to hire custodians to perform the custody duties of the funds' custodial properties, to verify and record the information provided by the private fund and the ownership of the funds and assets; in particular, if the nature of the private fund and the type of assets held by the fund are not suitable for the custody of the fund and cannot actually be appointed to the custodian, after notifying CIMA, A private fund may also not designate a custodian, but the private fund is still required to perform the verification and recording of property by (1) an administrator or other independent third party, or (2) a fund manager or operator or other party with a controlling relationship with the fund manager.

In the case of cash monitoring, the Private Fund Law requires private funds to appoint administrators, custodians, other independent third parties, fund managers or operators to (1) monitor the cash flow of private funds, (2) ensure that all cash of private funds is credited to cash accounts opened in the name of private funds, and (3) ensure that all paid-up capital contributions made by investors to private funds have been received.

In relation to the above three property requirements, the Private Fund Law provides that CIMA has the right to require an independent third party to value the assets of the private fund, verify the ownership of the assets or verify the cash monitoring under certain circumstances.

The Private Equity Fund Law also requires private equity funds that regularly trade securities or continue to hold securities to keep identification records of securities such as their transactions and the identification code records of the securities they hold, and provide them when required by CIMA

International Securities Identification Number; or

A widely adopted international standard alternative identifier;

A regional identifier or legal entity identifier for an issuer.

Economic Substance Law Requirements

The Cayman Islands International Tax Co-Operation (Economic Substance) Act was adopted on 21 December 2018 and has been implemented since 1 January 2019 and amended several times (the "Cayman Economic Substance Act").On 30 June 2021, the Cayman Tax Information Authority TIA issued version 3.1 of the Economic Substance For Geographically Mobile Activities Guidance (hereinafter referred to as the "Economic Substance Law Guide", which together with the Cayman Economic Substance Act is the "Cayman Economic Substance Regulations" ”）。 

Common private equity funds are obligated under Cayman's Economic Substance Regulations

The Cayman Economic Substance Act requires "relevant entities" to submit economic substance notifications ("ESNs") in accordance with the Cayman Economic Substance Regulations, while all "related entities" engaged in "relevant activities" are required to meet the economic substance requirements[4] and make an economic substance declaration ；The relevant business refers to banking, distribution and service centre business, financial leasing business, fund management business, headquarters business, holding company business, insurance business, intellectual property business, or shipping business, but expressly does not include investment fund business; related entities include companies registered under the Cayman Company Act (but excluding Cayman local companies), limited liability companies registered under the Limited Liability Companies Act, limited partnerships registered under the Limited Partnership Act or incorporated outside Cayman and under the Cayman Companies Act registered companies, but expressly excluding investment funds or non-Cayman tax resident entities. Therefore, the exempt limited partnership ELP in private equity funds does not fall within the scope of the above-mentioned related entities and does not apply to the Cayman Economic Substance Law, while private equity funds in the form of SPC should fulfill ESN obligations as related entities. However, the Economic Substance Law Guidelines, issued on 30 June 2021, include ELPs in the scope of related entities, which means that private equity funds in the form of ELPs are also required to meet ESN obligations.