Loeb Smith wins award for Best Law Firm: Fund Domicile at the Hedgeweek US Emerging Manager Awards 2023.

We are happy to share with you that for the second time in less than three (3) months Loeb Smith’s Investment Funds team has been voted Best Law Firm: Fund Domicile at the Hedgeweek US Emerging Manager Awards 2023.

The win comes after being voted Best Law Firm: Fund Domicile at the Private Equity Wire US Emerging Manager Awards 2023 in March 2023.

Thank you to each and every one of you who voted for us and congratulations to our Investment Funds team for the consistent high quality of its legal advice and responsive service delivery across our offices in the BVI, the Cayman Islands and Hong Kong.

For the service provider categories, the nominated firms are based on a widespread survey of more than 100 emerging hedge fund managers.

The exclusive awards ceremony took place on June 8, 2023 at the Convene 101 in New York.

Loeb Smith has been shortlisted in the Best Law Firm – Fund Domicile category at the US Emerging Manager Awards 2023!

We are pleased to announce that Loeb Smith has been shortlisted for the Hedgeweek US Emerging Manager Awards 2023 in the Best Law Firm – Fund Domicile category.

Pre-selection data for the fund manager awards was provided by Bloomberg, based on 2022 Calendar Year fund performance (31st December, 2021 to 31st December, 2022).

For the service provider categories, the nominated firms are based on a widespread survey of more than 100 fund managers. We have been shortlisted as we were nominated in a survey completed by 100+ emerging hedge fund managers. Winners are decided by a majority vote. The voting period ended on Monday, April 24th.

We are proud to provide a high quality of service that is consistently appreciated by our clients and we look forward to continue working with them to find successful outcomes and solutions to their day-to-day issues and complex, strategic matters.

This article follows our previous article of 5 January 2023 which considered, in broad terms, the changes to the BVI Business Companies Act, 2004 (the Companies Act) of the British Virgin Islands (BVI) brought about by The Business Companies (Amendment) Act, 2022 (the Amendment Act). This article will consider in more detail the changes introduced by the Amendment Act to the provisions of the Companies Act which deal with the restoration of companies which have been struck-off or dissolved.
In this article, references to the Amended Companies Act are references to the Companies Act as amended by the Amendment Act.

The Business Companies (Amendment) Act, 2022 (Companies Amendment Act) of the British Virgin Islands (BVI) which amends the BVI Business Companies Act, 2004 (Companies Act), came into force on 1 January 2023. The BVI Business Companies (Amendment) Regulations, 2022 (Companies Amendment Regulations) which amends the BVI Business Companies Regulations, 2020, also came into effect at the same time as the Companies Amendment Act.

The amendments introduced by the Companies Amendment Act and the Companies Amendment Regulations represent the commitment of the BVI to ensure that its financial services industry is aligned with international best prac­tices and compliant with the standards imposed by the Financial Action Task Force. The changes also embody the policy decisions of the Company Law Review Advisory Committee following public consultation in 2021.

A list of key changes introduced are as follows:

1. BVI residency requirement for liquidators in solvent liquidations
Prior to 1st January 2023, there was no residency requirement for an individual appointed as liquidator to conduct a solvent voluntary liquidation of a BVI company under Part XII of the Companies Act. The Companies Amendment Act has introduced a residency requirement for liquidators. To qualify, an individual must have physically lived in the BVI for at least 180 days, either continuously or in aggregate, prior to their appointment.

However, where joint liquidators are appointed, at least one of the joint liquidators is required to satisfy the BVI residency requirement but the BVI residency requirement shall not apply to the other joint liquidator if he or she is resident outside the BVI.

2. Names of Current Directors of a BVI Company are now publicly avail­able
Although the Register of Directors of a BVI company (with names, addresses, nationality, date of birth and other information required to be filed with the Registrar under Sections 118A and 118B relating to current and past Directors) continues to be a matter of private record, it is now possible to obtain a list of the names of the current directors of a BVI company through the Virtual Integrated Registry and Regulatory General Information Network (VIRRGIN), which is the online information platform maintained by the BVI Financial Services Commission for filing and accessing information regarding BVI entities. The personal particulars of the current direc­tors (e.g. addresses, nationality, date of birth and other information) will remain confidential and the names of any past directors will not be disclosed.

In addition, the name of a current director of a BVI company is only available by way of a search against a particular company. It is not be possible to search against names of individuals to see if that person is a director of any company.

3. New financial reporting rules
Although every BVI company must maintain financial records to ade­quately show and explain its transactions, there was no requirement for an unregulated com­pany to maintain records in any prescribed form, or to have such records audited or filed with any regulatory or supervisory authority.

As from 1 January 2023, BVI companies are now required to file an annual financial return (which will include specific financial information) with their BVI registered agent within nine (9) months of the end of the finan­cial year to which it relates. The actual form of annual financial return will likely consist of a relatively simple form balance sheet and profit and loss account.

The annual financial return will not be publicly available or accessible (though the registered agent will have an obligation to inform the Registrar of Corporate Affairs within thirty (30) days after the annual financial return was due, if it has not received the annual financial return), and there will be no requirement that the financial information included in an annual return be audited. The requirement to file an annual financial return will not apply to:

(i) companies whose shares are listed on a recognized exchange;
(ii) a company that is regulated under BVI financial services legislation and already provides financial statements to the BVI Financial Services Commission in accordance with the requirements of that financial services legislation, and
(iii) a company that already files its annual tax return with the BVI tax authority.

A company that fails to file an annual financial return may be fined and ultimately struck-off.

4. Bearer shares
Bearer shares will be phased out in the BVI, and from 1 January 2023 it is no longer permissible to issue bearer shares, or to convert or exchange registered shares into bearer shares. From 1 July 2023, any existing bearer shares will automatically be converted into regis­tered shares to be held by the relevant company on trust for the owner of the shares.

5. Register of members
Unless such information is already included in a BVI company’s memoran­dum and articles of association, a company’s regis­ter of members will need to include the nature of any voting rights. This may, as an example, include whether such voting rights are conditional or unconditional.

6. Continuation outside the BVI
The Companies Amendment Act has introduced a requirement for a BVI company intending to continue or redomicile out of the BVI to undertake the following at least fourteen (14) days before filing to continue out:

• advertise notice of its intention to redomicile from the BVI in the BVI’s Official Gazette and on its own website (if any) and specify the jurisdiction to which it intends to continue; and
• notify all of its members and creditors in writing of its intention.

7. Striking off, dissolution and restoration
The previous striking-off regime in the BVI under which companies that were struck off had a seven-year grace period before being dissolved, has been overhauled. As of 1 January 2023, every BVI company that is struck off from that date will be dissolved on the date that the BVI Registrar of Corporate Affairs publishes a notice of striking-off in the BVI Gazette (i.e. almost immediately). A company will be given 90 days’ grace notice to remedy the default actions (e.g. payment of fees) and regularise its status before it becomes liable to be struck off.

Subject to meeting certain prescribed conditions, a BVI company may be restored within five (5) years of being struck off and dissolved by making an application to the BVI Registrar of Corporate Affairs or the Court. Importantly, an application to the BVI Registrar of Corporate Affairs will only be permitted if the company was carrying on business or in oper­ation at the date of its striking-off and dissolution.

8. Public register of beneficial ownership
The BVI has previously committed to introducing a public register of beneficial ownership subject to such registers becoming an international standard. In line with this commitment, a framework will be enacted pursuant to which the BVI may introduce a public register of beneficial ownership by way of future regulations.

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This publication is not intended to be a substitute for specific legal advice or a legal opinion. For specific advice on changes to the BVI Business Companies Act, please contact your usual Loeb Smith attorney or any of the following:

E: gary.smith@loebsmith.com
E. peter.vas@loebsmith.com
E: robert.farrell@loebsmith.com
E: elizabeth.kenny@loebsmith.com
E: vivian.huang@loebsmith.com
E: yun.sheng@loebsmith.com
E: faye.huang@loebsmith.com

The Cayman Islands Monetary Authority (“CIMA”) published an updated Rule and Regulatory Procedure on 17 August 2022 in respect of the cancellation of certificates of registration (“De-registration”) of both mutual funds regulated under the Mutual Funds Act (2021 Revision) (“MFA”) and private funds regulated under the Private Funds Act (2021 Revision) (“PFA”).

What has changed?

The updated Regulatory Procedure for both mutual funds and private funds have both removed the concept of “Licence Under Liquidation” (“LUL”) and “Licence under Termination” (“LUT”).

Previously, a Fund could (i) provide liquidation as the reason for De-registration and be granted LUL status pending completion of liquidation of the Fund, or (ii) apply to CIMA for De-registration by paying the required surrender fee of US$731.71, returning the original certificate of registration (if issued instead of an electronic certificate) and a certified copy of the operators’ resolution and be placed in LUT, pending receipt of all the documents required by CIMA to confirm De-registration (e.g. submission of the audited accounts or confirmation of an audit waiver by CIMA).

Instead, now a Fund can only apply for De-registration if it is in good standing (i.e. all fees have been paid, the audited financial statements have been submitted or an audit waiver obtained and there are no outstanding queries from CIMA). Furthermore, the Fund must comply with the Notification Deadline in order to avoid incurring administrative fines.

This change also impacts regulated mutual funds which operate as master funds (“Master Funds”), as a Master Fund cannot complete its De-registration until its regulated feeder fund has been completely terminated by CIMA (i.e. until such time as the regulated feeder fund is also in good standing with CIMA).

The updated Regulatory Procedures further provides details of a “non-fund arrangement” ground for De-registration, where a Fund does not meet the definition of a “mutual fund” under the MFA or a “private fund” under the PFA.

What is the implication for Cayman domiciled Funds?

Previously, a Fund could submit a De-registration application before 31 December, be placed in either LUL or LUT status and benefit from either a reduction or waiver of the CIMA annual fees due by 15 January, the immediately following year, provided that the Fund completed any actions required in order to complete De-registration within a prescribed time period set by CIMA.

The revised two-step notification and application process for De-registration means that in order to avoid incurring CIMA renewal fees for the next financial year, a Fund will need to schedule to complete any actions to wind-down the Fund (i.e. final distributions, preparation of final accounts or applying and obtaining an audit waiver from CIMA) in good time ahead of 31 December in the relevant year.

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This publication is not intended to be a substitute for specific legal advice or a legal opinion. For specific advice on Cayman Mutual Funds and Private Funds, please contact your usual Loeb Smith attorney or :

E: gary.smith@loebsmith.com
E: elizabeth.kenny@loebsmith.com
E: vivian.huang@loebsmith.com
E: yun.sheng@loebsmith.com
E: santiago.carvajal@loebsmith.com
E: faye.huang@loebsmith.com
E: robert.farrell@loebsmith.com
E: peter.vas@loebsmith.com

The Cayman Islands Monetary Authority (“CIMA”) released a Notice on 19 April 2021 to confirm that the deadline for the first filing of audited accounts for Private Funds and the Fund Annual Return (FAR) form which is also required to be filed annually has been extended to 30 September 2021.

The extension relates only to the audited accounts and FAR forms for Private Funds and does not apply to open-ended mutual funds registered under the Mutual Funds Act (2021 Revision). The audited accounts and FAR forms for mutual funds are still required to be filed within six (6) months of each relevant Fund’s financial year end.

This article was first published in Asia Business Law Journal which can be accessed here: https://law.asia/side-letter-cayman-subscription-financing/

Subscription facilities dominated the Asian fund finance industry in 2020. However, as a result of widespread concerns about liquidity and an uncertain macroeconomic outlook, it has become more important than ever for a lender to undertake proper due diligence on an investment fund prior to providing new financing.

This article examines the most important issues pertaining to side letters to the limited partnership agreement (LPA) of a Cayman Islands exempted limited partnership (ELP), which are relevant to a lender looking to advance a subscription facility. ELPs remain the vehicle of choice for subscription financing transactions in Asia. The following are examples of side letter provisions that a lender will typically scrutinise:

Limitations on the incurrence of debt and collateral support

Side letters should not prohibit, restrict or impose limitations on the incurrence of debt, the giving of a guarantee and/or the granting of security, if that cuts across the terms of the proposed subscription financing. To the extent that an investor wishes to include such provisions in a side letter, carve-outs should be included to accommodate the financing transaction.

Excuse rights

An investor may wish to be excused from honouring a drawdown notice with respect to immoral investments, or in geographies or industries to which the investor is politically sensitive. These types of rights are relatively common, and are typically accommodated by most lenders. However, a lender will usually seek to exclude such an excused investor from the relevant ELP’s borrowing base, and may insist on a default event if the excused commitments exceed a specified threshold. This is typically negotiated, as excuse rights are investor-specific and generally unrelated to the creditworthiness of an investor.

Confidentiality restrictions

Any restrictions that prevent the disclosure of investor information are likely to lead the lender to exclude the applicable investor from the relevant ELP’s borrowing base because a lender may not be able to enforce its security if it does not have details of the investor, or be in a position to satisfactorily complete legally required “know your customer” checks. A compromise may be to agree to disclosure on a default, or to reassure investors that the lender has robust confidentiality safeguards.

Limitations of direct obligations to a lender

A lender will usually take issue with a provision which provides that an investor only owes direct obligations to the fund parties, as this may undermine its ability to enforce any security. If an investor is concerned about granting broad powers or rights to a non-fund party, such as a lender, a compromise may be to make clear that any limitations are not intended to prohibit or limit a lender from taking enforcement action on a default.

Limitations on documents from an investor

An investor may wish to receive side letter comfort that it will not have to sign or provide any documentation to a lender in connection with a subscription financing. Provided that the LPA includes customary representations and covenants that prospective financiers have the benefit of, this may prove sufficient from a lender’s perspective. The LPA could impose an obligation on the relevant ELP to use its best endeavours to avoid any requests to investors.

Sovereign immunity

A lender may exclude an investor that has the benefit of immunity from the relevant ELP’s borrowing base, but that will ultimately depend on the specific credit analysis that is undertaken. As a minimum, an investor that has such benefit will usually be asked to confirm that its obligations to the ELP are not subject to such immunity.

Transfers to an affiliate

An investor may wish to have the option to transfer its interest in the relevant ELP to an affiliate specified by it. A lender may seek to exclude such an affiliate from the relevant ELP’s borrowing base from a credit perspective. A compromise may be to permit transfers to affiliates, as long as this does not breach the ELP’s borrowing base.

Most favoured nation (MFN) provisions

As a final point, it is important to note that any adverse consequences for a lender of side letter terms may be multiplied if MFN provisions are included. A cost-friendly solution may be to include a carve-out with respect to provisions that detrimentally impact a lender in a subscription financing.

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Peter Vas
Partner Loeb Smith Attorneys
Hong Kong
T: +852 5225 4920
E. peter.vas@loebsmith.com

On 25 May 2020 the Cayman Islands government passed The Virtual Asset (Service Providers) Law, 2020 (“VASP Law”), which provides a legislative framework for the conduct of virtual assets business in the Cayman Islands and for the registration and licensing of persons providing virtual asset services. The VASP Law is intended to place the Cayman Islands with a cutting edge, robust framework which is in alignment with global regulatory standards, protect consumers and meet the requirements of the Financial Action Task Force recommendations in respect of virtual assets. In this two part series (this being Part 2) we look at the new VASP Law and its requirements with respect to licensing. Part 1 looked at the requirements with respect to registration.

1.   WHAT IS A VIRTUAL ASSET?

The VASP Law defines a “virtual asset” as “a digital representation of value that can be digitally traded or transferred and can be used for payment or investment purposes but does not include a digital representation of fiat currencies”.

The VASP Law makes a distinction between a “virtual asset” as defined above which will be regulated and a “virtual service token” which is defined as “a digital representation of value which is not transferrable or exchangeable with a third party at any time and includes digital tokens whose sole function is to provide access to an application or service or to provide a service or function directly to its owner.” 

The distinction is meant to deal with the usual question as to whether or not a digital token or coin is a security or a utility token. Virtual service tokens will be treated as utility tokens and therefore will fall outside the registration regime and the licensing regime under the VASP Law.¹

2.   WHAT ARE VIRTUAL ASSET SERVICES?

The VASP Law states that “Virtual asset service” means the issuance of virtual assets or the business of providing one or more of the following services or operations for or on behalf of a natural or legal person or legal arrangement: 

1. exchange between virtual assets and fiat currencies;
2. exchange between one or more other forms of convertible virtual assets;
3. transfer of virtual assets;
4. virtual asset custody service; or
5. participation in and provision of financial services related to a virtual asset issuance or the sale of a virtual asset.

3.   WHO IS A VIRTUAL ASSET SERVICE PROVIDER?

A person is a “virtual asset service provider” (“VASP”) under the VASP Law, if it is (1) a company, or a general partnership, or a limited partnership, or a limited liability company, or a foreign company registered in the Cayman Islands, and (2) provides a virtual asset service as a business or in the course of business in or from within the Cayman Islands and is registered or licensed in accordance with the VASP Law or is an existing licensee that is granted a waiver under the VASP Law.
A natural person cannot carry on or purport to carry on a virtual asset service as a business or in the course of business in or from within the Cayman Islands.

The VASP Law requires a VASP to either register with Cayman Islands Monetary Authority (“CIMA”) or be licensed by CIMA. Whether the VASP will have to register or be licensed will be dependent on the activity carried out by the VASP. However, broadly speaking, in the case of the provision of virtual asset custodial services or the operation of a virtual asset trading platform, the VASP is required to have a virtual asset service licence. It appears that in most cases where the VASP is carrying on business as a VASP but is not providing virtual asset custodial services or the operation of a virtual asset trading platform, registration with CIMA is required.

4.   CIMA CONSIDERATIONS: LICENCE OR REGISTER

In determining whether to grant a virtual asset licence, a sandbox licence, register an applicant as a “registered person” or to waive a requirement to licence or register under the VASP Law, CIMA will take into account the following:

1. size, scope and complexity of the virtual asset service, underlying technology, method of delivery of the service and virtual asset utilised;
2. knowledge, expertise and experience of the applicant;
3. the AML procedures that the applicant has in place;
4. internal safeguards and data protection systems being utilised by the applicant;
5. the similarity of the virtual asset service to securities investment business or any other regulated activity under any of the other Cayman Islands regulatory laws;
6. the risks involved;
7. whether the virtual asset service business involves the offering of virtual asset custodial services or the operation of a virtual asset trading platform;
8. the net worth, capital reserves and financial stability of the applicant;
9. the likelihood that the service will promote innovation, competition and benefits to consumers; and
10. the applicant’s senior officers, trustees and beneficial owners are fit and proper persons.

5.   VIRTUAL ASSET SERVICE LICENCE

A person who wishes to (i) provide virtual asset custody services (i.e. the business of safekeeping or administration of virtual assets) or (ii) to operate a virtual asset trading platforms (“VATP”) or is at the commencement of the VASP Law already doing so, should apply for a virtual asset service licence. For the purposes of the VASP Law, a VATP does not include a platform that only provides a forum where buyers and sellers post bids and offers and a forum where the parties trade in a separate platform or in a peer-to-peer manner.

1. CIMA criteria – In order to determine whether to approve an application for a licence, CIMA will consider the matters set out in section 4 above, whether approval of the application is against the public interest and if the applicant has (i) personnel with the necessary skills, knowledge and experience (ii) facilities, books, records and accounting systems, and (iii) adequate capital and cybersecurity measures, as CIMA considers appropriate having regard to the size, scope and complexity of the business. When CIMA has granted a licence, it will publish notification in the Cayman Islands Gazette.
2. CIMA regulatory requirements – CIMA may impose such regulatory requirements on a virtual asset service licensee as it considers necessary, including further restriction or prohibitions on the use of technology or practices which CIMA deems may disrupt or prejudice the functions of CIMA, the interests of the public and the financial services in the Cayman Islands.
3. Event-driven notifications – In addition to an annual renewal fee which is due by 15th January each year, a licensee is required to notify CIMA within 15 days of any changes made to the information in the application form submitted to CIMA.
4. Annual Audit obligations for Licensees – A licensee is required to have its accounts audited annually and submit such accounts to CIMA within 6 months of financial year end. CIMA may grant an exemption to this requirement if CIMA determines the requirement to be unnecessary or prohibitive given the size, scope and complexity of the economic activity and the availability of auditing services to the virtual asset service.

6.   REQUIREMENTS: VIRTUAL ASSET CUSTODY SERVICES

A licensee that provides virtual asset custody services must:

1. maintain best technology practices relating to virtual assets held in custody;
2. not encumber or cause any virtual asset to be encumbered, unless specifically agreed to by the beneficial owners of the virtual assets;
3. ensure that all proceeds relating to virtual assets held in custody shall accrue for the benefit of the owner, unless otherwise agreed in writing;
4. take such steps as may be necessary to safeguard the virtual assets held;
5. have adequate safeguards against theft and loss; and
6. enter into a custodial arrangement with the owner of a virtual asset, which includes the prescribed details set out in the VASP Law (i.e. in relation to the manner in which the virtual assets are to be held, the transactions the custodian is permitted to engage in, disclosures relating to the risks and fees etc.).

CIMA may also impose requirements on a licensee that provides virtual asset custody services, including (i) net worth requirements, (ii) reporting requirements, (iii) disclosures to clients concerning the transparency of operations, (iv) requirements for the safekeeping of client assets (including the segregated of assets, insurance requirements and cybersecurity measures), and (v) any other requirement CIMA determines is in the best interest of the beneficial owners of the assets held by the licensee.

7.   REQUIREMENTS: VIRTUAL ASSET TRADING PLATFORMS

1. CIMA requirements – CIMA may impose requirements on a licensee that operates a VATP where CIMA deems it necessary, including: (i) the type of client it may market its services to, (ii) the types of virtual assets that may and may not be traded on the VATP, (iii) the clearing and settlement process for transactions between buyers and sellers of virtual assets, and (iv) net worth and reporting requirements.
2. Due diligence requirement – A licensee operating a VATP is required to carry out reasonable due diligence procedures on virtual assets and their issuers listed on the VATP.
3. Securities investment business – A licensee who is operating a VATP must apply to CIMA, in the prescribed form, for approval prior to engaging in securities investment business² (as defined under the Cayman Islands Securities Investment Business Law (“SIBL”)) which relates to virtual assets. In determining an application by a VATP, CIMA will take into account whether the VATP lists or facilitates the issuance of securities which are virtual assets in accordance with SIBL and whether any additional supervision is required under SIBL.
4. Prohibitions on a licensee – A licensee that operates a VATP shall not:

• • provide financing to clients for the purchase of virtual assets, unless disclosures are made to client regarding the terms and risk of the financing;
  • engage in trading or market making behavior for its own account which could be detrimental to the interests of its clients, unless these activities are necessary for the operation of the VATP and these activities have been disclosed to clients of the VATP;
  • allow a virtual asset to be traded on the VATP unless it has assured itself that the virtual asset is not presented in a deceiving manner or in a manner that is meant to defraud;
  • allow a client to purchase or trade in virtual assets unless the licensee has assured itself the client is aware of the risks of purchasing, holding or trading the virtual asset and has provided disclosures in a form that the client can understand; and
  • provide fiat currency to fiat currency exchange services to users of the VATP.

8.   SANDBOX LICENCE

A “sandbox licence” is a temporary licence granted for a period of up to 1 year for a person providing a virtual asset service that represents an (i) innovative use of technology or (ii) uses an innovative method of delivery that requires supervision and oversight not offered by an existing licence or registration.

1. CIMA supervision – CIMA shall assess, monitor, supervise the innovative service, technology or method of delivery of a sandbox licensee with a view to ensuring that the service, technology or delivery (i) complies with the core principles of a sandbox licence, as set out in the VASP Law, (ii) improves the provision of financial services within the Cayman Islands, (iii) complies with global standards and best AML practices, (iv) facilitates the adoption of new financial services practices and technologies within the Cayman Islands, and (v) best practices and guidance are developed for the virtual asset service sector.
2. Direction by CIMA – CIMA has the discretion to require a person applying to be a registered person or a virtual asset service licensee to apply instead for a sandbox licence.
3. CIMA powers – CIMA may take any action necessary where it is of the opinion that the action is necessary for the protection of clients or potential clients and is in the interest of the public, may extend the duration of the sandbox licence, amend any restrictions or revoke it.
4. Fintech service provider – A fintech service provider may, but is not required to, apply for a sandbox licence. For the purposes of the VASP Law, a “fintech service provider” is a person who is carrying on a service that uses innovative technology to improve, change or enhance financial services, but is not a virtual asset service.
5. Compliance requirements – Where CIMA grants a sandbox licence, CIMA may impose any of the requirements that are applicable to a virtual asset service licensee and any restrictions that it considers necessary (e.g. impose a limit of the value or amount of virtual asset service or fintech service offered to clients).

9. CIMA’S ENFORCEMENT POWERS

CIMA has broad discretionary supervisory powers in respect of a registered person or licensee under the VASP Law. These powers are set out in Part 1 of this two part series.

CIMA may revoke a virtual asset service licence, sandbox licence or cancel the registration if the licensee or registered person has ceased or wishes to cease carrying on virtual asset service or has not commenced business within 1 year of the date of grant of the licence or the registration. 

1.  Section 3(2) of the VASP Law makes this clear by stating: “For the purposes of this Law, virtual service tokens are not virtual assets and a person or legal arrangement that provides services that involve virtual service tokens only are not required to have a licence or registration under this Law.”
2.  Securities investment business (as defined under the Cayman Islands Securities Investment Business Law mainly relates to managing securities, dealing in securities, advising in respect of securities, or arranging deals in securities)

This publication is not intended to be a substitute for specific legal advice or a legal opinion. For specific advice, please contact any of:

E: gary.smith@loebsmith.com
E: elizabeth.kenny@loebsmith.com
E: santiago.carvajal@loebsmith.com

On 25 May 2020 the Cayman Islands government passed The Virtual Asset (Service Providers) Law, 2020 (“VASP Law”), which provides a legislative framework for the conduct of virtual assets business in the Cayman Islands and for the registration and licensing of persons providing virtual asset services. The VASP Law is intended to place the Cayman Islands with a cutting edge, robust framework which is in alignment with global regulatory standards, protect consumers and meet the requirements of the Financial Action Task Force recommendations in respect of virtual assets. In this two part series (this being Part 1) we look at the new VASP Law and its requirements with respect to registration. Part 2 will look at the requirements with respect to licensing.

1. WHAT IS A VIRTUAL ASSET?

The VASP Law defines a “virtual asset” as “a digital representation of value that can be digitally traded or transferred and can be used for payment or investment purposes but does not include a digital representation of fiat currencies”.

The VASP Law makes a distinction between a “virtual asset” as defined above which will be regulated and a “virtual service token” which is defined as “a digital representation of value which is not transferrable or exchangeable with a third party at any time and includes digital tokens whose sole function is to provide access to an application or service or to provide a service or function directly to its owner.”

The distinction is meant to deal with the usual question as to whether or not a digital token or coin is a security or a utility token. Virtual service tokens will be treated as utility tokens and therefore will fall outside the registration regime and the licensing regime under the VASP Law.¹

2. WHAT ARE VIRTUAL ASSET SERVICES?

The VASP Law states that “Virtual asset service” means the issuance of virtual assets or the business of providing one or more of the following services or operations for or on behalf of a natural or legal person or legal arrangement:

1.   exchange between virtual assets and fiat currencies;
2.   exchange between one or more other forms of convertible virtual assets;
3.   transfer of virtual assets;
4.   virtual asset custody service; or
5.   participation in and provision of financial services related to a virtual asset issuance or the sale of a virtual asset.

3. WHO IS A VIRTUAL ASSET SERVICE PROVIDER?

A person is a “virtual asset service provider” (“VASP”) under the VASP Law, if it is (1) a company, or a general partnership, or a limited partnership, or a limited liability company, or a foreign company registered in the Cayman Islands, and (2) provides a virtual asset service as a business or in the course of business in or from within the Cayman Islands and is registered or licensed in accordance with the VASP Law or is an existing licensee that is granted a waiver under the VASP Law. 

A natural person cannot carry on or purport to carry on a virtual asset service as a business or in the course of business in or from within the Cayman Islands.  
The VASP Law requires a VASP to either register with Cayman Islands Monetary Authority (“CIMA”) or be licensed by CIMA. Whether the VASP will have to register or be licensed will be dependent on the activity carried out by the VASP. However, broadly speaking, in the case of the provision of virtual asset custodial services or the operation of a virtual asset trading platform, the VASP is required to have a virtual asset service licence. It appears that in most cases where the VASP is carrying on business as a VASP but is not providing virtual asset custodial services or the operation of a virtual asset trading platform, registration with CIMA is required.

4. REGISTRATION OF VASPS

Any person who is already carrying on business as a VASP at the date of commencement of the VASP Law or wishes to carry on a virtual asset service (for which a licence is not required under the VASP Law), will be required to apply to CIMA in order to become a “registered person” under the VASP Law.

5. CIMA CONSIDERATIONS: LICENCE OR REGISTER

In determining whether to grant a virtual asset licence, a sandbox licence, register an applicant as a “registered person” or to waive a requirement to licence or register under the VASP Law, CIMA will take into account the following:

1. size, scope and complexity of the virtual asset service, underlying technology, method of delivery of the service and virtual asset utilised;
2. knowledge, expertise and experience of the applicant;
3. the AML procedures that the applicant has in place;
4. internal safeguards and data protection systems being utilised by the applicant;
5. the similarity of the virtual asset service to securities investment business or any other regulated activity under any of the other Cayman Islands regulatory laws;
6. the risks involved;
7. whether the virtual asset service business involves the offering of virtual asset custodial services or the operation of a virtual asset trading platform;
8. the net worth, capital reserves and financial stability of the applicant;
9. the likelihood that the service will promote innovation, competition and benefits to consumers; and
10. the applicant’s senior officers, trustees and beneficial owners are fit and proper persons.

6. GENERAL REQUIREMENTS APPLICABLE TO A VASP AFTER REGISTRATION

The VASP Law sets out the continuing obligations which apply to a VASP after registration, including the following:

1. prepare accounts annually which are made available for inspection (including unaudited reports) to CIMA upon request (note: the VASP Law does not specify that the accounts need be audited);
2. ensure its senior officers and trustees are fit and proper persons to hold the respective positions;
3. ensure beneficial owners are fit and proper persons to have such control or ownership;
4. take such steps as are necessary to protect and secure the personal data and virtual assets of its clients;
5. ensure all communications relating to the virtual asset service are accurate;
6. comply with the Cayman Islands’ Anti-Money Laundering Regulations (2020 Revision), as amended (“AML Regulations”) i.e. including the appointment of AML officers and putting in place AML systems and procedures;
7. where performing a transfer of virtual assets, a VASP is required to collect and maintain information on the beneficiary and originator of the transfer in accordance with the AML Regulations, which are to be made available within 48 hours of receipt of a request by CIMA;
8. to notify CIMA within 15 days of any changes made to the information in the application form submitted to CIMA;
9. pay an annual renewal fee by the 15th January of each year; and
10. subject to certain exceptions, the prior approval of CIMA is required for the issue, voluntary transfer or disposal of 10% or more of the total shares or interest in a VASP – the incoming shareholder or partner also needs to be a “fit and proper” person. 

In addition, a VASP is not permitted to engage in securities investment business (as defined under the Securities Investment Business Law (2020 Revision) as amended (“SIBL”)) (this is likely where, e.g. a VASP is an investment manager or adviser or is providing brokerage services), unless the person is a licensee or registered person under SIBL and cannot appoint a senior officer or trustee of AMLCO without the prior approval of CIMA. 

Given the “four eyes” principle applied by CIMA in respect of other registered persons and licensees, it is likely that a VASP will be required to have a minimum of two directors, members or partners, as applicable.

7. ISSUE OF VIRTUAL ASSETS

1. Direct issue by VASP – In order to issue newly created virtual assets directly to the public in or from within the Cayman Islands in excess of a “prescribed threshold”, a registered person (i.e. a VASP which has already registered with CIMA) must first submit an “issuance request” to and obtain approval from CIMA. The VASP Law is silent on the value of “prescribed threshold” – this is essentially an amount in fiat currency or equivalent which can be raised by public issue by an issuer within a given timeframe, which will likely be confirmed by further amending regulation. 
2. Issue by a VATP on behalf of a VASP – However, a registered person may engage on one or more virtual asset trading platforms (“VATP”) in order to issue virtual assets over the prescribed threshold on the VATP. This is provided that the VATP is either (i) licensed under the VASP Law or (ii) licensed or registered and supervised for virtual assets by a government regulatory body in another non high-risk jurisdiction. Prior to engaging a VATP for the issuance of newly created virtual assets, a registered person is required to submit a virtual asset issuance request to and obtain approval from CIMA. 
3. Direct issue by a VATP – A licensee who operates a VATP may issue virtual assets directly on its own behalf to the public over the prescribed threshold by submitting an issuance request to CIMA for approval, where permitted by the terms of its licence. 
4. Issue by a VATP on behalf of a VASP – A VATP that is licensed under the VASP Law may issue virtual assets on behalf of a VASP directly to the public over the prescribed threshold where it is permitted under the terms of its licence and the VASP which is creating the virtual assets has obtained CIMA approval for the issuance. 
5. Obligations on issuer under the prescribed threshold – If a virtual asset issuance is within the prescribed threshold or involves the transfer or exchange of other virtual assets or fiat currency, a registered person is required to maintain records containing all the information required by CIMA for every transaction of the issuance and to make such records available to CIMA when requested. 
6. CIMA conditions – On approval of an issuance which is over the prescribed threshold, CIMA may impose requirements in relation to (i) the method by which the issuer may solicit members of the public to participate in the issuance (ii) the information provided to the public
   i.e. disclosure of risks (iii) the information that the licensee is required to collect from members of the public who participate in the issuance and (iv) the reporting requirements to CIMA. 
7. Reporting duty of licensee – If a licensee operating a VATP which is facilitating the issuance of newly created virtual assets on behalf of a VASP knows or has reasonably grounds to believe that the virtual asset issuance does not comply with an applicable requirements, the licensee shall immediately give CIMA written notice of its knowledge or belief, with reasons. 
8. CIMA response time – CIMA shall notify the licensee/ virtual asset issuer who submitted the issuance request whether it has been approved within 21 days of receipt of the issuance request.

8. CIMA CONSIDERATIONS: APPROVAL OF AN ISSUE OF VIRTUAL ASSETS

The VASP Law sets out a number of factors that CIMA will take into account in determining whether to approve an issuance request by a VATP or a registered person. This includes the following:

1. the nature of the virtual asset, including whether the virtual asset is a “security”, as defined in SIBL;
2. the functions and purpose of the virtual asset and the nature of the underlying asset which the virtual asset may represent (if applicable);
3. the accuracy and completeness of the disclosures made to the public regarding the issuance of virtual assets;
4. whether the VASP wishes to solicit the public directly for the purchase of the virtual assets;
5. the total number of virtual assets that will be available for purchase and the amount to be raised;
6. the period of time during which the issuance will take place;
7. the platform from which the virtual assets will be issued; and
8. the AML processes of the virtual asset issuer.

9. CIMA’S ENFORCEMENT POWERS

As a general note, CIMA has broad discretionary supervisory powers in respect of a registered person or licensee under the VASP Law, including but not limited to, the following: 

1. Examine the affairs – Whenever CIMA considers it necessary, examine the affairs of business of any VASP i.e. by way of regular returns, on-site inspections, auditor’s reports or in any such other manner as CIMA determines in compliance with the VASP Law.
2. Cease and desist – Where CIMA is of the opinion that a VASP is carrying out, pursuing or about to carry or pursue out an act that is unsafe or an unsound practice in conducting the business of VASP, CIMA may direct the VASP to cease and desist from carrying out the act or conduct.
3. CIMA direction – If at any time it appears to CIMA that a VASP has failed to comply with any of the requirements under the VASP Law, CIMA may by written notice direct the VASP to comply with the requirement within such period of time and on such conditions as specified in the notice.
4. Enforcement powers – If CIMA knows or has reasonable grounds to believe that a VASP:

• • is unable or appears likely to become unable to meet its obligations as they fall due;
  • is carrying on business fraudulently or otherwise in a manner detrimental to the public interest, to the interest of its clients or to the interest of its creditors;
  • has contravened any provision of the AML Regulations;
  • has failed to comply with a condition of its licence/ registration;
  • has not conducted the direction and management of its business in a fit and proper manner or has senior officers, managers or persons who have acquired ownership or control who are not “fit and proper persons”;
  • is a “corporate services provider” and has contravened the applicable law; or
  • has failed to comply with any lawful direction from CIMA.

CIMA may take certain actions, including, but not limited to the following:

1. 1. revoke the virtual asset licence or sandbox licence or cancel the registration;
   2. impose conditions upon the licence or amend or revoke such conditions;
   3. apply to the court for any order which is necessary to protect the interests of clients or creditors of the licensee or registered person;
   4. at the expense of the VASP, require that a licensee or registered person obtain auditor’s report to be submitted to CIMA on its anti-money laundering systems and procedures for compliance with the AML Regulations;
   5. require the substitution of any senior officer or trustee of the VASP appointed, or the divestment of ownership or control;
   6. appoint a person to advise the licensee on the proper conduct of its affairs and report the same to CIMA;
   7. requiring such action to be taken by the VASP as CIMA reasonably believes necessary.

CIMA may revoke a virtual asset service licence, sandbox licence or cancel the registration if the licensee of registered person has ceased or wishes to cease carrying on virtual asset service or has not commenced business within 1 year of the date of grant of the licence of the registration.

1.   Section 3(2) of the VASP Law makes this clear by stating: “For the purposes of this Law, virtual service tokens are not virtual assets and a person or legal arrangement that provides services that involve virtual service tokens only are not required to have a licence or registration under this Law.”

 This publication is not intended to be a substitute for specific legal advice or a legal opinion.
For specific advice, please contact either:

E: gary.smith@loebsmith.com
E: elizabeth.kenny@loebsmith.com
E: santiago.carvajal@loebsmith.com