News Archive | Page 7 of 8

The Companies (Amendment) Law, 2016 which came into force on 13th May 2016 has abolished the ability of Cayman Islands exempted companies to issue bearer shares and other forms of negotiable shares.

Section 231A of the Companies Law states that:

an exempted company may not issue any new bearer shares after May 13, 2016; and
all existing bearer shares must be converted into registered shares before July 13, 2016 or they will be void.

Companies which have bearer shares in issue prior to May 13, 2016 are required to notify the beneficial owner of a bearer share or the relevant custodian of the abolition before July 13, 2016.

The outlawing of bearer shares and other forms of negotiable shares is part of a series of actions being taken by the Cayman Islands Government to the assist global efforts to tackle tax evasion and corruption and increase transparency.

This publication is not intended to be a substitute for specific legal advice or a legal opinion. It deals in broad terms only and is intended to merely provide a brief overview and general guidance only. For more specific advice on bearer shares issued by Cayman Islands companies, please contact:

Gary Smith

Partner
E gary.smith@loebsmith.com
W www.loebsmith.com

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The Register of Members for Cayman Islands’ exempted companies is not required by the Companies Law to be held in the Cayman Islands, but is usually held at the Company’s registered office, along with the other statutory Registers and corporate records maintained by the Company. If the Directors would prefer the Register of Members to be kept elsewhere other than at the Company’s registered office, they need to pass a Board resolution to that effect.

The Register of Members needs to state (i) the names and addresses of shareholders of the Company; (ii) the number and class of shares held by each shareholder (including any distinguishing numbers in respect of those shares); (iii) the amount paid up or agreed to be considered as paid on the shares; (iv) the date on which the name of any person was entered in the Register as a member and the date the person ceased to be a member of the Company; and (v) whether each relevant class of shares held by a shareholder carries voting rights under the Articles of Association of the Company (including the right to appoint or remove directors) and if so, whether such voting rights are conditional.

All existing and all newly incorporated companies should ensure that their Register of Members show whether each class of shares held by a shareholder carries voting rights and if so, whether such voting rights are conditional.

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

E: gary.smith@loebsmith.com
E: ramona.tudorancea@loebsmith.com
E: vivian.huang@loebsmith.com
E: yun.sheng@loebsmith.com
E: elizabeth.kenny@loebsmith.com
E: santiago.carvajal@loebsmith.com
E: benjamin.wrench@loebsmith.com

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Cayman Exempted Mutual Funds now required to register with the Cayman Islands Monetary Authority

Further to our earlier legal update on Section 4(4) Funds registration with CIMA, Cayman Islands’ mutual funds which are currently exempted from registration with the Cayman Islands Monetary Authority (“CIMA”) under Section 4(4) of the Mutual Funds Law (2020 Revision) on the basis that (i) the shares or interests are held by not more than fifteen investors, (ii) a majority of whom are capable of appointing or removing the operator of the fund (“Section 4(4) Funds“) are now required under the Mutual Funds (Amendment) Law, 2020 (the “Law“) which came into force on 7th February 2020, to register with CIMA and fall within CIMA’s regulatory purview.

Timing for Registration with CIMA

Existing Funds: Section 4(4) Funds which launched prior to 7th February 2020 have a six (6) months’ period until 7th August 2020 to register with CIMA.

New Funds: Section 4(4) Funds which are launched after 7th February 2020 will need to register with CIMA immediately upon launch.

Registration Requirements
In connection with its registration with CIMA, each Section 4(4) Fund will be required to do the following.

File a certified copy of an extract of its constitutional documents with CIMA showing that a majority in number of its investors are capable of appointing or removing the operator of the Fund.
File with CIMA such other information as may be required in a prescribed Form.
Pay an annual fee to CIMA.

In common with all other CIMA regulated entities, each Section 4(4) Fund that is a company will be required to have at least two Directors appointed who will need to be registered with CIMA under the Directors Registration and Licensing Law.

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For further guidance and assistance with registering your Section 4(4) Fund with CIMA, please contact your usual Loeb Smith attorney or any of:

E: gary.smith@loebsmith.com
E: ramona.tudorancea@loebsmith.com
E: vivian.huang@loebsmith.com
E: yun.sheng@loebsmith.com
E: elizabeth.kenny@loebsmith.com
E: santiago.carvajal@loebsmith.com

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The Private Funds Law, 2020 (the “Law“) came into force on 7th February 2020 and introduces, among other things, a requirement for the registration of closed-ended funds (typically, investment funds which do not grant investors with a right or entitlement to withdraw or redeem their shares or interests from the fund upon notice) with the Cayman Islands Monetary Authority (“CIMA“). The Law refers to these closed-ended funds as “Private Funds”. Mutual funds (e.g. open-ended funds) are not caught by the Law and continue to be regulated by the Mutual Funds Law (2020 Revision) as amended. Accordingly, there is now a regulatory regime in the Cayman Islands for all mutual funds and a separate regulatory regime for “private funds” covered by the Law.

What is a “Private Fund”?

A “Private Fund” means a company, unit trust or partnership whose principal business is the offering and issuing of its investment interests, the purpose or effect of which is the pooling of investor funds with the aim of spreading investment risks and enabling investors to receive profits or gains from such entity’s acquisition, holding, management or disposal of investments, where:

the holders of investment interests do not have day-to-day control over the acquisition, holding, management or disposal of the investments; and
the investments are managed as a whole by or on behalf of the operator of the private fund, directly or indirectly, for reward based on the assets, profits or gains of the company, unit trust or partnership.

A list of “non-fund arrangements” including (i) securitisation special purpose vehicles, (ii) joint ventures, (iii) proprietary vehicles, (iv) holding vehicles, (v) preferred equity financing vehicles, (vi) sovereign wealth funds, (vii) structured finance vehicles, and (viii) single family offices are listed in the Schedule to the Law and are excluded from the scope of the Law.

Single investor Private Funds will be outside the scope of the Law as there would be no pooling of investor funds in this case.

Which Funds will fall within the scope of the Private Funds Law?

The Law applies to private equity funds, real estate funds, and other types of closed-ended funds set up as Cayman Islands limited partnerships, companies (including SPCs), unit trusts and limited liability companies.

The Law will also apply to non-Cayman Islands private funds carrying on business or attempting to carry on business in or from the Cayman Islands. As stated above, there is a separate registration regime for mutual funds under the Mutual Funds Law (2020 Revision) as amended and the Law will not apply to a regulated mutual fund or a regulated EU Connected Fund.

Restricted Scope Private Fund

The Law creates a category of Private Funds called a “restricted scope private fund” and this defined as (i) an exempted limited partnership; (ii) that is managed or advised by a person who is licensed or registered by CIMA or authorised or registered by a recognised overseas regulatory authority; and (iii) in which all of the investors are non-retail in nature, being either high net worth persons or sophisticated persons. The Law does not state what the consequences will be for registering with CIMA as a “restricted scope private fund” (e.g. the prescribed details to be filed with CIMA might be less in nature and scope and/or the fees payable to CIMA might be different).

Registration Process – What documentation is required to register with CIMA?

Section 5 of the Law states that a Private Fund is required to:

submit an application for registration to CIMA within twenty-one (21) days after its acceptance of capital commitments from investors for the purposes of investments;
file prescribed details in respect to the Private Fund with CIMA;
pay a prescribed annual registration fee to CIMA in respect of the Private Fund;
comply with any conditions of its registration imposed by CIMA; and
comply with the provisions of the Law.

In terms of documentation to be filed with CIMA, the Law refers to the filing of “prescribed details” in respect of the Private Fund but there is no requirement to file an offering memorandum or any other offering document. There are also no requirements in the Law on the contents of a Private Fund’s offering document, if any. Regulations stipulating the exact nature of the “prescribed details” to be filed have not yet been published.

Timing of Registration

Section 5 of the Law indicates that a new Private Fund falling within the scope of the Law will be required to:

submit its registration application to CIMA within 21 days after its acceptance of capital commitments from investors for the purposes of investments; and
be registered by CIMA before it accepts capital contributions from investors in respect of investments.

Accordingly, the timing of registration with CIMA will be somewhat different from that applicable to mutual funds.

New Funds: A Private Fund that begins to carry on business in or from Cayman at any time during the period of six (6) months beginning on 7th February 2020 may continue to carry on business in or from Cayman without registering with CIMA until 7th August 2020 or such further period as may be specified by CIMA.

Existing Funds: A Private Fund that immediately before 7th February 2020 was carrying on business in or from Cayman may continue to carry on business in or from Cayman without registering with CIMA until 7th August 2020 or such further period as may be specified by CIMA.

Neither the CIMA REEFS portal nor CIMA forms have as yet been configured or published to deal with the registration of new or existing Private Funds’ registration.

Requirement to register changes with CIMA

A Private Fund is required under the Law to notify CIMA:

(a) of any change that materially affects any information submitted to CIMA;

(b) of any change of its registered office or the location of its principal office.

The Private Fund will have twenty-one (21) days after making the change or becoming aware of the change to file details of the change with CIMA.

Fees

Regulations stipulating the fees payable to CIMA in respect of registration of Private Funds have not been published.

Regulatory Requirements for Private Funds

The Law requires that Private Funds that are subject to the Law have in place certain mechanisms and safeguards relating to audit, valuation of assets, safekeeping of fund assets, cash monitoring, and identification of securities.

Audit

Each Private Fund is required to (i) have its accounts audited annually by a firm of auditors on the CIMA approved list of auditors and (ii) file such audited accounts with CIMA within six (6) months of the end of each financial year of the Private Fund (along with an Financial Annual Return in CIMA’s prescribed form).

Audited accounts will be required to be prepared in accordance with the International Financial Reporting Standards or the generally accepted accounting principles of the United States of America, Japan or Switzerland or any non-high risk jurisdiction. The Law defines a “non-high risk jurisdiction” as any jurisdiction that is not on the list of high risk jurisdictions issued by the Financial Action Task Force.

CIMA may, in relation to the whole or part of any financial year of a Private Fund, grant an exemption to the Private Fund from the requirement to submit audited accounts to CIMA either absolutely or subject to such conditions as CIMA may deem appropriate. The circumstances in which such an audit exemption may be granted have not yet been published by CIMA but might be the same as, or similar to, the circumstances currently applicable to regulated mutual funds.

Valuation of assets

The Law requires a Private Fund to have appropriate and consistent procedures for the purposes of proper valuations of its assets, which ensures that valuations are conducted in accordance with the requirements in the Law. Valuations of the assets of a Private Fund are required to be carried out at a frequency that is appropriate to the assets held by the Private Fund and, in any case, on at least an annual basis.

Valuations of the Private Fund’s assets can be performed by:

(a) an independent third party that is appropriately professionally qualified to conduct valuations in a non-high risk jurisdiction;

(b) the manager or operator of the Private Fund, or a person who has a control relationship with the manager of the Private Fund, provided that:

i. the valuation function is independent from the portfolio management function; or

ii. potential conflicts of interest are properly identified and disclosed to the investors of the private fund; or

(c) an administrator not falling under paragraph (a) above who is appointed by the Private Fund.

Where the valuation of the Private Fund’s assets is not performed by an independent third party professionally qualified to conduct valuations in a non-high risk jurisdiction, CIMA may require the Private Fund to have its valuations verified by an auditor or independent third party.

The Law empowers CIMA to waive the valuation requirements, either absolutely or subject to such conditions as CIMA deems appropriate.

Safekeeping of fund assets

The Law requires a custodian (i) to hold the Private Fund’s assets which are capable of physical delivery or capable of registration in a custodial account except where that is neither practical nor proportionate given the nature of the Private Fund and the type of assets held; and (ii) to verify title to, and maintain records of, fund assets.

Where having a custodian is neither practical nor proportionate given the nature of the Private Fund and the type of assets held, title verification can be carried out by any of (i) the manager or operator of the Private Fund (subject to functional independence or conflicts management requirements), (ii) an independent administrator, or (iii) another independent third party.

Where the title verification is not performed by a custodian, an administrator or another independent third party appointed, CIMA may require the Private Fund to have its title verification verified by an appropriately professionally qualified independent third party.

Cash monitoring

The Law requires a Private Fund to appoint an administrator, custodian or another independent third party (or the manager or operator of the Private Fund) to:

• monitor the cash flows of the Private Fund;

• ensure that all cash has been booked in cash accounts opened in the name, or for the account, of the Private Fund; and

• ensure that all payments made by investors in respect of investment interests have been received.

When the cash monitoring function is not performed by an administrator, custodian or another independent third party, the cash management function established by the manager or operator of the Private Fund is required to be independent of the portfolio management function or the potential conflicts of interest must be properly identified and disclosed to investors.

Identification of securities

A Private Fund that regularly trades securities or holds them on a consistent basis must maintain a record of the identification codes (e.g. ISIN codes or CUSIP codes) of the securities that it trades and holds and make this available to CIMA upon request.

Penalty for Non-Compliance

The penalty for failing to comply with Section 5 of the Law (registration with CIMA) is liability on conviction to a fine of CI$100,000 (approximately US$122,000). The “operator” (e.g. the board of directors where the Private Fund is structured as a company or a general partner where the Private Fund is structured as a limited partnership) of a Private Fund will be responsible for securing the compliance by that Private Fund with the Law. The operator of a Private Fund that fails to discharge its responsibility for securing the Private Fund’s compliance with the Law commits an offence and is liable on conviction to a fine of CI$20,000 (approximately US$24,400).

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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 the new registration requirements for Cayman closed-ended funds and compliance generally with the Private Funds Law, 2020, please contact your usual Loeb Smith attorney or any of:

E: gary.smith@loebsmith.com
E: ramona.tudorancea@loebsmith.com
E: vivian.huang@loebsmith.com
E: yun.sheng@loebsmith.com
E: elizabeth.kenny@loebsmith.com
E: santiago.carvajal@loebsmith.com

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Cayman Islands’ mutual funds which are currently exempted from registration with the Cayman Islands Monetary Authority (“CIMA”) under Section 4(4) of the Mutual Funds Law (2020 Revision) on the basis that (i) the shares or interests are held by not more than fifteen investors, (ii) a majority of whom are capable of appointing or removing the operator of the fund (“Section 4(4) Funds“) will be required, once the Mutual Funds (Amendment) Bill, 2020 (the “Bill”) becomes law, to register with CIMA and fall within CIMA’s regulatory purview.

The Bill does not propose a prescribed minimum initial investment amount and Section 4(4) Funds will not be required to file an offering document (or any amendments) with CIMA. Certain regulatory powers of CIMA which already apply to existing CIMA regulated mutual funds will also apply to Section 4(4) Funds once the Bill becomes law.
In connection with their registration with CIMA, each Section 4(4) Fund will be required to do the following.

Pay an annual fee to CIMA.
File a certified copy of an extract of its constitutional documents with CIMA showing that a majority in number of its investors are capable of appointing or removing the operator of the Fund.
File with CIMA such other information as may be required in the prescribed form.

New Audit Requirement

Each Section 4(4) Fund will also be required to have its accounts audited annually by a firm of auditors on the CIMA approved list of auditors and file such audited accounts with CIMA within six (6) months of the end of each financial year of that Fund (along with an Financial Annual Return in CIMA’s prescribed form).
Audited accounts will be required to be prepared in accordance with the International Financial Reporting Standards or the generally accepted accounting principles of the United States of America, Japan or Switzerland or any non-high risk jurisdiction. The Bill defines a “non-high risk jurisdiction” as any jurisdiction that is not on the list of high risk jurisdictions issued by the Financial Action Task Force.

Timing for Registration for Existing Section 4(4) Funds

The Bill proposes that existing Section 4(4) Funds will have six (6) months from the date on which the Bill becomes law to register with CIMA and to comply with the new requirements.

An existing Section 4(4) Fund that registers with CIMA in 2020 will not be required to file its audited accounts in respect of any prior financial 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 the registration requirements for Cayman exempted mutual funds, please contact your usual Loeb Smith attorney or any of:

E: gary.smith@loebsmith.com
E: ramona.tudorancea@loebsmith.com
E: vivian.huang@loebsmith.com
E: yun.sheng@loebsmith.com
E: elizabeth.kenny@loebsmith.com
E: santiago.carvajal@loebsmith.com

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The EU’s General Data Protection Regulation (“GDPR”) applies to offshore investment funds with European investors since 25 May 2018. The Cayman Islands Data Protection Law (“DPL”), which will regulate the future processing of all personal data, is intended to come into effect in January 2019¹. Inspired from the UK’s Data Protection Act, DPL includes provisions very similar to GDPR (together “Data Protection Laws”), with certain notable differences.

As part of the subscription process, investors are required to provide a government-issued photo ID, source of funds and wealth, contact details, payment details, and tax residence information, or even additional information about employment, dependents, income and investment objectives (the “Investor Personal Data”), which are processed and stored by or on behalf of the investment fund (the “Fund”) and/or by one or more of the service providers to the Fund. Some of the processing may be done by different parties in various jurisdictions.

Generally, the Administrator, Transfer Agent, Distributor, and the Investment Manager of a Fund may fall within the definition of a Data Controller or Data Processor. To ensure compliance with GDPR and/or DPL, the Fund’s Board of Directors should review the contractual arrangements with these parties and may need to appoint a Data Protection Officer. As a reminder, the Board of Directors of the Fund is required to supervise third party service providers and ensure that there are sufficient measures in place to protect Investor Personal Data. Privacy Notices in the Fund’s offering documents would need to be updated to ensure that investors are fully aware of where their Personal Data is being processed, by whom and for what purpose.

For ease of reference, a brief comparison between GDPR and DPL is included below².

Comparison of the Main Provisions

	GDPR	DPL
Personal Data	Any information relating to an individual who can be identified, directly or indirectly, from that data (including online identifiers such as IP address-es and cookies may qualify as personal data if they are capable of being linked back to the individual).	Same as GDPR.
Data Controller	The person who, alone or with others, determines the purposes, conditions and means of the processing of Personal Data.	DPL applies to any Data Controller in respect of Personal Data (a) es-tablished and processed in the Cayman Islands; or (b) processed in the Cayman Islands otherwise than for the purposes of transit³.
Privacy Notice	At the time of collection of the data, individuals must be informed of the purposes and detail behind the processing, the details of transfers of data and any security and technical safeguards in place. This information is generally provided in a separate privacy notice.	Same as GDPR.
Right to Access	Individuals have the right to obtain confirmation that their Personal Data is processed and to access it. Data Controllers must respond within a month of the access request. A copy of the information must be provided free of charge.	Same as GDPR, but DPL permits a reasonable fee to be charged.
Retention Period	Personal data should not be kept for longer than is necessary to fulfil the purpose for which it was originally collected. Controllers must inform data subjects of the period of time (or reasons why) data will be retained on collection.	Not a requirement under DPL. However, as with the GDPR, if there is no compelling reason for a Data Controller to retain Personal Data, a data subject can request its secure deletion.rsonal data should not be kept for longer than is necessary to fulfil the purpose for which it was originally collected. Controllers must inform data subjects of the period of time (or reasons why) data will be retained on collection.
Right to Erase	Should the individual subsequently wish to have their data removed and the Personal Data is no longer required for the reasons for which it was collected, then it must be erased. Data Controllers must notify third party processors or sub-contractors of such requests.	Same as GDPR.
Transfers	International transfers permitted to third party processors or between members of the same group.	Same as GDPR.
Data Security	Minimum security measures are pre-scribed as pseudonymisation and encryption, ability to restore the availability and access to data, regularly testing, assessing and evaluating security measures.	Appropriate technical and organisational measures must be taken to prevent unauthorised or unlawful processing of Personal Data and against accidental loss or destruction of, or damage to, Personal Data⁴.
Data Processors	Security requirements are extended to data processors as well as Data Controllers.	There is no liability for processors under DPL. However, they may be held liable based on contract or tort law.
Data Breach	Data Controllers must notify the regulatory authority of Personal Data breaches without undue delay and, where feasible, not later than 72 hours after having become aware of a breach.	In the event of a Personal Data breach, the Data Controller must, “without undue delay” but no longer than five (5) days after the Data Controller should have been aware of that breach, notify the Om-budsman and any affected individuals⁵.
Breach Notice	The notification should describe the nature of the breach, its conse-quences, the measures proposed or taken by the Data Controller to ad-dress the breach, and the measures recommended by the Data Controller to the individual concerned to miti-gate the possible adverse effects of the breach.	Same as GDPR.
Right to be Forgotten	An individual may request the deletion or removal of Personal Data where there is no compelling reason for its continued processing.	DPL contains a similar right, although this is expressed as a general right of “erasure”. Under the UK’s Data Protection Act, the right is limited to processing that causes unwarranted and substantial damage or distress. Under DPL this threshold is not present. As with the GDPR, if there is no compelling reason for a data controller to retain Personal Data, a data subject can request its secure deletion.
Right to Object	An individual has the right at any time to require a Data Controller to stop processing their Personal Data for the purposes of direct marketing. There are no exemptions or grounds to refuse. A Data Controller must deal with an objection to processing for direct marketing at any time and free of charge.	Same as GDPR.
Direct Marketing and Consent	The Data Controller must inform individuals of their right to object “at the point of first communication” and in a privacy notice. For any consent to be valid it needs to be obvious what the data is going to be used for at the point of data collection and the Data Controller needs to be able to show clearly how consent was gained and when it was obtained.	Including an unsubscribe facility in each marketing communication is recommended best practice. If an individual continues to accept the services of the Data Controller without objection, consent can be implied.
Data Processors	The GDPR sets out more detailed statutory requirements to apply to the controller/processor relationship, and to processors in general. Data Pro-cessors are now directly subject to regulation and are prohibited from processing Personal Data except on instructions from the Data Controller.	Best practice would always be to put in place a contract between a controller and processor. Essentially, the contract should require the Data Processor to level-up its policies and procedures for handling personal data to ensure compliance with DPL. Use of sub-contractors by the service provider should be prohibited without the prior approval of the Data Controller⁶.
Data Protection Officer	Mandatory if the core activities of the Data Controller consist of processing operations which require large scale regular and systematic monitoring of individuals or large scale processing of sensitive Personal Data.	Does not require the appointment, although this is recommended best practice.
Penalties	Two tiers of sanctions, with maximum fines of up to €20 million or 4% of annual worldwide turnover, whichever is greater.	Refusal to comply or failure to comply with an order issued by the Ombudsman is an offence. Penal-ties are also included for unlawful obtaining or disclosing Personal Data⁷. Directors may be held liable under certain conditions⁸. The Data Controller is liable on conviction to a fine up to CI$100,000 or imprisonment for a term of 5 years or both. Monetary penalty orders of an amount up to CI$250,000 may also be issued against a Data Controller.

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

E: gary.smith@loebsmith.com
E: ramona.tudorancea@loebsmith.com
E: vivian.huang@loebsmith.com
E: yun.sheng@loebsmith.com
E: elizabeth.kenny@loebsmith.com

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The Data Protection Law, 2017 (Law) was passed on 27 March 2017 and it is not yet in force.
The comparison only includes provisions which may be relevant to offshore investment funds and is therefore not a comprehensive analysis.
See Art. 6 of DPL
See Schedule 1 of DPL
See Art. 16 of DPL
Under DPL, the Data Controller is liable for breaches and non-compliance, whereas processors may not be. It is therefore very important for a Fund’s Board of Directors to ensure that adequate contractual protections are in place.
See Arts. 53-54 of DPL
See Art. 58 of DPL

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The Cayman Islands Monetary Authority (“CIMA”) has extended the deadline for each CIMA registered Cayman domiciled investment fund which launched prior to 1 June 2018 to notify CIMA of the appointment of natural persons to act as its Anti-Money Laundering Compliance Officer (“AMLCO”), Money Laundering Reporting Officer (“MLRO”) and Deputy Money Laundering Reporting Officer (“DMLRO”) from 30 September 2018 to 31 December 2018. CIMA has clarified that CIMA regulated funds must still appoint these AML Officers by 30 September 2018 but now have until 31 December 2018 to notify CIMA of such appointments. Notification of the appointment of AML Officers to CIMA registered funds must take place via the CIMA REEFS portal.

CIMA has also clarified that each unregulated Cayman investment fund (and is therefore not registered with CIMA) which launched prior to 1 June 2018 now has until 31 December 2018 to designate entity specific AML Officers. Each Cayman investment fund launched from 1 June 2018 (“Post May 2018 Funds”) are expected to have AML Officers designated from the time of launch. Post May 2018 Funds which are required to register with CIMA will be required to register details of their AML Officers at the time of the fund’s registration with CIMA.

For specific advice on the appointment of AML Officers to your Cayman Islands’ investment funds, please contact any of:

E: gary.smith@loebsmith.com
E: vivian.huang@loebsmith.com
E ramona.tudorancea@loebsmith.com
E elizabeth.kenny@loebsmith.com

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Recent years have seen an unprecedented rise of the FinTech industry, i.e. financial technology businesses. According to the World Fintech Report 2017, more than half of financial services users worldwide do business with at least one non-traditional service provider, while traditional financial services firms are desperately trying to foster innovation (and usually end up seeking partnerships with or outright buying out FinTech start-ups). According to the same report, venture capital funding in FinTech companies reached close to US$25 billion in 2015.

FinTech companies have experienced major growth in recent years mainly due to addressing the needs of financial institutions with respect to modernising payment services and improving customer experience in the digital age. As the industry matures, however, FinTechs will have to deal with attention from regulators, a wave of mergers and consolidations and a slow-down or drop in valuation, and they will need a more pragmatic approach to business development, with a stronger focus on IP management and exit strategies.

As one of the foremost offshore financial centres, home to circa 70% of the world’s offshore investment funds, the Cayman Islands may soon become an attractive destination for FinTech entrepreneurs aiming to provide solutions for capital markets analytics, trading and portfolio management, as well as risk management and compliance. According to another recent report, a third of hedge fund managers are already using some type of FinTech-related solutions for their investment strategies and are carefully monitoring the FinTech landscape to maintain their competitive edge. Overall, FinTech can flourish in the Cayman Islands through synergies with already established industries.

In the first issue of our series of legal insights on owning IP through a Cayman Islands structure, we explored some of the key benefits of the Cayman Islands Special Economic Zone (SEZ). In this second issue, we take a closer look at how the Cayman Islands protects intellectual property, with a focus on FinTech IP.

The Cayman Islands legal framework has been modernized to cover intellectual property rights in the digital age.

FinTechs generally own a combination of an established “brand” or “trade name” (including logos or icons) protected as registered or unregistered trademarks and original works including software and codes which in certain cases may benefit from copyright protection. In some cases, patents and industrial designs are also included. All these IP rights are protected under Cayman Islands laws to the same standards as in the UK.

Modern copyright protection, including with respect to computer-generated works. The Cayman Islands have recently updated the copyright protection laws to bring them in line with the most recent developments under the UK Copyright, Designs and Patents Act 1988, as amended, which expressly includes computer programs, including any preparatory design materials, as well as databases, within the definition of “literary works” and therefore protects them as such for a duration of 50 years.
Standalone comprehensive trademark protection to replace current system of extension of UK/EU IP rights. At present, trademarks registered in the UK (or with WIPO with UK designation) or at the European level with the Office for Harmonization in the Internal Market (OHIM) may benefit from the same protection in the Cayman Islands by a simple filing with the Cayman Islands Register of Patents and Trademarks, without any substantive examination or opposition period. However, under The Trade Marks Bill, 2016, which is expected to be passed into law and enter into force in early 2017, a stand-alone mechanism for the registration of trademarks will allow companies incorporated in the Cayman Islands as well as foreign companies to obtain trademark protection without going through the UK.
Extension of UK/EU patents & industrial designs, and reinforced protection against “patent trolls”. Patents and industrial designs registered in the UK or at the European level can also be protected in the Cayman Islands subject to a simple filing with the Cayman Islands Register of Patents and Trademarks. In addition, the patent regime has now been amended to grant inventors additional protection against abusive challenges to their rights by “patent trolls”, i.e. entities that obtain patents for the purpose of suing those who innovate and develop new products. The Cayman Islands patent laws have now been amended to specifically prohibit bad faith infringement claims.

Confidential information (including “trade secrets”) is well protected in the Cayman Islands as part of the law of equity.

As is the case with other industries, in addition to trademarks, patents and copyrighted works, a lot of the value of the intellectual property developed in the FinTech industry comes in the form of confidential information, especially proprietary information constitutive of “trade secrets”, i.e. information which is valuable for being secret and that a company protects from public disclosure. This is especially true for business methods, ideas and algorithms, which cannot be patented. Also, in some cases, confidentiality may be preferable to patent protection.

The law of the Cayman Islands, as it relates to confidentiality, is a combination of common law, rules of equity and statute, and is based heavily upon English law, which treats the protection of confidential information, including trade secrets, as part of the law of equity. Despite the lack of statutory provisions in English law, several remedies (such as injunctive relief or damages) are available where trade secrets have been improperly acquired, disclosed or used. The Cayman courts will follow the established English case law on these issues.

As a result, FinTech companies benefit in the Cayman Islands from a protection of their most important asset, intellectual property, substantially at the same levels as in the UK, including with respect to confidential information and “trade secrets”, provided that they made reasonable efforts to maintain secrecy.

Protecting IP rights in the Cayman Islands:

Trade Secrets Best Practices for Fintech Companies:

⇒ In most cases, the biggest threat to trade secrets comes from employees. Make it clear to the employees and contractors having access to customer information, business models, pricing structures, proprietary software and data analytics applications that such information is constitutive of “trade secrets” and that its disclosure to any third party or its use for any purpose other than to further the company’s business are strictly forbidden, including after the end of the employment or business relationship. If the employees and/or contractors are not aware that the information should be protected as a “trade secret”, then the courts will not grant the protection sought.

Information about the state of the company’s financials, its solvency or ability to carry on business and its commercial relationships does not usually fall under “trade secrets”. Profit margins, costs, sales and development plans, however, may be deemed confidential information equivalent to a trade secret.

⇒ Have Non-Disclosure Agreements (NDAs) signed with potential clients, contractors or investors before providing them with any confidential information.

⇒ Have confidentiality, exclusivity, non-competition / non-solicitation and intellectual property clauses in the agreements with your employees.

⇒ Write up and implement a good information / data security policy and restrict access to information constitutive of “trade secrets” on a need-to-know basis.

⇒ Have an internal policy about communicating confidential information to third parties, including in scientific publications, industry conferences, to family and friends and in applications filed for public funding. Valuable information could also be disclosed when key employees are invited to speak at various industry conferences.

Confidential information constitutive of “trade secrets” will no longer be protected as such if it has been disclosed to the public, for example by being included in a patent application.

⇒ Have a policy on the classification and documentation of “trade secrets”.

⇒ Label and distinguish between

- Category 1/public or non-confidential information,
- Category 2/ confidential information, and
- Category 3/information constitutive of trade secrets

⇒ Train all your employees and contractors on how to maintain confidentiality, and also on how to prevent infringement of third party IP rights (having your employees use confidential information learned from their previous companies is likely to result in the contamination of your own “trade secrets” and potential liability ).

⇒ Be prepared to provide sufficient detail to show why information is constitutive of “trade secrets” and must be protected and also that the company took “reasonable efforts” to protect it.

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This is not intended to be a substitute for specific legal advice or a legal opinion.

For specific advice, please contact:
Corporate / M&A Specialist
E ramona.tudorancea@loebsmith.com
www.loebsmith.com

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The Cayman Islands have now brought into effect the long-awaited Limited Liability Companies Law, 2016 (the “LLC Law”) which introduces a new Cayman Islands limited liability company (an “LLC”). The LLC Law was published on 8th June 2016 but had not been brought into effect until 8th July 2016 in order to provide the Companies Registry with sufficient time to implement internal systems for dealing with registration of new LLCs. The Companies Registry is currently undertaking pilot testing of its internal systems and has advised that it expects to be able to accept registration applications for new LLCs before 15th July 2016.

Key Features of Cayman LLCs

An LLC formed under the LLC Law will be similar in structure to that of the Delaware LLC as the LLC Law is broadly based on the Limited Liability Company Act in the State of Delaware. However, the LLC Law has also preserved the broad legal principles applicable to Cayman Islands companies and the rules of equity and common law. Section 3 of the LLC Law expressly states that: “The rules of equity and of common law applicable to companies registered in the Islands, as modified by the Companies Law and any other Laws in force in the Islands applicable to such companies, shall apply to a limited liability company, except in so far as such rules and law or modifications thereto are inconsistent with the express provisions of this Law or the nature of a limited liability company”.
An LLC is a corporate entity which has separate legal personality to its members.
Formation of an LLC is straightforward. It requires the filing of a registration statement with the Companies Registry and payment of the requisite Government fee.
An LLC must have at least one member. It can be member managed (by some or all of its members) or the LLC agreement can provide for the appointment of persons (who need not be members) to manage and operate the LLC.
The liability of an LLC’s members is limited. Members can have capital accounts and can agree amongst themselves (in the LLC agreement) how the profits and losses of the LLC are to be allocated and how and when distributions are to be made (similar to a Cayman Islands exempted limited partnership).
An LLC may be formed for any lawful business, purpose or activity and it has full power to carry on its business or affairs unless its LLC agreement provides otherwise.
An LLC may (but is not required to) use one of the following suffixes in its name: “Limited Liability Company”, “LLC” or “L.L.C.”.
The following statutory registers are required to be maintained for an LLC but, similarly to the requirement for a Cayman Islands exempted company, only an LLC’s register of managers is required to be filed with the Companies Registry:

1. a register of members;
2. a register of managers; and
3. a register of mortgages and charges.

The register of managers and register of mortgages and charges are required to be maintained in a manner similar to the register of directors and register of mortgages and charges for a Cayman Islands exempted company.

Subject to any express provisions of an LLC agreement to the contrary, a manager of the LLC will not owe any duty (fiduciary or otherwise) to the LLC or any member or other person in respect of the LLC other than a duty to act in good faith in respect of the rights, authorities or obligations which are exercised or performed or to which such manager is subject in connection with the management of the LLC provided that such duty of good faith may be expanded or restricted by the express provisions of the LLC agreement.

Expected Benefits of the New LLC Vehicle

Under the LLC Law, it is now possible to:

Form and register a new LLC;
Convert an existing Cayman Islands exempted company into an LLC;
Merge an existing Cayman Islands exempted company into an LLC; and
Migrate an entity formed in another jurisdiction (e.g. Delaware) into the Cayman Islands as an LLC.

It is expected that the new Cayman Islands LLC structure will be attractive for general partner entities and other carried interest distribution vehicles. It may also prove attractive for management company entities and possibly for offshore funds in order to align the rights of investors between onshore and offshore investment funds in a master/feeder structures.

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For Specific advice on Cayman Islands limited liability companies, please contact either of:

E: gary.smith@loebsmith.com
E yun.sheng@loebsmith.com