The announcement in early February of a new regulatory approach for Expert Investor funds in Jersey was good news for private equity and hedge fund promoters alike. It marked the advent of a new phase of development for Jersey’s already substantial funds industry, whose origins trace back to the early 1970s.
With the introduction of the new regime, in effect there will be two types of fund classification: expert funds and retail funds. Such clear classification is bound to assist promoters and their advisors, and speed up the process of establishing private equity expert funds.
Key features for Expert Funds are as follows:
· They can be authorised by the Jersey Financial Services Commission (JFSC) within a few days, using a more streamlined procedure.
· They can be established using any of the standard types of investment vehicle (e.g. unit trust, limited partnership, corporate vehicle) and there will be no investment or gearing restrictions set by the JFSC.
· They can be offered to Expert Investors only, on the basis of offer documents setting out all material information.
· They will have a Jersey based, regulated functionary which will be able to certify compliance with the JFSC’s requirements for Expert Funds. Approval will be given by the JFSC on the basis of this self-certification. The Jersey functionary will have a responsibility to monitor the investment manager’s compliance with a fund’s investment restrictions and to maintain adequate records in the Island.
The Expert Fund Guide
The criteria to establish an Expert Fund in Jersey are set out in a guide published by the JFSC. It sets out an authorisation process that reduces the traditional JFSC authorisation timescales to a matter of days. A standard application form must be filed, together with copies of the offer document, fees and a declaration certifying that the Expert Fund complies with the requirements of the guide. Same day authorisations should be available following publication of the Codes of Practice (see below) as the JFSC will then cease to review an Expert Fund’s offer documentation.
What are the criteria?
An Expert Investor is:
(a) an investor who invests a minimum of $100,000;
(b) a person or entity (or an employee thereof) whose ordinary business or professional activity includes acquiring, managing, or giving advice on investments; or
(c) an individual with a net worth greater than $1,000,000 (excluding principal residence); or
(d) an entity with assets available for investment of not less than $1,000,000 or every member, partner or beneficiary of which is an Expert Investor; or
(e) a functionary or an associate of a functionary to the Expert Fund (or an employee or shareholder thereof); or
(f) a trustee of a family trust settled by or for the benefit of certain persons referred to above; or
(g) a trustee of an employee benefit trust established for the benefit of certain persons referred to above; or
(h) a government or public authority.
Any application to include other types of “carried interest” investor within the definition of Expert Investor, which is a vital consideration for many private equity fund schemes, is likely to be treated sympathetically by the Commission further encouraging private equity fund promoters.
Expert Investors are deemed to be able to evaluate the risks of investing in an Expert Fund and to bear the economic consequences should the investment fail, and are therefore also deemed to require less regulatory protection in relation to the manner in which the Expert Fund is structured.
The detailed criteria are beyond the parameters of this article: a copy of the Guide is available at www.jerseyfsc.org
The structure of an expert fund
The investment manager should be appropriately qualified in accordance with the published criteria. The JFSC promoter policy does not apply to Expert Funds. An Expert Fund will need to appoint a suitable Jersey functionary, with a monitoring and record maintenance role.
If the Expert Fund is a Jersey company, it must have two Jersey resident directors. If it is structured as a limited partnership or unit trust, the general partner or trustee must be a Jersey entity with two Jersey resident directors.
The requirements for an Expert Fund’s offer document benefit promoters in providing clear guidance as to the requirements for offer documents. Any changes made to an Expert Fund will no longer require the prior approval of the JFSC provided the criteria in the guide continue to be met.
The JFSC are now accepting applications to establish Expert Funds. Anyone in the process of establishing a Jersey private equity fund will therefore need to consider whether their fund meets the Expert Fund requirements. It could save time and cost.
We believe Jersey’s fund industry is underestimated internationally. This new regime shows that Jersey is serious about attracting serious private equity fund players.
Tim Herbert is a partner at Mourant du Feu & Jeune.