By Robin McCauley, Manager - Client Services, Equiom Isle of Man
Collective investment schemes can, on the surface, appear to be an appealing alternative to facing the financial pressures and bank lending challenges associated with personal investing. However, they come with a significant cost and substantial administrative burden, due to the inherent reporting obligations associated with this type of special purpose vehicle.
Isle of Man closed-ended investment companies (CICs) are different thanks to their cost effectiveness and straightforward administration requirements.
What is a CIC?
A CIC is a body corporate which:
- seeks to raise capital from participants for the primary purpose of investing that capital in accordance with a defined investment policy
- under the documents constituting the scheme, the rights of participants, represented by shares or securities of that body corporate, are not redeemable out of funds provided by the CIC at the election of the holders of the shares or securities
Why choose the Isle of Man for a CIC?
The Isle of Man’s dynamic regulatory regime makes it a jurisdiction of choice for CICs, thanks to its flexible legislative framework and the criteria required to keep CICs outside the scope of funds legislation. Other jurisdictions where legislation is more rigid, or where such arrangements would be deemed as a ‘collective investment scheme’, may place an additional burden of reporting obligations and cost onto the scheme operators and / or participants.
Could a CIC be considered to be a fund or collective investment scheme?
Under Manx law, up until November 2017, no company other than an open-ended investment company was regarded as a collective investment scheme. As long as shares were not redeemable at the option of the holder, and the fund itself did not provide a secondary market for the shares, there was no need to consider the potential impact of fund legislation in connection with CICs.
With effect from 1 November 2017, the Isle of Man Government revoked the Collective Investment Schemes (Definition) Order 2008, and replaced it with the Collective Investment Schemes (Definition) Order 2017 (the Order). Introduction of the Order meant that certain CICs previously considered to fall outside of such fund related legislation could potentially be brought into scope. For example, certain CICs may constitute a collective investment scheme if its units are promoted by, or on behalf of, its board in such a way that it is intended to be available for participation by the public or any section of it, unless an exemption applies.
What exemptions are available?
Exemptions will apply to a company if:
- the company’s constitutional documents prohibit offers to the public or any section of it and the number of participants is limited to a maximum of 49
- there is a minimum initial investment level for its units of at least US$100,000 for each participant
- the units are only promoted to particular classes of potential investor
The investors that fall within the exemptions set out in the Order are:
(a) A person, body corporate, partnership, trust or other unincorporated association whose ordinary business or professional activity includes acquiring, underwriting, managing, holding or disposing of investments, whether as principal or agent, or giving advice about investments
(b) Any director or partner of or consultant to a person referred to in (a)
(c) A functionary, or an associate of a functionary, to the CIC
(d) An employee, director or shareholder of, or consultant to a person in (c), who is acquiring the investment as part of his remuneration, or an incentive arrangement or by way of co-investment
(e) A trustee of a family trust settled by or for the benefit of, one or more persons referred to in (c) or (d)
(f) A trustee or operator of any employment benefit or executive incentive scheme, or trust established for the benefit of persons referred to in (c) or (d), or their dependents
(g) A government, local authority, public authority or supra‐national body in the Isle of Man or elsewhere
(h) A company, partnership, trust or other association of persons which has (or which is a wholly‐owned subsidiary of a body corporate which has) assets of at least US$1,000,000 available for investment
(i) An individual with a net worth, or joint net worth with their spouse, greater than US$ 1,000,000, excluding their principal place of residence
Why consider an Isle of Man CIC?
Isle of Man incorporated CICs are most commonly used as property funds, whereby the scheme promoter may engage a local CSP to establish the corporate structure and maintain its integrity throughout the life cycle of the investment. This ensures impartiality between the interests of the scheme promoter and the scheme investors / participants in the event that a difference of opinion were to arise.
Other generic benefits of using Isle of Man incorporated Special Purpose Vehicles (SPVs), which extend to such CICs, include:
- The robust Anti Money Laundering (AML) regulatory framework to which the local CSP would adhere, enabling the scheme promoter to be confident that the investors / scheme participants (if they are not already known to them) are bone fide, and meet the appropriate criteria
- Banks & lending institutions view the Isle of Man as a ‘creditor friendly’ jurisdiction, should the scheme be part funded by debt finance
- If required, expedited VAT registration in the Isle of Man (which forms part of the same VAT network as the UK) is possible
- Unlike UK Companies House, details of shareholders of Isle of Man companies are not made public
- An Isle of Man company can have its shares denominated in any currency without a requirement to specify authorised share capital
- The similarity of Isle of Man law to English law enables advisors to be comfortable dealing with Isle of Man companies
- Less ‘red tape’, in the form of streamlined accounting and filing requirements and no need to hold annual general meetings
- The ability to declare and pay dividends and make capital distributions (including distributions of assets in specie) subject only to meeting a statutory solvency test, allowing a streamlined return of capital to investors
- Tax neutrality of the Isle of Man SPV
In summary CICs can be, in certain circumstances, ideal as a special purpose vehicle, particularly to structure the acquisition of real estate. The specific exemption legislation on the Isle of Man, keeping such arrangements outside the scope of collective investment schemes, combined with the wider generic benefits of using Isle of Man SPVs make it a jurisdiction of choice for this type of vehicle. For further information in relation to setting up a CIC please contact Robin McCauley.
This article has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The article cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact Equiom to discuss these matters in the context of your particular circumstance. Equiom Group, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this article or for any decision based on it.