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ICOs in the Cayman Islands
We have experienced a rapid growth in Initial Coin/Token Offerings (“ICOs”) over the course of the last year and we have now advised on the launch of several dozen ICOs (both in relation to utility tokens and tokenized investment funds).
Whilst no specific legislation has been passed by the Cayman Islands Government in connection with ICOs and cryptocurrencies, it would be incorrect to say that ICOs are “unregulated”. The fact is that some of the existing legislation in the Cayman Islands can, and in certain circumstances will, be applicable. We have detailed the most relevant legal considerations when structuring an ICO in the Cayman Islands in a previous legal guidance note (Initial Coin Offerings in the Cayman Islands). But below is a shorter review. We suspect that more-specific guidance will be issued by the Cayman Islands Monetary Authority very shortly and that positive legislation will eventually be created.
The Securities Investment Business Law (2015 Revision) (“SIBL”)
SIBL is the Cayman Islands’ primary legislation relating to the regulation of investments in ‘securities’ and associated businesses. Essentially, no person shall carry on (or purport to carry on) securities investments business unless that person is the holder of an appropriate licence or is excluded from the requirement to hold a licence.
The term ‘securities’ is defined in SIBL by reference to a list of particular types of security (including shares, stock, partnership interests, instruments acknowledging indebtedness, options, futures etc.). This definition is narrower than that used in the US Securities Act of 1933 as there is no corresponding concept of an ‘investment contract’. There is instead just a specific list of types of security which does not specifically refer to a cryptocurrency or token.
As the definitions of ‘securities’ and ‘securities investment business’ are linked (i.e. securities investment business includes dealing in, managing and advising on securities), it is generally accepted that an ICO should fall outside of SIBL. As always, this depends on the particular circumstances of the ICO and so specialist advice should be taken on this point at the outset.
Mutual Funds Law (2015 Revision) (“MFL”)
In circumstances where the ICO is related to an investment fund (tokenized or otherwise) or some other form of investment vehicle, the possible application of the MFL should be considered.
In general terms, the MFL regulates “mutual funds” which is a company, unit trust or partnership that issues equity interests, the purpose or effect of which is the pooling of investor funds with the aim of spreading investment risks and enabling investors in the mutual fund to receive profits or gains from the acquisition, holding, management or disposal of investments.
The MFL should not therefore be a concern where the ICO is not intended to be an investment fund or engage in investment fund activity.
However, where the ICO is related to an investment fund or investment fund activity, the current definition of “equity interests” in the MFL becomes critical. Currently, the MFL defines “equity interests” as a share, trust unit or partnership interest that (i) carries an entitlement to participate in the profits or gains of the company, unit trust or partnership; and (ii) is redeemable or repurchasable at the option of the investor.
Accordingly, our view is that tokens issued by investment funds would not fall within the definition of “equity interests” in the MFL by virtue of them not being shares, trust units or partnership interests. However, those ICOs which are structured as tokenized funds should take specific legal advice in connection with their structure and, crucially, the rights attaching to the tokens as we expect regulatory changes to be announced by the Cayman Islands Monetary Authority (“CIMA”) imminently. We do not currently know what these changes will be but we would expect the definition of “equity interests” in the MFL to be extended to cover cryptographic tokens. Should that occur, tokenized funds which offer token holders the right to redeem would likely require registration with CIMA under the MFL and would need to also comply with the various requirements associated with such registration (including the requirement that each investor have a minimum subscription amount of US$100,000). We have several recommended solutions to address this until we have some specific legislation or guidance from CIMA.
The Hon. Alden McLaughlin, Premier of the Cayman Islands, told delegates at the 2018 Cayman Alternative Investment Summit: “the attributes that have made the Cayman Islands so attractive to the financial services sector – and the alternative investment space in particular – over the years will also ensure its relevance to the burgeoning financial technology space”. This further supports the view that the Cayman Islands Government intends to make the Cayman Islands the jurisdiction of choice for this new market.
How can we help?
We have seen a significant increase in activity in the cryptocurrency and ICO sectors and are well placed to provide advice on a prospective ICO and the launch of funds in this sector.
In addition to the incorporation of a Cayman Islands exempted company or limited liability company (through which the ICO would be operated), we can provide a full ‘health check’ service pursuant to which we would review the terms of the ICO against the Cayman Islands legislation referenced above and provide you with certainty as to which laws and regulations apply and how to operate in compliance with them.
Read the PDF on Initial Coin Offerings in the Cayman Islands.
This publication is for general guidance and is not intended to be a substitute for specific legal advice. Advice should be sought about specific circumstances.
If you would like further information please contact: