Offshore Fund - Regulation

Regulation

Typically, the regulatory regime will take a two tier approach, making a distinction between funds which are offered generally to members of the public, which require a high degree of regulation because of the nature of potential investors, and non-public funds on the other (for example, in the British Virgin Islands, see the Mutual Funds Act 1996, which applies a three-tier regulatory approach in this manner). Non-public funds are usually either categorised as private funds or professional funds. Typically, investors in non-public funds can be assumed to be sophisticated because of the nature of the offering – there may, for example, be a high minimum initial investment, say US$100,000, and/or a requirement that investors establish that they are "professional investors". Or the fund will be designed for a small and select group of investors and the constitutional documents will limit the number of investors, say to no more than 50. Although most offshore jurisdictions permit funds to obtain licences to operate as public funds, the onerous regulatory requirements associated with such licences usually means that only a small minority of offshore funds are available for subscription by the general public.

The tax advantages of the funds encourage high tax countries to apply some draconian laws to limit their distribution. Nonetheless, the vast majority of offshore funds operate primarily in investor markets in the United Kingdom and the U.S.A., although they are usually subject to ordinarily taxation in those jurisdictions as they apply to distributions of income arising from foreign sources.

Most offshore domiciling of funds tends to be regulatory driven rather than tax driven. The relative absence of regulation relating to leveraging and investment strategies in offshore jurisdictions encourages higher risk funds, such as hedge funds, to form themselves in those jurisdictions. The vast majority of the world's estimated 9,000 hedge funds are formed in Cayman Islands, British Virgin Islands, Luxembourg or Bermuda.