Brief - Isle of Man Exempt Schemes - Appleby

BRIEFIsle of Man Exempt SchemesThe Isle of Man has a full suite of fund options, butthe exempt scheme is a flexible and low cost vehiclethat is wholly outside the scope of fund regulation inthe Isle of Man and is suitable for use in relation tostart up private funds. This briefing note describesthe key features of the exempt scheme.Flexibility of Legal FormThe Isle of Man offers a full range of vehicles for useas fund structures. Corporate vehicles can beestablished either as traditional companies or underthe Island’s new Companies Act 2006, which offers astand-alone vehicle with minimal administrativerequirements, flexible capital structure and limiteddisclosure requirements.Both types of company can be established asprotected cell companies (“PCC”). PCCs areideal for use both in multi-class/single managerstructures and in multi-manager offerings.Isle of Man limited partnerships offer taxtransparency and a flexible legal framework. Alimited partnership may return capital prior to thewinding up of the partnership and, in order toprovide comfort to investors, the statute sets out a“white-list” of activities that will not result in limitedpartners being regarded as involved in themanagement of the partnership thereby prejudicingtheir limited liability status.The Isle of Man follows England in its trust law. As afund vehicle, the unit trust arrangement offers hugeflexibility and the security of knowing that thearrangements are not a matter of public record.Regulatory StatusFunds in the Isle of Man are generally subject toregulation commensurate with the category intowhich they fall. Regulatory requirements mayinclude the need to appoint appropriately licensedfunctionaries (such as an administrator, custodianand/or auditor), requirements as regards thepreparation and content of an offering document,investor certification obligations, minimumsubscription levels etc.Exempt schemes are an exception to theserequirements. If the criteria for exempt scheme statusare met, then the Isle of Man Financial SupervisionCommission or “FSC” regards the arrangements asbeing wholly outside the scope of fund regulation.Criteria for ExemptionThe criteria for exempt scheme status are two innumber. The first relates to the means of distribution;the second relates to the diversity of the investorbase. In detail, the criteria are as follows: interests in the exempt scheme may not beoffered (either by or on behalf of the fund orany investor) to the public or any section of it(i.e. the fund may only be offered on aprivate “friends and family” basis) and aprohibition to this effect must be included in

the constitutional documents of the fund; and the exempt scheme must have fewer than 50investors. This is a question of fact andrepresents an ongoing requirement.As an exempt scheme grows there may be goodreasons why it would become necessary orappropriate to make arrangements for public offeringsor to exceed the investor limit. In thesecircumstances it is a straightforward process toconvert an exempt scheme into a higher category ofscheme such as a Specialist Investment Fund or “SIF”or a Qualifying Investor Fund or “QIF”.Administration RequirementsAlthough there is no requirement for an exemptscheme to appoint a regulated fund administrator, theuse of an Isle of Man fund vehicle will require an Isleof Man fiduciary services provider to provideformation and ongoing compliance services. Theseare regulated activities in the Isle of Man and thereare a wide range of service providers available.If the use of a regulated fund administrator isregarded as necessary or appropriate, there are also anumber of experienced fund administration outfitsbased on the Isle of Man, from the global names toboutique providers. Overseas administrators may alsobe used in relation to an exempt scheme.Asset ManagementAs an unregulated vehicle, there are no restrictionson asset classes, trading strategies or leverage for anexempt scheme. Accordingly, the exempt scheme issuitable for any type of investment fund fromtraditional, long-only equity funds to hedge fundstrategies and from private equity to propertyinvestment.An exempt scheme can obtain investment advicefrom any source.The Isle of Man is unique among internationalfinance centers in continuing to have the capacity toattract and accommodate real business operations.The FSC has announced certain new investmentbusiness licence categories and refinements to itslicensing policy designed to attract hedge fundmanagement and related operations to the Island.Governance and Board PositionThere are no prescriptive requirements regarding thecomposition of the board of directors of an exemptscheme.No Regulatory pre-approvalsThere is no requirement for any pre-approval to besought from the FSC or any other body to launch anexempt scheme.FeesNo application fee is payable for the establishment ofan exempt scheme. However, an annual fee of £550is payable to the FSC. In addition, a modest annualcorporate charge is payable in relation to the use ofan Isle of Man corporate vehicle.InvestorsInterests in an exempt scheme may not be offered tothe public. Therefore investment may only beaccepted on a private basis from “friends and family”.As explained above, an exempt scheme is also subjectto a limit on investor numbers. The fund cannotaccept more than 49 investors and artificialarrangements for evading this limit are not effective.No Minimum SubscriptionAs an unregulated vehicle, there is a no prescribedregulatory minimum initial investment requirementfor an exempt scheme.TaxationThe Isle of Man offers a tax neutral environment forfund management operations. There are no capitaltaxes and the Island has a zero rate of corporate taxfor more taxpayers. This means that a corporate fundvehicle will benefit from a zero rate of income tax, aswill any fund management or administration business

ased in the Isle of Man. Some fees levied byfunctionaries based in the Isle of Man in respect ofservices to exempt schemes are subject to valueadded tax in the Isle of Man.Placing DocumentsAs an unregulated, private vehicle, there are nomandatory requirements relating to the preparationof a prospectus or offering document for an exemptscheme.Should you have any questions or requested forinformation please contact:Simon HardingPartnersharding@applebyglobal.comGill CrennellCounselgcrennell@applebyglobal.comClearly though, even in the context of a privateplacement, it is prudent to ensure that there is a clearstatement of the terms and statements upon whichinvestors may base their decision to invest.Accordingly, the preparation of a fairly detailedprivate placement memorandum is common.Flexible Custody ArrangementsThere are no prescriptive requirements for theappointment of a custodian in relation to an exemptscheme. The fund is free to implement whateverarrangements are appropriate for holding its assets,whether through the use of a third party, directownership or special purpose vehicles.No Mandatory AuditThere are no mandatory requirements relating to theaudit of the financial statements of an exemptscheme, although the Isle of Man does host offices ofall the major accountancy and audit practices shouldan audit be regarded as appropriate.BermudaBritish Virgin IslandsCayman IslandsGuernseyHong KongIsle of ManJerseyLondonMauritiusSeychellesShanghaiZurich