There may be circumstances when a privately controlled investment company can be attractive for small groups of connected parties.
What has become known as a ‘Friends & Family’ fund vehicle can facilitate effective pooling of investor capital.
The Isle of Man has long recognised such structures should be free from prescriptive regulatory requirements which are appropriate for publicly offered structures.
An exempt fund is a popular option provided there are no more than 49 investors at any one time and interests in the fund are not offered to the public.
Because it is regarded as a private arrangement, it is not subject to separate regulation and can be established relatively quickly and economically by licensed fund administrators. They have proved to be particularly suited to incubator funds, family office investments and as an alternative to typical company and trust structures.
The Abacus funds team has set out the benefits of an exempt fund:
1. Targeting like-minded investors
Connected parties with shared goals and ambitions can pool resources, which can then be professionally managed.
2. Specialised investment strategies
An exempt fund allows managers to pursue strategies that might not be feasible under more retail focussed regulatory frameworks, as there are no restrictions on asset classes.
3. No minimum subscription
There is no prescribed initial regulatory minimum investment required.
4. Asset protection
An exempt fund can offer protection against creditors, particularly important for preserving wealth.
5. Speed to market
Due to fewer regulatory hurdles, exempt funds can be established and launched more quickly than regulated funds. This is particularly advantageous when timing is critical, such as when responding to market-sensitive investment opportunities.
6. Cost-effective structures
Exempt funds are cost-effective to establish and maintain because they avoid many of the compliance costs associated with regulated funds. In some cases, the fund will be audit exempt making them attractive to fund managers and investors looking to minimise overheads.
7. Documentation
There are no prescriptive requirements in respect of private placement memorandum or the appointment of a custodian.
8. Regulation
Where exempt funds are administered by a regulated independent fund administrator investor benefit from a layer of scrutiny and security.
9. Spreading investing
Investors can be legally committed to providing future funds but drawdown may be spread over a long period of time. This means that there is certainty of financing a project without unnecessarily tying up capital prior to it being required.
10. Future proofing
As an exempt scheme grows and the investment strategy is proven, there may be good reasons why it would become appropriate to decide for public offerings or to exceed the investor limit. In these circumstances it is a straightforward process to convert to a higher category scheme such as a specialist fund.
No action should be taken on the basis of this note, nor should it be construed as amounting to tax, legal or VAT advice. Suitable, specific and professional advice should always be obtained in respect on any particular issue.
