Offshore jurisdictions are facing regulatory challenges and growing onshore competition, but the Channel Islands seems to be bucking the trend. Jersey, with its light-touch regulation, is emerging as a preferred destination for Asia-focused funds, while the Guernsey-headquartered stock exchange offers attracting listing opportunities for debt issuers. So, what are the trends to take note of when charting the Channel Islands?
Fund product offerings typify less regulation, lower costs and faster speed to market
In the past few years, we have seen a shake up in the offshore and onshore funds industry in Asia. Some onshore jurisdictions are offering up new and exciting fund products – such as Singapore’s variable capital company (VCC) and Hong Kong’s open-ended fund company (OFC) as well as the limited partnership fund regime – to both rival and complement more well-established fund structures.
Meanwhile, certain jurisdictions in the offshore world continue to upgrade their regulations to remain aligned with the gold standard of international practices, including the Cayman Islands and the British Virgin Islands (BVI) bringing closed-ended funds into regulation for the first time.
There has been much discussion in Asia around the changing landscape for funds and an increase in competition between onshore and offshore fund products. While the author does not expect that the Cayman Islands will disappear from the world stage as the go-to funds jurisdiction of choice, what has become clear is that fund managers, investors and advisers have more choice and options than ever before when it comes to setting up their fund vehicle and selecting their jurisdiction.
Among the available options, there is one jurisdiction that has been quietly growing in the fund space and that is worth paying attention to: Jersey, in the Channel Islands. Jersey is home to the world’s largest private equity fund and some of Europe’s largest private equity, infrastructure, venture capital and private debt funds. With a long history in Asia for private wealth structuring for ultra-high net worth individuals and high net worth families, Jersey has been steadily gaining traction in US and Asian markets.
As at the end of June 2019, the fund assets serviced in Jersey rose to US$481.2 billion, up 17.1% from 2018, with private equity/venture capital and infrastructure funds remaining the most popular fund types, according to the 25th annual Monterey Jersey Fund Report, 2020.
In 2017, Jersey overhauled its funds regime into a simplified framework, offering various fund options and products on a sliding scale of regulation, largely depending on the investor profile and where the fund is being marketed. The options range from “notification only” funds to more regulated forms of fund structures.
Jersey now stands as a serious contender in the funds space and, contrary to some popular misconceptions, it offers products that have lighter regulation, lower costs and faster “speed to market” than its offshore and onshore counterparts. Apart from notification only funds, all Jersey funds are eligible to be marketed into the EU and European Economic Area (EEA), in accordance with the Alternative Investment Fund Managers Directive (AIFMD), through national private placement regimes and the passporting regime, once available.
Jersey offers a wide range of corporate or fund vehicles that are familiar, including companies, limited partnerships (including those with their own separate legal personality and limited liability partnerships), unit trusts, cell companies similar to the Cayman SPC and Singapore VCC and, soon to come, limited liability companies (LLCs). Of the various fund products available, on the lightest end of the regulatory scale are: (1) the Jersey Private Fund (one of the most popular fund vehicles); and (2) a notification only fund, which is also known as an Eligible Investor Fund. A summary of the key features of these funds is below.
Jersey private fund
- Maximum of 50 investors at any time and a maximum of 50 initial offers.
- Must not be listed on a stock exchange. May be open or closed for redemptions by investors.
- Investors must qualify as professional investors and/or subscribe for interests with a value of at least £250,000 (US$322,000).
- No limit on fund size, no investment or borrowing restriction.
- A simple consent is required from the regulator, the Jersey Financial Services Commission (JFSC), under local legislation, which takes around 48 hours.
- A non-Jersey administrator can be appointed.
- No need to prepare a formal offering memorandum, but investors must sign a simple investment warning (usually included in the subscription document).
- No audit requirement.
- The fund is not regulated by the JFSC on an ongoing basis.
Some additional requirements apply if the fund is actively marketed into the EU/EEA, as defined in the AIFMD, but it is possible to upgrade a Jersey Private Fund so that it may be marketed into the EU/EEA at a later stage, and that process is relatively straightforward and a well-trodden path.
Costs: As at the time of writing, the initial application fee charged by the JFSC for a Jersey private fund without EU/EEA marketing is £1,340 (US$1,762) and the annual fee payable to the JFSC is £1,070.
Notification only fund
- Cannot be marketed in EU/EEA countries, but suitable for all other investors.
- Investors must be eligible investors only (any one of 11 categories, one of which is an investor of US$1 million or more).
- May be listed, provided that the
exchange permits transfer restrictions to ensure that only eligible investors are allowed to invest in the fund.
- May be open or closed for redemptions by investors.
- No limit on the number of investors, no investment or borrowing restrictions.
- No authorization process, simply file a notice.
- A non-Jersey administrator can be appointed.
- No need to prepare a formal offering memorandum, but must obtain a written acknowledgement from each investor confirming their acceptance of the risks involved in the fund, typically dealt with in the application form.
- No audit requirement for limited partnerships and unit trusts.
- No ongoing regulation.
Costs: As at the time of writing, there is no notification or annual fee charged by the JFSC.
Other unregulated vehicles
Outside of the funds regime, an investment vehicle may not be required to be regulated at all in Jersey, which means lower costs and requirements. Investment vehicles that are not funds vehicles, which hold a single asset, or which carry on a business such as property development, generally fall outside Jersey’s regulations on funds.
An investment vehicle will not be regulated as a fund in Jersey unless it is a scheme or arrangement for the investment of capital which: (1) has as its object, or one of its objects, the collective investment of capital; and (2) operates on the principle of risk spreading, or units are to be bought back or redeemed continuously, or in blocks at short intervals on the request of the holder and out of the assets of the fund, or units will be issued continuously, or in blocks at short intervals.
Carey Olsen Singapore
10 Collyer Quay #24-08
Ocean Financial Centre
Tel: +65 6911 8310
There is an emerging trend for issuers in the region to list debt on The International Stock Exchange
The International Stock Exchange (TISE) is a unique listing and trading venue that is based in Europe but outside of the EU. It is located in the Channel Islands of Guernsey and Jersey, with another office in the Isle of Man. TISE was established in 1998, and today there are more than 3,000 securities with a total market value of over £400 billion (US$522 billion) listed on the exchange.
Equity listings comprise a pool of predominantly “domestic” trading companies, as well as SMEs based in the UK and investment vehicles such as Guernsey and Jersey domiciled funds and UK Real Estate Investment Trusts (REITs). Debt securities make up the largest proportion of listings on TISE, with issuers ranging from smaller UK corporates right through to multinational organizations.
The truly international nature of the market is reflected by the fact that there is a growing trend for Asian-backed issuers to list debt on TISE. These listings have included issuers that are incorporated in the region itself, for example Hong Kong, however often the issuing vehicles will be formed in the British Virgin Islands or Cayman Islands, although from a listing perspective there is no reason why these cannot instead be Guernsey or Jersey-domiciled entities.
Another key feature of these structures is that they are often issuing debt under New York law to investors who are in some cases qualified institutional buyers within the meaning of rule 144A under the US Securities Act of 1933, or outside the US (to non-retail noteholders) in compliance with regulation S under the Securities Act. To date, the issuances have typically comprised an interest coupon of between 5% and 15%, and a maturity of between one and five years, and often the arrangements include the presence of both a keepwell provider and a personal guarantor.
TISE played a role in a ground-breaking property deal when the exchange became home to US$4.1 billion worth of bonds, which were listed as part of the financing for what at the time was the world’s most expensive real estate transaction for a single building. The bonds were issued by CHMT Peaceful Development Asia Property to finance the acquisition of Hong Kong’s fifth-largest skyscraper, The Center.
The bonds were listed on TISE in two tranches of about US$3.3 billion tranche A notes, and US$800 million tranche B notes, with an 18-month maturity. The Jersey office of law firm Walkers acted as listing sponsor and adviser to CHMT Peaceful Development Asia Property, working with their counterparts at Ashurst in Hong Kong.
This is one of several Chinese-origin issuances that we have seen coming to TISE in the past 18 months. It follows a period of gradual but sustained growth following from the listing of three series of notes by China Cinda Finance Centre (2014) II Limited, in 2015. At the time, these notes represented the first securities to be listed on the exchange by an issuer with an ultimate parent company domiciled in China, which is China Cinda Asset Management Company. The offices of Mourant in Hong Kong and Guernsey worked with their counterparts at King & Wood Mallesons and Davis Polk & Wardell to complete the transaction.
These types of issuers are attracted to TISE by the fact that it is a specialist global debt market with sensible rules and providing a speedy turnaround of applications at a competitive price. TISE has a service delivery framework that means responses to initial applications are made within three business days from submission and subsequent reviews will be carried out within two business days. This provides issuers with speed and certainty, while the exchange is also able to consider more unusual transactions and move quickly to introduce new products.
TISE’s initial and annual fees are set according to product type, rather than varying by market capitalization like some other markets. For example, an issuer of one (non-high yield) security class of debt securities being marketed to non-retail investors would incur an initial fee of £5,200 (US$ 6,800) and an annual fee of just £1,200 (US$ 1,500). This is competitive with similar markets and more reasonable than larger exchanges, considerably so in some cases.
TISE’s listing rules, which include specific sections on equity and debt, have conditions for listing, disclosure requirements and continuing obligations, which are proportionate to the type of product and the targeted investor base. For instance, the disclosure requirements for debt being marketed to retail investors is enhanced in comparison to those being marketed to non-retail investors. This sensible approach to the application of regulation is appreciated by issuers, especially those whose investor base comprises institutional and professional investors seeking to hold securities for the long term.
Issuers can also rely on the fact that TISE is a member of the Quoted Companies Alliance (QCA) and its market authority is an affiliate member of the International Organization of Securities Commissions (IOSCO) and the World Federation of Exchanges (WFE). In addition, the UK tax authority, Her Majesty’s Revenue & Customs (HMRC), deems TISE to be a recognized stock exchange for the purposes of being an applicable listing venue for UK real estate investment trusts (REITs), an eligible market for investments from self-invested personal pensions (SIPPs) and individual savings accounts (ISAs), and issuers being able to avail of the quoted Eurobond exemption (QEE).
Other recognitions include the US Securities and Exchange Commission (SEC), the Australian Securities Exchange (ASX) and the German regulator, BaFin. The former means that TISE is approved by the SEC as a designated offshore securities market (DOSM) within the meaning of regulation S under the US Securities Act of 1933. The latter means that TISE-listed products are automatically eligible assets as part of the listed investment allocation of German insurance companies and German UCITS (undertakings for the collective investment in transferable securities) funds. UCITS funds from many European economic area (EEA) jurisdictions can also invest into TISE-listed products.
How to list on TISE
An issuer must have a TISE listing member appointed as a sponsor or listing agent while it is an applicant for listing, or is listed. The sponsor/listing agent acts as an intermediary between the issuer and the exchange, and responsibilities include preparing and lodging the formal listing application via the online information hub, TISE Portal.
To start, the issuer, via the sponsor/listing agent, files an initial submission with documents in draft. Once the submission meets the minimum information requirements, then an analyst is assigned to the application. The application is reviewed and a recommendation is made on the issuer’s suitability for listing, which is considered by the market authority’s listing and membership committee (LMC). Within three business days from submission of the initial application, and subject to payment of the initial fee, a comment letter is released which outlines the LMC’s determination in respect of suitability for listing, any remedial work which is required for the application, or additional information that is required to be submitted.
For each subsequent review of the application, TISE will respond within two business days. Final applications that are received before midday (UK time) can be considered and approved by LMC for admission at either 18:00 that evening or 08:00 the next morning. Once approved and subject to payment of the first annual listing fee, a grant of listing letter is released and the security is admitted to listing and trading at the relevant time, at which point it will be added the official list that is maintained on the TISE website.
TISE has seen growth in the number of listings coming to the market that are financing green, or wider sustainable and social initiatives. This has accelerated since the onset of the coronavirus (covid-19) global pandemic, when we have also seen issuances resulting from corporate refinancing across various sectors. Essential refinancing has tended to be in the highest covid-impacted sectors of retail, entertainment and travel, with the more opportunistic in the technology, media and telecoms sectors, which have fared better and even seen growth.
With 390 securities admitted in the first half of this year, TISE had the most successful first six months of a year since its inception, despite covid-19, and applications continue to hold up well as issuers from across the globe are attracted by the cost efficiency and responsive service offered by a nimble and agile market.
(This article does not constitute investment or other professional advice and should not be construed as a recommendation to buy, sell, hold or solicit any investment, security or other financial instrument or product)
THE INTERNATIONAL STOCK EXCHANGE (TISE)
PO Box 623, Helvetia Court,
Block B, 3rd Floor, Les Echelons,
St Peter Port, Guernsey, GY1 1AR