OFFSHORE Series | Changes in the Typical Structure and Registration Requirements for the Cayman Islands Exempted Limited Partnerships (ELPs)

Following the publication of our article "Understanding the Registration and Operation of Hong Kong Limited Partnership Funds (LPFs)" on the "China Wealth & Wisdom" WeChat official account, we have received inquiries from clients regarding the establishment of Hong Kong LPFs. During the discussions, clients also inquired about the advantages, disadvantages, similarities, and differences between Hong Kong Limited Partnership Funds (LPFs) and Cayman Islands Exempted Limited Partnership Funds (ELPs).

In light of this, we are sharing knowledge about Cayman ELP funds with you and other interested individuals.

Cayman Islands: A Haven for Global Private Funds

As a renowned offshore financial center, the Cayman Islands has consistently attracted cross-border investors from around the world. Apart from establishing offshore companies for investment or IPO purposes, the Cayman Islands is also a popular jurisdiction for the registration and establishment of global private funds.

It is often said that "Luxembourg is a paradise for mutual funds, while the Cayman Islands is a haven for private funds." So why do private funds flock to the Cayman Islands? The reasons are twofold:

Firstly, the Cayman Islands' fund regulatory laws are similar to those of the United States, which is recognized by many US fund managers and investors. This has a significant impact on private funds from other countries/regions. Secondly, Cayman ELP funds, with their flexible organizational structure and streamlined establishment process, are well-suited for time-sensitive Pre-IPO projects. Additionally, Cayman ELP funds can benefit from offshore tax exemptions, providing certain tax deferral advantages. The popularity of Cayman ELP funds speaks for itself, as they represent nearly 98% of the active 37,640 Cayman partnership entities as of the end of 2022.

Typical Characteristics of Cayman ELP Funds

Cayman ELP funds, widely embraced by cross-border private equity funds (particularly those in Asia), exhibit typical characteristics of limited partnership entities, including:

-No separate legal personality;

-Neither the ELP nor the partners are subject to taxation in the Cayman Islands;

-At least one general partner and one limited partner;

-All management responsibilities lie with the general partner;

-Limited partners bear limited liability, except in certain circumstances;

-In the event of insufficient assets, general partners bear unlimited liability;

-The fiduciary duties of general partners cannot be breached.

Typical Structure of Cayman ELP Funds

In a typical structure of a Cayman ELP fund, both general and limited partners are essential. The general partner is often a exempted company incorporated in the Cayman Islands. The general partner is responsible for the management and operation of the ELP fund and bears unlimited liability. On the other hand, limited partners typically have only a capital contribution obligation, as stipulated in the partnership agreement.

In general, the management of the ELP fund can be entrusted to an investment manager/advisor, who can oversee the management and consultancy of the ELP fund and make investments in various special purpose entities to generate fund investment returns. Qualified general partners can also serve as the investment manager/advisor themselves.

During the investment and operation process, ELP funds require support from third-party legal advisors, independent auditors, and administrative service providers to ensure legal compliance, audit compliance, and administrative compliance, among others. These elements form the basic structure of a Cayman ELP fund.

Establishment and Registration of Cayman ELP Funds

Registering an ELP fund with the Cayman Islands Monetary Authority (CIMA) involves two main steps:

Establishment of a Cayman Exempted Partnership Entity:

Name: The name of the Exempted Limited Partnership Entity must include the words "Limited Partnership" or the abbreviations "L.P." or "LP." If the name includes words such as "Bank," "Insurance," "Trust," "Royal," or others, prior consent from the Cayman Islands Registrar of Exempted Limited Partnerships is required. An additional foreign name (e.g., Chinese) can be added before or after the name.

Registered Office: A registered office located in the Cayman Islands is required, typically provided by a licensed service provider recognized by CIMA.

General Partner: A registered office located in the Cayman Islands is required, typically provided by a licensed service provider recognized by CIMA. The general partner can be an individual or entity residing, settling, incorporating, registering, or being registered in the Cayman Islands or elsewhere.

At least one general partner must meet the following conditions:

-If an individual, they should be a resident of the Cayman Islands.

-If a company, they should be incorporated under the Cayman Islands Companies Law (as revised in 2021) or registered under Part IX of the Cayman Islands Companies Law (as revised in 2021)

-If a partnership, they should be registered under Section 9(1) or Section 42 (if applicable) of the Exempted Limited Partnership Law.-

-If other persons, they should be registered under any other applicable law or regulation.

The general partner of a Cayman ELP fund is usually a Cayman Islands company.

Registration as a Cayman ELP Fund:

After establishing the Exempted Limited Partnership Entity, the next step is to apply to CIMA to register the Cayman ELP entity as an ELP-type fund.

Private funds must submit a registration application to CIMA within 21 days of receiving capital commitments from investors, except in cases exempted by Cayman regulations.

The application includes:

-Application Form (APP-101-77)

-Certificate of registration/formation of the ELP entity

-Constitutive documents, such as the partnership agreement

-Offering documents, summary terms, or other marketing documents

-Consent letters from CIMA-approved auditors and administrators (if applicable)

-Ownership structure of the private fund, among other details.

After submitting the application and paying the registration fees, a registration notification is typically received within 2-4 weeks.

At this stage, the Cayman ELP fund is registered and ready for actual operations. Day-to-day operations involve various fund compliance activities, including administrative management, financial reporting, tax reporting, auditing, valuation, custodianship, anti-money laundering, counter-terrorism financing, financing compliance, CRS reporting, and more.

Due to space limitations, we plan to provide further insights into Cayman fund compliance in future articles. If you have urgent compliance needs for your Cayman fund operation, please feel free to consult our professionals and initiate early discussions.

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