Bermuda funds - more than a token offering?
First published in The Royal Gazette, Legally Speaking, November 2018
Bermuda continues to attract technology-based start-ups. With each new start-up comes the question of what types of digital transactions are permitted under our legal and regulatory regime, including the ability to offer tokenised funds.
By a tokenised fund, we are referring to a fund that represents investors’ interest in the fund through the issuance of digital assets. There are several reasons why interest is being generated in tokenised funds, which depend upon the type of token to be issued and the type of fund being launched.
The purpose of this article is not to provide an exhaustive explanation of why one may look to launch a tokenised fund but to explain whether, if one wishes to do so, whether Bermuda can facilitate such an offering and, if so desired, (e.g. to satisfy investor demand for a regulated product), bring such a fund within the scope of the Investment Funds Act 2006 (Act).
The Act defines an investment fund (fund) as any arrangement in relation to property of any description, including money, that has the purpose or effect of enabling persons taking part in it, to participate in or receive profits or income from acquiring, holding, managing or disposing of the property or sums paid out of such profits or income.
The Act contains certain requirements for the formation, operation and offering of interests in Bermuda investment funds. To be regulated by the Act, the arrangements represented by the fund must have certain features. What is commonly a deciding factor is whether investors (Participants) are entitled to have their “units” redeemed in accordance with the fund’s constitution and prospectus.
The key question is then whether tokens issued by a tokenised fund can constitute “units”. The Act defines a “unit” as “the rights or interests however described (emphasis added) of the Participants in a fund”. Such a broad definition means that it is possible for a fund to be within the scope of the Act and subject to the regulation of the Bermuda Monetary Authority, as a result of the issuance of “tokens” to investors.
Tokenised funds are regulated in the same manner as traditional funds. Therefore, specific service providers may be mandated under the Act depending upon the type of fund classification that the tokenised fund falls within. Where a tokenised fund is offered to a limited number of investors, it may be possible to file an exclusion from the Act on the basis that the fund is a private fund.
As with non-tokenised funds, the responsibility for the prevention of money laundering and terrorist financing must be considered. A tokenised fund will likely be required to adopt and maintain a robust anti-money laundering and anti-terrorist financing (AML/ATF) programme, under which investors will be required to provide reliable evidence to verify their source of funds used to pay for the tokens, and their personal information including their identity, residential address, date and place of birth, and nationality if the investor is an individual.
If an investor is a legal entity or arrangement (except where they may be listed on an appointed stock exchange), the fund may need to carry out more comprehensive due diligence to understand and verify matters relating to beneficial ownership and control.
In addition to considering the provisions of the Act and AML/ATF obligations, advisers will need to discuss with their clients whether it will also be necessary to comply with the provisions that have been introduced to Bermuda in connection with initial coin offerings.
In summary, if someone is seeking to launch a tokenised fund in a well-respected and regulated fund jurisdiction, Bermuda is not only able to offer a solution but one that is, save for the current initial novelty surrounding the tokenisation of a fund, well established. Being able to offer such a tried and tested product is great for investors as well as those seeking to raise capital -- and presents a real opportunity for Bermuda to expand its current fund focus.
This column should not be used as a substitute for professional legal advice. Before proceeding with any matters discussed here, persons are advised to consult with a lawyer.