Ramparts appoints Ravi Viroomal as Business Development Director
Ramparts, a leading Gibraltar law firm and fiduciary group business, today announced the appointment of Ravi Viroomal as Business Development Director.
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The rapid growth and increasing popularity of cryptocurrencies have led to the emergence of numerous crypto funds aiming to capitalise on this growth market. Setting up and managing a crypto fund is not simple so careful consideration of the key issues is required from the outset.
Establishing and operating a successful crypto fund requires careful consideration of various factors, including regulatory compliance, investment strategies, risk management, and operational infrastructure. Agility in the face of a frenetically fast-changing technology and security (and securities law) landscape is key.
Commercially, you need to establish trust and show how the investor could not easily replicate the risk-reward profile of your fund. Most importantly, you need to have the investors’ interests at heart in how you operate the fund and ensure your reward structure is aligned with their returns. Invest some of your capital or return in your fund.
Credible people are significant investors in anything they are willing to sell to other people.
This article explores some of these key elements to seek to provide valuable insights for individuals and entities interested in venturing into the crypto fund space.
The Crypto markets and sectors are often compared to the traditional finance (TradFi) markets on steroids. Rapid change and volatility are the only certainty in the crypto asset and crypto fund sectors. We often speak to prospective fund managers who believe it will be relatively easy to raise money, but that is not our experience.
Creating a Unique Selling Point (USP) and explaining why you and your chosen team with your investment strategies are the best choices for capital allocation takes time and requires planning and trust building.
The crypto fund market continues to grow (though not as quickly as in the heyday of 2017-2018!)
Crypto funds come in all different shapes and sizes. As a specialist crypto fund administrator Ramparts has helped set up and manage:
If you want to play in this space, it is essential to consider what gives you and your fund an edge in this competitive landscape.
Investors can choose to allocate capital to BTC, ETH or a range of crypto assets relatively easily themselves – so the key question for a budding crypto fund manager is:
How does your fund (create alpha)? By increasing your investors potential returns whilst reducing the investors risk and time commitment
The answer may be:
There are other edges, but ultimately it usually comes down to how difficult it would be for an investor (or other fund manager) to replicate what you do.
In the EU, crypto funds are regulated under the Alternative Investment Fund Managers Directive (AIFMD). Whilst the UK and Gibraltar are no longer in the EU, the regulation of funds is still substantially the same as the EU.
AIFMD and the UK and Gibraltar equivalent regimes regulate most crypto funds (Alternative Investment Funds – AIFs) primarily at the fund manager level. This approach allows for different regulatory treatment of independent fund managers whose business is to manage a range of funds as a professional service from the smaller self-managed fund managers.
Smaller self-managed funds and their fund managers can operate with a lighter touch on the basis that the fund manager is responsible for their fund and not offering themselves on the market as an independent fund manager. See, for example, the UK FCA AIFM guide.
The lighter touch registration and reporting regime is open to self-managed fund managers that manage AIFs whose assets under management do not exceed:
(i) €100m – for open-ended funds; or
(ii) €500m – for closed-ended funds provided that the portfolio(s) under management were not leveraged and that investors had no redemption rights exercisable for five years following the date of the initial investment in each AIF.
In addition, following Brexit Gibraltar has implemented a dual funds regime for global funds that allows opt-out from some of the restrictive elements of AIFMD that apply to larger fund managers and funds. This is because many crypto funds are not EU-focused and many aspects of AIFMD are not fit for purpose for crypto asset funds, since they do not use the same depositary, custodian and regulated financial market and financial instrument infrastructure.
You should work with a licensed fund administrator. As a regulated administrator, they are responsible for ensuring your fund complies with all KYC and source of wealth requirements for investors, management of the AML and CTF policies and procedures, suspicious transaction reporting and more widely the various obligations in respect of automatic exchange of financial information between jurisdictions under the OECD Common Reporting Standards (CRS) and US Foreign Account Tax Compliance Act (FATCA) requirements.
The fund administrator will work with you and your team to try to ensure that your marketing activities, onboarding processes and other operational activities as a fund and a fund manager are compliant with the key regulatory requirements.
Gibraltar offers a range of different fund vehicles which can be established as limited companies, limited partnerships or unit trusts. In Gibraltar, we tend to use limited company structures more often than partnerships and both are more commonly used than unit trusts.
We also have a Protected Cell Company (PCC) regime for EIFs that enables EIFs to operate with multiple cells having different assets, liabilities, investors and trading strategies.
Funds are established in accordance with the Financial Services Act 2019 and respective underlying regulations.
Private funds:
A private fund is a collective investment scheme which can be offered privately to a defined identifiable group of up to 50 investors. Such limit includes potential investors to whom the offer is communicated but who choose not to invest. Private funds are not authorised by the GFSC and are intended for early-stage or close-knit funds (e.g. when raising capital from friends and family, or people within the fund manager’s close network).
As per EIFs (see below), the offer document should set out the fund strategy, operations, costs, restrictions and risks. Directors are obliged to follow the investment objectives in the offering document.
Although independent directors are not required by regulation, it is important to consider the tax impacts of where management and control may be performed (see below).
Experienced Investors Funds (EIFs)
EIFs are fully regulated by the GFSC and may be marketed to experienced investors internationally under any applicable private placement regulations (and potential exemptions) in the jurisdiction of the residence of investors. There are no minimum requirements governing the invested capital.
Experienced investors (individuals, body corporates or trusts) must fall into one of the following categories:
EIFs may be listed on an exchange such as the Gibraltar Stock Exchange and there are no legislative restrictions on accepting US investors provided the fund and manager adhere to the relevant US securities law.
EIFs are required to appoint two authorised EIF directors at least one of whom is resident in Gibraltar (unless regulatory dispensation is obtained).
Most of the funds we are involved with are either private funds or experienced investor funds that use private placement memorandums – since the funds are not offered to the public or listed on a regulated trading venue.
Much of the work for crypto funds offering documents involves being very clear about the high-risk nature of those funds as an investment class – in addition to ensuring the offer document reflects the intended investment strategy to be deployed.
The offer document must also allow sufficient flexibility and agility to the fund manager given the fast pace of the crypto markets and ever-changing crypto security issues. Crypto funds should also refer to their security and custody arrangements and maintain up-to-date treasurer or custodian policies
Funds are usually structured with a corporate or partnership fund vehicle and a limited company fund manager (also known as the investment director). The investment director company will receive the performance fee and management fee for managing the fund. The ‘carried interest’ of the fund manager may be structured in different ways as needed to suit the fund manager (including by way of founder shares and dividends or the issue of management participation shares).
The fund and the fund manager will also decide how the expenses of the fund are met and ensure the offer document makes this clear to investors.
It is crucial to distinguish between the tax treatment of the fund vehicle and its activities and assets from the tax treatment of the fund manager. Sometimes the Gibraltar fund will have a fund manager established or operating in another country and that country’s tax laws are relevant to how their carried interest will be characterised and taxed. In addition, the tax treatment of growth in value of fund assets, management fees and performance fees can be different.
A successful crypto fund requires a wide range of supportive stakeholders to succeed.
The difficulties of securing and maintaining good banking and payment relationships in this sector must not be underestimated. In addition, the high-profile collapse of FTX has made it harder and more expensive to engage with auditors.
Your fund administrator will work with you to identify suitable banks, payment partners and auditors.
The major regulatory issues to be mindful of are the financial promotions, securities offering and fund manager restrictions or registration requirements that exist in many countries. Whilst experienced investor funds may be able to benefit from National Private Placement Regimes (particularly because they exclude retail investors), it is important to understand the scope of such regimes and whether registration for any exemption is required by the fund or the fund manager (e.g. such as the US regime for offer documents and foreign fund managers that manage investments of US Persons). We administer funds that are registered with the SEC and other bodies under applicable exemption regimes in the US.
Some key conduct points to always have in mind:
Unlike traditional securities, the valuation, reporting and audit of cryptoasset values can be difficult. There is a limited number of traditional reporting tools and this means that the fund manager needs to work closely with the fund administrator to agree on a suitable methodology and ensure investors are made aware of the reference tools being used for valuation purposes.
It would not be an article about the difficulties of operating in the crypto space without referencing the unique challenges of finding banks and other payment service providers to enable subscriptions and redemption and payment of expenses. Ramparts works closely with a range of reputable payments companies to assist the fund manager find a suitable payment solution for their fund.
In our next articles, we will cover:
This summary outlines some of the key issues involved in setting up and managing a crypto fund successfully. While the crypto fund industry offers significant opportunities, it is essential to consider the key elements of success when setting up for fund structure and dealing with prospective investors.
By understanding these key elements, aspiring fund managers can navigate the complexities of the crypto market and establish a solid foundation for long-term success in this dynamic and rapidly evolving industry.
Ramparts is a licensed fund administrator who specialises in crypto fund administration. We administer funds with over $800m in NAV and work with other law firms in Gibraltar as well as advisors in other jurisdictions (such as the BVI) to act as fund administrators.
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