There were over 170 of these schemes in operation during 2013, with a total net asset value of around $5.45bn*.
There are three categories of collective investment schemes in the Isle of Man – regulated (authorised funds, regulated funds and recognised funds), registered (specialist funds and qualifying funds) and unregulated (exempt schemes).
Exempt schemes are private arrangements, which cannot be marketed to the general public and are restricted to having no more than 49 investors.
There are no specific requirements as to the permitted investors, permitted underlying investments, composition of financial statements or functionaries, making the structure very flexible in its application and day-to-day operation where tax advice and total expense ratio support their existence.
The most appropriate corporate vehicle for any new exempt scheme is selected after specific tax advice, asset management and investor requirements are taken into consideration. The vehicle can range from a traditional 1931 Act company, a 2006 Act company, through to a protected cell company (PCC) or a limited partnership or unit trust arrangement.
Holding assets through a recognised Isle of Man domiciled legal structure is often advantageous for those seeking leverage or borrowing from financial institutions. Furthermore, assets can be segregated within an exempt scheme through the use of separate sub-funds, thus providing a simple and cost effective structure for housing family assets or different investment strategies.
While there is no requirement to appoint appropriately licensed functionaries to the exempt scheme, the use of an Isle of Man corporate vehicle will require an Isle of Man fiduciary service provider to deliver formation and ongoing compliance services.
In addition, a fund administrator will add significant value to the process of ongoing valuation of assets, the provision of accounting services, administration of other functionary agreements and in providing the comfort and transparency of additional party oversight. There are no specific obligations in respect of the composition of the board of directors of an exempt scheme.
Pre-approval does not need to be sought from the Financial Supervision Commission or any other body to launch an exempt scheme, nor are there any prescribed parameters as to the preparation or content of any offering document, investor certifications or minimum subscription levels.
Related to this, there are no initial or ongoing fees in the Isle of Man for the establishment or the operation of an exempt scheme, aside from the normal incorporation fee and annual corporate charge that are payable in relation to the use of an Isle of Man corporate vehicle.
Lower cost
These factors contribute to making the exempt scheme a lower cost solution that is quick to establish and administer thereafter for its appropriate user base. Added to this is the benefit of the island’s zero rate company tax regime.
There are no restrictions on the asset classes that can be used and held within the exempt scheme or around strategies of borrowing or leverage, making for a highly flexible arrangement.
The exempt scheme is suitable for a wide range of investment strategies, from long only traditional asset classes to hedging and speculative strategies, private equity or property. An exempt scheme can also hold non-financial assets, examples of which might include yachts, aircraft, art and antiques and intellectual property.
The scheme may contain one holding or many and it can obtain investment advice from any source. It is also flexible in that additional sub-funds can be added to accommodate different investment objectives or strategies or to segregate particular assets as was mentioned above.
An exempt scheme is not required to appoint a custodian and the fund is free to implement whatever arrangements are appropriate for holding its assets, whether through the use of a third party, or direct ownership of special purpose vehicles. Many investors appreciate the confidentiality provided by an exempt scheme arrangement.
There are no mandatory requirements relating to the audit of the financial statements of an exempt scheme, however the scheme can still take advantage of the availability of local accountancy and audit practises, should an audit be regarded as appropriate or a necessary requirement of its investor base.
As an exempt scheme grows, there may be good reasons why it would become appropriate to make arrangements for public offerings or to exceed the investor limit. In these cases, there is a process that would allow the exempt scheme to convert into a regulated or recognised category of scheme.
Because investments in an exempt scheme may not be offered to the public and may only be accepted on a private basis, they tend to represent a ‘friends and family’ arrangement. The nature of this private arrangement provides many benefits to high net worth individuals and private family offices who are seeking alternative structures for their assets in a recognised and highly regarded jurisdiction such as the Isle of Man.
