A TIME TO BUY: Crypto Funds during a bear market.

“A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful” – Warren Buffet.

During the recession of 2008, whilst most investors were selling their stocks, property and assets, Warren Buffet was buying.

Knowing when the time to buy has come is the difficult part, even the best make mistakes. In 2008 when Buffet called to buy, the market continued to drop well into 2009. That said, there is no better time to be prepared to buy than during times of economic turmoil. 

The “Oracle of Omaha” is no crypto advocate, having referred to Bitcoin as a “gambling token”. 

However, like any other market, in the crypto space, those with deep pockets and investment tact look to have their war chests ready to make the most of the market before it recovers. This period may well be the best time to set up investment vehicles or pool resources with other investors. Importantly, we must leave judgement of the market and when to invest to the experts, who themselves are unlikely to have a definitive answer. However, preparation and careful planning before taking the initiative to invest is never out of place. 

In recent months, we have seen many investment vehicles in the space signal that they are beginning to show interest in spending. 

For new and existing investors, it is important to carefully assess how they currently operate and weigh the options available in terms of jurisdiction and structure. This is especially true in the crypto space given the uncertainties faced in many jurisdictions and the cautious, or even aggressive, attitude of regulators towards activities involving crypto assets. 

When it comes to managing capital, the structure of choice will depend on the nature of the activities envisioned. These might consist of: 

• Persons or entities investing on their own account.  
• A handful of participants pooling resources to invest. 
• Experienced investors working with third party capital. 

In all cases, investors should err on the side of caution when deciding where and how to operate from. 

Gibraltar offering 

Gibraltar is renowned for its legal and fiduciary services and applies a legal system based on the common law and influenced by EU law. Early adoption means that service providers and advisors are now well versed when it comes to the peculiarities of the DLT space. 

An early adopter

One of the key benefits is legal, regulatory and tax certainty in what can often still be an uncertain business globally. Gibraltar has established a robust DLT regulatory framework which has been in place since 2018. From an early stage, there has been a clear push in Gibraltar to embrace new developments and not stifle growth. By creating a licensing regime early on, the jurisdiction has attracted many projects. Strict procedures and regulatory guidance have ensured that only the very best are licensed in Gibraltar. This has kept standards high and in turn attracted more projects to the jurisdiction.

Robust industry specific legal framework

Businesses in Gibraltar which carry out specific activities may be required to be licensed by or registered with the Financial Services Commission. Those which do not meet the requirements for existing licensing frameworks will know where they stand. 

Banking services 

It is widely known that when crypto assets are involved, opening an account with a fully licensed bank is very difficult globally. In Gibraltar, banking services can be obtained locally for crypto-related undertakings. In addition, there is no restriction on using banking service providers from third-countries. We have found crypto friendly banks in other jurisdictions to welcome business from Gibraltar. 

Choice of Structure 

When managing third party capital, investors need to be aware of the requirements in respect of collective investment schemes (“CIS”). 

In Gibraltar, the prevailing authority for investment services, and financial services generally, is the Financial Services Act 2019 (the “Act”). The Act provides that any CIS operated in or from Gibraltar must be either authorised or recognised in accordance with Part 18 of the Act. 

A CIS is any arrangement regarding property of any description, the purpose or effect of which is to enable persons taking part in the arrangement (whether by becoming owners of the property or any part of it or otherwise) to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income.

The Act allows for the establishment of:

• Regulated funds subject to a light touch, yet effective regulatory regime designed to maintain the highest standards and protection for investors and offer the highest degree of speed to market and flexibility. This regime is designed to work with high-net-worth investors/those with previous investment experience and does not allow for retail investors; and
• Non-regulated private investment vehicles. Subject to meeting strict restrictions, these vehicles are designed for investors working with “friends and family” and should not be offered to more than 50 participants. 

 Each of these can be structured in several ways. 

A Gibraltar fund can be set up as:

• a regulated experienced investor fund (EIF) structured as a private limited company;
• a regulated EIF structured as a protected cell company (PCC);
• a regulated EIF structured as a limited partnership;
• a regulated EIF structured as a protected cell limited partnership (PCLP);
• an unregulated private fund structured as a private limited company; or
• an unregulated private fund structured as a limited partnership.

 Timescale 

Funds generally take 6-8 weeks to set up in Gibraltar.

Despite being regulated, EIFs in Gibraltar are not burdened with having to wait for regulatory approval before commencing operations or making changes to the investment strategy of a fund. On the basis that an EIF is required to appoint licensed  individuals and service providers to oversee operations, an EIF can commence operations immediately, as long as the regulator is notified and receives copies of all documentation within 10 days of launch.  

Management 

A Gibraltar fund can be managed by an external fund manager or can be managed by its board of directors (i.e. a self-managed fund).

EXPERIENCED INVESTOR FUNDS (EIFs)

Gibraltar’s experienced investor fund regime is regulated under the Financial Services (Experienced Investor Fund) Regulations 2020 (EIF Regulations) and provides for the establishment of a regulated fund for marketing to either experienced or high net worth investors. EIFs are authorised and regulated by the Gibraltar Financial Services Commission (GFSC). An ‘experienced investor’ is defined in the EIF Regulations. The criteria set out within the definition are not cumulative, therefore an investor need only fall into one of the following categories:

• Investment Professionals;
• Companies with net assets in excess of €1 million;
• Unincorporated associations with net assets in excess of €1 million;
• Individuals whose net worth, or joint net worth with spouse, is greater than €1 million; or be
• Participants who invest a minimum of €100,000 in one or more EIFs and:
  • are certified high net worth investors;
  • are certified sophisticated investors;
  • are self-certified sophisticated investors; or
  • do so on the basis of solicited advice.
• Participants who invest a minimum of €50,000 in one EIF and have been professionally advised.

EIFs are required to be structured with:

• two EIF Directors authorised by the GFSC;
• a Gibraltar fund administrator or a non-Gibraltar fund administrator that has been approved by the GFSC;
• a Gibraltar auditor; and
• a custodian for the safekeeping of the EIF’s assets.

There is no statutory minimum on the amount to be invested in an EIF. However, it is normal practice to set the minimum subscription amount to €100,000 as this makes it easier to onboard prospective investors.

Key benefits:

• EIFs can invest across any asset class and there are no requirements on the diversification of portfolio assets, making EIFs effective fund vehicles for cutting edge sectors. The only requirement is that the fund must follow the investment strategy which it sets out in its offering memorandum.
• EIFs may be launched without the need for regulatory pre-approval; 
• EIFs can be tokenised through the use of approved technology solution providers such as Tokeny, Securitize, etc.

Protected Cell Companies (PCCs) or Protected Cell Limited Partnerships (PCLPs):

• PCCs & PCLPs can create cells (or sub-funds) where the assets and liabilities attributable to each cell will be statutorily segregated from the assets and liabilities of other cells.
• Each cell may have a different investment strategy and fee structure.
• One or any number of investors may participate in the investment through the subscription to that cell.
• There is no limit to the number of cells that a PCC or PCLP can have.
• Cells do not have their own separate legal personality. All cells come under the PCC or PCLP, which is the only legal person.
• In a PCC or PCLP, cells do not all need to be either open-ended or closed-ended, there can be a mixture of both.

PRIVATE FUNDS

Private funds are established pursuant Schedule 24, Part 2, of the Financial Services Act 2019. Once launched, a private fund must be registered with the GFSC. However, private funds are not licensed, authorised or regulated by the GFSC.

A private fund may invest across any asset class provided that it follow the investment strategy set out in its offering memorandum.

Private funds may be established as limited companies or as limited partnerships but not as PCCs or PCLPs.

Promoting private funds:

The promotion of private funds is restricted; the following conditions must be adhered to:

• the offer must be addressed to an identifiable category of persons to whom it is directly communicated by the offeror or his appointed agent;
• the members of that category shall be the only persons who may accept the offer and must be in possession of sufficient information to be able to make a reasonable evaluation offer;
• the number of persons to whom the offer is communicated must not exceed 50; and
• the offer must be made in respect of shares in the private fund and that the fund will remain private for at least one year after the date that the offer is made (upon such time at which it can then be can be converted into a regulated EIF).

 TAXATION

 Funds:

• Gibraltar funds can be structured to be entirely tax neutral or transparent.
• Ordinary Gibraltar corporate tax regime (territorial basis taxation) = 12.5% on Gibraltar source income only.

o    No capital gains tax

o    No wealth tax

o    Inter-company interest income over £100,000 = tax at 12.5%

• There is effectively no assessable tax base if the source of the fund’s income is from outside Gibraltar.
• No withholding tax.
• It may be necessary to take legal advice from other jurisdictions, for example on withholding tax in the state(s) where the assets are based.