1. Capitalising on
Offshore Investment
Funds
Presented by Shayne Krige
May 2012

2. Werksmans History
Established in Cape Town and
Johannesburg in 1900’s

3. Werksmans Today
One of the leading corporate
commercial firms in Africa
4 offices in South Africa, Lex
Africa in 54 African countries
Over 200 lawyers

4. Werksmans Accolades
Expertise and lawyers recognised internationally including:
Best Lawyers International
Chambers Global - The World’s Leading Lawyers for Business
IFLR1000 - The Guide to the World's Leading Financial Law Firms
Legal500
PLC Which Lawyer
The International Who’s Who Legal
Our leadership in M&A has been recognised by DealMakers, Ernst &
Young and MergerMarket

5. Investment Funds Team
 Shayne Krige - 12 years heading up investment funds
practice of a European law firm based in Paris
 Dylan Cunard - 7 years in investment funds with a magic
circle firm in London
 Doelie Lessing - international tax expert
 Ina Meiring - regulatory expert ex-UNISA law lecturer
 Work closely with M&A and corporate commercial teams

6. Presentation Overview
 Opportunities in the offshore fund market
 Definitions
 Offshore regulation of funds
 Offshore regulation of managers
 International Developments

7. Presentation Overview
 Opportunities in the offshore fund market
 Definitions
 Offshore regulation of funds
 Offshore regulation of managers
 International Developments

8. Opportunities in the Offshore Fund Market
 Tax Changes
 Exchange Control Changes
 Interest in Africa

9. Opportunities - Tax
‣Two Tax Issues:
‣Residency - place of effective management
‣POEM results in tax on worldwide income
‣ Source - permanent establishment
‣SA manager creates PE in SA

10. Opportunities - Tax
 Steps towards an investment management exemption
 2012 Budget Speech
“This [tax] risk has deprived local fund managers of
foreign investment business and has even forced certain
local fund managers to relocate abroad. It is proposed that
a legislative carve-out be created for foreign investment
funds so that these funds are not inadvertently subject to
worldwide taxation.”

11. Opportunities - Tax
 Excon changes driving demand for offshore products
 Companies can invest R500m offshore
 Individuals can invest R4m offshore

12. Opportunities - Africa
 An increasingly popular investment destination
 Private Equity - energy, renewables, infrastructure,
property
 Hedge fund interest growing

13. Presentation Overview
 Opportunities in the offshore fund market
 Definitions
 Offshore regulation of funds
 Offshore regulation of managers
 International Developments

14. What is Offshore?
 Tax Havens?
 Outside South Africa

15. What is a Fund
Public Fund
Private Fund
Open-ended
Collective Investment Scheme
Closed-ended
Collective Investment Scheme
Investment
Club

16. What is an Investment Manager?
 Talkers
 Investment Advisor recommends (non-discretionary)
 Doers
 Investment Manager implements (discretionary)

17. Presentation Overview
 Opportunities in the offshore fund market
 Definitions
 Offshore regulation of funds
 Regulatory overview
 Fund structures
 Popular jurisdictions
 Offshore regulation of managers
 International Developments

18. Offshore Fund Rules - General
 Unregulated Fund - no regulation if no right to redeem
(“closed-ended”)
 Regulated Fund - private, professional, public and
administered regimes

19. Unregulated Fund Loophole
Closed-Ended Open-Ended
Investors Right to demand Redemption in the discretion of
Redemption Rights redemption. directors.
Form of Redemption Redemption Request Redemption Instruction
Notice
Regulation Not regulated Regulated
Suited To Private Equity, Real Estate, Liquid funds, Hedge Funds,
Private Funds Public Funds, Retail Funds
Examples Morgan Stanley China A- T. Rowe Price, Fidelity
Share Fund, Alpine Total Investments
Dynamic, Adams Express

20. Presentation Overview
 Opportunities in the offshore fund market
 Definitions
 Offshore regulation of funds
 Regulatory overview
 Fund structures
 Popular jurisdictions
 Offshore regulation of managers
 International Developments

21. Fund Structures - Corporate Structure
Onshore
Manager
Management
Agreement
Advisory
Agreement
Offshore
Investors
Manager
Advisor
Management M P Offering
Bank Agreement Shares Shares Memorandum
Administrator
Banking
Administration
Agreements
Fund Agreement
Company
Custodian Registered
Custodian Agreement Agent
Agreement Registered
Agent
Assets

22. Fund Structures - Limited Partnership
Onshore
Manager
Management
Agreement
Advisory
Agreement Offshore
General Investors
Partner
Onshore
Advisor Limited Liability
Unlimited Liability
Limited Partnership Agreement
Offering Memorandum
Bank
Administrator
Banking Limited Administration
Agreements
Partnership Agreement
Custodian
Custodian Agreement
Assets

23. Presentation Overview
 Opportunities in the offshore fund market
 Definitions
 Offshore regulation of funds
 Regulatory overview
 Offshore fund structures
 Popular jurisdictions
 Offshore regulation of managers
 International Developments

24. Considerations When Choosing Fund Jurisdiction
 Type of investors targeted
 Home country of targeted investors
 Public image of jurisdiction in home country
 Predicted size of fund
 Tax rules in manager jurisdiction

25. Popular Offshore Fund Jurisdictions
Channel
BVI
Islands Luxembourg
Cayman EU Mauritius Malta Ireland
Islands Listed
Regulation & Tax

26. Popular Offshore Jurisdictions
No. of Co.’s No. of Currency GDP Growth
Funds Rate
BVI 775,000 2,600 USD $0.9Bn 11%
Cayman 70,000 10,000 USD $1.9Bn 6.5%
Jersey 32,000 578 GBP $5.1Bn 3.8%

27. Popular Offshore Jurisdictions
British Virgin Islands Cayman Islands
Fund Type Public Private Professional License Registered Administered Exempt
Fund Fund Fund d Fund Fund Fund Fund
Regulation High Low Low High Low Low None
Investor Retail “Club” Institutional, Retail Institution Retail Retail
Type high net al, high
worth net worth
Number of Unlimite 50-300 Unlimited Unlimite Unlimited Unlimited <15
Investors d d
Min. None None $100,000 None $100,000 None None
Investment

28. Popular Offshore Jurisdictions
Jersey Isle of Man
Fund Type COBO Only Authorised Professional Administered
Scheme Investor Fund
Fund
Regulation Flexible High Medium Low
Type of Generally Retail Professional “Experienced”
Investor professional.
No more than
50.
Investment Few Few None None
Restrictions
Min. None but None $100,000, None
Investment £250,000 for $1m net
PIRS worth
Local None Licensed Day-to-day Custodian
Service Manager, operations
Providers Trustee Bank

29. Popular Onshore Jurisdictions
Luxembourg Ireland
Fund Type UCITS Sophisticated Retail Fund Professional Qualifying
Investor Fund Investor Fund Investor Fund
Regulation High Medium High Medium Medium
Type of Retail Institutional, Retail Institutional, high Institutional,
Investor high net-worth net-worth high net-worth
Investment Comprehensive Yes but more Comprehensive Comprehensive if Comprehensive
Restrictions flexible if UCITS UCITS if UCITS
Min. None €125,000 None €125,000 €250,000
Investment
Local Service Administrator, Administrator, Administrator, Administrator, Administrator,
Providers custodian, custodian, custodian custodian custodian
(manager) auditor

30. Other Contenders
Advantages Disadvantages
Malta EU Member State Lack of precedent
Flexible Regime Limited service providers
Accessible Regulator EU rules
Low Tax
Mauritius African investment New regime
Potential Excon advantage International image - due diligence
Close to South Africa Limited service providers
Low Tax Far from Europe and USA

31. Presentation Overview
 Opportunities in the offshore fund market
 Definitions
 Offshore regulation of funds
 Offshore regulation of managers
 International Developments

32. Offshore Regulation of Managers
 Discretionary investment management is invariably
regulated
 Non-discretionary investment advice is often not
regulated

33. Attributes of a Good Jurisdiction
Manager Fund
Convenience of location - schools, Meets investor requirements
lifestyle etc.
Appropriate regulatory environment Appropriate regulatory environment
Appropriate tax for company and No tax, low setup and running costs
owners
Access to quality service providers Convenience -travel, time zone,
currency, language
Compatibility of vehicle with strategy

34. Presentation Overview
 Opportunities in the offshore fund market
 Definitions
 Offshore regulation of funds
 Offshore regulation of managers
 International Developments

35. International Developments
 BVI - Securities & Investment Business Act
 Codifies existing practice
 Investment Advisors now regulated
 Local representative required
 Private and professional funds must have offering
memorandum, auditor, manager, custodian and
administrator
 $100,000 minimum in professional fund for ALL investors

36. International Developments
Alternative Investment Fund Managers Directive
(AIFMD)
Dylan Cunard

37. What is the AIFM Directive?
 Aims to introduce a harmonized regulatory framework
across the EU for EU-established managers of
alternative investment funds (AIFM).
 Designed to regulate hedge funds and private equity
funds which were blamed for some of the instability in
the financial crisis.
 Supported by countries like Germany and France and
has been criticized by the UK.
 Marketing Passports available for EU-established AIFMs
(from 2013) and possibly for Non-EU AIFMS (from
2015) to allow marketing across the EU once
authorization is granted in one Member State

38. Main requirements for EU AIFMs
 AIFMs must be authorised and subject to supervision in
their home member state;
 Minimum capital of at least EUR125,000;
 Reporting requirements such as annual reports;
 Restriction on delegation of manager’s duties;
 Independent valuation of assets required;
 Stricter regulation of depositories;
 Restrictions on manager’s pay (Similar to the
restrictions we have seen for bankers).
CARVE OUTS – e.g. de minimis for small funds,
supranational institutions, pension and social funds

39. Summary of Legislative Process
Timetable Key Milestones
29 April 2009 Draft Directive published by EU Commission
1 July 2011 Publication of the Directive in the EU Official Journal of the European Union
23 February 2012 ESMA published a discussion paper on the key concepts of the AIFMD
14 March 2012 HM Treasury consultation paper on the transposition of the AIFMD into UK law,
open until 4 May 2012
22 July 2013 AIFM Directive must be transposed
22 July 2013 Final transposition into Member State law
22 July 2014 AIFMs need to be authorised
2015 ESMA to report on functioning of the passport system for EUAIFs and AIFMs
national private placement regimes and extension of passport system to non-EU
AIFs and AIFMs
2015 Commission to adopt implementing legislation setting date when passports for
non-EU AIFs and AIFMs will be available
2018 ESMA to publish report on passport functioning plus possible end to private
placement regimes
2018 Commission due to adopt further implementing legislation setting date for end of
private placement regimes

40. International Developments
 United States Foreign Account Tax Compliance Act
(FATCA)
 Funds are “invited” to enter into an agreement with the
IRS
 Procedure to identify US customers and report investments
to IRS
 Obtain a waiver from each investor (including non-US). If
investor refuses, fund must forcible redeem
 Penalties - 30% withholding on all payments from US
payors (not just US revenue) and US FSP’s must close
account of fund that fails to sign agreement (exclusion
from US securities market)
 Implementation 2012 onwards

41. Presentation Overview
 Opportunities in the offshore fund market
 Definitions
 Offshore regulation of funds
 Offshore regulation of managers
 International Developments

42. Fund Issues We’re Working On
 MF Global Collapse
 SA fund restructurings
 Offshore fund setup
 Foreign Managed Account Distribution
 UCITS Distribution
 Illiquidity Issues
 Fund Migrations
 ETF Structuring
 SIBA regulations in the BVI

43. THANK YOU
Shayne Krige
skrige@werksmans.com
May 2012
Nothing in this presentation should be construed as formal legal
advice from any lawyer or this firm. Readers are advised to consult
professional legal advisors for guidance
on legislation which may affect their businesses.
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