The Investment Funds Act, 2019 (the “IFA”) and its accompanying regulations, the Investment Funds Regulations, 2020 (the “IFR”) govern the licensing and regulation of investment funds and parties related to investment funds in The Bahamas. The IFA, repealed and replaced the Investment Funds Act, 2003 and modernized the regulatory framework applicable to investment funds.
Definition of investment fund
The IFA defines an investment fund as a unit trust, a company, a partnership or investment condominium (“ICON”) which issues or has equity interests, the purpose or effect of which is the pooling of investor funds with the aim of spreading investment risks and achieving profits and gains arising from the acquisition, holding, management or disposal of investments.
For the purposes of the IFA, an equity interest is a share, trust unit, participation interest or a partnership interest that carries an entitlement to participate in the profits or gains of the issuer thereof and that, except where the issuer is a closed-ended fund, is redeemable or re-purchasable at the option of the investor.
Under the IFA, parties related to an investment fund include, an administrator, operator, promoter, custodian, valuer, investment fund manager, investment fund advisor, European Union (“EU”) alternative investment fund manager (an “EU AIFM”), a Bahamian company which markets an investment fund or an EU alternative investment fund (“AIF”) in the EU or manages an EU alternative investment fund (whether or not it is marketed in the EU, an “AIFM”), or a custodian appointed by an AIFM for each investment fund that it manages (an “AIFMD custodian”).
Type of investment funds and the requirement for licensing
Investment funds which carry on business in or from The Bahamas must obtain one of the following categories of investment fund license:
- professional fund license;
- SMART fund (which stands for “Specific Mandate Alternative Regulatory Test” funds) license; or
- standard fund license.
In this context, an investment fund will be carrying on business in or from The Bahamas if (i) it is incorporated, registered or established in The Bahamas, (ii) is structured as a unit trust which is governed by the laws of The Bahamas, (iii) it operates as an investment fund licensed under the IFA or (iv) it is offered to persons in The Bahamas who are not accredited investors (i.e. retail investors), regardless of where the investment fund is established, incorporated or registered.
All investment funds, other than standard funds, can be licensed by the Securities Commission of The Bahamas (the “Commission”) or an investment fund administrator licensed under the IFA holding an unrestricted license. Standard funds can only be licensed by the Commission.
A professional fund license is appropriate for funds that are offered to professional (sophisticated/accredited) investors only. Such persons include, (i) a bank or trust company licensed by the Central Bank of The Bahamas or pursuant to the laws of another jurisdiction, (ii) any registered firm under the Securities Industry Act, 2011 (the “SIA”) or pursuant to the laws of another jurisdiction, (iii) any insurance company licensed under the laws of The Bahamas or in another jurisdiction, (iv) any pension fund where a registered investment manager has been appointed to manage the fund’s assets (v) any institutional investor or financial institution, (vi) any natural person with a net worth of $200,000 or more who can evidence that they have the expertise, experience and knowledge with respect to making their own decisions (vii) any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that persons spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year, (viii) any trust with total assets in excess of $5,000,000, or (ix) any entity with net assets in excess of $5,000,000 which has appointed a licensed investment manager to make investment decisions on its behalf.
This is a category of investment fund that provides for an element of flexibility as it enables the Commission to prescribe the regulatory and reporting requirements for such funds. Seven SMART fund templates have been approved by the Commission; with six templates currently in use. Other structures may also be considered.
Summaries of the requirements and characteristics for the approved templates which are currently in use are as follows:
SMART Fund Template 001 – The promoter (that is the person inside or outside The Bahamas who is directly or indirectly responsible for the formation of the fund but does not include a professional advisor or underwriter acting for and on behalf of such a person) must be a financial institution, as defined in the IFR, each investor must be a customer of the promoter and a party to a discretionary management agreement and the assets of the investors can only be subject to fees either at the fund level or the management level but not both.
SMART Fund Template 002 – There can be no more than 10 investors who hold equity interests in the fund and each investor is required to be a person who qualifies to invest in a professional fund (see above under Professional fund). The majority of investors must have the power to appoint and remove the operators of the investment fund, which for the purpose of the IFA, are the directors of a company, the trustee of a unit trust, the general partner of a partnership or the governing administrator of an investment condominium.
SMART Fund Template 004 – There can be no more than 5 investors with equity interests in the fund and the fund must operate as a legal entity. A SMART Fund 004 is not required to appoint an administrator but can instead be administered by its operators.
SMART Fund Template 005 – There can be no more than 5 investors with equity interests. The investors must be those to whom a professional fund can be offered, the fund must operate as a private investment vehicle appoint an administrator which is a financial institution as defined in the IFR and not require a license from the Commission as an investment fund administrator.
SMART Fund Template 006 – Provides for the creation of a side pocket fund where illiquid assets from an existing identified investment fund can be transferred into a new SMART fund, provided however that no more than 30% of the gross assets of the existing identified investment fund are invested in the SMART fund. The investors must be those who can invest in a professional fund. At least 75% of the shareholders of the existing identified investment fund must approve the establishment of the SMART fund. A SMART fund 006 is not required to appoint an administrator and instead the operators of the fund can administer the fund.
SMART Fund Template 007 – SMART Fund 007, also known as the Super Qualified Investment Fund, permits a single investor but allows a maximum of 50 investors to have an equity interest in the fund. There is a minimum investment of US$500,000 and the administrative functions of the fund can be outsourced to any reputable person in a jurisdiction on an as needed basis.
SMART funds 001, 004 and 005 are not required to have an offering memorandum/offering document. SMART funds 002, 006 and 007 are required to have a term sheet (a short form offering memorandum/offering document) containing certain prescribed information. If however a SMART fund 001, 004, or 005 chooses or elects to have a term sheet, the term sheet is required to include certain requirements as prescribed by the legislation.
This category of investment fund is appropriate for funds which do not satisfy the requirements of any of the other categories of investment fund under the IFA and is the most strictly regulated category of investment fund.
Continuing obligations of licensed funds
Current Offering Memorandum
All investment funds which are offered for sale in The Bahamas are required at all times to have filed a current offering document with the Commission.
Annual audit and financial statements
Investment funds are required to cause reliable accounting records to be kept in relation to all sums of money received and expended by the fund, the matters in respect of which such receipt and expenditure takes place and the assets and liabilities of the fund.
Professional and standard funds are required to be audited annually and to file a copy of their audited financial statements with the Commission within six months of the funds’ financial year end.
In the case of SMART funds 002, 004, 005 and 007 such funds are not required to be audited annually if all of the holders of equity interests in the fund unanimously waive the requirement for the fund to have an annual audit. If the annual audit requirement is waived, the investment fund is required to file semi-annual performance reports with the Commission.
The SMART fund 001 is not required to produce annual audited financial statements; instead, such funds are required to produce annual unaudited financial statements and semi-annual performance reports which have to be filed with the Commission. In the case of SMART Fund 006, a performance report or management account is to be filed every six months with the Commission and every shareholder of record.
Where audited financials are not prepared, the fund must have an accountant confirm once every three years, that the unaudited financials have been maintained in accordance with IFRS set by the International Financial Reporting Board, or GAAP set by the United States Financial Accounting Standards.
Annual declaration and annual fees
All investment funds must submit a written declaration by 31st January in each year stating that all information filed with the Commission is current and applicable and pay its annual fee. Additionally, for each SMART Fund, the operators are required to certify to the Commission by 31st January in each year that the fund is qualified to operate as that particular SMART Fund.
Minimum number of operators
Investment funds that are structured (i) as companies, must have a minimum of two directors, (ii) partnerships, must have a minimum of two general partners and (iii) as investment condominiums, are required to have a governing administrator or a general administrator.
Investment fund manager requirement
All investment funds are required to appoint an investment fund manager who must be registered with the Commission or, if the fund will be offered for sale in the EU, an AIFM, who must be licensed by the Commission.
All investment funds must appoint an investment fund administrator which is either (i) licensed in The Bahamas under the IFA or (ii) licensed or registered and operating as an investment fund administrator in accordance with the laws of a jurisdiction outside of The Bahamas prescribed by the Commission, unless the fund is:
- self-administered (which is a fund that is administered by its own operators);
- a SMART Fund 004, 006 or 007 (which may be administered by its operators); or
- a SMART Fund 005 (see further above).
Where the investment fund is structured as an ICON, the ICON must appoint (i) a governing administrator who is responsible for the governance functions of the operator of an investment fund imposed by the IFA and the IFR and (ii) a general administrator who is responsible for the general administration functions imposed upon an administrator by the IFA, or a single administrator to perform both functions. Both the governing administrator and the general administrator must be regulated entities which fall within one of the categories set out in the Investment Condominium Act.
Custodian and AIFM custodian requirement
All investment funds must appoint a custodian, EXCEPT for funds whose investment structure or the nature of the fund’s assets are such that they do not require that a custodian be appointed to hold the assets of the investment fund (for example, fund-of-funds or master-fund structures). In such cases, the operators of the fund must certify in writing that the fund, due to its investment structure or the nature of its assets, does not require a custodian. Even where such a certification is given, the Commission can still require the appointment of a custodian.
AIFMs must ensure that a single AIFMD custodian is appointed for each investment fund it manages.
Licensing of investment funds
Applications for the licensing of an investment fund (by the Commission or an administrator holding an unrestricted administrator’s license under the IFA) must be submitted in the prescribed form, and accompanied by the prescribed documents and fee.
Application & Annual Renewal Fees
|Category||Application fee||Renewal Fee|
|Professional Fund with administrator||$1,625||$2,200|
|Professional Fund with administrator (fast tracked application)||$3,125||$2,200|
|Professional Fund – Self Administered||$1,625||$2,500|
|Professional Fund – Self Administered (fast tracked application)||$3,125||$2,500|
|SMART Fund with administrator||$1,625||$2,200|
|SMART Fund with administrator (fast tracked application)||$3,125||$2,200|
|SMART Fund – Self Administered||$1,625||$2,500|
|SMART Fund – Self Administered (fast tracked application)||$3,125||$2,500|
Principal Office Fees
|Category||Principal Office Fee|
|Professional Fund with administrator||$1,000|
|Professional Fund – Self Administered||$1,000|
|SMART Fund with administrator||$1,000|
|SMART Fund – Self Administered||$1,000|
Non-Bahamas based funds
If an investment fund is established in a jurisdiction other than The Bahamas but has a nexus to The Bahamas through being administered or managed in or from The Bahamas, such fund is a non-Bahamas based fund for the purposes of the IFA. Where the non-Bahamas based fund (i) is administered in or from The Bahamas, the administrator or (ii) managed in or from The Bahamas, the investment fund, must notify the Commission of the nature of the fund’s nexus to The Bahamas within 14 days or the start or termination of the relationship. If the non-Bahamas based fund is offered for sale in The Bahamas, a current copy of its offering memorandum must be filed with the Commission.
Regulation of investment fund administrators
Entities carrying on the business of investment fund administration in or from The Bahamas are required to be licensed by the Commission. There are two categories of investment fund license administrator’s license; an unrestricted investment fund administrator’s license that authorizes the holder to license an unlimited number of investment funds and a restricted investment fund administrator’s license, that authorizes the holder to administer only the investment funds specified by the Commission.
For the purposes of the IFA, investment fund administration includes, administering the operations and administrative affairs of an investment fund or providing the administrative services for an investment fund including the accounting, valuation or reporting services.
Investment fund administrators which are licensed under the IFA are required to, among other things (i) be structured as a company incorporated or registered under the Companies Act, 1992 or the International Business Companies Act, 2000 and (ii) have a principal office in The Bahamas or made arrangements for a principal office in The Bahamas.
An unrestricted investment fund administrator must submit the following documentation to the Commission within 30 days of the licensing a fund:
- the offering document of the fund along with a written certification from the administrator or an attorney that the offering document is in compliance with the IFA;
- a certified copy of the fund’s constitutive documents along with a written certification from the administrator or an attorney that the constitutive documents are in compliance with the IFA;
- documentation establishing the fitness and propriety of the promoter, operator, investment fund advisor or investment fund manager or both, the EU AIFM, the AIFM and the AIFMD custodian, if applicable, the custodian and auditor of the investment fund;
- a copy of the licence issued by the administrator; and
- the prescribed fee.
Ongoing reporting obligations
Annual fees and annual declaration
A licensed investment fund administrator must pay its annual fee, the prescribed principal office fee for each fund it administers and submit a written declaration to the Commission that all information filed with the Commission is current and applicable, on or before 31st January in each year.
An investment fund administrator must have its financial statements audited annually by an approved auditor and submit its audited financial statements to the Commission within four months of its financial year end or within such extension of that period as the Commission may reasonably allow.
Requirements to report certain matters
If an investment fund administrator knows or has reason to believe that an investment fund for which it provides a principal office or a promoter or operator of such investment fund (a) is or is likely to become unable to meet any of its obligations as they fall due (b) is carrying on business otherwise than in accordance with the IFA or any other applicable legislation or (c) is carrying on business in a manner that is or is likely to be prejudicial to investors or creditors of the investment fund, the investment fund administrator must immediately give the Commission written notice of its knowledge or belief giving its reason for such knowledge or belief.
Licensing of investment fund administrators
An application for an investment fund administrator’s license must be made to the Commission in the prescribed form and accompanied by the prescribed information and fee.
The Commission may grant an investment fund administrator’s licence if it is satisfied that the applicant, among other things, has sufficient expertise to administer investment funds, will administer investment funds in a proper manner, is of sound reputation and has directors, officers and senior management who meet the fit and proper requirements of the Commission.
The current application and license fees are as follows:
|Category||Application fee||Initial Licensing Fee||Annual Renewal Fee|
|Restricted investment fund administrator (0 – 24 funds)||$5,000||$9,375||$13,500|
|Restricted investment fund administrator (25 – 49 funds)||$7,500||$12,500||$21,850|
|Restricted investment fund administrator (50+ funds)||$11,000||$16,000||$28,500|
|Unrestricted investment fund administrator (0 – 24 funds)||$11,000||$16,000||$21,850|
|Unrestricted investment fund administrator (25 – 49 funds)||$12,500||$17,500||$30,000|
|Unrestricted investment fund administrator (50+ funds)||$16,000||$21,000||$36,850|
Investment Fund Manager Registration and AIFM Licensing Requirements
Persons providing investment management services to investment funds must register with the Commission to do so. In addition to registration under the IFA, persons providing investment management services to a standard fund or any other fund in any other jurisdiction, which is not limited to being offered to accredited investors, must also either be (i) registered with the Commission under the SIA to engage in the business of managing securities or (ii) licensed or registered in prescribed jurisdiction.
Persons that engage in (i) marketing an investment fund or EU AIF in the EU with an EU passport or (ii) managing an EU AIF with an EU passport, irrespective of where the EU AIF is marketed, must be licensed by the SCB as an AIFM.
An application for registration as an investment fund manager or AIFM must be made in the prescribed form and accompanied by the prescribed documentation and an application fee of $250. The initial registration fee is $375 per fund and the annual renewal fee is $625 per fund. However, no registration fee or renewal fee is payable if the investment fund manager is registered under the SIA or in a jurisdiction prescribed by the Commission.
The registration of an investment fund manager must be renewed annually by 31st January of each year, accompanied by a confirmation in the prescribed form that the information filed with the Commission is current and the renewal fee (if applicable).
AIFMs and investment fund managers are subject to ongoing reporting requirements under the IFA and the IFR.
Ongoing Requirements applicable to all regulated persons under the IFA
All regulated persons under the IFA, that is, all persons licensed or regulated under the IFA, are subject to ongoing, approval, regulatory and reporting requirements.
Supervisory authority of the Commission
The Commission has broad investigative, inspection, production, regulatory and enforcement powers under the IFA.
The Commission, its officers, employees agents and advisors are prohibited from disclosing any information relating to, among other things, the affairs of the Commission, any application made to the Commission and the affairs of any regulated person or client of a regulated person, except where such disclosure is among other things, (i) required by law, (ii) permitted by any Court of competent jurisdiction in The Bahamas, (iii) for the purpose of assisting the Commission to exercise any of its functions under the IFA or (iv) with the voluntarily provided consent of the regulated person or client of such regulated person.
Should you require any further information on investment funds, please contact a member of the Firm’s Securities and Investment Funds Practice Group.