According to section 16 of the Private Funds Law (“PFL”), all regulated Cayman Private Funds are required to have procedures for the valuation of its assets and shall be carried out at a frequency that is appropriate to the assets, in any case, on at least an annual basis.
In September 2020, the Cayman Islands Monetary Authority (“CIMA”) issued a new regulatory policy labelled Exemption from Valuation Requirement for a Private Fund (“Policy”). This Policy outlines the criteria used and the required documentation needed to assess if an exemption may be granted to a Private Fund from the valuation requirement. The criteria used, will be classified as an absolute or conditional exemption.
An absolute exemption will relate to all valuation requirements pursuant to section 16 of the PFL and be for a period not exceeding one year. It will be considered in the following circumstances:
a Cayman Islands court has frozen the assets of the Private Fund. The exemption here will be for the period during which the funds are kept frozen as stipulated by the courts; or
as part of a Mutual Legal Assistance Treaty, where there is agreement to repatriate the proceeds of the Private Fund.
A conditional exemption will relate to any of the valuation requirements set out in section 16 of the PFL and be for a period not exceeding one year. This exemption will be considered in the following circumstances:
a Private Fund has not launched but does not wish to be deregistered;
a Private Fund has not launched and wishes to be deregistered;
a Private Fund is unable to complete a valuation due to events such as bankruptcy proceedings, legal or regulatory enforcement actions related to the Private Fund or to a significant underlying investment position of that Private Fund; or
a Private Fund has been placed in compulsory liquidation by order of a court of a competent jurisdiction and CIMA is satisfied with the appointment of the liquidator and the scope of the liquidator’s review.
Note: “Launched” refers to a situation where the Private Fund has accepted capital commitments from investors for the purpose of investments.
A Private Fund may submit a request for a conditional exemption once all of the following conditions are met:
the request for valuation exemption is in accordance with the Private Fund’s constitutive documents;
the Private Fund operator/director has communicated its intention to apply for an exemption to all investors;
the Private Fund’s constitutive documents are amended to clearly articulate absolute restrictions on (1) any new investors participating and (2) the ability of investors to increase, decrease or modify in any way, their investment interest in the Private Fund;
acknowledgement by the Private Fund that it waives its rights to request an exemption from the annual audit requirements pursuant to section 13(6) of the PFL; and
the valuation completed immediately following the period of exemption and the valuation upon which the subsequent audited financial statements are based are performed by an appropriately professionally qualified independent third party.
Further considerations and required documentation
As part of this assessment, CIMA will also consider whether the following criteria are met:
the Private Fund is in good standing, including completed the timely filing of regulatory reports, submission of prudential returns, completion and submission of unqualified annual audit reports and payment of fees;
the Private Fund and its operators/directors are not subject to any litigation proceedings;
CIMA has found the Private Fund to be in full compliance with its anti-money laundering and counter terrorism and proliferation financing obligations in the current valuation period and the period immediately preceding and/or where CIMA has determined that there are no concerns with the Private Fund’s framework to manage money laundering, terrorism financing and proliferation financing risks; and
CIMA is satisfied with the operation of the Private Fund.
All requests for a valuation exemption should be accompanied by an explanation of the reason for the Private Fund’s inability to complete the valuation and the associated material risks. Evidence of notification provided to the Private Fund’s investors of the request for exemption should also be provided to CIMA. Depending on the circumstances, additional documentation is required as outlined in the Policy.
CIMA shall assess each Private Fund’s circumstances on a case by case basis, to determine whether the exemption from valuation requirements is deemed appropriate. The decision to grant any exemptions is at the sole discretion of CIMA.
The Policy may be accessed on the CIMA website here.
If you have any questions or would like to discuss this further, please get in touch with your usual IMS contact.