Sitting at the entrance to the Mediterranean Sea at the southern end of the Iberian Peninsula lies the British Overseas Territory of Gibraltar. Ceded to the British from Spain in 1713 during the Treaty of Utrecht, the disputed territoryhas historically served a strategic purpose both militarily and economically, being one of the world’s busiest shipping lanes and connects the Atlantic Ocean with the Mediterranean Sea.
These days, Gibraltar’s main appeal has been tourism and the jurisdictional arbitrage it provides bookmakers, online gambling operators, and the like due to the territory’s favorable regulatory and corporate tax regimes. Additionally, the EU passporting benefit that allows for cross-border investment in the European Economic Area (EEA) has long made Gibraltar a haven for the financial services industry.
I recently decided to visit Gibraltar given I was already in the area (the Costa del Sol region of Spain) to meet with the team I’m advising from FortKnoxster.
Gibraltar Fund Structures
There are two popular structures for setting up a fund in Gibraltar; the Experienced Investor Fund (EIF) and the Private Scheme (PS). These structures are agnostic to the underlying assets they govern for investors (i.e. fine art, classic cars, digital assets).
The EIF investor suitability requirements are similar to accredited investor requirements in the United States. In the case of the EIF, the investor needs to earn at least 100,000 Euros per year — or its equivalent in an alternative fiat — or prove a net worth of at least 1 million Euros, excluding one’s personal residence.
The main constraints of this structure is that the fund is not allowed to be promoted without reasonable assurances that the audience you are promoting the fund to are accredited investors. For example, if the fund managers wanted to have a roadshow for the fund, they would have to ensure the audience for the event are all accredited investors.
Additionally, an EIF requires two local directors approved by the Gibraltar Financial Services Commission.
The Private Scheme
More restrictive than the EIF in terms of the number and types of investors you can potentially have, the Private Scheme (PS) limits investors to “family and friends” of the fund manager(s). A road show is prohibited under the PS structure.
In addition, only 50 “offerings” can be made in a PS fund structure for the life of the fund. For example, if you made all available offers (50), and only five investors joined the fund as Limited Partners (LPs), then only those five investors will ever be LPs in the fund.
Given the finite number of offers that can be made under the PS structure, there is strong incentive for the fund manager(s) to have substantial dialogue when evaluating the suitability of a prospective investor before making an offering. Having a board of directors is optional in a PS structure, though recommended.
Given a local bank account is needed for both the EIF and PS structures, a local administrator for the fund is necessary for non-residents. The cost of a local administrator can generally cost, at minimum, 15,000 GBP per annum. Banks naturally feel comfortable having working relationships with administrators that are local and with reputations that can be more easily vetted, hence the requirement.
Another area where there’s benefit to having a local administrator is for the distancing of liability for the fund managers. The major value-add in this area is derived from the stated Net Asset Value (NAV) methodologyindicated in the fund’s offering documents. Among other NAV calculations, fund managers ought to present their methodology for the fund’s performance (i.e. seeking alpha benchmarked against Bitcoin’s performance, etc). Having a local administrator as a signatory to the fund’s performance methodology allows for some distancing of liability to the fund managers.
The Bottom Line
Starting a fund in Gibraltar can cost anywhere from 25,000-40,000 GBP depending on the structure chosen and level of complexity. Though firms in Gibraltar are in most cases agnostic to helping structure funds for US-based investment, the firm I talked to has never had a client that set up a fund for US-based investors. Law firms in Gibraltar are often sought out by European entities seeking to enjoy EU passporting benefits in a jurisdiction with favorable tax and regulatory arbitrage. Most of them make a commercial, not legal, decision to exclude US-based investors from their Private Placement Memorandums (PPMs), often due to concerns about SEC regulatory oversight. Generally, any business that accepts investment from Americans is theoretically within scope of the SEC’s jurisdiction,potentially.
The guidance I received about forming a crypto fund jurisdictionally was, given I intend to make offerings to primarily US-based investors, to consider a Delaware, LLC for US-based investment and an offshore entity (i.e. Cayman Islands, British Virgin Islands) if I want to take investment from foreign investors. This master-feeder structure is very popular wth traditional hedge funds and emerging crypto funds.
Ultimately, I concluded that forming a crypto fund in Gibraltar was not optimal for my personal fund formation plans. I’m nonetheless grateful that I had an opportunity to put “boots on the ground” and see for myself what this mysterious, yet intriguing, territory has to offer.
Disclaimer: The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.