Why MENA-Based Startups Choose to Integrate in the Cayman Islands and British Virgin Islands | Walkers

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According to a report by data platform Magnitt, total funding raised by startups in the Middle East and North Africa (MENA) was around US$864 million in the first quarter of 2022. Startups in the UAE accounted for 27 .3% of all closed deals. in the MENA region and 34.4% of all funding raised in the region in 2022 to date. The US$256 million raised by Saudi Arabia-based startups in the first quarter of 2022 is the highest amount the Kingdom has ever raised in a single quarter to date. With startup funding in the MENA region at an all-time high, a growing number of founders will need to consider which jurisdiction to use when setting up an investor-friendly holding company.

This article aims to provide an overview of some of the key characteristics of the Cayman Islands and the British Virgin Islands (BVI) as the most commonly used offshore jurisdictions for startups based in the MENA region.

Knowledge of investors

Knowledge of the domicile and legal form of the investment vehicle is an essential element in ensuring the marketing of a startup to potential investors. Estimated to be home to more than two-thirds of non-US domiciled investment funds, the Cayman Islands is the largest and most popular offshore domicile for establishing investment vehicles, by some margin . The structuring of the investment vehicle tends to be investor driven and in many cases institutional investors will insist that a Cayman Islands or BVI vehicle be used given their familiarity with it.

In addition to investor familiarity, the two jurisdictions are also recognized as centers of excellence for cross-border financing structures, mergers and acquisitions and capital markets transactions and provide a neutral platform to aggregate and access capital. , which is recognized by regulators and banks.

A reliable legal system

As British Overseas Territories, the Cayman Islands and the BVI have English-based legal systems, established and independent judicial systems, and a court of final appeal in the form of the Privy Council of the United Kingdom. United in London, which offers investors both the comfort of a legal system with which they are generally familiar and the legal certainty of an established body of law. Understood and accepted by creditors and investors, it is this strong legal and judicial system (and the ease of operation, flexible corporate regimes and tax neutrality) that makes these two offshore jurisdictions such an attractive offer for investors. international investors.

Structural flexibility and safety

One of the main reasons the Cayman Islands and BVI are ideal jurisdictions for startups is the flexibility to determine the business characteristics of the organizational structure. The memorandum and articles of association can be easily amended to set out commercially agreed governance arrangements. Multiple classes of shares can be created with different voting, dividend and distribution rights, and companies have the flexibility to create additional classes of shares for subsequent funding rounds.

There is no minimum capital requirement to be invested at the time of incorporation. The company can be incorporated with a single shareholder and director, who can be the same natural or legal person. Additionally, there is no requirement for a director or shareholder of a holding company to reside in the Cayman Islands or the BVI. The company can operate (and can be operated from) anywhere in the world with minimal financial reporting requirements.

The ultimate goal of most startups is to succeed and provide its investors with a return on investment. Having a vehicle that is suitable for an IPO or acquisition by a larger company will be an important consideration from a business structuring perspective. Cayman Islands and BVI companies are listed on all major international stock exchanges, including the New York, Hong Kong and London stock exchanges.

The flexibility and certainty of the structures associated with Cayman Islands and BVI companies provide early stage startups with a platform to negotiate terms with investors and raise capital efficiently.

Tax neutrality

International investors will often come from a different jurisdiction than the operating target company and will generally want neutrality in the choice of jurisdiction for their investment (including equal legal and tax treatment). There is no income tax or corporation tax attached to companies established in the Cayman Islands or the BVI. For investors, this means that resources can be pooled for investment without investment returns being subject to an additional layer of taxation beyond that imposed by the investor’s home jurisdiction and the jurisdictions where trading profits are made. These favorable tax regimes provide startups with a tax-efficient platform to retain or reinvest profits in the business.

Privacy

Neither the register of directors nor the register of shareholders need be publicly filed in the Cayman Islands or the BVIs, ensuring a high degree of confidentiality for founders and investors. Founders will be required to provide standard know-your-client documentation to directors and certain investors of the holding company. The Company’s corporate services provider is required to collect beneficial ownership information from investors, and such information may be made available at the request of certain national and international government authorities.

Speed ​​and ease of incorporation

The Cayman Islands and BVI are competitively priced and a company can be incorporated very quickly (often within 24 hours of receiving instructions). The ease of establishment of companies in either of these jurisdictions continues to play a role in influencing the decision of founders to use these jurisdictions.

Conclusion

The competitive strength of Cayman Islands and BVI in the startup space lies in their respective ability to provide efficient, cost effective and tax neutral platforms for international capital flows in an environment of legal, political and economic stability. Both jurisdictions are renowned for their investor-friendly regulations, while maintaining proportionate regulation and supervision, which are all major reasons why startups based in the MENA region continue to integrate into the Cayman Islands and BVI.

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