Asset Protection SPCs and Series LLCs

General
#1

This discussion is not legal advice. Every one should ask a lawyer to assist.

:star2: Navigating Uncharted Waters: Asset Protection for SPCs and Series LLCs Abroad :star2:

Welcome to an discussion that delves into the critical issue of asset protection for Segregated Portfolio Companies (SPCs) in the Cayman Islands and Series LLCs in Delaware when they operate in foreign countries where their unique structures may not be recognized.

SPCs in the Cayman Islands: A Beacon of Asset Segregation In the Cayman Islands, SPCs have risen to prominence due to their exceptional ability to create multiple segregated portfolio entities (SPs) under a single legal umbrella. This feature is paramount in insulating assets from financial entanglement, and recent legal developments have further fortified the practice of asset segregation, even in cases extending beyond the jurisdiction.

Delaware Series LLC: A Dual-Edged Sword Turning our attention to Delaware’s Series LLC, we find a parallel structure that is indeed similar to SPCs. However, a crucial distinction emerges - in some instances, the asset segregation shield in Delaware Series LLCs may not be as robust as in Cayman’s SPCs. This variability can be a concern when these entities operate in foreign jurisdictions.

The Dilemma of Foreign Recognition The heart of the matter lies in what happens when SPCs and Series LLCs operate in foreign countries that do not acknowledge their unique structures. This dilemma becomes especially pressing when dealing with international assets. Many of these entities hold cryptocurrencies on foreign centralized exchanges, own patents, and engage in profitable international real estate markets.

So, let’s dive into the discussion. How do SPCs and Series LLCs navigate the complex landscape of foreign jurisdictions where their structural advantages may not be recognized? What safeguards can be put in place to ensure the protection of international assets in these scenarios? Share your experiences, insights, and strategies for addressing this critical issue. Join the conversation, and together, let’s find solutions to this multifaceted challenge! :speech_balloon: #AssetProtection #SPCs #SeriesLLCs #ForeignRecognition #InternationalAssets #LegalConsiderations

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Foreign Bank Accounts
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#2

Nevertheless, it is crucial to recognize that each Segregated Portfolio (SP) must be distinctly identifiable and explicitly bear the term ‘segregated portfolio’ or ‘SP’ within its name. The most pivotal aspect of Segregated Portfolio Companies (SPCs) lies in the fact that each SP retains the autonomy to possess its own assets and obligations, despite lacking a distinct legal entity status.

Furthermore, the assets and liabilities of an individual segregated portfolio are firmly isolated and enjoy complete protection from the assets and liabilities of all other segregated portfolios within the overarching SPC framework, as per Section 220 of the Companies Act (2022 Revision). This protective ring-fencing extends to safeguard these assets from the general assets held by the overarching SPC.

Consequently, a creditor of one segregated portfolio is precluded from pursuing the assets of any other segregated portfolio, and likewise, a creditor of the SPC is barred from seeking recourse to the assets of any of the SPs.

In situations where a foreign nation may not recognize the SP structure, they may still acknowledge the SPC as a distinct legal entity. In such cases, the Board of Directors possesses the authority to reallocate assets among the various SPs through a resolution. However, it is imperative to note that funds earmarked for foreign endeavors must originate from the SP’s dedicated cryptocurrency wallet or bank account, not from the general SPC account. This ensures clear separation and transparency in financial transactions.

This comprehensive approach allows SPCs (Segregated Portfolio Companies) to operate seamlessly while maintaining the integrity and autonomy of their segregated portfolios.

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#3

I have encountered similar issues when dealing with the recognition of a GmbH and a KG from Germany, which are legal forms. In German corporate law, as the name suggests, the GmbH & Co. KG is a hybrid of the legal forms GmbH (Gesellschaft mit beschränkter Haftung – a limited liability company) and KG (Kommanditgesellschaft – a limited partnership). However, despite this hybrid nature, the GmbH & Co. KG is still considered a KG (limited partnership) and is categorized as a partnership (Personengesellschaft).

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#4

This is not legal advice and is for discussion purposes only as mentioned at the beginning of the post and applicable to the entire discussion.

US Series LLCs have not been tested and have not proven their security against breaching the shield between different entities versus Segregated Portfolio Companies from the Cayman Islands, giving Series LLCs limited applications compared to SPCs in the Cayman Islands.

The Series LLC is different from a traditional Limited Liability Company (LLC). In fact, the Series LLC is not available in all states and has only been adopted in Delaware, Nevada, Illinois, Iowa, Oklahoma, Tennessee, Texas, and Utah.

The California Series LLC is a rarer entity, as California does not allow for Series LLCs to be formed under state law. However, Series LLCs formed in other states can register with the state and do business in California.

In states that have this kind of enabling legislation, each series within the LLC works as a separate entity under state law. This is why many people are attracted to Series LLCs – they have the ability to shield property in different series from liabilities incurred in or against one another without paying state fees for multiple entities.

This means that an LLC containing two properties can choose to place each into a separate series, so that liabilities from one can’t cause problems with the assets of the other.

Legal Uncertainty Surrounds Series LLCs Vs Cayman Islands SPCs
The biggest problem with Series LLCs is that many states (including California) don’t have series legislation and may choose to ignore the laws of the state where the series was created. That’s because you’re subject to their rules when doing business in their state.

The example of the attitude of the California Franchise Tax Board applies to fees, but liability protection is also an issue. Since Series LLCs are so new, they’ve never been tested by courts, even in the states that permit them. That means there’s no guarantee that limited liability protection will be extended to each series until every state rules on the subject.

Difficulties with Series LLCs Across State Lines: One should be concerned about how Series LLCs will be treated by the states that don’t have laws permitting them. If you set up a Series LLC in Nevada and then register it as a foreign entity conducting business in the state of Massachusetts, each series in the LLC owns a separate piece of property.

If there’s a lawsuit in regards to one of these properties, you can’t be sure that the Massachusetts court will honor the series structure of the LLC, applying Nevada’s law to the real estate and activities that are located in Massachusetts.

If they do, the claimant can collect only against the property in that series. If they don’t, the claimant can collect against the properties in other series as well. States are expected to give full faith and credit to legislation of other states, but the answer is uncertain. Exceptions do happen.

Since the laws about creating Series LLCs are different in every state that permits them, it might take a long time before enough case law is accumulated to give us any level of comfort about using them.

Segregated Portfolio Companies from the Cayman Islands have been proven, as described in the post above, to uphold the segregation. And even if an enforcement is issued in another nation, it will not be valid in the Cayman Islands, thus keeping the Cayman SPC theoretically safe. The problem is what happens to the assets of the Cayman Island SPC held not in the Cayman Islands but in a foreign nation; well, these could potentially be taken by the court also when belonging to another Segregated Portfolio. Thus, it is imperative for the SPC fund managers to ensure that leverage and liabilities are strictly managed when doing business in other nations than the Cayman Islands or states not recognizing SPC or Series LLC

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#5

It seems to me that a Cayman Islands SPC is just safer because the Cayman Islands, as a tax haven, offer protection against the enforcement of foreign verdicts. In the USA, a series of LLCs cannot offer protection from federal court enforcement or enforcement within other states. It seems that it’s somewhat similar to cannabis. While it may be legal in some states, it remains illegal in others and at the federal level. In the Netherlands, it is legal throughout the entire nation, making it a better option in that regard for business.

What is the best practice for Investors and Fund Managers ?

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#7

Good points. Each person’s and institution’s situation is unique and should involve consultation with the relevant legal, tax, and compliance professionals. However, what I find most interesting about SPCs is cost efficiency and flexibility.

Cost Efficiency: SPCs can be a cost-effective alternative to establishing separate legal entities for each investment or project. This structure allows for the management of multiple portfolios under one corporate umbrella, reducing administrative and compliance costs.

Flexibility: SPCs offer flexibility in structuring and managing different investment strategies or assets. Each portfolio can have its own distinct investment objectives, strategies, and risk profiles, providing flexibility for fund managers and investors.

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#8

This is not legal or investment advice. With regard to your question about what investors and fund managers should be cautious about, in our opinion, it essentially boils down to the same thing: investors need to assess how fund managers manage the risk associated with Segregated Portfolio Companies (SPCs) conducting business in foreign jurisdictions, and fund managers need to diligently work to mitigate such risks.

The most straightforward way to address your query is to outline what you may want to inquire about when considering an investment in a Segregated Portfolio Fund. Specifically, you should examine how investment managers handle the task of mitigating risks, particularly those arising from business activities and assets held in foreign jurisdictions.

  1. When comparing Segregated Portfolio Funds in the Cayman Islands with Serial LLCs in the USA, it’s worth noting that Cayman Island Segregated Portfolio Funds undergo external audits, which elevates their level of scrutiny. Nonetheless, conducting your own research and seeking advice from your investment advisor and legal counsel is essential. This is especially crucial when assessing the risk exposure of all Segregated Portfolio Funds to foreign jurisdictions.
  2. Determine where the fund’s assets are held. Are they stored in cryptocurrency wallets in the Cayman Islands or on centralized exchanges in foreign jurisdictions? Are the bank accounts for each fund separated and held in foreign jurisdictions or within the Cayman Islands or other jurisdictions that legally recognize Serial LLCs and Segregated Portfolios?
  3. Investigate how Segregated Funds manage leverages, loans (including mortgages, if it’s a real estate fund), and other contractual obligations in foreign jurisdictions.
  4. Find out if the funds utilize LLCs or other legal entities in foreign jurisdictions where they invest to protect both the Segregated Portfolio Company and the segregated portfolio itself.
  5. Review the fund’s mandate. For instance, as example all our ChainBLX SPC Segregated Funds (SP Funds) are prohibit assuming liability and leverage through investments in foreign jurisdictions (e.g., futures, debt). Additionally, do they carry insurance for foreign real estate properties?
  6. Assess whether the Segregated Portfolios have competent legal counsel in all the jurisdictions where they conduct business. This is another critical consideration.

Please note that these are general points to consider when evaluating Segregated Portfolio Funds, and you should consult with professionals for specific advice tailored to your situation.

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#9

You mentioned bank accounts, and let me tell you, getting them for a crypto fund is an absolute nightmare. It’s even worse in the Cayman Islands, and if you’re dealing with US investors, it’s beyond frustrating. Now, I should add that I’m in ESG consulting, so I can provide advice on making funds ESG-compliant. However, these banking issues are a whole different ballgame. How did you manage to navigate through this mess?

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#10

@Nancy_Muellerhof

Just click on the link above Foreign Bank Accounts

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#11

Navigating the Legal Waters: Offshore SPC vs. Delaware’s Serial LLC for Patent Holdings

This post is for general information purposes only and is not intended to be, and should not be construed as, legal advice or a legal opinion on any specific facts or circumstances. Every situation is unique. The information contained within this post is not intended to create, and receipt of it does not constitute a lawyer-client relationship. This post is not intended to be, and should not be used as, a substitute for advice from a licensed attorney and/or tax professional. I encourage all viewers of this post to not act on the information within this post without first seeking professional advice from an attorney licensed to practice in the appropriate jurisdiction. I am licensed to practice in the state courts of California, the federal districts of California, and the Eastern District of Texas, and registered before the United States Patent and Trademark Office. Any post that relates to situations outside of these jurisdictions is based on general legal and business knowledge only.

In the vast realm of intellectual property, patents reign supreme as both the treasures of innovation and substantial financial investments. As legal navigators in this intricate landscape, you find yourself at the critical juncture of choice: where is the optimal harbor to anchor our patents for maximum protection and strategic advantage? In this exploration, you shall chart a course to two intriguing destinations: the serene harbors of the Cayman Islands with their Segregated Portfolio Companies (SPCs) and the bustling ports of Delaware’s Serial Limited Liability Companies (LLCs).

The Complexity of Liability Protection:

In one corner, Delaware’s Serial LLC beckons with its allure. Envision it as a versatile legal vessel, equipped to navigate various income streams generated by your patents. Each serial LLC can be tailored with distinct ownership structures and income-sharing arrangements, providing the canvas for crafting intricate tax strategies and organizational efficiency. It is akin to a reliable merchant ship, a conduit for the generation of profits.

In the opposite corner, the Cayman Islands’ SPC stands as a potential fortress of asset segregation. Within this legal sanctuary, each segregated portfolio benefits from the robust legal framework of the Cayman Islands, insulating it from potential turbulence affecting other portfolios within the same SPC structure. This level of legal insulation mirrors the protective barriers that safeguard diverse characters in an intricate legal drama.

Tax Advantages:

Before setting sail on your voyage, let’s pause to consider the alluring tax advantages of offshore patent holdings. Numerous offshore jurisdictions, including the Cayman Islands (like Curacao in the past), extend favorable tax treatment to intellectual property (IP) income, notably royalty payments. Such favorable tax regimes yield significant tax savings for patent holders. Moreover, offshore entities may facilitate tax-efficient repatriation of profits, a value-enhancing feature that enhances the appeal of offshore patent holdings.

Asset Protection:

Beyond tax considerations, offshore structures provide a legal bulwark for asset protection. In scenarios involving legal disputes or financial turbulence, assets domiciled offshore often prove to be less susceptible to seizure or liquidation. This legal safeguard preserves the intrinsic value of patents and the income they generate, akin to a legal shield guarding against the tempestuous tides of adversity.

Risk Diversification:

A central consideration in your voyage is the art of risk diversification. Holding patents, trademarks, copyrights, and other works within an offshore fund enables prudent spreading of risk. By aggregating multiple patents within a fund, legal risk is distributed across a diverse portfolio of assets. For example, this pragmatic approach mitigates the impact of any single patent’s success or failure, an invaluable strategy in sectors where patent outcomes are as unpredictable as the tide.

Flexible IP Management:

Flexibility, a hallmark of offshore entities, finds application in intellectual property management. Companies can initiate patent development and filing from offshore funds or companies, thereby affording the strategic liberty to select jurisdictions aligning with business objectives, tax imperatives, and intellectual property strategies. It’s analogous to selecting favorable legal winds to propel your patent voyage.

Patent Family Considerations:

As you navigate this complex sea, a salient question arises: should an entire patent family be housed offshore, or should specific patents within the family be selected for offshore protection? The answer hinges on contextual factors, including the strategic significance of each patent, the tax implications at play, and licensing intentions. A diversified approach, combining onshore and offshore patent holdings, may emerge as a judicious path forward.

Infringement and Enforcement:

A matter of substantial legal consequence pertains to the enforcement of patent rights. It is pertinent to note that US patents held within offshore entities remain subject to US patent law and are enforceable through US courts. However, the enforcement of offshore patents against US entities introduces nuanced legal complexities that demand careful consideration. A meticulous legal strategy for enforcement, aligned with the overarching objectives of the patent holder, is a prerequisite.

Federal vs. State Jurisdiction Clarified:

Here’s where the plot thickens: while patent law is indeed a federal domain in the United States, the choice of entity structure can significantly influence how liability is treated. Under federal law, the liabilities of different serial LLCs are not always treated as entirely separate entities. Instead, they can intermingle, akin to boats navigating interconnected waters. This is in contrast to the cohesive shielding offered by SPCs, which protects segregated portfolios from each other’s liabilities more effectively.

Inventor and Assignee Roles:

In the realm of patent ownership, the roles of the inventor and assignee hold pivotal significance. Typically, the inventor retains specific rights, such as the right to be acknowledged as the inventor on the patent. The entity to which the patent is assigned, be it a company or offshore fund, usually assumes the mantle of legal rights to the patent, encompassing the authority to license or enforce it. To avert legal disputes, well-defined roles for the inventor and assignee, meticulously outlined in legal agreements, are imperative.

As you embark on this intricate voyage, the imperative lies in assembling a seasoned crew of legal, business consultants, and tax advisors. They shall serve as the compass and sextant, ensuring the secure navigation of your assets and the seamless flow of earnings through the labyrinthine channels of intellectual property law. In this expansive ocean of innovation and opportunity, may the legal flag of your intellectual property endeavor unfurl high, propelling you toward the prosperous horizons where your patent treasures await.

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Frederic M. Douglas is an attorney practicing IP litigation.

DouglasPatents.com.

(949) 293-0442

In 1996, Mr. Douglas graduated from the University of California, Berkeley with a Bachelor of Science degree in chemical engineering. In 1999, he received his Juris Doctorate degree from the University of California, Davis School of Law and then became a member of the California bar and registered to practice before the USPTO.

In law school, Mr. Douglas served as a judicial intern to Superior Court Judge Jeffrey Gunther. Prior to law school, Mr. Douglas was an engineering intern at the Lawrence Livermore National Laboratory in the area of semiconductor processing. He also worked as an engineer for Tosco Refining.

Mr. Douglas has been the lead attorney in several patent infringement litigation cases (defendant and plaintiff). Mr. Douglas also maintains a patent prosecution practice.

For more background on patent applications, consult his publication, Patent Application Practice, published by Thomson Reuters - Patent Application Practice, 2d | Legal Solutions

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#12

Related to this topic, some good comments on Cayman investment vehicle principles from a recent Digital Davos panel:

• Compliance costs have increased globally, not just in Cayman but in most of the world.
• Cayman has a tried and tested fund model dating back to the early 2000s.
• A vast network of professionals in Cayman including lawyers, accountants, industry, government, and regulators worked together to build an attractive product.
• Cayman is a top-of-mind location for setting up fund structures.
• Cayman’s proximity to the US is also a factor.
• One widespread Cayman fund model is referred to as a Collective Investment Vehicle.
• The collaboration between professionals has been successful in building the product.
• Cayman may be an ideal location for many looking to set up fund structures.

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