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Why MENA-based Startups Are Choosing To Incorporate In The Cayman Islands And The British Virgin Islands – Shareholders



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According to a report by data platform Magnitt, the total
funding secured by startups in the Middle East and North Africa
(MENA) amounted to approximately US$864 million in the first
quarter of 2022. Startups in the UAE accounted for 27.3% of all
deals closed across MENA and 34.4% of all funding raised across the
region in 2022 to date. The US$256 million raised by KSA-based
startups in the first quarter of 2022 marks the highest the Kingdom
has ever raised in a single quarter to date. With startup funding
in MENA being at an all-time high, an increasing number of founders
will need to consider which jurisdiction to use when incorporating
an investor friendly holding company.

This article looks to provide insight into some of the key
features of the Cayman Islands and the British Virgin Islands (BVI)
as the offshore jurisdictions most commonly used by MENA-based
startups.

Investor familiarity

Familiarity with the domicile and legal form of the investment
vehicle is a critical element in ensuring a startup’s
marketability with potential investors. Estimated to house more
than two-thirds of non-US domiciled investment funds, the Cayman
Islands is the largest and most popular offshore domicile for the
establishment of investment vehicles, by some margin. The
structuring of the investment vehicle tends to be investor driven
and, in many cases, institutional investors will insist on a Cayman
Islands or BVI vehicle being used given their familiarity with the
same.

Apart from investor familiarity, both jurisdictions are also
recognised as centres of excellence for cross-border financing
structures, M&A and capital market transactions and provide a
neutral platform to pool and access capital, which is recognised by
regulators and banks.

Trusted legal system

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

Flexibility and certainty of structures

One of the main reasons why the Cayman Islands and the BVI are
ideal jurisdictions for startup companies is the flexibility to
determine the commercial features of the organisational structure.
The company’s memorandum and articles of association can be
easily amended to set out the commercially agreed governance
provisions. Multiple classes of shares can be created with
different voting, dividend and distribution rights, and companies
have the option to create additional classes of shares for later
funding rounds.

There is no minimum capital requirement that needs to be
invested at the time of incorporation. The company can be
incorporated with a single shareholder and director, which can be
the same individual or corporate entity. In addition, there is no
requirement for a director or shareholder of a holding company to
reside in the Cayman Islands or BVI. The company can carry out its
business (and can be operated from) anywhere in the world with
minimal financial reporting requirements.

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

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

Tax neutrality

International investors will often be from a different
jurisdiction than the operating target business and will usually
want neutrality in electing the jurisdiction for their investment
(including equal legal and tax treatments). There is no income tax
or corporation tax attaching to companies established in the Cayman
Islands or BVI. For investors, this means resources can be pooled
to invest without returns on that investment 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 favourable tax regimes provide a
tax efficient platform for startups to retain or reinvest profits
in the business.

Confidentiality

Neither the register of directors nor the register of
shareholders is required to be publicly filed in the Cayman Islands
or BVI, ensuring a high degree of confidentiality for founders and
investors. Founders will need to provide standard
know-your-customer documentation for directors and certain
investors of the holding company. The company’s corporate
services provider is required to collect beneficial ownership
information on investors, and such information may be made
available where requested by certain domestic and international
governmental authorities.

Speed and ease of incorporation

The Cayman Islands and the BVI are competitively priced and a
company can be incorporated very quickly (often within 24 hours of
receipt of instructions). The simplicity of establishing companies
in either of these jurisdictions continue to play a role in
influencing the decision of founders in using these
jurisdictions.

Conclusion

The Cayman Islands’ and the BVI’s competitive strength
in the startup space lies in their respective ability to provide
effective, cost-efficient 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 key reasons why
MENA-based startups continue to incorporate in the Cayman Islands
and the BVI.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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