The world is facing a number of important economic challenges, including the distinct possibility of a no-deal Brexit, and a sharper slowdown in China as a result of the ongoing trade war with the U.S. However, for offshore law firms the outlook has remained bright, with work flowing in from both traditional and non-traditional sources.
The global economy is not in a good state right now. While economic growth remains sluggish worldwide, businesses and industries have several other challenges to contend with. These include the spectre of Britain crashing out of Europe without a deal, and the ongoing trade war between the U.S. and China. However, it is not all doom and gloom from the perspective of offshore law firms, who see a steady influx of work from more established industries, as well as fast-growing new sectors in Asia.
SURGING SECTORS
Fiona Chan, partner in offshore law firm Appleby’s Hong Kong office, notes a marked increase throughout various sectors.
“In particular, banking, (re)insurance, medical, pharmaceutical and biotech. These resulted in a marked increase in our offshore activities relating to different practice areas, such as banking & finance, corporate, IPOs, funds, insurance, private client and trusts and technology & innovation,” says Chan.
Lishi Fong, partner in the banking and finance practice of Harneys’ Singapore office, sees an increase in activity in the funds space.There has been a growth in several credit funds and commodities funds, which she thinks is the result of Singaporean government introducing stimuli for foreign investment.
“Over the years, the government has introduced many policies to attract foreign direct investments (according to a report produced by the Economic Development Board of Singapore, foreign direct investments jumped from $62 billion in 2017 to $77 billion in 2018) and Singapore is seen to be politically stable with a reliable legal and regulatory system,” says Fong.
“In 2018, Singapore introduced the Variable Capital Companies Act, which is aimed at providing fund managers with an alternative form of corporate vehicle for use as a collective investment scheme. With the variable capital companies (VCC) framework, more fund managers may look to Singapore when establishing their fund,” Fong adds.
Maggie Kwok, her colleague in Hong Kong, shares similar observations.
“In APAC, we are seeing healthy growth in fund launches in both the fintech and blockchain space. A handful of cash-rich and sovereign-backed asset managers and fintech specialists in the region have, in a short space of time, been occupying themselves with setting up their investment fund platforms to allow interested participants to tap into their expertise and technology,” says Kwok, a partner in the investment funds and regulatory practice of Harneys’ HongKong office.
Philip Graham, partner in the investment funds and regulatory practice in Harneys’ BVI office, is aware of “a boom over the last three years” in three specific areas within the crypto-asset space, namely: (i) crypto-asset focused fund launches; (ii) initial coin offerings (ICOs) and in more recent times, initial exchange offering (IEOs) and security token offerings (STOs); and (iii) the establishment of digital currency exchanges.
He’s certainly not alone in his view. Geoffrey Tang, senior legal manager in Ogier’s Hong Kong corporate team, notes the cryptocurrency and blockchain-based technology sectors are seeing a lot of interest in the region and particularly in Singapore.
The general fascination with blockchain alone is enough to drive the growth.
However, there remains much accompanying nervousness about it.
“Anecdotally, most people accept that in certain ways, the rise of blockchain will fundamentally change every industry on the planet. Digital currencies are just a small part of it, but with the general awareness of Bitcoin and other altcoins, they lead the charge for the blossoming disruptive force,” Graham explains.
“Clearly, growth is also driven by valuation and with the wildly fluctuating cryptocurrency prices, investors remain fascinated by this space, if not slightly terrified.”
Besides blockchain, Ian Mann, Harneys’ Asia managing partner and the long-term head of its litigation and restructuring practice group in Hong Kong, thinks e-commerce has been a big driver of fintech in the region. However, it might be slowing down now.
“In Asia, basic e-commerce payment gateways combining direct-to-market customer participation with fully branded or ‘white-label’ full-service delivery has driven early fintech innovation. The market is probably slowing after initial low barrier to entry participation saturation,” he says.
CHALLENGES
Despite the interest, Tang says regulators have been adopting a more cautious approach given the perceived volatility of the crypto/blockchain sector.
Graham is even more vocal, naming “regulation, regulation, regulation” as the key hurdle in this area.
“As with any new industry, the global regulatory bodies are desperately trying to bend and flex their existing laws to try and meet the relevant requirements in this space. But largely failing miserably. This will be a constantly evolving story through time, but at the moment, they simply cannot keep up with the evolutionary process, which means they constantly over or under regulate the area,” says Graham.
“This leads to a lot of the protagonists regularly “jurisdiction shopping” to find the most suitable home for their product. Some wish to operate entirely without regulation and there are jurisdictions which offer that. Some wish to operate squarely within a regulatory framework, but need those laws to be carefully thought through and allow enough flexibility for their product to flourish,” he adds.
To allow space for growth but to maintain enough control, regulators have created testing grounds via sandboxes, particularly for the fintech industry.
“Regulators in APAC have demonstrated their commitment and drive for innovation by adopting regulatory sandboxes, which are formal programs designed to test financial services and business models with actual customers, subject to certain safeguards and oversight,” notes Kwok.
Regulatory sandboxes have been launched in various jurisdictions in the region including Hong Kong Securities and Futures Commission’s Regulatory Sandbox, Singapore’s Fintech Regulatory Sandbox and Japan’s Fintech Proof of Concept Hub.
However, regulators have been more accommodating with other industries.
“As the number of listed companies from more established sectors increases, a number of jurisdictions in Asia have been expanding their listing regimes to facilitate the listing of companies from emerging and innovative sectors,” says Tang.
“The growth of the biotech, fintech and blockchain-based technology sectors in Asia broadly dovetail with the growth of these sectors globally as investors seek higher potential returns and to diversify their investments. The acknowledgement by regulators in Asia of the need to adapt their regulatory regimes to facilitate capital raisings by companies in these sectors to remain globally competitive has also served to drive this growth.”
Examples of this include the expanded listing regime for biotechnology companies in Hong Kong, who have traditionally had difficulty meeting the financial eligibility tests for listing. And companies with dual-class share structures with weighted voting rights in Hong Kong and Singapore, who have traditionally not been able to list without collapsing such structures.
“Although the reform of regulatory regimes in Asia to facilitate capital raisings by companies in emerging and innovative industries is a welcome one, most of these expanded regimes in Asia have only been in place for a short time,” says Tang.
Thus, he says some companies are reluctant to be the “first mover” to list under the expanded regimes and are waiting for market practice to settle and develop first.
Regulatory development is a key topic in the challenges of other booming sectors too.
Fong says the VCC is new and has not been tried and tested. Although the legal framework for setting up the VCC is in place, there may be practical issues which will only be known when one is setting up the VCC.
Prabha Sasidharan, senior associate at Appleby, says the legal hurdles for any new industries are often linked to the development of the legal and regulatory regimes of any relevant country.
For instance, the SFC in Hong Kong had only issued guidelines to regulate digital assets towards the end of 2018 by imposing licensing conditions on intermediaries who manage or distribute funds investing in virtual assets of more than 10 percent of their portfolio, irrespective of whether virtual assets meet the definition of “securities” or “futures contracts.”
These include guidance on custody requirements, portfolio valuation and risk management. The issuance of eight digital bank licenses by the Hong Kong Monetary Authority only occurred in 2019, after years of discussions.
“All these proactive steps are welcoming signs that the jurisdiction is positively defining the regulatory framework within which businesses may operate, but further development and refinement are required for such frameworks to become mature,” says Sasidharan.
ADVANTAGES AND OPPORTUNITIES
But Fong believes that Cayman funds will co-exist with VCCs, given the familiarity international investors have with the Cayman fund structure. Therein lies the opportunity for offshore firms.
“There will be more cross-selling opportunities between offshore firms and onshore firms as we will have clients wanting to explore the VCC structure and clients of onshore law firms may want to explore the Cayman or Luxembourg fund structure. We play a supporting counsel role in the funds formation space and we will continue to work closely with the onshore counsel to support our clients and provide them with innovative and practical solutions,” says Fong.
In comparison with Asian jurisdictions, Sasidharan says there are less legal hurdles in Bermuda, the Cayman Islands and the BVI.
“In 2018 Bermuda introduced a new legal and regulatory framework designed to govern and regulate initial coin/token offerings and the digital asset business and InsurTech sectors. The Cayman Islands and the BVI both have flexible systems and are well placed to become an attractive destination for technology entrepreneurs,” says Sasidharan.
Ogier’s Tang describes the use of offshore jurisdictions by companies in the fintech and blockchain-based technology-based sectors as “exceedingly popular.”
“Many of the established offshore jurisdictions (for example, the Cayman Islands and the BVI) combine tax neutrality with a stable and internationally recognised legal platform,” says Tang.
For those companies from other emerging and innovative sectors that wish to come to market, the traditional advantages of using an offshore jurisdiction remain, including the flexible nature of offshore company law to facilitate the compliance with listing and ongoing requirements for listed companies; speed and efficiency in setting up new offshore entities; and robust common law legal system based on English law.
Therefore, offshore law firms are well placed to advise companies from these sectors on the advantages of using offshore jurisdictions for their businesses and navigating the relevant regulatory and legal requirements from early stage to when they come to market (and beyond).
According to Harneys, the jurisdictions of the BVI and the Cayman Islands have proved exceptionally welcoming to this line of business and as a result, offshore firms have seen a huge amount of the work in this area.
“Harneys took a pioneering role in the cryptocurrency space back in 2016 with several exceptionally talented clients from the west coast of the US, whilst all of our competitors initially took a backseat. Since then, we have launched over 100 crypto-asset focused funds across both jurisdictions with clients based all over the world,” says Graham.
The firm has also claimed to be involved with some of “the truly premier ICOs,” including the world’s largest (at the time) in 2017 when a client raised $1.7billion using a BVI domiciled vehicle.
“Both jurisdictions have regulators who are keen to get the relevant laws in this area exactly right and private sectors who have genuine expertise with this unique type of work. We find clients continue to come to us directly and so offshore law firms are truly at the coal-face of this industry,” says Graham.
WINNING, RETAINING CLIENTS
While the benefits of tapping an offshore legal firm are clear, the path to winning and retaining the clients is another artform of its own. Many of those that Asian Legal Business spoke to have a view on how to do it.
“As many companies from the emerging and innovative sectors are still early-stage companies and may not have a clearly delineated legal function, it is important for offshore firms to build relationships early, be pro-active in considering alternative legal structures that enable their clients to achieve their commercial aims and become trusted advisers to these companies on an ongoing basis (rather than on a project to project basis),” says Tang.
Tang also cites flexibility in pricing as important as these companies may be operating under stringent budget constraints as they seek to grow their businesses.
Graham thinks showing a willingness to understand their client’s business and needs is key.
“Besides that, having dedicated teams on the ground with local network and expertise in the various regions working with the onshore regulators to ensure that the laws are suitable and appropriate. We are still at a very embryonic stage and so being nimble and pragmatic as the evolutionary process unfolds will also be crucial,” he says.
Appleby’s Sasidharan believes it to be imperative for offshore firms to develop a clear strategy both globally and locally and provide an all-round service covering key offshore jurisdictions.
In preparation, she says that the firm has for the past few years developed a global Technology & Innovation group with a sizable Hong Kong team focusing on China, Hong Kong and Singapore.
Language skills are also a winning factor.
“Our language capabilities allow us a considerable advantage in assisting clients with a Chinese background,” says Chan. She adds that her firm can provide advice from the initial set up of corporate structures right through to complex legal analysis. And in a fastmoving sector, informing and updating clients is highly beneficial. “Our service to the clients does not end with the completion of our legal work – we continue to update clients as the law and regulation evolve, which is essential given these fast-changing industries,” she says.
To contact the editorial team, please email ALBEditor@thomsonreuters.com.