If you’re new to the investment world, you might not be fully aware of the importance and function of the Securities Exchange Commission (SEC), which is the regulatory body that governs and regulates the types of investments made available to the American public. If you think investing in an offshore mutual/managed fund is a relatively straightforward process, you’d be right, but the ease with which shares in a mutual fund can be purchased is dependent upon the investor’s jurisdiction of domicile. A US resident, for example, will probably find that less than 10% of the world’s offshore mutual funds are directly accessible, due to the presence of the SEC.

It is the institution’s job to make sure that any investment undertaken by a US citizen is registered and regulated under the guidelines in vigor. By regulating investments in this way, the SEC attempts to sift out the more questionable investments. For an investment to be approved, the investor must lodge a valid prospectus with the SEC, and a multitude of other requirements must be met. One such requirement is the way in which a particular fund invests and the maximum amount that it can invest in any particular place. The fund must also maintain an open book policy, allowing any government agency to gain access to the register of shareholders and the amount invested. And these are just a few of the rules a fund must follow in order to be available to the American public.

It can cost an offshore fund in excess of US$2,000,000 to comply with these requests. The open book policy also conflicts with the charters of a tax haven, and incurs the added expenses of setting up a new company office and transferring staff. This procedure would then have to be followed in each subsequent country the fund wanted to advertise in where it didn’t already comply with the country’s regulations. Imagine the fees and charges these companies would have to charge just to cover costs: it is therefore not economically viable for them to conduct business in this manner.

The solution to this challenge, however, is quite simple: rather than a fund trying to comply with the jurisdiction of every potential investor, the potential investor complies with the fund’s jurisdiction via the use of the appropriate offshore vehicle. When an offshore vehicle – commonly referred to as a structure – is set up, it becomes a separate entity, meaning that it is not a part of you. So if you set up in a tax haven like Vanuatu, that then becomes the nationality of the entity. By incorporating in one of these tax havens, you effectively remove the barrier imposed by the regulatory bodies such as the SEC. (You can also opt for a mail redirection service.)

The example mentioned above works if you were only setting up a structure for the purpose of gaining access to global investment opportunities. However, if you were structuring for asset protection – such as litigation – and you simply used a nominee shareholder or bearer shares, you would not be totally legally separated from the structure. To do so properly, you would need to place the bearer shares into a trust or, ideally, form a trust that would then become the legal owner of the entity.