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.