The tier is chosen to the register, not the register to the tier.

Every fund regime in the two centres is built as a trade between the breadth of the register and the weight of the duties. The public tier may be offered to anyone, and it carries the whole rulebook: a prospectus the regulator reads before a unit is sold, a depositary or custodian with oversight duties, a prescribed valuation cycle, a governance structure with independent oversight, and a disclosure regime designed for people who cannot protect themselves. The exempt tier is offered to professional clients only, by private placement, with a minimum subscription, and it is notified to the regulator rather than approved by it. The qualified investor tier sits behind a higher minimum and a lighter regime still, on the footing that a person who can write that cheque can read a constitution and pay for advice on it. The three are presented to a manager as a choice of regime. They are a choice of who may be on the register, and the choice is made once, at formation, by the person who knows least about the register at that moment.

This note sets out what each tier fixes, why the order in which the decision is taken decides whether it holds, how the register is written so that the tier can be read against it, where the wrong order surfaces, and what a manager, its counsel, its administrator and its lender each hold in the decision. It ends with the sequence a structure follows and the questions managers bring to it.

What each tier fixes

Four things are fixed by the tier, and none of them can be changed afterwards without the regulator, the consent of the holders and a re-papering of every subscription.

The investor test. The exempt and qualified investor tiers admit professional clients, assessed under the conduct rulebook of the centre. For an undertaking, the assessment runs on a deemed route, for entities that are professional by what they are, such as regulated firms, governments, central banks and collective investment funds, and on an assessed route, for entities that meet a balance-sheet test and that the firm judges to have the experience to be treated as professional. For a natural person, the assessed route requires a net-asset test, generally set at one million United States dollars and tested against what the person holds rather than what they turn over, taken together with a second limb of relevant experience, professional certification or qualifying work in the financial sector. A holder who fails the test cannot be on the register of either private tier, and its standing has to be evidenced in the manager's file at admission and again at every later transfer.

The minimum subscription. The exempt tier's minimum is the lower of the two; the qualified investor tier's is ten times higher, in both centres. The minimum is tested per holder. The regimes are particular about aggregation: a holder who reaches the minimum only by combining several family members, or through a nominee that holds for several persons, is a holder whose standing the administrator will have to opine on at every capital call, and the tier's counting rules decide whether the nominee is one holder or several.

The holder cap. The lighter tiers cap the number of holders, at a figure each centre's rules state, and the cap is counted on every day of the vehicle's life rather than at first close. Transfers, estates and the dissolution of a feeder all move the count without the manager subscribing anybody.

What the vehicle may hold and how. A fund investing in real property is built closed-ended below the public tier; the public tier's property fund is a listed trust with a distribution requirement and a cap on the share of assets under development. Leverage limits, valuation frequency, the requirement for an independent valuer, custody arrangements and the form of the periodic report all step with the tier. A strategy that needs a particular feature, quarterly valuation for a lender's covenant, say, or a development share above the public cap, needs a tier that permits it.

The order that fails

A manager chooses the qualified investor form for its speed and its light touch, forms the vehicle, notifies the regulator and goes to market. The register it can actually raise then reveals itself, one subscriber at a time.

A family office that cannot meet the qualified investor minimum without aggregating three family members, each of whom would have to be classified separately as a professional client on the assessed route, and one of whom has the assets but not the experience.

A pension institution whose own investment policy requires a regulated product with a depositary, which the tier does not provide, and whose trustees will not vary the policy for one commitment.

A corporate holder whose counsel will not sign the professional client declaration because the holder's balance sheet, read the way the rulebook reads it, with the exclusions the rulebook applies, falls short of the undertaking threshold.

A sovereign that will subscribe only through a feeder, which is one holder for the cap and forty participants for the lender's borrowing base, and whose feeder's own tier in its own jurisdiction caps its holders at a number the sovereign's own structure exceeds.

A bank's private-banking book that wants to place its clients' money through a nominee, where the tier's counting rule looks through the nominee and the nominee's clients are retail.

Each of those is a subscriber the form cannot take, and none of them can be fixed by drafting after the vehicle is formed. The cures offered at that point are a conversion to a higher tier, in front of every holder already in, with the regulator's approval and a new set of documents, or a second vehicle alongside the first with its own tier, its own costs and its own regulator. Both are the price of having chosen the tier first, and both are paid in the currency a manager has least of during a raise, which is time.

The order that holds

The reverse order is cheaper and it is mechanical. The register is written first: every holder the manager intends to admit over the life of the vehicle, not only at first close. For each, the category it falls into under the conduct rulebook and the route by which it would be classified; the minimum it can subscribe and whether it would need to aggregate; the form it needs to hold through, directly, through a feeder, through a nominee; and the requirements of its own regime, whether it needs a depositary, a regulated product, a particular reporting form, a particular domicile.

The list is then read against the three tiers. The tier that admits the whole list is the tier. If no tier admits the whole list, the register is two registers, and the structure is a master with two feeders or a pair of parallel vehicles, each at the tier its own register needs, designed before either is formed. The list also tells the manager what the tier will cost it: a register of twelve institutions fits the qualified investor tier and gains a light regime; a register of sixty professional clients needs the exempt tier's cap and its duties; a register that includes anybody who fails the professional test needs the public tier, and the public tier's whole cost is the price of that one holder, which is a price the manager may decline to pay by declining the holder.

By tier · by what it fixes	Public	Exempt	Qualified investor
Who may hold	Anyone, on a prospectus the regulator has read	Professional clients only, by private placement	Professional clients only, by private placement, behind the higher minimum
Minimum subscription	None the tier imposes	The lower minimum the rules state	Ten times the exempt minimum
Holder cap	None	A cap the rules state, counted daily	A lower cap, counted daily
Regulator's role	Approves the constitution and the prospectus before launch	Records a notification; reviews afterwards	Records a notification; reviews afterwards
Property funds	Listed trust, distribution requirement, development cap	Closed-ended	Closed-ended
Valuation and custody	Prescribed cycle, depositary oversight	Lighter; the constitution carries what the tier does not	Lightest; the constitution carries almost all of it
What it suits	A wide register of smaller tickets	A register of up to the cap of professional investors	A small register of institutions that can read the documents

Reading the tier against the strategy

The register is one half of the reading. The strategy is the other, because each tier also fixes what the vehicle may do, and a strategy that needs a feature the tier withholds has chosen a tier it cannot use.

A real-assets strategy holding land or buildings is closed-ended below the public tier in both centres, and a manager who wants an open-ended real-assets vehicle for a register that wants liquidity has described the public tier's listed trust, with its distribution requirement and its cap on development, or a vehicle that cannot exist. A development strategy with a high share of assets under construction is outside the public property fund's cap and belongs in a private tier by that fact alone.

A credit strategy with a lender's loan-to-value covenant tested monthly needs a valuation more frequent than the private tiers prescribe, which the constitution can provide for above the tier's floor, and a valuer whose independence the constitution secures because the tier does not.

A strategy that intends a continuation vehicle in year six, a distribution in kind at the end, or an admission to trading needs the tier to permit each: the continuation under the centre's related-party process, the distribution under the tier's rules on in-kind distributions, the admission under the public tier's conditions on the day. A private tier chosen without reading the year-six moves is a private tier read for four years of a ten-year life.

A strategy that will borrow at the fund level against undrawn commitments needs a tier whose leverage rules permit the facility, and a legal form whose commitments can be assigned. The tier's leverage cap is read against the capital-call facility, the portfolio facility and any guarantee the fund might be asked to give, because a guarantee is leverage for the purpose of the cap whether or not the constitution calls it that.

Splitting a register

When no tier admits the whole list, the register is split, and the split is drawn in one of two ways.

A master-feeder puts the portfolio in one master vehicle and the holders in two or more feeders above it, each feeder at the tier its own holders need. The master's tier admits the feeders as holders; each feeder's tier admits its own register. The master is usually at the lightest tier its feeders can pass, because the feeders are its only holders, and each feeder is a fund in its own right with its own regulator, placement perimeter and substance. The split is cheap at the master and expensive at the feeders, and the distribution leg between them is where the structure fails most often.

A parallel structure puts two vehicles side by side, each holding the same assets in the same proportions, each at the tier its own register needs, with a co-ordination agreement that governs allocation, timing, expenses and exit. The split is expensive in the chain beneath, because two funds holding one asset need a shared holding company or two, and cheap in the register, because each vehicle's holders deal with one constitution.

The choice between the two is made on where the complexity is better carried: above the portfolio, in the feeders, or beside it, in the parallels. A register that splits on the tier alone, with no tax or regulatory reason for the holders to be in different jurisdictions, usually splits into feeders. A register that splits because some holders need a different domicile, a different treaty position or a different form usually splits into parallels.

The cap and the minimum over a ten-year life

A worked illustration, as a type. A qualified investor fund is formed with a cap of fifty holders and a register of thirty at final close. In year two a sovereign holder reorganises its investment arm into four subsidiaries and transfers its interest to them: thirty-three. In year three a family holding company is demerged into three: thirty-five. In year four a feeder with eighteen participants is wound up by its own sponsor and the participants arrive on the register directly: fifty-two. The vehicle is over its cap on a day nobody chose, and every one of those movements was lawful under the constitution's transfer provision as drafted.

The same vehicle drafted with headroom of twenty, an aggregation rule counting holdings under common control as one, and a feeder provision requiring the feeder's sponsor to give a year's notice of dissolution and to replace the feeder with a nominee the tier counts as one: the sovereign's four subsidiaries count as one, the family's three count as one, the feeder's participants arrive through a nominee. The register stands at thirty-one.

The minimum runs the same way. A holder that subscribed at the minimum and transfers half its position to another holder has transferred a holding below the minimum, which the tier may not permit the transferee to hold. A constitution that permits partial transfers only where both the retained and the transferred holding meet the minimum has read the tier; one that permits partial transfers without the test has drafted a transfer the administrator cannot register.

Where the wrong order surfaces

At the second close, when the holder count reaches the cap with commitments still open. The manager chooses between refusing a subscriber it spent a year courting and converting the vehicle to a tier it was not built for, and either choice is made in front of the holders already in.

At the first capital call, when the administrator asks for the classification record of a holder admitted on an aggregation the tier does not recognise. The call to that holder cannot be made until the record exists, and the record cannot be made because the aggregation was never lawful.

At the first transfer, when a holder must sell and the only buyers who pass the tier's test are the holders already on the register, so that the transfer provision the constitution offers cannot be operated and the selling holder is in distress.

At the thematic review, when the regulator of the centre asks for the classification record of every holder and finds three that the tier would not have admitted. The vehicle was outside its tier from the day each was admitted, and the manager's own permission is the thing under review.

At exit, when a buyer of the portfolio, or a successor vehicle in a continuation, runs diligence on the register and finds holders whose admission cannot be evidenced. A register that cannot be evidenced is a register the buyer's counsel prices.

Four cases, as types

A manager forms a qualified investor fund for a credit strategy, expecting a register of eight institutions. At the second close a regional bank wants to place its private-banking clients' money through a nominee company. The tier's counting rule looks through nominees; the clients are two hundred retail persons; the bank's commitment is refused, and the bank places with a competitor whose exempt fund admitted a different structure.

A manager forms an exempt fund for a real-assets strategy and admits a family office on the family office's own professional standing, without classifying the family holding company that is in fact the holder. Three years later the holding company deals with the manager directly on a transfer, its own classification has never been performed, and the regulator's review reads the register as having carried an unclassified holder since first close.

A manager writes its register first: eleven institutions, two family holding companies and a sovereign through a feeder. The two family companies fail the qualified investor minimum and pass the exempt tier's; the feeder is one holder for the cap. The manager forms an exempt fund, reserves headroom under the cap, and admits all fourteen at first close with a classification record for each.

A manager writes its register and finds that one pension institution requires a depositary the private tiers do not provide. Rather than form a public fund for one holder, the manager offers the institution a parallel vehicle in the centre's public tier, sized to that institution alone, co-ordinated with the main fund. The institution declines the cost, the manager declines the holder, and the decision is taken before either vehicle exists.

What the regulator reviews

Both centres' regulators run thematic reviews of the private tiers, and a review begins with a request for the file rather than with a visit. The request is for the notification and every document filed with it; the constitution and the memorandum as issued, with every supplement; the classification record for every holder on the register, with the route, the criteria, the evidence and the acknowledgement; the administrator's register and its count on each day of the review period; the transfer records, with each transferee's classification and the route by which it was approached; and the periodic reports the tier requires. The review reads the register against the tier on the day of each admission and each transfer, and a holder that the tier would not have admitted is a breach dated to the day it arrived.

The consequence depends on the centre and the facts, and in both it reaches the manager's permission rather than only the fund. A vehicle found to have been outside its tier is treated as having been a fund of a different kind for the period of the breach, with the duties of that kind unperformed; a manager found to have admitted holders without classifying them has breached its own conduct obligations. The file that survives a review is the file that was built as the register was admitted, because a record reconstructed afterwards is a record the review reads as reconstructed.

What each party holds

The manager holds the decision and its evidence: the register list, the tier chosen to it, the reasons, and the classification record for every holder on every day.

Counsel holds the reading of the tier's rules against the list, the drafting of the constitution's admission, transfer and conversion provisions, and the opinion that the vehicle meets its tier's conditions at notification.

The administrator holds the count, the minimum test at each subscription and transfer, and the reporting the tier requires; it is the party who will ask for the classification record at the first call.

The lender holds the borrowing base, which is the register read for credit: a feeder that is one holder for the cap is forty participants for the lender, and the lender's grading of the register is a second reading of the same list.

The regulator holds the review: the classification records, the notification, the ongoing filings, and the power to treat a vehicle outside its tier as a vehicle of a different kind for as long as the breach lasted.

The holder holds its own classification and the protections it gave up by being professional, and its counsel reads the tier for what the holder is owed.

The sequence

1. The manager writes the intended register for the life of the vehicle, holder by holder, with category, route, minimum, holding form and own-regime requirements.
2. Counsel reads the three tiers against the list and identifies which admits all of it, or how the list splits.
3. The structure is drawn to the result: one vehicle at one tier, or a master with feeders, or parallels, each at the tier its own register needs.
4. Headroom under the holder cap is fixed and written into the constitution.
5. The constitution's admission, transfer, aggregation and conversion provisions are drafted to the tier's rules and the placement regimes of the register's states.
6. The classification record is built into the subscription process, with criteria, evidence, date and acknowledgement.
7. The administrator reads the draft for the count, the minimum and the reporting before notification.
8. The vehicle is formed and notified, and the register is admitted against the list.

Questions a manager asks

Can the tier be changed later if the register grows. It can, by conversion to a higher tier, with the regulator's process, the holders' consent and a re-papering of every subscription, and it is done in front of everybody. A conversion path written into the constitution at formation makes it a procedure; its absence makes it a negotiation.

Is the qualified investor tier worse for the holders. It is lighter, and the protections it omits are the ones a professional client is presumed able to do without or to contract for. A register of institutions with their own counsel usually prefers it; a register that includes holders relying on the regime's protections does not.

Can a nominee or a feeder be used to bring in holders the tier would not admit directly. The tier's counting and look-through rules decide, and they differ between the centres and between the tiers. A feeder is a fund in its own right with its own tier; a nominee is looked through by some rules and not others. The answer is read from the rules before the structure relies on it.

What happens if one holder turns out to have failed the test. The vehicle was outside its tier from the day of admission. The cure is the holder's exit, by transfer to a permitted holder or by redemption where the constitution permits it, a disclosure to the regulator where the rules require it, and a review of every other classification.

Does the choice of tier affect the lender. Directly. The lender reads the register as a borrowing base, and the tier's cap and minimum shape the register the lender can count.

Does the tier affect marketing in the Gulf states. The tier governs the offer within the centre. Each onshore state's regime governs the offer there, on its own terms, and a tier chosen to the register has usually also been chosen with each state's route in view.

Terms used

Tier: one of the three categories of fund the centre's rules define, public, exempt and qualified investor, each with its own investor test, minimum, cap and duties.

Professional client: a person assessed or deemed under the conduct rulebook to be able to bear the loss of the retail protections, on the criteria the rulebook states.

Deemed and assessed routes: the two ways an undertaking or a person reaches professional status, by what it is or by a test the firm applies.

Holder cap: the maximum number of holders a tier permits, counted daily.

Headroom: the difference between the cap and the register at any time, reserved at formation against transfers and estates.

Feeder: a separate fund whose only asset is units in the master, counted as one holder by the master's tier and as a fund by its own.

Conversion: the procedure by which a vehicle moves from one tier to a higher one, with the regulator's process and the holders' consent.

Classification record: the manager's file showing, for each holder, the route, the criteria, the evidence, the date and the acknowledgement.

What to read

The funds rules of the centre for the tier definitions, the investor tests, the minimums, the holder caps and the counting rules; the conduct rulebook for the professional client criteria on the deemed and assessed routes; the constitution's admission, transfer, aggregation and conversion provisions; each onshore state's placement regime for the holders that sit there. On this site, the vehicles room under Structures, the funds rooms for each centre under the restricted reading, and the marketing room under Jurisdictions.