Jersey: Fishing For Funds: Offshore Red Herrings

Last Updated: 9 December 2008
Article by Appleby  

"Red herring" is a term frequently encountered in the context of investment funds. Although reference to a red herring may, in isolation, suggest an intention to mislead or divert attention from the truth, in the context of funds the term has certainly acquired a different meaning. More importantly, red herrings have become an effective means of assessing investor interest in a prospective fund prior to formal establishment. They may also reduce the level of importance sometimes afforded to certain factors in choosing an offshore location for a fund, in particular timing applicable to the formation process and the level of start-up costs which a promoter may be responsible for in the event of a delayed or non-launch of their fund. In this way, red herrings encourage fund promoters to choose the appropriate long-term domicile for their fund at the outset.

By way of background, a document pursuant to which an interest in a fund is offered to investors is usually termed a "prospectus", "offering memorandum", "offering circular", "information memorandum" or the like. This describes the interest being acquired (typically shares in a company, interests in a partnership or units in a unit trust) and the material terms of the fund. Although a prospectus may be used as a collective term it normally suggests a retail offering, and an offering memorandum, offering circular, information memorandum or the like normally suggests a private offering. The choice of term used to describe the document, and the content thereof, is typically dictated by the laws and regulations, including any stock exchange rules, applicable to the fund.

Origins of red herrings

The term red herring, as used in a financial context, appears to originate in the U.S. For instance, suggests the origin of the definition is as follows: "a tentative prospectus circulated by the underwriters of a new issue of stocks or bonds that is pending approval by the U.S. Securities and Exchange Commission: so called because the front cover of such a prospectus must carry a special notice printed in red". Any similar tentative financial prospectus is also included and, indeed, in practice the term has been extrapolated to apply to the tentative prospectus, offering memorandum, offering circular, information memorandum or the like of almost any fund located anywhere.

Investor base

Key information considered in deciding to form a new fund is the level of actual investor interest in the target market for the specific fund product. General market information is often insufficient. Significant legal and administrative costs will be incurred in the formation of the fund and, barring contingency fees, will be payable irrespective of the level of investment. In addition, significant time and effort will be required by the promoter, together with potential service providers, to progress a fund from initial conception through to establishment. Once established, fully documented and regulated (if required), changes to fund documents to facilitate target market demands can also be cumbersome and costly.

In practice, these timing and formation issues can be less sensitive to funds using a red herring, in particular as it allows them to assess the existence of a significant investor base and progress with the finalisation of the fund following circulation of the red herring. In this sense, a red herring can be used to provide a breather in the formation process. More importantly, the cost and timing benefits mean that choosing the most appropriate jurisdiction for fund domicile can instead focus on the credibility of the jurisdiction, nature of the laws and regulations, structural issues, availability and competence of fund service providers, investor preferences, historic connections, geographic location and convenience.

Legal issues

Nevertheless, both legal and regulatory issues must be considered prior to the circulation of a red herring. In all cases, appropriate legal counsel for each jurisdiction with which the proposed fund will have a connection, including the chosen domicile for the fund and each jurisdiction in which the red herring will be circulated, should be engaged to do so.

Legal issues would include potential liability for the content or circulation of a red herring. A prospectus is normally issued and circulated by a fund following establishment and approval by the board, general partner or trustee of the fund. However, proceeding by way of this route eliminates practical advantages of a red herring. Additional work will be required in order to progress to a stage where the prospectus will be formally approved, and in any event enquiries may be made by potential regulators, auditors, directors and other fund service providers as to the conduct of a fund entity during the period between initial formation (for instance, the date of incorporation of a fund company) and regulatory approval - usually in the case where this period is protracted.  Careful consideration should therefore be given to the stage of fund formation at which a red herring will be issued.

Regulatory issues

Regulatory implications of a red herring are also important. Red herrings typically include comprehensive disclaimers and disclosures relating to the tentative nature of the document, the fact that the fund is not yet formally constituted and also that the red herring does not comprise an offer of the interest described on a preliminary basis therein. Nevertheless, the question as to whether a red herring is permitted (or at least not prohibited), and if so the precise wording of the disclaimers and disclosures, should be carefully considered with reference to each jurisdiction with which the proposed fund will have a connection in order to ensure that the document and circulation thereof is within applicable legal and regulatory parameters.

In short, red herrings in the funds world are far from intended to deceive. They are intended to inform, and are a pragmatic way for a fund promoter to fish for investor interest prior to full costs and time being incurred in formal establishment. Given appropriate consideration of the legal and regulatory requirements, red herrings can be used to bridge the gap between the ultimate objective of formal fund establishment and the immediate need to assess investor appetite on an informed basis.

So, let's go fishing!

This article first appeared in the autumn 2008 issue of Appleby Jersey's Finance newsletter.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions