The British Virgin Islands (“BVI”) is the world’s largest offshore corporate domicile with close to 500,000 active companies. It is also world’s second-largest offshore investment funds domicile with about 2,000 active investment funds.

The primary legislation in the BVI which regulates the investment funds industry is the Securities and Investment Business Act, 2010 (“SIBA”). SIBA regulates both funds and fund functionaries operating in or from within the BVI. SIBA came into effect on May 17, 2010 and along with the accompanying Mutual Funds Regulations, 2010 replaced the Mutual Funds Act, 1996.

Under SIBA, the term “mutual fund” or “fund” is used to represent what are commonly known as investment funds or hedge funds and it is defined as a company incorporated, a partnership formed, a unit trust organised, or other similar body formed or organised under the laws of the BVI or of any other country or jurisdiction which:

(a) collects and pools investor funds for the purpose of collective investment; and
(b) issues fund interests that entitle the holder to receive on demand or within a specified period after demand an amount computed by reference to the value of a proportionate interest in the whole or in a part of the net assets of the company, the partnership, the unit trust or other similar body, as the case may be, and includes:

(i) an umbrella fund whose shares are split into a number of different class funds or sub-funds, and
(ii) a fund which has a single investor which is a mutual fund not registered or recognised under SIBA.

Pursuant to the above definition, SIBA only regulates: (i) open-ended funds (whose equity interests are redeemable at the option of the investor), and (ii) administrators, managers and custodians of such open-ended funds. SIBA does not regulate closed-end funds.

Some of the recognised advantages of setting up an investment fund in the BVI include:

– a stable political and economic jurisdiction which is committed to international compliance;
– a tax neutral environment;
– a recognised and respected legal system supported by English common law, modern local legislation, and a well-developed court system, including a dedicated commercial division;
– no regulatory restrictions on investment policies or strategies or on performance and other fee arrangements;
– no requirement to appoint local directors or local functionaries;
– various types of fund structures including, single class funds, multi-class funds and master feeder funds are facilitated;
– statutory segregated portfolio ring-fencing;
– low start-up and ongoing fees and costs; and
– no requirement for a local auditor sign off on the fund’s accounts.

Funds regulated by SIBA fall within five categories, namely: private funds, professional funds, public funds, incubator funds and approved funds.

Private fund

This is a fund whose constitutional documents specify that it will have no more than 50 investors or that the making of an invitation to subscribe for or purchase shares is made on a private basis.

Professional fund

This is a fund in which shares are only made available to professional investors and the initial investment by all of the investors (excluding exempted investors) is not less than US$100,000 (or equivalent).

Public fund

This type of fund is the most regulated since it is open to a larger number of investors most of whom might be unsophisticated.

Public funds must be registered before engaging in any business activity in or from within the BVI. A public fund must publish a prospectus including the information required by SIBA and must also produce and distribute audited annual financial statements.

SIBA requires that a prospectus for a public fund shall provide “full and accurate disclosure of all such information as investors would reasonably require and expect to find for the purpose of making an informed investment decision”. The prospectus is also required to contain a summary statement of investors’ rights including the right to claim for rescission of their purchase, or for recovery of damages in the event of any misrepresentation in the prospectus of the fund.

Public funds are also subject to the Public Funds Code, 2010 (the “Code”) which came into force on March 31, 2011. The Code sets out four principles by which a public fund must conduct its business: (i) integrity; (ii) management and control; (iii) investors’ interests; and (iv) relationship with the FSC. A public fund is responsible for applying the principles to its particular circumstances which may require adopting higher standards than is set out in the remainder of the Code to avoid being in breach of the principles.

Incubator fund

This fund has the following key features:

– a maximum of 20 investors;
– a minimum initial investment of US$20,000 by each investor; and
– a cap of US$20 million on the value of investments of the fund.

The incubator fund is ideal for new managers and start-ups. There are no functionary requirements, accordingly, an incubator fund can be established and operated without an administrator, manager, custodian or auditor. Also, the fund is not required to have an offering memorandum but is required to file a description of its investment strategy and give appropriate investment warnings to investors.

An incubator fund is permitted to operate for two years (with the possibility of one additional year). This time period allows for the establishment of a track record without onerous regulatory obligations. Prior to the end of the two or three period (as applicable) or upon exceeding any of the specified thresholds, the fund must elect one of the following options:

– convert to an approved fund;
– convert to a private fund or professional fund by preparing, amongst other things, an audit demonstrating its current financial position and compliance with the Regulations and submitting the appropriate application to the Commission; or
– where it is not viable for the fund to continue at the end of the two or three year period, wind up its operations.

Approved fund

This fund has the following key features:

– a maximum of 20 investors at any one time; and
– a cap of US$100 million on the value of investments of the fund.

An approved fund has no minimum initial investment requirement, and is not required to appoint an auditor, manager or custodian. The fund is however required to appoint an administrator to provide suitable oversight of its operations. No offering memorandum is required but the fund is required to file a description of its investment strategy and give appropriate investment warnings to investors.

Unlike the incubator fund, the approved fund can continue to operate as an approved fund for an indefinite period, unless:

– a decision is made to convert the fund to a private or professional fund;
– it is required to convert into a private or professional fund by virtue of the fact that it has exceeded one of the relevant thresholds; or
– it elects to wind up its operations.

The FSC requires a fund wishing to be recognized, registered or approved to submit an application which must include evidence of the fund’s status together with details of each of the fund’s functionaries (being the investment manager, administrator, custodian and auditor).

In considering an application for recognition or registration, the FSC will require that the manager, administrator and custodian of a BVI investment fund be incorporated in either the BVI, or a “recognised jurisdiction”, which, for the purposes of the SIBA, are currently as follows:

Argentina, Australia, Bahamas, Bermuda, Belgium, Brazil, Canada, Cayman Islands, Chile, China, Curacao, Denmark, Finland, France, Germany, Gibraltar, Greece, Guernsey, Hong Kong, Ireland, Isle of Man, Italy, Japan, Jersey, Luxembourg, Malta, Mexico, Netherlands, New Zealand, Norway, Panama, Portugal, Singapore, Spain, South Africa, Sweden, Switzerland, United Kingdom and the United States of America.

In addition, functionaries incorporated in other jurisdictions may be acceptable if the jurisdiction is regarded by the FSC as having a prudent system of regulation and supervision of investment business including mutual funds business.

The above functionary requirements are primarily relevant for private, professional and public funds since an incubator fund requires no functionaries, and an approved fund only requires an administrator.

Investment funds in the BVI are usually set up using either: (a) a BVI business company, (b) a limited partnership, or (c) a unit trust. The BVI business company is the most popular of the three vehicles.

BVI business company – this is a separate legal entity from the investing shareholders and would be structured as a limited liability company. BVI business companies are regulated by the BVI Business Companies Act, 2004 (“BCA”) which allows for a great deal of flexibility in terms of structuring funds. The BCA also specifically provides for the structuring of segregated portfolio companies which are very useful for investment fund structures.

BVI limited partnership – this can be established pursuant to the Partnership Act, 1996. A limited partnership is formed in the BVI by a general partner and at least one limited partner executing Articles of Partnership and by submitting a Memorandum of Partnership to the FSC.

Unit trust – this can be established pursuant to a deed of trust. A unit trust arrangement is not a separate legal entity. It is the trustee who has legal capacity and who holds the assets of the fund on the terms of the deed of trust for the investors in the unit trust scheme. Under BVI law, the holders of units in a unit trust scheme are the beneficial owners of the trust assets.

The following are some general requirements for BVI investment funds:

– they must have at least two directors;
– they must appoint an authorised representative resident in the BVI (being an agent licensed by the FSC to provide authorised representative services); and professional and private funds intending not to appoint either an investment manager, administrator, custodian or auditor must apply to the FSC for an exemption from the requirement to appoint such a functionary.

Our lawyers and financial services specialists at Atrium Legal Lab provide solutions to clients by combining the traditional legal fabric with new technologies.

The BVI incubator fund can be launched very quickly and provides tremendous flexibility for start-up and emerging managers who want to establish and demonstrate a track record. The incubator fund, when coupled with the approved manager regime and the overall package of BVI investment fund products, increases the attractiveness and competitiveness of the BVI as an investment funds jurisdiction and reinforces its leading status in the global investment funds market.

Atrium Legal Lab has a team of trained professionals to advise clients who are interested in BVI investment fund products. In particular, we welcome questions about BVI incubator funds and are pleased to assist you.