British Virgin Islands Fund Formation

British Virgin Islands Funds Structures

The British Virgin Islands (BVI) provide a variety of options for establishing and structuring investment funds. Business companies are the most popular option, however, limited partnerships and unit trusts are also viable alternatives for managers. All of these structures offer a range of benefits, including tax advantages, legal flexibility and simpler setup processes.

The British Virgin Island’s law includes provisions for Segregated Portfolio Companies (SPC). This type of company allows distinct portfolios of assets and liabilities to be legally divided and separated from one another. Each portfolio will not be affected by the assets and liabilities of other portfolios, allowing for a greater level of control and flexibility for the company.

Regulation

The BVI Financial Services Commission (the FSC) is the local regulator.

The Securities and Investment Business Act, 2010 (as amended) and the Mutual Funds Regulations, 2010 (as amended) (together, SIBA) are the main pieces of legislation that govern the business of investment funds in the BVI and contain provisions relating to registration and licensing.

Open-ended investment funds are those in which investors have the right to redeem their interests on demand, as outlined in the fund documentation. These funds must be recognised or registered with the Financial Services Commission (FSC) in order to be compliant with the Securities Investment Business Act (SIBA).

Closed-end investment funds, which are funds that do not allow investors to redeem their interests according to the fund documents, used to be exempt from regulation by the Securities and Investment Business Act (SIBA). However, due to recent changes to the regulatory regime, such funds are now required to be recognized and regulated by the Financial Services Commission (FSC). This means that the operators of closed-ended investment funds must make an application for recognition and registration under SIBA and obtain the relevant licences from the FSC. This will protect investors and ensure that the funds are run in a safe and compliant manner.

Types of open-ended investment funds

Professional funds

A professional fund is the most popular BVI investment fund type. It is forcused at high net worth, professional investors and the minimum initial investment by each investor is US$100,000 (or its equivalent in another currency).

A ‘professional investor’ is defined under SIBA as being a person: (a) whose ordinary business involves, whether for that person’s own account or the account of others, the acquisition or disposal of property of the same kind as the property, or a substantial part of the property, of the fund; or (b) who has signed a declaration that the person, whether individually or jointly with the person’s spouse, has net worth in excess of US$1,000,000 (or its equivalent in another currency) and that the person consents to being treated as a professional investor.

An ‘exempted investor’ is the investment manager, administrator, promoter or underwriter of a fund, any employee of the investment manager or promoter, or such other person as the FSC may specify from time to time.

A professional fund may carry on business for up to 21 days prior to obtaining FSC recognition,

so long as the application for recognition is lodged with the FSC within 14 days of launch. This means it is possible for professional funds to come to market very quickly in the BVI.

Private funds

A private fund is a fund with a limited number of investors – either 50 or less, or subscribers who are invited on a private basis. These specified rules are laid out in the fund’s governing documents. The fund is not authorised to have more than 50 investors, nor can it use public invitations to encourage potential subscribers. Instead, the invitation must be tailored privately, to meet the needs of the chosen investors.

“Private basis” is defined under SIBA as including an invitation which is made to certain specified persons or by reason of a private or business connection between the person making the invitation and the investor.

A private fund must obtain its FSC recognition prior to launch. This is usually a quick process which takes a couple of weeks.

Incubator funds

An incubator fund is a fund that is designed for start-up managers who may be looking to set-up quickly and create a track record.

The key features of an incubator fund are:

• it can have a maximum of 20 The investors must be ‘sophisticated private investors’ which is defined under BVI law as being a person who has been invited to invest in an incubator fund and the amount of that person’s initial investment is not less than US$20,000;
• the minimum investment for each investor is US$20,000; and
• the net assets must not exceed US$20,000,000 (or its equivalent in another currency).

An incubator fund can operate for a period of two years, which may be extended to three years on application to the FSC. At the end of this time period, or if the incubator fund has more than the permitted number of investors or net assets, it must:

• convert to a private fund, professional fund or an approved fund; or
• liquidate; or
• cease to be a fund (by amending its constitutional documents to remove any reference to being a fund).

Where an incubator fund either liquidates or ceases to be a fund, it should give investors adequate notice of the change and the opportunity to redeem their fund interests.

An incubator fund is not required to have a manager, administrator, custodian or auditor. An incubator fund may just have a term sheet rather than a fuller offering document, which must include certain risk warnings.

Approved Fund

An approved fund is a fund that is aimed at smaller, private offerings or friends and family funds. Unlike the incubator fund, there are no eligibility requirements, no required minimum level of investment and no set time limit on the life of an approved fund (assuming it has all the key features set out below).

The key features of an approved fund are:

• it can have a maximum of 20 investors; and
• the net assets must not exceed US$100,000,000 (or its equivalent in another currency).

An approved fund must have a third-party administrator but it is not required to have a manager, custodian or auditor. Like the incubator fund, an approved fund may just have a term sheet rather than a fuller offering document, which must include certain risk warnings.

Private Investment Fund (PIF)

Private investment funds, traditionally known as closed-end funds, are now subject to recognition and regulation by the FSC.

The FSC may recognise a PIF if it is satisfied that:

• the fund is lawfully incorporated, registered, formed or organised under the laws of the BVI or a country outside the BVI;
• the constitutional documents of the fund specify that:
  • the fund is not authorised to have more than 50 investors;
  • an invitation to subscribe for, or purchase, fund interests shall be made on a private basis only; or
  • the fund interests shall be issued only to professional investors1with a minimum initial investment for each investor of US$100,000 (or its equivalent in any other currency);
• the fund meets such other criteria as may be specified in the Regulations, and, on recognition, the fund will be compliant with the Act, the Regulations and any applicable practice directions; and
• recognising the fund is not against the public interest.