Investment Fund Managers "Brexit" to the BVI
For years, the Cayman Islands has held the title of the world’s largest offshore fund domicile. Being the most well-known, it was the safe choice for investment managers. Today, however, BVI, the world’s second-largest offshore fund domicile with just under 2,000 active open-ended investment funds and many other unregulated closed-ended investment funds, is an increasingly attractive alternative for what may be a better future for investment managers and their investors.
And while both Cayman and BVI have emerged with new funds features and products over the past decade, with many similarities, the BVI has distinguished itself by focusing on legislative and regulatory reforms to benefit investment managers looking for flexibility and cost cutting. The primary legislation in the BVI that regulates its investment funds regime and makes the jurisdiction appealing is the Securities and Investment Business Act, 2010 (SIBA) and its accompanying regulations, the Mutual Funds Regulations, 2010. SIBA regulates both funds and fund functionaries operating in or from the BVI, and offers specific advantages.
Advantages of BVI investment fundsThe BVI is the world’s largest offshore corporate domicile with close to 500,000 active companies. 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 are facilitated, including single class funds, multi-class funds and master-feeder funds.
- Statutory segregated portfolio ring-fencing.
- Amendment of constitutional documents may be made by shareholders or directors, where so authorized.
- Low start-up and ongoing fees and costs.
- No requirement for a local auditor sign off on the fund’s accounts.
- Leading service providers, including lawyers, accountants and other fund professionals.
When considering the choice between BVI or Cayman, although they are similar on many levels, BVI has these key advantages:
- No local auditor sign-off is required. (You can use an auditor once they are in a recognised jurisdiction, as described below.)
- Directors or shareholders can amend the constitutional documents, which provides a degree of flexibility for restructuring.
- Start up, ongoing fees, and legal fees are lower.
Together, these benefits can be significant for a fund in general, but especially for small to medium sized funds during start up.
Under SIBA, the term “mutual fund” or “fund” 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 any other country or jurisdiction which:(a) collects and pools investor funds for the purpose of collective investment; (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.
By definition, SIBA only regulates: (i) open-ended funds (whose equity interests are redeemable at the option of the investor) and their (ii) administrators, managers, and custodians. SIBA does not regulate closed-end funds, which are often referred to as private equity funds.
Categories of investment funds
Funds regulated by SIBA fall within five categories; private funds, professional funds, public funds, incubator funds, and approved funds, defined as follows:
Private fund– 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.
– 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). Exempted investors include, the manager, administrator, promoter, or underwriter of the fund, or any employee of the fund manager.
Public fund– A fund that is neither a private fund nor a professional 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. Such funds must publish a prospectus including the information required by SIBA, and must also produce and distribute audited annual financial statements.
Under SIBA, 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 must also 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 fund prospectus.
Public funds are subject to the Public Funds Code, 2010 (the Code). 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 BVI Financial Services Commission. Such funds are 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 type of 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; 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 type of 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.
Types of investment fund vehicles
Investment funds in the BVI are usually set up using either; (i) a BVI business company, (ii) a limited partnership, or (iii) a unit trust. The BVI business company is the most popular of the three vehicles.
BVI business company
– A separate legal entity from the investing shareholders, a BVI business company would be structured as a limited liability company. They 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 certain types of investment fund structures.
BVI limited partnership
– The limited partnership can be established pursuant to the Partnership Act, 1996. It 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 BVI Registry of Corporate Affairs.
– A unit trust can be established pursuant to a deed of trust. The arrangement is not a separate legal entity. Rather, 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.
Set up of investment funds and acceptance of their functionaries
The BVI Financial Services Commission (FSC) requires a fund wishing to be recognised, registered, or approved to submit an application that must include evidence of the fund’s status together with details of each of the fund’s functionaries—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, include the following:
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, or 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.
BVI Approved Manager
The BVI also has a fast track “Approved Manager” regime which permits a BVI company or partnership to conduct business as an investment manager or investment advisor to certain funds without the need for a lengthy approval process. It creates a fast-track for the approval of fund managers and advisors, and also provides a lighter touch regulatory regime for such managers and advisors.
To be eligible as an Approved Manager, the manager must:
(a) be a BVI company or partnership;
(b) manage or intend to manage a BVI private or professional fund;
(c) manage or intend to manage a BVI closed-ended fund;
(d) manage or intend to manage a fund from any recognised jurisdiction that has equivalent characteristics to a BVI private or professional fund; and
(e) have assets under management of not more than US$400 million in respect of open-ended funds, and of not more than U$1 billion for closed-ended funds.
The investment funds industry is rebounding from the difficult times of the recession period, allowing investment managers to seek creative options which not only enhance investment returns, but also provide regulatory oversight and flexibility for the benefit of investors and investment managers alike. As more investment managers, from large-to-small, consider their own Brexit, they are looking to the BVI. As the second largest funds domicile with a stable legal and regulatory environment, investment managers can be assured that the BVI will find additional ways to enhance its product for the benefit of users, and will continue to do so into the foreseeable future.