Options offered by BVI investment fund vehicles - International Law Office

Background
Investment fund vehicles
Fund structures
Recognition or registration under the Securities and Investment Business Act
Fund functionaries and service providers
Ongoing requirements for mutual funds
Anti-money laundering obligations
Fees payable to Financial Services Commission

This update looks at the various investment fund vehicles available in the British Virgin Islands (BVI). It concentrates on regulated investment funds and, in particular, offshore hedge funds, since these constitute a large majority of the investment funds domiciled in the British Virgin Islands and make up approximately one-quarter of all offshore hedge funds established worldwide.

Background

The BVI investment funds industry is regulated by the Investment Business Division of the Financial Services Commission and the industry is primarily governed by the Securities and Investment Business Act 2010.

Under Part III of the act and the Mutual Fund Regulations 2010, regulated funds are categorised as private funds, professional funds or public funds. However, not all investment funds are subject to the act, as it regulates only open-ended funds (whose equity interests are redeemable at the option of the investor). Closed-ended funds (whose equity interests are not redeemable at the option of the investor) are not subject to specific regulation in the BVI.

While many offshore jurisdictions offer a tax-free domicile for investment funds, there are a number of advantages to establishing an investment fund in the BVI. These include:

• the tax-neutral environment;
• a stable political and economic jurisdiction which is committed to remaining fully compliant with all supra-governmental bodies responsible for policing the world's financial markets;
• a recognised and respected legal system derived from English common law, as supplemented by modern local legislation;
• a dedicated commercial court with a dedicated specialist judge and court staff;
• no regulatory restrictions on investment policies or strategies or on performance and other fee arrangements;
• no requirement to appoint local directors, functionaries or auditors;
• a fast-track procedure for professional funds;
• the ability to amend the memorandum and articles of association of the fund without (in most cases) requiring a vote of the members;
• statutory segregated portfolio ring-fencing; and
• comparatively low start-up and ongoing fees and costs.

Investment fund vehicles

Sponsors and fund managers considering establishing investment funds in the BVI may choose to structure the fund as one of the following:

• a BVI business company;
• a limited partnership; or
• a unit trust.

The majority of BVI investment funds are established as companies limited by shares under the Business Companies Act 2004. Limited partnerships are also common, while unit trusts are relatively rare.

BVI business companies
A BVI business company is a separate legal entity from the investing shareholders. The shareholders of a BVI business company have no direct legal or beneficial interest in any assets of the company, which are instead legally and beneficially owned by the company itself.

The Business Companies Act provides much flexibility in terms of structuring funds, which adds to the characteristics that made the historical International Business Companies Act in the British Virgin Islands the top offshore corporate domicile.

For example, there is no longer a concept of 'authorised capital' or 'share capital', and therefore there is no longer a requirement for any par value or capital to be attributed to shares. A company need only state in its memorandum of association the maximum number of shares that it is authorised to issue. The directors may designate different series of shares within each class without the need to amend the constitutional documents of the fund, giving a great deal more flexibility to funds wishing to use series accounting techniques to achieve equalisation of performance fee allocations among shareholders.

Limited partnerships
BVI limited partnerships are established pursuant to the Partnership Act 1996. A limited partnership is formed by a general partner and at least one limited partner executing articles of partnership and by submitting a memorandum of partnership to the Financial Services Commission. The articles of partnership need not be filed with the commission and form the internal governing document of the partnership, dealing with issues such as partnership contributions, withdrawals and the day-to-day running of the partnership.

A limited partnership has no separate legal personality distinct from its partners. Therefore, the general partner is liable for the debts and obligations relating to the limited partnership. As a matter of BVI law, a limited partner is not liable for the debts and obligations of the limited partnership, provided that the limited partner does not participate in the control of the partnership business.

Unit trusts
Unit trusts are established pursuant to a deed of trust. A unit trust arrangement is not a separate legal entity. The trustee has legal capacity and 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.

If the trustee of a BVI unit trust is a company incorporated in or operating out of the BVI, the trustee is likely to require a trust licence under the Banks and Trust Companies Act 1990, as well as having to apply for recognition of the unit trust as a fund under the Securities and Investment Business Act.

Fund structures

BVI law facilitates a number of alternative structures for investment funds, including the following common structures:

• Single class funds are set up with a single class of shares, giving investors the opportunity to participate in a single investment portfolio.
• Multi-class funds (sometimes referred to as umbrella funds) issue equity interests in a number of different classes to enable investors to participate in a range of investment portfolios. The objective is to achieve cost efficiency but, since the portfolios are segregated only for internal accounting purposes, a conventional company is subject to the inherent risk of cross-class liability. To deal with this issue, multi-class funds can be incorporated in the BVI as segregated portfolio companies under which the assets attributable to a particular portfolio are segregated by statute and not available to meet the liabilities of creditors attributable to any other portfolio.
• Master/feeder funds are structured to enable subscriptions made in separate feeder vehicles to be pooled into and managed as a single master fund portfolio. A typical example of a master/feeder fund would involve US-domiciled taxable investors investing directly in an onshore vehicle (often a US limited partnership) and US tax exempt or non-US investors investing in an offshore vehicle (normally a BVI business company). Each feeder fund then invests all of its assets in an offshore master fund (normally a BVI business company). The principal objective is to enable investors that are subject to differing tax or other regulations or with distinct requirements to participate together in the same investment portfolio having common investment objectives. The structure achieves economies of scale for portfolio-related activities.
• Single investor funds are widely used by institutions, funds of funds and high-net-worth individuals as an alternative to managed accounts solutions. By establishing a fund, investors maintain the flexibility and limited liability of a corporate vehicle which can engage its own service providers.

Recognition or registration under the Securities and Investment Business Act

The Securities and Investment Business Act requires all investment funds formed in the BVI that fall within the act's definition of a 'fund' to be recognised or registered as a fund by the Financial Services Commission. The act defines a 'fund' as a company or any other body, a partnership or a unit trust incorporated, formed or organised, whether under the laws of the BVI or any other country, which:

• collects and pools investor funds for the purpose of collective investment; and
• 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 a part of the net assets of the company, partnership, unit trust or other similar body, as the case may be, including:
  • an umbrella fund whose shares are split into a number of different class funds or sub-funds, and
  • a fund which has a single investor which is a mutual fund not registered or recognised under the act.

The three categories of regulated investment fund are as follows.

Private funds
A private fund is restricted to either having no more than 50 investors or only issuing invitations to subscribe for or purchase fund interests on a private basis. Private funds must be recognised by the commission before they carry on business. Historical policy guidelines issued by the commission under the previous mutual funds regime suggested that a fund will be regarded as having commenced its business when a prospectus (or other document intended to invite the purchase of or subscription for shares of the fund) is published.

Professional funds
A professional fund may carry on its business or manage or administer its affairs for a period of up to 21 days without being recognised under the act.

A professional fund is a fund in which the shares are made available only to professional investors and the minimum initial investment by each professional investor (other than exempted investors) is not less than $100,000 (or other currency equivalent).

A 'professional investor' is a person:

• 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
• who, whether individually or jointly with his or her spouse, has a net worth in excess of $1 million (or other currency equivalent).

An 'exempted investor' is:

• the manager, administrator, promoter or underwriter of the fund; or
• any employee of the manager of the fund.

Public funds
A public fund is a fund that is neither a private fund nor a professional fund. It is generally viewed as a retail product and, accordingly, the regulatory burden is considerably higher.

Public funds must be registered by the commission before they carry on business. Registered public funds may not invite the public or any section of the public to purchase shares unless, before such invitation, they publish in writing a prospectus which complies with the Securities and Investment Business Act and the Public Funds Code, which is approved by and signed on behalf of the fund's directors and registered by the commission.

Fund functionaries and service providers

The Securities and Investment Business Act requires a fund wishing to be recognised or registered to appoint the following functionaries:

• an investment manager;
• an administrator;
• a custodian; and
• an auditor.

However, private or professional funds may apply for an exemption from appointing an investment manager, custodian or auditor.

In considering an application for recognition or registration, the Securities and Investment Business Act requires that the manager, investment adviser, administrator and/or custodian of a BVI mutual fund satisfy the commision's fit and proper criteria. The commission has designated the following countries as recognised jurisdictions: Argentina, Australia, Bahamas, Bermuda, Belgium, Brazil, Canada, Cayman Islands, Chile, China, Denmark, Finland, France, Germany, Gibraltar, Greece, Guernsey, Hong Kong, Ireland, Isle of Man, Italy, Japan, Jersey, Luxembourg, Malta, Mexico, Netherlands, Netherlands Antilles, New Zealand, Norway, Panama, Portugal, Singapore, Spain, South Africa, Sweden, Switzerland, United Kingdom and United States.

An application for recognition or registration of a mutual fund whose functionaries are domiciled in a recognised jurisdiction and which holds the appropriate regulatory status in that jurisdiction will generally be processed without further assessment of the fit and proper status of the relevant functionary. The commission also may accept a functionary domiciled in another jurisdiction if the applicant can satisfy the commission that it has a system for the effective regulation of investment business, including mutual funds business.

Ongoing requirements for mutual funds

The Securities and Investment Business Act places various statutory requirements on mutual funds recognised as private or professional funds, the key provisions of which are as follows:

• A mutual fund must notify the commission within 14 days of certain events occurring. These include the appointment or removal of a director, an amendment to its constitutional documents or offering document or a change in the address of the fund's place of business.
• A mutual fund must also notify the commission at least seven days before the appointment of a new functionary.
• All mutual funds must appoint an authorised representative in the BVI. This entity acts as the conduit between the fund and the commission.
• A mutual fund must submit a copy of its offering document to the commission, which must contain a prescribed investment warning.
• A mutual fund must appoint and at all times have an auditor to audit its financial statements (although the commission may exempt certain funds on application). Audited financial statements for each financial year must be submitted to the commission within six months of year end.
• A mutual fund must have at least two directors, one of whom shall be an individual.

Mutual funds registered as public funds must comply not only with the above provisions, but also with some further regulatory requirements set out in the Securities and Investment Business Act, the Mutual Fund Regulations and the code.

Anti-money laundering obligations

The BVI anti-money laundering regime applies to all mutual funds, since they are classified as relevant persons under the Anti-money Laundering Regulations 2008. As such, a mutual fund is required to:

• put in place investor onboarding procedures which address typical know-your-customer requirements;
• appoint an officer of the fund or another individual as money laundering reporting officer for the fund. In practice, this may be a director of the mutual fund itself or a person provided by one of the functionaries to the mutual fund;
• report suspicious transactions to the Financial Investigations Agency; and
• put in place documentation (eg, a compliance manual) outlining how the mutual fund complies with the BVI anti-money laundering requirements.

The BVI rules acknowledge that mutual funds may outsource any and all of these obligations to functionaries based outside the BVI, such as an administrator or investment manager. Such outsourcings must be documented in writing.

Fees payable to Financial Services Commission

The fees payable by BVI funds to the commission are competitive and lower than those in other offshore and onshore jurisdictions. From January 1 2011, a private or professional fund must pay a $700 application fee and an annual fee of $1,000. Before January 1 2011, there was no application fee. From January 1 2011, a public fund must pay $1,000 on application for registration and an annual fee of $1,500. Again, before January 1 2011, there was no application fee.

For further information on this topic please contact Ross Munro at Harney Westwood & Riegels by telephone (+1 284 494 2233), fax (+1 284 494 3547) or email (ross.munro@harneys.com).