January 27 2011
Investment fund vehicles
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.
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:
Sponsors and fund managers considering establishing investment funds in the BVI may choose to structure the fund as one of the following:
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.
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 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.
BVI law facilitates a number of alternative structures for investment funds, including the following common structures:
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:
The three categories of regulated investment fund are as follows.
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.
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:
An 'exempted investor' is:
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.
The Securities and Investment Business Act requires a fund wishing to be recognised or registered to appoint the following functionaries:
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.
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:
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.
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:
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.
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.
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