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12/08/20
BVI Investment Funds Regime At A Glance
The British Virgin Islands have been a dominant player within the offshore fund industry for decades. In this short article, we explain why this has been the case and what the jurisdiction has been doing lately to become an even more attractive domicile for investment funds.
Investment fund is the broad term encompassing all types of collective funds and schemes, including mutual funds, hedge funds, real estate funds and private equity/venture capital funds.
An investment fund is a pooling arrangement made by a group of investors regarding the ownership of their property into a collective scheme, losing day-to-day control and direct ownership of the assets concerned while it is then collectively managed by the operator of the scheme.
If the fund vehicle is open-ended, the investors have a right to request redemption of their shares at regular and specified intervals should they decide to exit the fund. Redemption proceeds will then be calculated as a share of the fund’s net asset value at the relevant redemption day. Increases and decreases in the value of the fund’s assets are directly reflected in the amount an investor can withdraw.
On the other hand, closed-ended funds are funds where investors are not entitled to do so. They are generally used for real estate projects or for investment ventures where the partners are only a few and know each other.
One of the regulatory changes the BVI has seen during this year was the regulation of closed-ended investment vehicles.
The fund industry worldwide is a hugely important part of the financial system, with fund vehicles of various types, strategies and sizes expecting to reach US$23.73 trillion by 2024, and the hedge fund industry holding assets for US$69 billion as of the date of this article.
An offshore fund is a collective investment scheme established in an international financial centre such as the British Virgin Islands, the Cayman Islands, and Luxembourg. These jurisdictions offer eligible investors significant tax benefits compared to many high tax jurisdictions, together with regulatory advantages which include the following:
- The flexibility to set out investment strategies and objectives without restrictions generally imposed by onshore regulators.
- The absence of expensive reporting requirements.
- The fact that offshore centres tend to have governments that recognise the importance of working closely with the private sector to provide legislation that meets market needs.
- The concentrated level of fund expertise.
In the case of the BVI, the jurisdiction has been one of the leading fund domiciles since the enactment of the Mutual Funds Act back in 1996 and it has always been regarded as a very cost-effective one. When this fund legislation was replaced by the Securities and Investment Business Act of 2010 and the Mutual Funds Regulations of 2010, the approval of modern regulation dealing with Approved Managers, Incubator and Approved Funds, and now closed-ended investment vehicles, there are more reasons than before to establish both an investment fund and its manager in the territory.
Currently, the BVI has approximately 1,500 regulated funds recognised by the Financial Services Commission (FSC), including a growing number of them dealing with investments in projects, tokens, ventures related to digital currency, and blockchain technology in general.
The regulatory framework in force and applied in most of the offshore jurisdictions typically implies a two-tier approach, making a distinction between funds offered to members of the public, which require a higher degree of regulation because of the retail nature of potential investors, and funds either offered to sophisticated investors or only marketed among a small and selected group of investors connected with the investment manager. The BVI is no exception to this, and it currently offers five types of open-ended investment funds: incubator (20-20-20 fund), approved, private, professional, and public funds.
Offshore jurisdictions allow different structures to be used for investment funds and a combination of structures may also be permitted. In most cases, funds can be set up as companies, partnerships or unit trusts. In the case of the BVI, funds can also be structured as segregated portfolio companies (a structure which provides for segregation of assets and ring-fencing of liabilities) and/or can be a part of a master-feeder structure.
Types Of Funds Existing In The BVI
- Incubator fund
The incubator fund is a very simple vehicle that targets emerging managers who are interested in testing an investment strategy and generating a track record without involving the expenses associated with other more complex types of funds. They can operate for a maximum period of three years.
This type of fund is often referred to as the”20-20-20” fund, as it can have up to 20 investors, it can have up to US$20 million in assets and the minimum investment of $20,000 per investor.
- Approved fund
The approved fund is very useful when the manager wishes to raise monies from a small group of investors (the maximum of 20 investors also applies to this fund), but it needs to operate for a longer period. This type of fund is particularly popular with family offices.
Different to what happens with the Incubator Fund, the Approved Fund must have an administrator from the outset, but it does not need to have either an auditor, a compliance officer, etc., helping to keep control of costs.
It operates similarly to the incubator fund, including the benefit of the fast-track approval process and the possibility to commence business two days from the date of receipt of a completed application with the Commission.
Approved Funds may have assets under management for up to US$100 million.
- Private fund
This fund product is the best option when the manager targets family members and friends as potential investors.
Private Funds do not have a minimum subscription threshold, and, at the same time, they do not impose any ‘sophistication’ tests for investors. The restriction, in this case, is that they cannot have more than 50 investors at any one time or that the fund interests are exclusively offered on a private basis, thus enabling up to 300 invitations.
- Professional fund
With the Professional Fund, there are no restrictions on assets under management or on the number of investors the fund can have; but interests in a professional fund may only be issued to “professional investors” and the minimum initial investment by each investor must not be less than US$100,000.
“Professional investors” are persons whose ordinary business involves the acquisition or disposal of property of the same kind as the property, or a substantial part of the property or the fund or who, whether individually or jointly with their spouse, may have a net worth above US$1 million.
Professional funds are by far the most popular fund in the BVI.
- Public fund
Public funds are generally viewed as a retail product and therefore, the regulatory burden placed on them is considerably higher than that of a private or professional fund.
Public funds cannot make an invitation to the public to subscribe for shares unless, before such invitation, they publish a prospectus that complies with the Public Funds Code, is approved by the directors of the fund, and is duly registered by the Commission.
Also, public funds require a full set of service providers.
2020 Changes
In recent months, various improvements have made added to the BVI investment fund products. These improvements were made to ensure that the jurisdiction continues to follow best practices whilst, at the same time, remaining flexible and cost-effective.
These changes, which came into effect on 1 July 2020, include the following:
(a) Valuation of fund property
All BVI investment funds now are required to maintain a clear and comprehensive policy for the valuation of fund property, with procedures that are sufficient to ensure that the valuation policy is effectively implemented and to ensure that the fund administrator adheres to these policies. The new requirements require the valuation policy and procedures to:
- Be appropriate for the nature, size, complexity, structure and diversity of the fund and the fund property;
- Be consistent with the provisions concerning valuations contained in the fund's constitutional documents and offering documents;
- Require valuations to be undertaken at least on an annual basis;
- Include procedures for preparing reports on the valuation of fund property;
- Specify the mechanisms in place for the dissemination of valuation information and reports to investors; and
- Ensure that the fund investment manager is independent from the fund administrator and its performance or control do not involve only one person.
(b) Safekeeping and segregation of fund property
The Incubator and Approved Funds Regulations have been amended to ensure that all incubator and approved funds have arrangements for the safekeeping of fund property, including the segregation of fund property.
The following arrangements are considered appropriate according to the type of assets the fund may hold:
- If the fund invests in financial instruments: the fund should maintain appropriate safekeeping arrangements with persons dealing in such activities (i.e. custodians or prime brokers).
- If the fund invests intangible assets: a traditional custodian is not required, but the fund must appoint a person with sufficient expertise and resources to ensure that the documentation concerning the fund’s ownership of such assets is maintained and safeguarded (i.e. a notary public).
- If the fund invests in other funds: a person with sufficient expertise should be in charge of monitoring and controlling all investments related to such investment funds.
(c) Closed-ended funds
With the approval of the Securities and Investment Business (Amendment) Act, 2019 and the Private Investment Funds Regulations, 2019 the BVI has introduced, for the very first time, a regulatory regime applicable to closed-ended collective investment, which are now known in the territory as "private investment funds" and are subject to further regulation if both of the following conditions are met:
- Collects and pools investor funds for the purpose of collective investment and diversification of portfolio risk; and
- Issues fund interests, which entitle the holder to receive an amount in accordance with the value of a proportionate interest in whole or in part of the net assets.
As this definition is widely drafted, most existing closed-ended funds are expected to now be caught by these new requirements and so will now become regulated by the FSC.
For pre-existing close-ended collective investment schemes, there was a six-month transition period which ended on 1 July 2020.
The main obligations for private investment funds under the PIF Regulations are as follows:
- Filing audited financial statements within six months after the financial year-end;
- Notifying any changes related to the place where the business is developed, bylaws, fund structure, officials and term sheet; and
- Payment of the licence annual fee.
Conclusion
The most recent changes introduced by the BVI have made it even more appealing for investment managers interested in setting up modern investment vehicles and benefitting from a light-touch and pragmatic regulatory framework which, at the same time, follows international best practices.
As a consequence of the above, our view is that the jurisdiction will remain a hive of activity for some time to come, especially when it comes to small to mid-sized hedge funds, emerging managers, family offices and/or digital assets/cryptocurrency funds, who value working with a flexible, dynamic, reputable and cost-efficient jurisdiction which offers fund products for all needs.
Martín A. Litwak
Lawyer specialised in wealth structuring and investment funds.
Martín has focused on providing advice to high net worth (HNW), ultra-high net worth (UHNW) and institutional families domiciled in Latin America.
His expertise in setting up and/or managing fiduciary structures designed to tackle issues related to the lack of rule of law, the lack of privacy and the fiscal voracity of the countries in which they reside and/or conduct their business activities, as well as his experience in resolving succession issues and/or to ensure that the family assets are well protected makes him one of the foremost lawyers in this field.
He has also assisted several Latin American based fund managers with the establishment and licensing of hundreds of investment funds, the majority of them in the British Virgin Islands and the Cayman Islands.
Finally, Martín has been very active in multi-jurisdictional mergers and acquisitions, international financial transactions of several types (i.e. private equity/venture capital deals, project financing, structured finance, IPOs, etc.), tax amnesties and the provision of advice in transactions involving crypto-assets and Blockchain (ICOs, STOs, etc.)
