A mutual fund is subject to regulation in the BVI if it pools investor funds for the purpose of collective investment; is open ended and; the equity interests that are redeemable entitle the holder to receive an amount calculated by reference to the value of a proportionate interest in the net assets of the fund.
Closed-end funds are not subject to direct regulation in the BVI.
Hedge funds domiciled in the BVI make up approximately one quarter of all offshore hedge funds established worldwide. This popularity is due to the many advantages of establishing an investment fund in the BVI including a tax neutral environment and a stable political and economic jurisdiction committed to remaining fully compliant with all supra-governmental bodies.
Additionally, there are no regulatory restrictions on investment policies or requirement to appoint local directors, local functionaries or local auditors.
Types of Funds
There are a number of BVI fund products suited to everyone from the startup manager setting up an incubator fund to established institutional fund managers with billions under management.
An incubator fund allows emerging managers to engage in a two-year “validity” period to establish a track record and to test its viability. During that period, the fund can operate with light regulation, no mandatory service providers and without conducting an audit. Another benefit of establishing such a fund in the BVI is the fast track approval process, which enables an incubator fund to commence business just two business days after submitting a complete application.
The maximum number of investors during this time is 20 and each one must invest at least US$20,000. The incubator fund’s net assets may not exceed US$20 million at any time. At the end of the validity period, the fund must convert to a private, professional or approved fund. Alternatively, if the fund is not deemed viable it must wind down its operations.
The BVI offers the approved fund for managers who want to establish a private offering to a small group of investors on a longer term basis. The number of investors is capped at 20 and net assets may not exceed US$100 million. However, there is no minimum initial investment required and the fund is not required to appoint an auditor, a manager or a custodian. It is required to appoint an administrator to ensure there is some suitable oversight of its operations. This type of fund also benefits from the BVI’s fast track approval process and may receive approval to commence business within two days of submitting an application to the FSC.
Private funds do not have a minimum initial investment amount for each investor or any “professional” or “sophistication” test for investors. This makes them popular with start-up managers, allowing a friends and family offering.
To qualify as a private fund, the fund must either have no more than 50 investors or only make a private invitation to subscribe for or purchase fund interests.
Private funds must be recognised by the FSC before they carry on business. A fund will be regarded as having commenced its business when it publishes a prospectus or other document inviting to purchase or subscribe for shares of the fund.
The most popular category, professional funds make up approximately 70 per cent of all regulated funds in the BVI. The interests may be made to either professional investors or exempt investors.
A professional investor is a person:
- whose ordinary business involves the acquisition or disposal of property of the same kind as the property of the fund; or
- who, whether individually or jointly with a spouse, has a net worth in excess of US$1,000,000.
The minimum initial investment for a professional investor must be at least US$100,000.
Exempted investors, on the other hand, do not have a required minimum initial investment. An exempted investor includes:
- the manager, administrator, promoter or underwriter of the fund; or
- any employee of the manager of the fund.
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 SIBA.
A public fund is generally viewed as a retail product, making the regulatory burden considerably higher than that of a private or professional fund. However, a public fund is not subject to any BVI restrictions on the categories or number of investors it may invite to invest in the fund.
BVI Business Companies
Most BVI investment funds are established as companies limited by shares. A separate legal entity from its investing shareholders, a BVI Business company requires only limited liability for investors. The shareholders of a BVI Business Company have no direct legal or beneficial interest in any of the assets of the company which are instead legally and beneficially owned by the company itself.
Several benefits come along with structuring an investment fund as a BVI Business Company. The fund structure is very flexible, with no concept of “authorised capital” or “share capital” under BVI law. Additionally, shares do not need to have any par value or capital attributed to them. The directors may also designate different series of shares within each class of shares without the need to amend the fund’s constitutional documents. This gives flexibility to funds wishing to use series accounting techniques to achieve equalisation of performance fee allocations among shareholders.
The BCA also allows private, professional or public funds to be structured as Segregated Portfolio Companies (SPC). An SPC is a single company with the benefit of statutory segregation of assets and liabilities between segregated portfolios established within the company. SPCs are popular for multi class or umbrella funds in which two or more segregated portfolios use different investment strategies.
A limited partnership does not have a separate legal personality distinct from its partners, making the general partner ultimately liable for the debts and obligations relating to the limited partnership. A limited partner is not liable for the debts and obligations of the limited partnership beyond the amount contributed.