The British Virgin Islands (“BVI”) is one of the most popular and established jurisdictions for the formation and operation of offshore investment funds and managers. BVI investment fund structures are globally known for their flexibility allowing investment managers and investment fund sponsors to tailor their offering to the needs of their investors. Some of the key advantages of BVI investment funds include the following: A modern, recognized and robust legal system derived from English common law, including a very flexible corporate statute (the BVI Business Companies Act 2004). Key features include:
- A dedicated and experienced commercial court
- Competitive professional and government fees
- Fast turn-around times
- No regulatory restrictions on investment policies, strategies or objectives, and
- No requirement to appoint local directors, local functionaries, or local auditors.
Regulatory Background
By way of background, only open-ended investment funds are regulated in the BVI, closed-ended funds are not. Open-ended funds are investment funds which provide their investors with the option to redeem their shares or interests in the investment fund, at their request. In contrast, the redemption of interests in a closed-ended fund requires the approval by the closed-ended fund. There are no specific regulations for closed-ended investment funds under BVI law. Due to the illiquid nature of its investments, most private equity funds are structured as unregulated closed-ended funds.
In the BVI there are five types of regulated open-ended investment funds:
- The Incubator Fund
- The Approved Fund
- The Private Fund
- The Professional Fund; &
- The Public Fund
BVI Private Funds
The Private Fund (the “Private Fund”) is geared towards start-up managers and family and friends’ funds. It has no minimum investment threshold. However, the Private Fund must be limited to either having no more than 50 investors or to inviting potential investors to subscribe for, or purchase, Interests on a private basis only. The Private Fund is an attractive alternative to the Approved Fund.
A Private Fund must:
- Have two directors, one of which must be an individual,
- Have an investment manager, funds administrator, custodian (or prime broker) and an auditor appointed (subject to certain exemptions),
- Have an authorised representative
The Incubator Fund
The incubator fund (the “Incubator Fund”) is geared towards start up investment managers who wish to offer investments into a regulated investment fund at reasonable costs to build up their track record. The key characteristics of an Incubator Fund are:
- The total number of investors is restricted to 20,
- An investor must initially invest at least USD20,000,
- The net assets of the Incubator Fund must not exceed USD20,000,000 (or its equivalent in any other currency),
- No requirement to have an offering document in place,
- No requirement to have third party service providers appointed,
- No requirement to file audited financial statements, and
- The life span is limited to 2 years (or 3 if an extension is granted) after which an Incubator Fund may be converted into a Professional Fund, a Private Fund or an Approved Fund. Alternatively, an Incubator Fund can also be converted into an unregulated closed-ended fund.
An Incubator Fund must:
- Have two directors, one of which must be an individual
- Have an authorised representative. The authorised representative will serve as a conduit between the fund and the BVI Financial Services Commission (the “FSC”),
- Submit financial statements annually (which need not be audited),
- Submit returns to the FSC regarding its status, i.e. the number of investors, total investments, aggregate subscriptions and redemptions, net asset value of the fund and details of any significant investor complaints; and
- Notify the FSC within 14 days of any changes to the information provided in the application or in relation to any matter which is likely to have a material impact on the fund.
The Approved Fund
The approved fund (the “Approved Fund”) is geared towards ‘family and friends’ funds managers. Its key characteristics are:
- The total number of investors is restricted to 20
- Net assets of the Approved Fund must not exceed USD100,000,000 (or its equivalent in any other currency)
- No minimum investment
- No requirement to have an offering document in place
- No requirement to have third party service providers appointed, except for appointment of a fund administrator which will, in short, provide the Approved Fund with registrar and transfer agent and net asset value calculation services, and
- No requirement to file audited financial statements
Although not required by law, in practice the Approved Fund will often have a third-party investment manager appointed.
An Approved Fund must:
- Have two directors, one of which must be an individual
- Have an authorised representative
- Submit financial statements annually (which need not be audited),
- Submit returns to the FSC regarding its status, i.e. the number of investors, total investments, aggregate subscriptions and redemptions, net asset value of the fund and details of any significant investor complaints; and
- Notify the FSC within 14 days of any changes to the information provided in the application or in relation to any matter which is likely to have a material impact on the fund.
The Professional Fund
The professional Fund (the “Professional Fund”) is geared towards sophisticated investors. It is the most popular type of regulated investment fund in the BVI, with a market share of around 70% of all regulated BVI funds.
An investor in a Professional Fund must be either a professional investor or an exempted investor:
- A professional investor is a person whose ordinary business involves the acquisition or disposal of property of the same kind as the property held by the fund or who, whether individually or jointly with a spouse, has a net worth in excess of USD1,000,000. A professional investor must make an initial investment of at least USD100,000
- An exempted investor is not subject to minimum investment requirements. An exempted investor includes the fund manager, administrator, promoter or underwriter of the fund or any employee of the manager of the fund.
A Professional Fund must:
- Have two directors, one of which must be an individual
- Have an investment manager, funds administrator, custodian (or prime broker) and an auditor appointed (subject to certain exemptions)
- Have an authorised representative
- Submit audited financial statements annually; &
- Notify the FSC of certain changes as specified in the relevant legislation.
The Private Fund
The Private Fund (the “Private Fund”) is geared towards start-up managers and family and friends’ funds. It has no minimum investment threshold. However, the Private Fund must be limited to either having no more than 50 investors or to inviting potential investors to subscribe for, or purchase, Interests on a private basis only. The Private Fund is an attractive alternative to the Approved Fund.
A Private Fund must:
- Have two directors, one of which must be an individual,
- Have an investment manager, funds administrator, custodian (or prime broker) and an auditor appointed (subject to certain exemptions)
- Have an authorised representative
- Submit audited financial statements annually, and
- Notify the FSC of certain changes as specified in the relevant legislation.
The Public Fund
The Public Fund (the “Public Fund”) is geared towards investment managers seeking to offer a retail investment fund. The regulatory regime applicable to a Public Fund is considerably more complex than for any other regulated BVI fund. However, there are no restrictions on the type of investors, number of investors, marketing to investors or the maximum value of assets held by the Public Fund.
Fund Vehicles
BVI investments funds can be formed as companies, segregated portfolio companies (for a private, professional or public fund only), limited partnerships or unit trusts. Most of the BVI investment funds are established as companies limited by shares. Limited Partnerships are more often used in the context of unregulated closed-ended funds
BVI Incubator Funds – Overview
Are you looking to set up a Fund? Is this your first time setting up a Fund???
If so, you may be interested to know that the most popular model of “Start Up” Fund in the BVI is the Incubator Fund.
In 2015 the progressive jurisdiction that is the BVI (British Virgin Islands) recognized there was a gap in the Fund Setup Market for a lightly regulated model of Fund.
Hence regulations were passed allowing for the set-up in the BVI of 2 new models of Mutual Fund ie Incubator Funds and Approved Funds.
Prior to 2015 the only option for a successful trader/prospective fund manager wanting to dip his or her toe into the Fund Management Market was to set up a (non- licensed) Closed End Fund ie a Fund wherein the Investor was/is required to lock in his funds for a fixed investment period.
This limitation often caused a promoter difficulty in fund raising as most investors would prefer a mechanism that would entitle them to withdraw their funds on demand if desired or needed.
The (relatively) new BVI Regulations enable Incubator and Approved Funds to be set up and launched on a fast track, low cost basis with limited regulatory oversight by the BVI Financial Services Commission (“the Commission”).
Fund Requirements
An Incubator Fund has a minimum investment requirement of US$20,000, a cap on net assets of US$20M and can take in no more than of 20 investors. An Incubator Fund does not need to appoint an Administrator or a Custodian or an Investment Manager or an Auditor.
An Approved Fund has a net asset cap of US$100 Million and no minimum investment requirement but is limited to no more than 20 investors. An approved fund is required to appoint an Administrator but does not need to appoint a Custodian or an Investment Manager or an Auditor.
Application Process
An applications for approval as an Incubator Fund or an Approved Fund must be lodged with the Commission and be accompanied by:
- The constitutional documents;
- Details of the investment strategy;
- A prescribed form of investor warning; and
- An application fee (US$1,500).
An Incubator Fund or Approved Fund can commence business 2 days from the date of receipt of a completed application by the Commission.
Duration & Conversion of Incubator Fund
An Incubator Fund has a limited life span of two years which can be extended for up to 12 months. An Approved Fund has no such limits. An Incubator Fund can convert to an Approved Fund, a Private Fund or a Professional fund, or may be wound up at the end of its term. An Incubator Fund can convert to a Private Fund or a Professional Fund or to an Approved Fund by lodging the required/prescribed application with the Commission.
Ongoing Obligations
Part of what keeps the set up and admin costs low is that service provider requirements are minimal:- Each fund is only required to appoint an Authorized Representative in the BVI and an Approved Fund is required to have an Administrator at all times. Pleasingly, there are no mandatory custody requirements and there is no requirement for the issuance of an Offering Document. If/where the fund decides to not issue an Offering Document, the required investor warnings can be set forth in a separate term sheet.
The key regulatory requirements for an Incubator Fund and Approved Fund are:
- An annual fee of US$1,000 is payable to the Commission on or before 31 March of each year
- Must have a minimum of two directors at all times, one of whom must be an individual
- The Fund Entity must notify the Commission of any change to any of the information submitted to the Commission in the set-up application; (eg you’d need to advise of any conduct which has, or is likely to have, a material impact or significant regulatory impact, changes to directors, etc changes to ownership/promoter structure etc).
- Prepare and file annual financial statements with the Commission (note there is no requirement for an independent audit)
- Twice a year you must file a return with the Commission
OCI Service etc Fees
We confirm assist you to register an Incubator Fund in the BVI. Our fees would be as follows:
- Incorporation of the fund will be $2,150 Annual renewal will be $1,750
- Professional fee for application with FSC for Fund licence $1500 (note if the application becomes complicated additional charges will apply)
- FSC application fee $1500 or $750 after June, (annual renewal will be $1,500)
- Authorized Representative fee effective from application $1,600 per annum
- For Administration we can certainly do this at competitive rates. The specific fees will depend upon various factors such as frequency of NAV, investment strategy, number of investors etc… By way of example, if the Fund only requires an annual NAV and holds a single or minimal number of easy to value positions and has only a handful of investors, we could do the Admin for as little as US$12k-$14k per annum/NAV. However if the Fund wants monthly NAVs and has multiple, frequently traded positions the fees would start in the region of US$29,000.
(The above assumes that the authorized share capital figure, as stated in the Company’s articles of Association will be no greater than $50,000. If you require a higher amount of authorized share capital additional fees are payable to the BVI registry both at incorporation and yearly thereafter, on a sliding scale).
Documents etc Required
The following documents are required for the application:
- Instruction Sheet
- FSC application form
- Notarized passport and proof of address for each director, shareholder and beneficial owner
- Bank Reference for each director, shareholder and beneficial owner,
- Professional reference for each director, shareholder and beneficial owner
- Police Certificate for each director, shareholder and beneficial owner
- Resume for each director
- Form A application for the Directors (2 minimum)
- Offer document ie if you have prepared your own, (We can also assist with drafting of same. We can draft a standard offering document for $US1,500).
Would you like to know more? Then please Contact Us:
info@offshorecompaniesinternational.com
DISCLAIMER: OCI is a Company/Trust/LLC/LP/Foundation Formation Agency. We are not tax advisers or legal advisers. You are advised to seek local legal/tax/financial advice in regards to your local reporting/tax requirements before committing to set up or use an Offshore Company or other entity.
