By Matthew Feargrieve
10 February 2020
1. BVI Investment Funds: Overview
Investment funds domiciled in the British Virgin Islands (often referred to simply as “the BVI”) are regulated by the Investment Business Division of the Financial Services Commission (the “FSC”). The Investment Business Division is responsible for the regulation and supervision of securities and investment business and collective investment schemes, that carry on business in and from within the Territory. The Division ensures compliance with relevant BVI laws, as well as with the territory’s international standards of regulation and supervision.
As at 31 March 2013, there were 2,303 open-ended investment funds recognised by or registered with the FSC, of which 1,538 were established as professional funds, 574 as private funds and 146 as public funds. It is not possible to state with any accuracy how many of those 2,303 open-ended investment funds can be classified as “hedge funds”, but the proportion is generally considered to be something in the order of 75%, making the BVI the world’s second largest offshore centre of alternative management after the Cayman Islands.
Closed-ended funds have no obligation to be filed with the FSC and so it is not possible accurately to estimate the number of closed-ended funds domiciled in the BVI. It may be assumed that closed-ended and other types of unregulated fund comprise a substantial proportion of the one million or so companies and limited partnerships registered in the BVI as at 31 March 2013.
1. As at 31 March 2013 there were additionally 530 licensed providers of investment business services (the majority of which were management companies appointed by BVI registered investment funds) and 5 management companies utilising the new “Approved Manager” regime that was introduced in 2012, and which is considered below.
2. Regulatory Regime
The FSC was established in 2001 as the autonomous financial services regulatory authority in the BVI. In addition to the regulation of financial services, the FSC is responsible for the Registry of Corporate Affairs at which all publicly available documents pertaining to companies and limited partnerships registered in the BVI are maintained.
The Investment Business Division of the FSC administers and enforces the Securities and Investment Business Act, 2010 (“SIBA”) (which replaced the Mutual Funds Act 1996), the Mutual Fund Regulations, 2010 and the Regulatory Code, 2009. This is the primary legislation that governs investment funds in the BVI, the centerpiece of which is SIBA.
The 2,303 investment funds recognized by or registered with the FSC as at 31 March 2013 derive their regulatory status in the BVI by virtue of being considered “mutual funds”. This definition is unique to the BVI, bears no resemblance to that term as it is commonly understood in North America, and is defined in SIBA as a company, partnership or unit trust that:
2.1 collects and pools investor funds for the purpose of collective investment; and
2.2 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 in a part of the net assets of the fund, and includes:
(a) an umbrella fund whose shares are split into a number of different class funds or sub- funds; and
(b) a fund which has a single investor which is a fund not registered or recognised under SIBA.
Three points of note flow from this definition:
(1) the reference to single investor funds brings such funds within the definition of “mutual fund” in order to ensure that master funds (which may have only one investor) are brought with the ambit of SIBA;
(2) the definition in SIBA of “fund interests” expressly excludes debt interests, and so funds issuing debt interests are excluded from the licensing and other requirements of SIBA; and
(3) closed-ended funds are not brought within the ambit of SIBA.
The following types of mutual fund fall within the SIBA licensing regime:
(1) mutual funds established as BVI entities (companies, limited partnerships and unit trusts);
(2) mutual funds established outside the BVI but which carry on business in the BVI through a branch operation or representative office; and
(3) mutual funds established outside the BVI which promote themselves to persons who are BVI citizens or residents, or who are physically present in the BVI.
SIBA also regulates:
(1) mutual fund administrators, managers and custodians established as BVI entities; and
(2) mutual fund management or administrative entities established outside the BVI but which carry on their business in the BVI.
3. Categories of Mutual Fund
For regulatory purposes, there are three principal types of mutual fund under SIBA: private funds, professional funds and pubic funds.
Private Funds
SIBA defines a private fund as a mutual fund which by its constitutional documents:
3.1 has restricted the maximum number of its investors to fifty; or
3.2 has specified that all invitations to subscribe for interests in the fund shall be made on a private basis.
On application, a proposed private fund will be expected to demonstrate the “private basis” of offering its shares to prospective investors. SIBA provides that a private invitation to subscribe fund interests will include an invitation:
3.3 to specified persons and which is not calculated to result in fund interests becoming available to other persons or to a large number of persons; or
3.4 by reason of a private or business connection between the fund and the subscriber.
There is an FSC policy guideline that amplifies what may be considered “private” by stating that “the making of invitations to as many as 300 persons might be considered an offering on a “private basis” if it can be demonstrated that the person made the invitations to specified persons and had no deliberate intention of making invitations to other persons. The making of invitations to a significantly greater number of persons than 300 would cast doubt upon compliance with the spirit of “private basis” which is embodied in SIBA, on the grounds that a large number of persons is not consistent with what is commonly understood to be “private”.” In any case, the private fund will be limited to having at most 50 investors of record.
Professional Funds
SIBA defines a professional fund as a mutual fund whose interests are made available only to professional investors, each of whom (unless considered an “exempted investor”) must invest at least US$100,000 (or currency equivalent) by way of initial subscription.
A “professional investor” is any person satisfying one of two possible criteria:
3.5 a person whose ordinary business involves investment business similar to the kind the fund is undertaking;
3.6 a person whose net worth (either individually or jointly with a spouse) exceeds US$1,000,000 (or currency equivalent).
In simple terms, therefore, a “professional investor” is (in theory at least) a person who knows what he is doing when investing in the fund, who understands the risks of an investment and can absorb the potential losses arising therefrom. It is for this reason that 1,538 of the 2,303 mutual funds filing with the FSC as at 31 March 2013, amongst which there will be a high proportion of hedge funds, are established as professional funds. It follows that the majority of mutual funds domiciled in the BVI and operating as hedge funds will take the form of professional funds.
An “exempted investor” (to which the US$100,000 minimum initial subscription requirement does not apply) is (a) the fund’s manager, administrator, promoter or underwriter, or (b) any employee of the fund’s manager.
Unlike a private fund, which must be recognised by the FSC before it commences business (broadly understood to mean publishing a placement memorandum), 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. This ability is subject to some qualification, however: (a) the fund must satisfy the criteria for a professional fund, and (b) the fund must comply with and be managed and administered in compliance with SIBA.
Public Funds
A public fund is one that is neither a private fund nor a professional fund. A public fund offers interests to the general public. Essentially a retail product, this type of mutual fund is accorded the highest degree of regulation.
A public funds must be registered with the FSC before engaging in any business activity in or from within the BVI. In addition, SIBA requires that its prospectus shall provide “full and accurate disclosure of all such information as investors would reasonably require and expect to find for the
purpose of making an informed investment decision”. The prospectus is also required to contain a summary statement of investors´ rights, and must be approved and signed by (or on behalf of) the fund’s directors, who take responsibility for the content thereof.
Because of the retail nature of pubic funds, this article will focus primarily on private and professional funds.
4. Regulatory Application Process
The application to obtain private, professional or public status is made by the fund to the FSC using a prescribed form of application form and supported by a number of documents, including:
4.1 the fund’s constitutional documents and certificates of incorporation or registration
4.2 offering document (or explanation as to why no offering document is being issued)
4.3 a prescribed investment warning in the offering document (or if no offering document is being issued, the investment warning must be provided separately to investors)
4.4 subscription documents
4.5 consent letter signed by the fund’s BVI legal counsel
4.6 relevant service provider appointment exemptions (if claimed): auditor, custodian and manager must be appointed by the fund unless an exemption is available and is claimed (see the section entitled “Fund Service Providers”, below).
4.7 US$700 application fee.
The application process for a private or professional fund typically takes one week from the submission to the FSC of the supporting documents to issue of the FSC’s certificate of registration or recognition (as applicable).
5. Fund Service Providers
SIBA requires that BVI mutual funds (private, professional, public) must appoint:
5.1 an authorised representative
5.2 a manager
5.3 a custodian
5.4 an administrator
5.5 an auditor
5.6 two directors (minimum).
A private or professional fund must give the FSC at least seven days’ prior notice of a functionary’s appointment (or retirement or removal).
The FSC has the ability to take enforcement action against a fund if its functionaries do not meet the “fit and proper” requirements of the FSC. For these purposes, the FSC has a list of jurisdictions that it officially recognises in order to provide some certainty in relation to those of the BVI fund’s overseas service providers that it will deem as acceptable.
Authorised Representative
Every mutual fund must have an authorised representative in the BVI, the functions of which are to act as an intermediary between the fund and the FSC.
Manager
A mutual fund is required at all times to have a manager. A private or professional fund may apply for an exemption from this requirement. In addition, management entities will be subject to the licensing requirements of SIBA. These are considered below under “Management Companies”. A local manager is not required under BVI law.
Custodian & Administrator
A mutual fund is required at all times to have a custodian and an administrator. A fund may apply for an exemption from the requirement to appoint a custodian. No exemption from the requirement to appoint an administrator is available under BVI law. A local custodian or administrator is not required under BVI law.
Auditor
Private and professional funds are required to appoint an auditor and file with the FSC annual financial Statements, unless the fund is exempted from the audit requirement by the FSC. There is no local auditor sign-off requirement, not does the auditor have to be approved by the FSC.
Directors
Every mutual fund must have at least two directors, one of whom must be an individual. The directors must satisfy the FSC’s “fit and proper” requirements, and a private or professional fund must give the FSC at least fourteen days’ prior notice of a director’s appointment, retirement or removal. There is no residency requirement for the directors.
The directors of private and professional funds are generally expected to be individuals (as opposed to corporate entities). With respect to funds established as limited partnerships, there is
no requirement that the general partner of the limited partnership be a BVI company or the general partner be resident in the BVI.
6. Private and Professional Funds: Ongoing Obligations
In order to enable provide the FSC with sufficient information to enable it to monitor the BVI funds industry and plan its development, SIBA requires private and professional funds are subject to certain reporting obligations to the FSC, primarily relating to:
6.1 the cessation or termination of a functionary’s appointment
6.2 any amendment of its constitutional documents
6.3 any change of its place of business, whether in or outside the BVI
6.4 the issuance of any offering document not previously provided to the FSC
6.5 the amendment of any offering document previously provided to the FSC
6.6 financial information for the relevant reporting period, including start- and end- NAVs, total subscriptions, total redemptions, net income/loss, dividends/ distributions and year end gross assets.
This information, in respect of the previous calendar year, is contained and sent to the FSC in an annual prudential or statistical return that the fund must lodge with the FSC no later than 30 June in the current calendar year.
Unless exempted, private and professional funds must prepare annual audited accounts and file the same with the FSC within six months of year end or any extended period permitted by the FSC and not exceeding 15 months in total.
The FSC has the ability to require funds to provide such additional information that it considers necessary to remedy any inaccurate, incomplete or unverified information already provided.
7. Investment restrictions on Mutual Funds
There are no requirements or restrictions under BVI law relevant to a fund’s investments, investment strategy, liquidity profile and use of leverage or derivative instruments.
8. Offering & Subscription Document Content
A BVI mutual fund must issue and offering document, or furnish the FSC with an explanation as to why it seeks to dispense with an offering document and the means by which it is proposed that investors are provided with all relevant information.
BVI law makes very few demands on the content of a fund’s offering document, other than the requirement under SIBA that investors in private or professional funds must be provided with an investment warning, prominently located in the offering document, to the effect that:
8.1 the fund has been established as a private or professional fund, as the case may be;
8.2 in the case of a private fund, the fund is suitable for private investors only and that the fund is limited to 50 investors or any invitation to subscribe for interests in the fund may be made on a “private basis” only;
8.3 in the case of a professional fund, the fund is suitable for professional investors, and with respect to each investor, a minimum initial investment of US$100,000 (or such larger sum as may apply with respect to the fund) is required;
8.4 the fund is not subject to supervision by the FSC or by a regulator outside the BVI and that the requirements considered necessary for the protection of investors that apply to public funds do not apply to private or professional funds;
8.5 an investor in a private or professional fund is solely responsible for determining whether the fund is suitable for his investment needs; and
8.6 investment in a private or professional fund may present a greater risk to an investor than investment in a public fund.
Where a private or professional fund does not issue an offering document, this investment warning must be provided to each investor in a separate document.
SIBA additionally requires that applicants for fund interests may only be accepted by the private or professional fund if that applicant has provided a written acknowledgement that it has received, understood and accepted the prescribed investment warning. In practice this acknowledgement is contained as a representation in the fund’s subscription documents.
9. Management Companies
A private, professional and public fund in the BVI is required to appoint a manager. The conduct of investment business in or from within the BVI is subject to the licensing requirements of SIBA.
SIBA licensing Regime
The term “in or from within the BVI” means that the licensing requirements will be applicable to BVI entities conducting ‘investment business’ outside the BVI, as well as BVI and non-BVI entities conducting ‘investment business’ within the BVI (unless those activities constitute an excluded activity or are conducted by excluded persons, as considered below) and any person who solicits a person in the BVI in order to offer investment services.
“Investment business” is broadly defined to include (i) dealing in investments, (ii) arranging deals in investments, (iii) managing investments, (iv) providing investment advice, and (v) providing custodial or administration services with respect to investments. “Investments” is defined to include shares, interests in a partnership or fund, debentures, bonds, other debt instruments and derivatives and other interests relating to such investments.
Licensees are required to comply on an ongoing basis with a number of requirements under the SIBA and the Regulatory Code 2009 including requirements relating to capital resources, the appointment and removal of directors, changes to ownership structures, insurance, corporate governance, segregation of client assets, advertising and such other requirements to be included in a dedicated part of the Regulatory Code 2009.
Exclusions from SIBA licensing regime
SIBA provides for the exclusion of certain types of investment activities and certain types of persons from the abovementioned prohibition.
The excluded activities include, inter alia:
9.1 accepting, transferring or becoming party to (other than as debtor or surety) an instrument creating or acknowledging indebtedness in respect of any loan or credit guarantee;
9.2 the issuance, redemption or repurchase by a company of its own shares or debentures, fund interests by a unit trust or partnership interests by a partnership;
9.3 a sale of goods or services where the supplier does not hold himself out as generally as engaging in the business of buying investments with a view to selling them or regularly solicit members of the public to buy, sell subscribe for or underwrite investments;
9.4 particular transactions that are primarily carried out for risk management purposes;
9.5 providing investment advice in the course of a profession or non-investment business;
9.6 transactions relating to employee share schemes;
9.7 dealing as a bare trustee, or providing advice as a trustee to co-trustees or trust beneficiaries; and
9.8 giving investment advice as a director of a company to another director of the company, provided that the director does not otherwise carry on investment advice or investment management business.
There are no excluded activities in connection with custodial or administration services.
In addition to these excluded activities, SIBA excludes from its licensing requirements persons (a) who do not otherwise carry on (or hold themselves out as carrying on) investment business and does not receive remuneration separately for activities that constitute investment business, and (b) who are:
(a) directors, partners, trustees or participants in joint ventures who provide investment business services to their respective company, partnership, trust or joint venture; or
(b) are companies that undertake an activity that constitutes investment business exclusively with, or for, a company within the same group.
Public, private or professional funds or recognised foreign funds are also excluded when undertaking an activity that constitutes carrying on business as a mutual fund in or from within the BVI.
10. Management licensing process
The licence application process will take around 6 weeks to complete. The application will entail the preparation and filing with the FSC of several documents, including (a) a detailed business plan, and (b) documents evidencing the fulfilment of the FSC’s “fit and proper” requirements in relation to the applicant’s directors, senior officers and significant shareholders.
Under the SIBA regime each in, the person seeking a licence must satisfy the FSC’s. References, police reports and declarations on each such person must be provided to the FSC. A detailed business plan must also accompany the application.
11. Ongoing obligations of licensees
Once licensed to carry on an ‘investment business’, SIBA sets out various ongoing obligations on the licensee regarding corporate governance, capital resources, the appointment of directors, a compliance officer and MLRO, preparation of audited accounts, changes of ownership, insurance, advertising, segregation of client assets, an approved persons regime, conduct of business rules and other administrative requirements.