By Simon Schilder, partner, Ogier – In recognition of the needs of assisting start-up and small/ mid-sized non-institutional investment managers to overcome some of the continued barriers to entry into the industry, the British Virgin Islands (BVI) has recently published the Securities and Investment Business (Incubator and Approved Funds) Regulations, 2015 (the Regulations). These Regulations, which are expected to come into force shortly, introduce two new funds products into the BVI’s funds offering, the “Incubator Fund” and the “Approved Fund”, which are intended to complement the BVI current offering of Private Funds; Professional Funds; and Public Funds.
These new fund products are very much aimed at accommodating the needs of both start-up and small/ mid-sized non-institutional investment managers, by offering them a cost effective regulated fund solution, which ought to therefore assist them in bringing their funds to market whilst managing their operational cost base.
The introduction of these two new funds products, which follows on from the success and popularity of the Approved Manager product introduced into the BVI a couple of years ago, is an exciting development for the BVI's funds industry and one which is universally welcomed.
The key features of the two funds products are as follows:
Incubator Fund
- available for offerings to “sophisticated private investors” only (for these purposes, to be a "sophisticated private investor" a person must be invited to invest and the amount of his or her minimum initial investment shall not be less than USD20,000);
- maximum of 20 investors able to invest in the Incubator Fund at any one time;
- aggregate assets under management not exceeding US$ 20 million (or its equivalent in another currency);
- “Incubator Fund” approval status limited to two years (with a possible further 12 month extension available at the discretion of the Financial Services Commission (FSC)), following which the Incubator Fund must either (i) convert into a Private Fund; Professional Fund; or an Approved Fund or (ii) cease operating as a fund;
- simplified licensing process;
- fast track time to market in that an Incubator Fund may commence business two business days following receipt by the FSC of the licence application;
- offering document/prospectus not mandatory and if no offering document is prepared, the regulatory requirement is that investors must each be given a written investment warning;
- on-going regulatory obligations limited to notification of changes within 14 days;
- audit of financial statements not mandatory; and
- no mandatory service providers.
Approved Fund
- maximum of 20 investors able to invest in the Approved Fund at any one time;
- aggregate assets under management not exceeding USD100 million (or its equivalent in another currency);
- simplified licensing process;
- fast track time to market in that an Approved Fund may commence business two business days following receipt by the FSC of the licence application;
- offering document/ prospectus not mandatory and if no offering document is prepared, the regulatory requirement is that investors must each be given a written investment warning;
- on-going regulatory obligations limited to notification of changes within 14 days;
- audit of financial statements not mandatory; and
- other than a requirement to have a fund administrator, no other mandatory service providers.
In keeping with the intended cost-effective features of these two new funds products, once licensed, the on-going regulatory obligations of an Incubator Fund and an Approved Fund are similarly light touch and primarily consist of obligations to notify the FSC of key changes and periodic reporting (semi-annually for an Incubator Fund and annually for an Approved Fund), including the submission of unaudited financial statements.
A distinction between an Incubator Funds and an Approved Fund under the Regulations is that the life of an Incubator Fund has a limited duration (two years, with a possible further 12 month extension available at the discretion of the FSC). In contrast, provided that the fund continues to be eligible, an Approved Fund is available for an unlimited duration. At least two months prior to the expiration of its term, an Incubator Fund is required to either convert into a Private Fund, Professional Fund or Approved Fund; or cease operations. This is an important feature, in that it enables start-up investment managers to test their investment strategy and gain a track record whilst remaining subject to and so able to benefit from the more light touch regulation available to Incubator Funds under the Regulations.
An obligation upon an Incubator Fund and an Approved Fund to convert also exists where either aggregate assets under management or the number of investors exceeds the maximum thresholds set under the Regulations (assets under management of US$ 20 million or 20 investors for an Incubator Fund; or assets under management of USD100 million or 20 investors for an Approved Fund) for two consecutive months.
In either case, it is intended that such a conversion process will be reasonably straight forward and will involve the submission of an application to the FSC to convert, with various supporting documents, including, in the case of an Incubator Fund, an audit of the fund’s current financial position (such audit being an independent determination of the status of the fund's finances as opposed to an audit of its financial statements) and an audit of its compliance with the requirements of the Regulations.
