By Simon Schilder (Partner) and Oliver Bell (Associate), Ogier BVI – While use of the BVI funds regime (as contained within the Securities and Investment Business Act, 2010 (SIBA)) has, historically, been the preserve of established investment managers operating in the hedge fund arena, the flexibility and cost-effectiveness of BVI private funds can provide start-up investment managers with the opportunity to cost effectively develop marketable track records within the confines of a formal fund structure.
BVI private funds also give family offices and high-net-worth individuals (HNWs) the opportunity to take advantage of domestic estate planning services.
The changing investment landscape
Start-up investment managers need to find innovative ways in which to test their investment strategies and establish a track record while maintaining strict controls over their cost base. At the same time, family offices/HNWs are increasingly looking for more formal fund structures for their private investment vehicles in order to take advantage of domestic tax deferral and estate planning opportunities. For such family offices/HNWs, the need to strike the correct balance between setting up a cost-effective fund structure and satisfying any domestic regulatory requirements is paramount.
In both cases, the checks and balances, and regulatory oversight provided by a full-form fund structure is unnecessary. As this article will explain, the flexibility offered by the BVI private funds regime makes it ideally suited to fulfill the needs of such parties, by providing a flexible, robust and cost-effective fund platform.
An introduction to BVI 'Private' Funds
A BVI "fund" (also known as a "mutual fund") under SIBA, is a company, limited partnership or unit trust which fulfills a two part test, namely it:
- collects and pools investor funds for the purposes of collective investment; and
- issues fund interests that entitle the holder to receive, on demand, an amount computed by reference to the value of a proportionate interest in the whole or in a part of the net assets (i.e. the entity is a collective investment scheme which issues redeemable fund interests entitling the holder to receive, on redemption, the net asset value of the interests being redeemed).
Though SIBA talks about "collective investments," there is no prohibition on a BVI fund being structured as a single investor fund, which is a common requirement of family offices/HNWs.
In order to be eligible for recognition as a "private fund," the constitutional documents of the company, limited partnership or unit trust must specify that:
- the fund is not authorised to have more than fifty investors; or
- an invitation to subscribe for, or purchase, interests is made on a private basis only.
BVI investment vehicles formed by start-up managers, or family offices/HNWs ought not to have any difficulty in satisfying these requirements.
Additionally, the Mutual Funds Regulations, 2010, require any offering document issued to contain, in a prominent place, a warning that the fund is suitable for private investors only, and that the fund is limited to fifty investors or that any invitation to subscribe for the fund interests may be made on a private basis only. It is important to note, however, that a formal offering document is not required. This will appeal to family offices/HNWs who neither need nor wish to incur the expense of preparing a formal detailed offering document. In this case, the investment warning would be provided to each investor as a separate document, (for example, by way of a side letter or simple-form subscription agreement).
Ongoing obligations of BVI private funds
Under the Regulations, all BVI private funds are required to have, at all times, at least two directors and a fund administrator (whose role is to, inter alia, calculate the net asset value, and to file, each year, a "Mutual Funds Annual Return" with the BVI Financial Services Commission (FSC)), such return summarising the assets under management and investment spread (and, therefore, used by the FSC to monitor systematic risk within BVI structures).
Additionally, all BVI private funds are required to engage the following service providers (unless specifically exempted by the FSC):
(a) an investment manager;
(b) a custodian; and
(c) an auditor.
Availability of potential exemptions under the Regulations
Obtaining the exemptions available under the Regulations is likely to be key for start-up investment managers and family offices/HNWs looking to take advantage of the BVI private funds regime for their own personal needs.
In applying for an exemption from the requirement to appoint a custodian, the appointment of a prime broker or the trading of esoteric assets, for example, would be reasonable justifications to enable the FSC to grant such an exemption.
In the case of an application for exemption from the requirement to appoint an investment manager (which will, most likely, be of interest to family offices/HNWs), the FSC has indicated a willingness to grant exemptions in situations where the management function is being carried out by the directors either:
- where the directors carry out the discretionary management function for actively traded investments; or
- where, given the nature of the underlying asset class, investment management decisions are infrequent.
BVI private funds established by family offices/HNWs where the directors would likely also be the investment decision makers should, therefore, be confident in their ability to gain this exemption.
When granting an exemption to appoint an auditor, the FSC will want comfort that, not only is the fund closely held, but that all investors are comfortable with the fund's financial statements not being audited. BVI private funds formed by start-up investment managers, or family offices/HNWs should be confident that they will be able to persuade the FSC that the granting of this exemption is justified.
Under the Regulations, applications for exemptions can be made at the time of the application for recognition as a BVI private fund (i.e. at the time of fund licensing) or at any subsequent time.
The following features of BVI private funds ought, therefore, to be of particular interest to start up investment managers and family offices/HNWs:
- no minimum investment;
- no minimum number of investors;
- no requirement for a lengthy offering document; and
- the ability to take advantage of exemptions regarding the appointment of an auditor, custodian or investment manager.
These features, when combined with a cost-effective platform and an appropriate level of regulatory oversight by the FSC, should provide a number of useful solutions to their needs.