Setting up an alternative investment fund in the British Virgin Islands
The British Virgin Islands
The British Virgin Islands is a leading jurisdiction for the formation of alternative investment funds, having approximately 2,800 funds registered or recognised under the Securities and Investment Business Act 2010 (SIBA). SIBA replaced the Mutual Funds Act, 1996 (the MFA) in May 2010 and has been welcomed with widespread praise by the industry. SIBA has retained the familiar and well liked framework of public, professional and private funds first established by the MFA but has updated the regime to codify long standing policy and practices as well as bringing the BVI fully into line with best practice and international standards. Funds recognised or registered under SIBA are regulated by the Financial Services Commission (the Commission), the financial regulator in the British Virgin Islands.
SIBA requires all investment funds falling within its definition of “fund” to be recognised or registered with the Commission. SIBA restricts the definition of “mutual fund” to open-ended funds that entitle investors to demand redemption of their fund interests immediately or within a period of notice. Accordingly only such funds are regulated under SIBA. Closed ended funds are not subject to specific regulation although BVI established managers and other BVI established functionaries of closed ended funds will in many circumstances require a licence under SIBA.
SIBA introduces a wide ranging licensing regime which requires any person carrying on “investment business” in or from within the BVI to hold a licence. The activities constituting investment business include acting as an investment manager, administrator, investment advisor or custodian with respect to a wide variety of financial instruments. It includes most functionaries of open and closed ended funds but the precise outcome depends on the services provided and the structure of the fund. It is important to note, however, that non-BVI functionaries of a BVI fund carrying on business from outside the BVI will not generally need to hold a license under SIBA.
Sponsors and fund managers considering setting up investment funds in the British Virgin Islands may choose from the following range of possible vehicles:
BVI Business Company
The vast majority of British Virgin Islands investment funds are established as companies limited by shares under the BVI Business Companies Act, 2004 or as limited partnerships formed under the Partnership Act, 1996.
Categories of fund
The three categories of regulated fund are as follows:
Private fund. Restricted to either (a) having no more than 50 investors or (b) only making an invitation to subscribe for or purchase fund interests on a private basis.
Professional fund. May only issue fund interests to “professional investors” and the initial investment for all investors, other than exempt investors (as defined), may not be less than US$100,000 or equivalent in another currency.
Public fund. Greater regulation imposed as no restrictions on investors or minimum investment.
Private funds and public funds must be recognised or registered under SIBA before they commence business whereas professional funds may commence business for a period of up to 21 days without being recognised provided that they otherwise comply with the requirements of SIBA as if they were recognised and that an application is submitted to the Commission within 14 days.
A professional investor is a person either (a) whose ordinary business involves the acquisition or disposal of property of the same kind as the property or a substantial part of the property of the fund or (b) who has signed a declaration that he, whether individually or jointly with his spouse, has net worth in excess of US$1,000,000 and that he consents to be being treated as a professional investor.
Functionaries / service providers
All functionaries of funds regulated under SIBA must satisfy the Commission’s “fit and proper” criteria. Functionaries of a public fund require the prior approval of the Commission. Every public fund must have a manager, administrator and custodian and each must be independent or functionally independent of the fund and each other.
Private and professional funds must generally have a manager, administrator and custodian although an exemption from the requirement to appoint a manager and/or administrator is available upon application to the Commission.
The Commission confirmed that functionaries of funds established and located in the BVI or any of the following countries may be recognised and accepted by the Commission for the purposes of acting as a functionary of a BVI fund (the notice extends the list of recognised countries which applied under the MFA – the new countries are highlighted):
Argentina, Australia, Bahamas, Bermuda, Belgium, Brazil, Canada, Cayman Islands, Chile, China, Denmark, Finland, France, Germany, Gibraltar, Greece, Guernsey, Hong Kong, Ireland, Isle of Man, Italy, Japan, Jersey, Luxembourg, Malta, Mexico, Netherlands, Netherlands Antilles, New Zealand, Norway, Panama, Portugal, Singapore, Spain, South Africa, Sweden, Switzerland, United Kingdom and United States of America
The Commission has also stated that it may recognise and accept a functionary from outside the BVI and the above countries if it is satisfied that the country has a system for the effective regulation of investment business, including funds.
No restrictions on strategy, leverage or valuation
There are no restrictions on the strategy a fund may pursue, provided it is not otherwise in breach of the laws of the British Virgin Islands. There are no limits on leverage taken by the funds. There are currently no rules imposed on funds as to how they value their assets. However, a Public Funds Code is currently in consultation and is expected to come into force later in 2010. As the name suggests, the Code only applies to registered public funds and imposes additional disclosure and governance requirements on public funds (including provisions relating to valuation policy and disclosure).
Financial statements and audit
Public funds: Financial statements for each financial year must be prepared which comply with IFRS, US, UK or Canadian GAAP or such other accounting standards as may be approved by the Financial Services Commission on a case by case basis. The financial statements must be audited by an auditor approved by the Financial Services Commission. There is no local sign off.
Private and professional funds: Financial statements for each financial year must be prepared in accordance with one of the prescribed financial standards (UK, US or Canadian GAAP or IFRS) or internationally recognized and generally accepted accounting standards equivalent to such standards. The Financial statements must be audited by an auditor meeting certain prescribed criteria unless the fund is exempted from the audit requirement by the Financial Services Commission (no local sign off). The above provisions are not applicable to financial years ending prior to 17 May 2010.
All funds regulated under SIBA must submit a return to the Commission no later than 30 June in each year in respect of the calendar year ending on 31 December of the previous year. The return contains basic prudential and governance information and summary financial information. The return does not require any information on the identity of investors or the specific investments within the fund’s portfolio. Such information is confidential to the Commission and may only be publicly disclosed on an aggregated basis.
Public Funds: Public funds may not make an invitation to the public to subscribe for or purchase fund interests unless the offer is contained in a prospectus which has been approved by the fund’s governing body and the prospectus has been registered (i.e. approved) by the Commission. The prospectus is required to provide full and accurate disclosure of all information as investors would reasonably require and expect to find for the purpose of making an informed investment decision. Additional minimum disclosure requirements for a prospectus are to be contained in the Public Funds Code (currently in consultation).
Private / Professional Funds: A private or professional fund must submit a copy of its proposed offering document to the Commission upon application for recognition or provide an explanation as to why no offering document is to be issued. The prescribed investment warning must be included in a prominent place within an offering document (or if no offering document is issued, provided to each investor or potential investor in a separate document) but otherwise SIBA does not prescribe what should be included within the offering document. Copies of offering documents issued to investors or potential investors must be filed with the Commission. The constitutional documents of private and professional funds must contain prescribed statements referring to their status as private and professional funds respectively.
Directors / authorised representative
SIBA requires that every fund established as a company have at least 2 directors. Corporate directors are permitted for private and professional funds provided that at least one director is an individual but are not permitted for public funds. There are no requirements for local directors. However, with effect from 12 October 2010, each fund must appoint an authorised representative unless the fund has a significant management presence in the BVI. The authorised representative itself must be a person located in the BVI holding a certificate from the Commission authorising it to act in such capacity.
Regulated funds are subject to a reasonable number of requirements to notify the Commission either before or after the occurrence of certain events such as appointment and resignation of directors and functionaries and changes to documents.
Manager’s and administrator’s licenses
A licence may be granted by the Commission to a person proposing to carry on business in or from within the BVI as the functionary of funds if the Commission is satisfied that, inter alia:
a) the applicant, its directors and senior officers and significant shareholders satisfy the Commission’s fit and proper criteria; and
b) the organisation, management and financial resources of the applicant are, adequate for the carrying on of the relevant investment business.
A holder of a licence under SIBA must comply with the requirements of the Act and, upon it becoming applicable to SIBA licensees, relevant sections of the Regulatory Code, 2009.
All BVI funds, managers and administrators must comply with the Anti-Money Laundering Regulations, 2008 and the Anti-money Laundering and Terrorist Financing Code of Practice, 2008. However, BVI funds commonly outsource the majority of its obligations under such legislation to its administrator who is then required to comply with the AML laws of its home jurisdiction.
BVI funds and functionaries are exempt from BVI income tax. Furthermore, investors in BVI funds are not liable to any BVI income tax with respect to fund interests. There are no estate, inheritance, succession or gift taxes payable in the British Virgin Islands with respect to any interests in a fund.
By Ross Munro, Harneys