When the British Virgin Islands introduced the Approved Manager regime at the end of 2012 it was heralded as a significant step forward. With start-up managers facing dual pressures of investor preference for regulatory oversight, and higher barriers to entry (from a cost perspective), there was no satisfactory option. The new regime changed that. Managers suddenly had the ability to enjoy lighter touch regulatory oversight that was more in line with their needs, and had an alternative to becoming SIBA-licensed on day one.
This was the first sign of the BVI actively responding to meet a genuine need of start-up and emerging managers; the lifeblood of the industry.
"The BVI funds community is looking to assist at every rung on the ladder to ensure that a manager not only has a firm and reliable base upon which to start, but also minimises some of the many difficulties the emerging manager faces," says Philip Graham, Partner at law firm Harneys.
The second, more recent development in May 2015, was the introduction of two new fund products to sit alongside the Approved Manager regime: the BVI Approved Fund and the BVI Incubator Fund.
The incubator fund is aimed at managers who do not necessarily have the benefit of seed investor capital but who wish to set up quickly and establish a track record with minimal set-up costs and without having to comply with onerous regulatory obligations. The product is therefore expected to be attractive to start-up managers who are seeking the best environment to grow their AUM in the most cost-efficient manner.
"The incubator fund is permitted to operate for two years (with the possibility of one additional year) with no mandatory requirement to appoint functionaries (i.e. administrator, custodian or manager) and no requirement to appoint an auditor and therefore is free to appoint any of these that the manager actually feels he needs to get off the ground," explains Graham.
This high degree of flexibility is contingent upon the fund remaining within the relevant thresholds applicable to the fund at all times. These thresholds are:
• a maximum of 20 investors;
• a minimum initial investment of USD20,000 by each investor; and
• a cap of USD20 million on the value of the net assets of the fund.
The approved fund is aimed at managers who wish to establish a fund for a longer term, but on the basis of a more private investor offering, which may appeal to family offices or an investor base of close connections.
It too has relevant thresholds:
• a maximum of 20 investors at any one time; and
• a cap of USD100 million on the value of the net assets of the fund.
"The approved fund has similar characteristics to the long-standing private fund recognised under the Securities and Investment Business Act, 2010 including no minimum initial investment for the investors. However, unlike the private fund, the approved fund is not required to appoint an auditor, a manager or a custodian. To ensure there is some suitable oversight of the operations of the fund, it is required to appoint an administrator which will be reassuring to potential investors," says Graham.
Unlike the incubator fund, the approved fund does not have a restricted validity period and can continue to operate as an approved fund for the full duration of its lifetime, unless:
• a decision is made to voluntarily apply to the Commission to recognise the fund as a private or professional fund;
• it is required to convert into a private or professional fund upon exceeding one of the relevant thresholds; or
• it elects to wind up its operations.
If the BVI is going to become the home of the emerging manager, it has to acknowledge some of the key requirements for that segment of the market. One of those is the importance of speed, with both new fund products being able to commence trading within two business days of lodging a completed application for approval with the Commission.
"It is anticipated that the legal costs will be lower than those associated with setting up a private or professional fund in the BVI, largely because the mandatory information to be contained in the offering documents of these funds is greatly reduced, thereby allowing these funds to use short-form term sheets where appropriate.
"When you combine this cost saving, together with the option to only appoint the service providers that the manager believes the fund requires, the new regime will provide significant cost savings to an investment manager of one of these funds. When coupled with the `light touch' approved manager product, the British Virgin Islands now offers an emerging manager everything they might need to launch as quickly and prudently as possible," says Graham.
The BVI Company
Part of the BVI's popularity is that the BVI fund is such a well recognised product among the global investment community. For private equity managers, the BVI has a good corporate statute in the BVI Business Companies Act 2004 (the "BC Act").
Nevertheless, partnerships are also increasing in popularity and this is set to continue in 2016 when the new Partnership Act will be introduced.
Many of the BVI's advantages are common to numerous other jurisdictions (English language, absence of currency exchange controls, US dollar as a currency, stable democracy, common law legal system with final appeal to the Privy Council in London), but a number of other advantages are not:
Taxation – BVI has no income tax, corporation tax, capital gains tax, wealth tax or similar fiscal laws. Whilst companies will normally pay taxation in the usual way in countries where they engage in business, using a BVI company as a fund vehicle can create a tax neutral layer in the overall fund structure thereby streamlining and simplifying the taxation involved to the relevant domicile of each individual investor.
Speed – Subject to satisfying relevant KYC requirements, companies can be incorporated quickly by licensed registered agents via the BVI's online electronic interface, usually within 24 hours.
Names – BVI companies may be incorporated with foreign character names (e.g. a Chinese name) in addition to their English name.
Cost – BVI companies are still comparatively inexpensive compared to other premium jurisdictions such as Cayman and Bermuda, and most mid-shores such as Hong Kong or Singapore. The regulatory fees, both on formation and on an annual basis therefore are also competitive.
Confidentiality – Although safeguards exist to prevent abuse of corporate confidentiality in relation to money laundering and international crime, law abiding companies can exist with the confidence of privacy.
Corporate flexibility – Company law in the BVI is designed to provide the maximum flexibility consistent with common law legal systems. Companies are permitted to undertake any lawful act or activity, and there are no strictures relating to corporate benefit. This allows asset managers to get extremely creative with their product in certain circumstances, to ensure that the needs of investors can be met.
With all of the regulatory obligations that surround the global investment funds industry right now, the barrier to entry for emerging managers is only getting higher. More managers are simply unable to find the capital to make it financially worthwhile putting a vehicle together.
When one considers all of the advantages that the BVI offers as the leading jurisdiction for offshore incorporations, along with the fact that the vast cost-savings that can be made by using a BVI fund will be directly attributable to the fund, "we genuinely believe that one of the standard questions in a prudent investor's due diligence questionnaire should actually be turned on its head from `Why have you chosen a BVI fund vehicle?" to `Why haven't you chosen a BVI fund vehicle?'," concludes Graham.
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