By Philipp Neumann (pictured), Counsel Campbells, BVI, Team BVI Member – Starting a regulated investment fund can easily become a vicious circle for many start-up fund managers: The lack of track record will make it difficult to raise investor capital regardless of how creative or extraordinary the ideas of the start-up managers may be and, in turn, the lack of investor capital will often make it difficult to bear the upfront costs for the establishment of a regulated fund.
In the past, start-up managers would find themselves in the situation where they had to start with unregulated vehicles in order to build up their track records. This is a difficult way to attract prospective investors in times of increasing demand for transparency.
The British Virgin Islands (BVI) is one of the largest and most popular domiciles for regulated investment funds worldwide. It is well known to international investors and financial institutions for its flexible company law and solid regulatory framework.
The BVI government, regulator (the BVI Financial Services Commission) and industry practitioners have a track record of working closely together and ensuring that the types of investment funds products available in the BVI meet market demands. Reflecting this approach, in 2012, the BVI introduced a new investment fund manager licence which allows start-up managers to manage investment funds without being subject to overly burdensome regulatory requirements.
Very recently, the BVI has further expanded its investment funds repertoire and introduced two new types of investment funds: the Approved Fund and the Incubator Fund. This article deals with the Incubator Fund only. As its name suggests, the Incubator Fund is geared towards start-up fund managers and there is a widespread perception within the investment funds industry that the Incubator Fund is perfectly suited to meet the needs of start-up fund managers.
In the BVI, open-ended investment funds (investment funds which provide their investors with an option to redeem their shares or interests in the fund) are regulated. The Incubator Fund falls within the category of an open-ended fund and is subject to regulation in the BVI. However, the Incubator Fund is less regulated than other BVI regulated investment funds, allowing start-up managers to bascially self-manage a regulated investment fund at lower set-up and on-going costs.
Commonly, Incubator Funds will be set up as a BVI company with limited liability, incorporated under the BVI Business Companies Act. The BVI Business Companies Act provides for great flexibility allowing sponsors of the Incubator Fund to tailor the constitutional documents of the fund to their needs. For example, most amendments to the constitutional documents of a BVI company do not need investor participation.
The key characteristics of an Incubator Fund are: (i) the total number of investors is restricted to 20 sophisticated private investors; (ii) an investor must initially invest at least USD20,000; and (iii) the net assets of the Incubator Fund must not exceed USD20,000,000 (or its equivalent in any other currency). There is no requirement to have an offering document in place – a short term sheet will suffice. There is also no requirement to have third party service providers appointed, no requirement to file audited financial statements, no capital requirements, and no restriction on asset classes or risk diversification requirements. Even if the Incubator Fund can be operated as a self-managed investment fund, it may also choose (or asked by investors), to have a third party manager appointed. Using an approved manager for an Incubator Fund would be a good solution in this regard.
The life span of an Incubator Fund is limited to 2 years (or 3 years if an extension is granted by the BVI Financial Services Commission) after which an Incubator Fund may be converted into a Professional Fund, a Private Fund or an Approved Fund. Alternatively, an Incubator Fund can also be converted into a closed-ended fund which is not regulated. It could also be liquidated if it had come to the end of its natural life.
By way of background, the key requirement for an investment into a Professional Fund is that the investor must initially invest at least USD100,000. In contrast, a Private Fund has no minimum investment threshold but is limited to either having no more than 50 investors or to private marketing, i.e. it cannot be marketed publicly. A Professional Fund and a Private Fund must both have certain third party service providers appointed and, subject to limited exemptions, file audited financial statements annually. The Approved Fund has certain restrictions in relation to the maximum number of investors and the maximum value of net assets.
An Incubator Fund must have two directors appointed, one of which must be an individual. Directors of an Incubator Fund do not need to be resident in the BVI. As with all BVI companies and partnerships, an Incubator Fund will need to have a registered agent and registered office in the BVI and, in addition, have an authorised representative appointed. The registered agent will provide the Incubator Fund with certain company management services and the authorised representative will serve as a conduit between the Incubator Fund and the BVI Financial Services Commission. There is a good number of experienced service providers in the BVI offering such services.
Full compliance with the on-going obligations of the Incubator Fund should not add a significant layer of costs to the Incubator Fund. The reporting requirements for an Incubator Fund are kept to a minimum. The Incubator Fund must submit certain information to the BVI Financial Services Commission on a recurring basis (for example in relation to the number of investors, total investments, aggregate subscriptions and redemptions, net asset value of the fund and details of any significant investor complaints) and notify the BVI Financial Services Commission within 14 days of any changes to the information provided in the application or in relation to any matter which is likely to have a material impact on the Incubator Fund.
The set-up times for an Incubator Fund are usually very short. An Incubator Fund may start business two business days after the submission of a complete application for approval to the BVI Financial Services Commission.
Lastly, no income, corporate, capital gains or withholding tax will be levied on an Incubator Fund.
The Incubator Fund is an attractive and solid vehicle for start-up managers who wish to launch their regulated investment fund rapidly.
