British Virgin Islands: New BVI Funds Products Look Promising For South Africa

The British Virgin Islands is offering two new fund formats, designed to provide a cost--‐effective and efficient platform for investment managers who are new to international fundraisings, according to Patrick Colegrave, partner at law firm Harneys.

Colegrave believes the new formats will be of interest to the hedge fund community in South Africa, given their lower--‐cost structures designed to cater to smaller or early--‐stage fund managers seeking international exposure. "They provide a cost--‐efficient alternative to managers wishing to test the appetite for their strategy in the international market," he said.

The first format is an ''incubator fund", aimed at start--‐up managers with open--‐ ended strategies (typically long--‐only or hedge fund strategies) that are looking to establish a track record and test a strategy in the most cost--‐efficient manner, in one of the leading jurisdictions globally for the domicile of funds.

The second format is an "approved fund", again aimed at managers with open--‐ ended strategies (typically long--‐only or hedge fund strategies) that are looking to establish a fund with a private offering on a long--‐term basis in a tested and respected funds jurisdiction but in the most cost--‐efficient manner.

Colegrave notes that the BVI is recognised globally as a leading funds jurisdiction, with more than 15% of all offshore hedge funds domiciled there. It is regulated by the Financial Services Commission (FSC), which is committed to complying with international regulatory standards. The BVI is OECD compliant, has signed up to tax information exchange agreements (TIEAs) with 27 countries and, in relation to the European Union (EU) Alternative Investment Fund Managers Directive (AIFMD), is in the process of securing TIEAs with all outstanding EU member states and has a cooperation agreement in place with the European Securities and Markets Authority (ESMA). These measures ensure that BVI funds are and will continue to be marketable internationally; in EU member states (notwithstanding AIFMD) in compliance with local private placement rules and subject to local laws, in the US, Middle East and Asia.

The key features of the incubator fund

• Light regulation and minimal ongoing regulatory obligations.
• Limited mandatory information to be contained in an offering document means that the fund can operate using a short--‐form term sheet, keeping legal costs and time associated with set--‐up to a minimum.
• No mandatory functionaries (ie: administrator, custodian or manager) to be appointed. The fund can choose whether to appoint any functionaries it believes the fund requires.
• No requirement to conduct an audit or file audited financial statements.
• A two--‐year validity period (with the possibility to extend this by a maximum of 12 months on application to the FSC) gives the manager time to test their strategy and determine whether the fund is viable before committing to operate as a private, professional or approved fund.
• Ability to commence business within two business days of lodging a complete application for approval with the FSC.

Criteria for the incubator fund

• The fund must have no more than 20 investors.
• Each investor must be a "sophisticated private investor", which means that they were invited to invest in the fund and must make a minimum initial investment of US$20,000.
• The net assets of an incubator fund must not at anytime exceed US$20 million.
• The constitutional documents must state that the fund is an incubator fund.
• Each investor must be provided with a written warning (either in a prominent place in the offering document or in a separate document) that:
• • the fund is an incubator fund;
  • the total number of investors in the fund is limited to a maximum of 20;
  • the fund is suitable for sophisticated private investors;
  • the incubator fund is limited to the value of its net assets not exceeding US$20 million;
  • the incubator fund is not subject to supervision by the FSC and that the requirements considered necessary for the protection of investors that apply to public funds do not apply to an incubator fund;
  • an investor in an incubator fund is solely responsible for determining whether the fund is suitable for his or her investment needs;
  • investment in an incubator fund may present a greater risk to an investor than investment in a public fund;and
  • by reason of the above, the fund is limited to an initial period of two years and may, thereafter, unless it decides to terminate its business, apply to the FSC to be recognised as a private or professional fund or approved as an approved fund.

The key features of the approved fund

• Light regulation and minimal ongoing regulatory obligations.
• Limited mandatory information to be contained in an offering document means that the fund can operate using a short--‐form term sheet, keeping legal costs and time associated with set--‐up to a minimum.
• No minimum initial investment threshold for investors.
• Mandatory functionaries kept to a minimum; an approved fund is required to have an administrator at all times but can choose whether to appoint any other functionaries it believes the fund requires.
• No requirement to conduct an annual audit or file audited financial statements.
• Ability to convert to a private or professional fund at a later date, should the fund outgrow the restrictions of an approved fund.
• Ability to commence business within two business days of lodging a complete application for approval with the FSC.

Criteria for the approved fund

• The fund must have no more than 20 investors.
• The net assets of an approved fund must not at anytime exceed US$100 million.
• The constitutional documents must state that the fund is an approved fund.
• Each investor must be provided with a written warning (either in a prominent place in the offering document or in a separate document) that:
• • the fund is an approved fund;
  • the total number of investors in the fund is limited to a maximum of 20;
  • the approved fund is limited to the value of its net assets not exceeding US$100 million;
  • the approved fund is not subject to supervision by the FSC and that the requirements considered necessary for the protection of investors that apply to public funds do not apply to an approved fund;
  • an investor in an approved fund is solely responsible for determining whether the fund is suitable for his or her investment needs; and
  • investment in an approved fund may present a greater risk to an investor than investment in a public fund.

Previously published in Hedge News Africa.

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