The principal legislation pertaining to funds in the British Virgin Islands ("BVI") is the Securities and Investment Business Act, 2010 ("SIBA") and regulations thereunder. (the "Regulations"). This Act sets out the requirements for the recognition and registration of funds incorporated or formed under the laws of the BVI or otherwise carrying on business from within the BVI.
Funds in the BVI may be incorporated as business companies or formed as partnerships or unit trusts. The business company, being a corporate vehicle, is the most common structure used to form a fund in the BVI. Fund companies can be incorporated as segregated portfolio companies. For ease of reference, we have in this memorandum assumed that the fund is structured as a business company, except where otherwise noted.
Advantages
No exchange controls
There is no taxation in the British Virgin Islands in relation to dividends, interest, rents, royalties, compensations and other amounts paid by an investment fund to persons who are not resident in the British Virgin Islands. All instruments relating to transfers of property to or by the investment fund and all instruments relating to transactions in respect of the shares, debt obligations or other securities of the fund and all instruments relating to other transactions relating to the business of the fund are exempt from the payment of stamp duty in the British Virgin Islands.
No exchange controls
There are currently no withholding taxes or exchange control regulations in the British Virgin Islands applicable to an investment fund or its members.
Investment worldwide
Provided the trustee is permitted to do so by its trust deed, or the company by its Memorandum of Association, investments of any type may be made anywhere in the world, subject always to the restrictions of local laws of any applicable jurisdiction.
Government approvals
Other than the requirement outlined below relating to managers, there are no governmental approvals or consents which need to be obtained, nor any statutory requirements to be complied with in relation to the issue of units or shares by a British Virgin Islands' closed ended investment fund (as defined below) or the circulation of offering documentation, provided that there is no solicitation of the members of the public in the British Virgin Islands. Open ended investment funds (as defined below) are required to be either recognised as private of professional funds or registered as public funds by the Financial Services Commission (the "FSC") in the British Virgin Islands.
TYPES OF FUNDS
Funds Generally
SIBA defines a fund as a business company, partnership, unit trust or any other body which "(a) collects and pools investor funds for the purpose of collective investment, and (b) issues fund interests that entitle the holder to receive on demand or within a specified period after demand an amount computed by reference to the value of a proportionate interest in the whole or in a part of the net assets of the company or other body, partnership or unit trust, as the case may be".
The definition of fund includes hedge funds and other vehicles which otherwise satisfy the definition of a fund as set out above. It will not generally catch close-ended funds, such as private equity funds.
A fund which is incorporated or formed under the laws of the BVI or otherwise carrying on business from within the BVI must be registered or recognised under SIBA as:
- a professional fund;
- a private fund; or
- a public fund.
In respect of a fund which is incorporated and already operating in another jurisdiction, it is also possible for the fund to apply to become a recognised foreign fund in the BVI.
Professional Funds
A professional fund is a fund whose shares are made available only to professional investors and the initial investment of each investor in the fund (other than certain "exempted investors") is not less than US$100,000 or its equivalent in another currency. "Exempted investors" is narrowly defined and includes employees of the manager or promoter of the fund and fund functionaries.
A professional investor is defined as a person (i) whose ordinary business involves, whether for that person's own account or the account of others, the acquisition or disposal of property of the same kind as the property, or a substantial part of the property, of the fund; or (ii) who has signed a declaration that he, whether individually or jointly with his spouse, has net worth in excess of US$1,000,000 (or its equivalent in another currency) and that he consents to being treated as a professional investor.
Private Funds
A private fund is a fund whose constitutional documents specify either that it will have no more than 50 investors or that the making of an invitation to subscribe for or purchase shares issued by the fund is to be made on a private basis only. An invitation made on a "private basis" includes an invitation which is made (a) to specified persons and is not calculated to result in shares becoming available to other persons or to a large number of persons; or (b) by reason of a private or business connection between the person making the invitation and the investor.
Public Funds
A public fund is a fund which is not recognised as a professional fund or a private fund.
Procedure
A fund structured as a business company under the BVI Business Companies Act, 2004 is incorporated by filing with the Registrar of Corporate Affairs the memorandum and articles of association of the company. The memorandum and articles of association prescribe the operational aspects of the fund, including dealing dates, valuation dates, the procedures for the issue and redemption of shares, the methods for pricing shares and valuing assets, and investment restrictions, if any.
The fund may generally be incorporated within 24 hours once the memorandum and articles of association are in final form. However, additional time must be given before the commencement of the offer of shares in order to allow the prospectus and various agreements to be finalised and signed and for the necessary governmental approvals to be obtained.
Professional and Private Funds
Once incorporated, a company which proposes to carry on business as a professional or private fund must apply for "recognition" under SIBA. In order to be recognised, the professional or private fund must demonstrate to the FSC that it satisfies the requirements set out in SIBA. Generally, this obligation is satisfied by submitting to the FSC an application form, together with a certified copy of the memorandum and articles of association of the fund and the fund's prospectus. The FSC may exempt the fund from preparing and submitting a prospectus if it is satisfied as to how information will otherwise be communicated to potential investors.
The FSC will review the application form to ensure the functionaries are acceptable (as to which see section 4 below) and will use the certified copy of the memorandum and articles of association to ensure the fund has been duly incorporated. In the case of a professional fund, the subscription agreement will also be submitted to ensure it, and the memorandum of association and prospectus, have the requisite professional fund language. With respect to a private fund, the FSC will review the memorandum of association and prospectus to ensure it has the requisite private fund language.
The FSC will refuse to recognise the fund if it does not comply with the provisions of SIBA or if the FSC determines that granting recognition is not in the interests of investors or in the public interest.
Each professional and private fund must have at least two directors, at least one of whom must be an individual.
The prospectus of a professional or private fund must contain a form of investment warning which is prescribed by the Regulations. In summary, the prescribed investment warning states that the requirements considered necessary for the protection of investors that apply to public funds do not apply to professional or private funds.
A professional fund may carry on its business in or from within the BVI for a continuous period not exceeding 21 days without being recognised under SIBA if it satisfies the criteria for a professional fund and complies with, and is managed and administered in accordance with, the requirements of SIBA and the Regulations. However, a professional fund should exercise caution in this regard, as the fund may have to stop carrying on business or stop managing or administering its affairs if it has not received recognition by the expiry of the 21 day grace period. While a well structured application will generally be processed within three to five business days, BVI professional advice should be obtained to determine the likelihood of the success of the application.
Where a fund is recognised as a professional or private fund, the FSC will enter details in the Register of Professional funds or the Register of Private funds and issue a certificate of recognition. The register contains the following details:
- the address of the fund's place of business in the BVI;
- the name and address of the person in the BVI authorised to accept service on the fund's behalf;
- the address, if any, outside the BVI where the fund has a place of business;
- the date of recognition of the fund;
- and the status of the recognition of the fund.
Public Funds
A fund which will not be "recognised" as a professional fund or private fund must apply for "registration" as a public fund under SIBA. In order to be registered, the public fund must demonstrate to the FSC that it satisfies the requirements of a public fund as set out in SIBA.
An application form must be submitted to the FSC along with a certified copy of the memorandum and articles of association of the company. The application form is similar to the application form for professional and private funds, although more detailed information is required. In particular, the prospectus of a public fund must contain prescribed information (as to which, see below) and be registered with the FSC and the fund's functionaries must satisfy the FSC's 'fit and proper' criteria. The FSC has issued detailed guidance on this criteria, which, broadly, require the FSC to be satisfied of the honesty, integrity, reputation, competence, capability and financial soundness of the relevant persons. The FSC will require a resume, two personal references, a bank reference, a photocopy of the passport picture page and a police clearance certificate on each director of the public fund. A public fund may not have corporate directors.
A public fund may not carry on business or manage or administer its affairs until it is registered under SIBA. It is anticipated that the FSC will be issuing a "Public Funds Code" containing additional obligations in respect of the process for the registration and the ongoing regulation of a public fund.
Functionaries and counter-parties
Common functionaries of an open ended fund include:
- an investment manager, who undertakes day to day management of the investments of the fund;
- an administrator, who administers the accounts of the fund, undertakes anti-money laundering compliance on behalf of the fund and commonly calculates the net asset value of the fund. The administrator commonly acts as registrar and transfer agent for the fund; and
- a custodian, who holds the assets of the fund for safe keeping. It is also common for the directors to engage an investment advisor, either directly or through the investment manager, and for the fund to execute many of their trades through or with prime brokers.
Under SIBA, a registered or recognised fund must, at all times, have:
- an investment manager;
- an administrator;
- and a custodian who is functionally independent from the investment manager and the administrator.
It is possible, in certain circumstances, to apply for the fund to be exempted from the requirement of having an investment manager and/or a custodian.
Each registered or recognised fund is also required to appoint an authorised representative in the British Virgin Islands unless the fund has significant management presence in the British Virgin Islands. The authorised representative's role is limited to liaising between the fund and the FSC.
Ongoing Regulation
Private and Professional Funds
Each professional and private fund is required to prepare financial statements complying with the International Financial Reporting Standards promulgated by the International Accounting Standards Board, UK GAAP, US GAAP, Canadian GAAP or internationally recognised and generally accepted accounting standards equivalent to any of the foregoing. Each professional and private fund is required to provide a copy of its audited financial statements to the FSC within six months after its financial year end.
Written notice is required to be given to the FSC within 7 days of any resignation or termination of a functionary of a professional or private fund. Further, no new functionary may be appointed without at least 7 days prior notification to the FSC of the proposed appointment. A fund does not breach the requirement of the Regulations if a functionary resigns, is terminated or otherwise ceases to act as a functionary and a replacement is appointed within 7 days of the original functionary ceasing to act.
The FSC is also required to be notified of any change to the directors, authorised representative or auditor of a professional or private fund, any change in the address of the fund's place of business, any amendment to the constitutional documents of the fund, the issue of an offering document that was not previously provided to the FSC and any amendment to such offer document.
Public Funds
Certain additional ongoing requirements are specific to public funds. In particular, a public fund requires the FSC's prior consent for any material change to its prospectus or structure, including any change of a director, functionary or auditor. There are also additional requirements regarding the prospectus of a public fund, which must contain the following information:
- full and accurate disclosure of all such information as investors would reasonably require and expect to find for the purpose of making an informed investment decision; and
- a summary of the statutory shareholders' rights.
Where any of the information required to be disclosed in the prospectus ceases to be accurate in a material particular, the fund must publish and file an amendment to the prospectus within 14 days.
Where any prospectus published by a public fund contains a misrepresentation relating to the matters prescribed by the Act, a person who purchases shares pursuant to the prospectus is deemed to have relied upon any such misrepresentation and may elect to exercise a right of action
- for the rescission of the purchase or
- for damages.
Unit Trust
A unit trust will operate and be regulated in much the same way as a corporate form fund. SIBA includes within the definition of "fund" a unit trust, whether organised under the laws of the BVI or elsewhere, and defines "shares" to include units in a unit trust. The unit trust is constituted by a trust deed, and such deed is exempt from certain registration requirements in the BVI.
The trust deed will contain general provisions for the establishment of the trust and will also prescribe the commercial and operational aspects of the unit trust, including dealing periods, issues and redemptions of units, pricing and valuations, investment restrictions (if any), etc. There is no requirement that a unit trust appoint a local custodian or manager in the BVI, although it is not uncommon for the promoters of a unit trust to establish an affiliated business company to act as manager. In practice, a unit trust will usually appoint an administrator to issue, redeem and transfer units.
A properly structured unit trust is exempt from the BVI income tax, estate tax, inheritance tax, succession tax, gift tax or any other duty.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
