The British Virgin Islands (“BVI”) has recently launched two new and exciting investment fund products namely, the “incubator fund” and the “approved fund”. These new products were launched pursuant to regulations made under the Securities and Investment Business Act, 2010 (as amended). Specifically, the legislation which governs these new products is the Securities and Investment Business (Incubator and Approved Funds) Regulations 2015 (the “Regulations”).
The incubator fund is primarily geared towards emerging managers who want to establish and demonstrate a track record prior to going after more and larger investors, whilst the approved fund is primarily geared towards smaller groups of closely connected investors and is expected to work well for family offices.
Key Features
The incubator fund and the approved fund each share the following three key features and benefits:
- They can be launched very quickly and commence trading within two (2) business days of lodging an application for approval with the BVI Financial Services Commission (the “Commission”)
- They have limited functionary requirements
- They offer a cost effective alternative for emerging managers and small closely connected investor groups
The Incubator Fund
The incubator fund is expected to appeal to emerging managers looking for a low cost entry into the fund market, but with room to grow when its investors and AUM increases. The incubator fund has the following key features:
- a maximum of 20 investors;
- a minimum initial investment of US$20,000 by each investor; and
- a cap of US$20 million on the value of investments of the fund.
The incubator fund is ideal for new managers and start-ups. There are no functionary requirements, accordingly, an incubator fund can be established and operated without an administrator, manager, custodian or auditor. Also, the fund is not required to have an offering memorandum but is required to file a description of its investment strategy and give appropriate investment warnings to investors.
Under the Regulations, an incubator fund is permitted to operate for two years (with the possibility of one additional year). This time period allows for the establishment of a track record without onerous regulatory obligations.
Prior to the end of the two or three period (as applicable) or upon exceeding any of the specified thresholds, the fund must elect one of the following options:
- convert to an approved fund;
- convert to a private fund or professional fund by preparing, amongst other things, an audit demonstrating its current financial position and compliance with the Regulations and submitting the appropriate application to the Commission; or
- where it is not viable for the fund to continue at the end of the two or three year period, wind up its operations.
The Approved Fund
The approved fund is geared towards managers who wish to establish a fund for a longer term, and is fairly similar to the existing BVI private fund regime, however, it has lower caps on AUM and investors and is therefore more likely to appeal to smaller groups of closely connected investors and family offices.
An approved fund has the following features:
- a maximum of 20 investors at any one time; and
- a cap of US$100 million on the value of investments of the fund.
An approved fund has no minimum initial investment requirement, and is not required to appoint an auditor, manager or custodian. The fund is however required to appoint an administrator to provide suitable oversight of its operations. No offering memorandum is required but the fund is required to file a description of its investment strategy and give appropriate investment warnings to investors.
Unlike the incubator fund, the approved fund can continue to operate as an approved fund for an indefinite period, unless:
- a decision is made to convert the fund to a private or professional fund;
- it is required to convert into a private or professional fund by virtue of the fact that it has exceeded one of the relevant thresholds; or
- it elects to wind up its operations.
Summary
The BVI incubator and approved funds provide tremendous flexibility for investment fund operations in dedicated scenarios with the incubator fund appealing to emerging managers and the approved fund appealing to smaller closely connected investor groups and family offices. These new products when coupled with the approved manager regime and the overall package of BVI investment fund products increases the attractiveness and competitiveness of the BVI as a funds jurisdiction and reinforces the BVI’s role in the global investment funds market.
For further information, please contact Christopher Simpson(csimpson@onealwebster.com) or Mr. Kerry Anderson(kanderson@onealwebster.com).
