To incubate is to keep something in a suitable environment for a term where it can develop to its full potential. Increasingly, the concept is being applied to hedge funds, where “to incubate” implies structured conditions for the development and verification of investment strategies over time. As such, an incubator fund is ideal for start-up and emerging managers who do not have much capital but aim to attract greater sums of capital in the near future. Establishing a verifiable track record via an incubator fund has proven successful in demonstrating a manager’s capabilities, and is an opportune path for attracting meaningful capital sums. Structured properly, an incubator fund offers new opportunities for emerging hedge fund managers.
In support of this growing trend, the British Virgin Islands (BVI) recently launched a tailor-made product for such start-up and emerging managers aptly named, the “incubator fund.” This new type of fund was launched pursuant to regulations made under the BVI Securities and Investment Business Act, 2010 (as amended). Specifically, the legislation that governs this new fund is the Securities and Investment Business (Incubator and Approved Funds) Regulations 2015 (the Regulations).
As a fund geared primarily towards start-up and emerging managers who want to establish and demonstrate a track record prior to going after more and larger investors, the incubator fund has the following three key features and benefits:
(1) It 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).
(2) It has limited functionary requirements.
(3) It offers a cost effective alternative for start-up and emerging managers and small, closely connected investor groups.
An incubator fund has the following regulatory thresholds:
- 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.
Limited Functionary Requirements
The BVI incubator fund has no functionary requirements. Accordingly, it 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 only 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, 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.
- Where it is not viable for the fund to continue at the end of the two or three year period, the fund must wind up its operations.
Further General Requirements
A BVI incubator fund is required to appoint an authorised representative in the BVI, and must have at least two directors at all times, one of which must be an individual. The fund is required to prepare and submit to the Commission its annual financial statements, although there is no requirement that these statements be audited. The fund is also required to submit semi-annual returns to the Commission regarding its eligibility to utilise its fund classification.
An application for approval of a fund as an incubator fund must be accompanied by an application fee of US$1,500 and the annual renewal fee is US$1,000.
The BVI incubator fund can be launched very quickly and provides tremendous flexibility for start-up and emerging managers who want to establish and demonstrate a track record. The incubator fund, 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 an investment funds jurisdiction and reinforces its leading status in the global investment funds market.
O’Neal Webster has a team of trained professionals to advise clients who are interested in BVI investment fund products. In particular, we welcome questions about BVI incubator funds and are pleased to assist you. The author, O’Neal Webster Partner, Christopher Simpson, welcomes your call at (284) 494 5808 or your email at email@example.com. More information about the firm can be found at www.onealwebster.com.