Investment funds are a significant part of the global capital markets industry. Onshore jurisdictions play an unrivalled role, but increasingly offshore jurisdictions such as the British Virgin Islands (“BVI”) feature in the structures used by onshore investment managers to cater for a wide and ever expanding cross section of investors. The BVI is the world’s largest offshore corporate domicile with close to 500,000 active companies, and it is also the world’s second-largest offshore investment funds domicile, with over 2,200 active open-ended investment funds. The primary legislation in the BVI which regulates its investment funds regime is the Securities and Investment Business Act, 2010 (“SIBA”) and its accompanying regulations, the Mutual Funds Regulations, 2010. SIBA regulates both funds and fund functionaries operating in or from within the BVI.
What is an investment fund?
The question is often asked, what is an investment fund and does it have to be regulated in the BVI? Under SIBA, the term “mutual fund” or “fund” is used to represent what are commonly known as investment funds or hedge funds, and it is defined as a company incorporated, a partnership formed, a unit trust organised or other similar body formed or organised under the laws of the BVI or of any other country or jurisdiction 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, the partnership, the unit trust or other similar body, as the case may be; and includes
(i) an umbrella fund whose shares are split into a number of different class funds or sub-funds, and
(ii) a fund which has a single investor which is a mutual fund not registered or recognised under SIBA.
Pursuant to the above definition, SIBA only regulates: (i) open-ended funds (whose equity interests are redeemable at the option of the investor), and (ii) administrators, managers and custodians of such open-ended funds. SIBA, however, does not regulate closed-end funds which are often referred to as private equity funds.
Fund structures being used by investment managers
Since the global recession, investment managers have become more creative in terms of the structures they use to secure benefits for their onshore investors, their offshore investors and of course the investment manager. Although most of the structures have been used for many years some have now become more dominant not only for US based managers but also for Latin American, European and Asian based managers who have a strong clientele within their region but are looking for a larger and more diverse pool of investors. Generally, the structures either take the form of a master-feeder, mini-master or parallel fund structure, each of which is described briefly below.
In this structure, there are generally two feeders, a domestic onshore feeder and an offshore feeder, both of which invest all of their assets into a master fund which is usually also an offshore fund – typically a BVI fund because of the benefits associated therewith which are highlighted below. Investors would subscribe for shares in the feeder funds and those funds would flow directly into the master fund for investment by the fund manager. When a redemption request is made, funds are transferred from the master fund to the appropriate feeder fund and then on to the investor. The benefit of the structure itself is that it segregates the onshore investors from the offshore investors for tax and regulatory purposes.
In this structure, the master fund is an onshore entity and onshore investors invest directly into the master fund. Offshore investors use an offshore feeder which invests directly into the master fund. Again, a BVI fund is typically used as the offshore feeder because of the benefits associated therewith which are highlighted below. Offshore investors would subscribe for shares in the feeder fund and those funds would flow directly into the master fund for investment by the fund manager. When a redemption request is made, funds are transferred from the master to the feeder and then on to the investor. The benefit of the structure itself is that it segregates the onshore investors from the offshore investors, again for tax and regulatory efficiency, but it also has certain specific tax benefits for the investment manager in a US context.
In this structure, a parallel investment vehicle is formed to invest in the same investments at the same time as the primary fund. This fund would have substantially the same terms as the primary fund, with the relevant differences to accommodate the regulatory, tax or other investment requirements applicable to the investors in the parallel fund. In the typical scenario, a US based fund would form a BVI parallel fund to accommodate non-US investors who often would invest through the BVI entity to avoid the US tax compliance obligations that apply to investors in the US entity. The parallel fund would generally invest directly in each investment in conjunction with and simultaneously with the US based primary fund, in proportions determined by their respective investor funding.
Advantages of BVI investment funds
Some of the recognised advantages of setting up an investment fund in the BVI include:
- a stable political and economic jurisdiction which is committed to international compliance;
- a tax neutral environment;
- a recognised and respected legal system supported by English common law, modern local legislation and a well developed court system, including a dedicated commercial division;
- no regulatory restrictions on investment policies or strategies or on performance and other fee arrangements;
- no requirement to appoint local directors or local functionaries;
- various types of fund structures including, single class funds, multi-class funds and master-feeder funds are facilitated;
- statutory segregated portfolio ring-fencing;
- amendment of constitutional documents may be made by shareholders or directors where so authorised;
- low start-up and ongoing fees and costs;
- no requirement for a local auditor sign off on the fund’s accounts; and
- leading service providers including lawyers, accountants and other fund professionals.
There is always a comparison between the BVI and Cayman and although they are similar on many levels the BVI has the key advantage in that no local auditor sign off is required (you can use an auditor once they are in a recognised jurisdiction – which is described further below), directors or shareholders can amend the constitutional documents (which provides a degree of flexibility for restructuring) and start up, ongoing fees and legal fees are lower. These benefits together can be significant for a fund in general, but especially for small to medium size funds during start up.
Categories of investment funds
Funds regulated by SIBA fall within three categories, namely: private funds, professional funds and public funds.
- Private fund – this is a fund whose constitutional documents specify that it will have no more than 50 investors or that the making of an invitation to subscribe for or purchase shares is made on a private basis.
- Professional fund – this is a fund in which shares are only made available to professional investors and the initial investment by all of the investors (excluding exempted investors) is not less than US$100,000 (or equivalent). Exempted investors include, the manager, administrator, promoter or underwriter of the fund; or any employee of the manager of the fund.
- Public fund – this is a fund that is neither a private fund nor a professional fund – it is essentially a retail fund.
All private and professional funds must be recognised under SIBA, whilst all public funds must be registered under the SIBA.
Types of investment fund vehicles
Investment funds in the BVI are usually set up using either: (a) a BVI business company, (b) a limited partnership, or (c) a unit trust. The BVI business company is the most popular of the three vehicles.
- BVI business company – this is a separate legal entity from the investing shareholders and would be structured as a limited liability company. BVI business companies are regulated by the BVI Business Companies Act, 2004 (“BCA”) which allows for a great deal of flexibility in terms of structuring funds. The BCA also specifically provides for the structuring of segregated portfolio companies which are very useful for certain types of investment fund structures.
- BVI limited partnership – this can be established pursuant to the Partnership Act, 1996. A limited partnership is formed in the BVI by a general partner and at least one limited partner executing Articles of Partnership and by submitting a Memorandum of Partnership to the BVI Registry of Corporate Affairs.
- Unit trust – this can established pursuant to a deed of trust. A unit trust arrangement is not a separate legal entity. It is the trustee who has legal capacity and who holds the assets of the fund on the terms of the deed of trust for the investors in the unit trust scheme. Under BVI law, the holders of units in a unit trust scheme are the beneficial owners of the trust assets.
Recognition or registration of investment funds and acceptance of their functionaries
The BVI Financial Services Commission (BVI FSC) requires a fund wishing to be recognised or registered to submit an application which must include evidence of the fund’s status together with details of each of the fund’s functionaries (being the investment manager, administrator, custodian and auditor). Exemptions may be sought from the requirement to have a custodian and an auditor.
In considering an application for recognition or registration, the BVI FSC will require that the manager, administrator and custodian of a BVI investment fund be incorporated in either the BVI, or a “recognised jurisdiction”, which, for the purposes of the SIBA, are currently as follows:
Argentina, Australia, Bahamas, Bermuda, Belgium, Brazil, Canada, Cayman Islands, Chile, China, Curacao, Denmark, Finland, France, Germany, Gibraltar, Greece, Guernsey, Hong Kong, Ireland, Isle of Man, Italy, Japan, Jersey, Luxembourg, Malta, Mexico, Netherlands, New Zealand, Norway, Panama, Portugal, Singapore, Spain, South Africa, Sweden, Switzerland, United Kingdom and the United States of America.
In addition, functionaries incorporated in other jurisdictions may be acceptable if the jurisdiction is regarded by the BVI FSC as having a prudent system of regulation and supervision of investment business including mutual funds business.
The investment funds industry is rebounding from the tumultuous times of the recent recession and investment managers are now more creative and are looking for options which not only enhance investment returns but still provide regulatory oversight and flexibility for the benefit of investors and investment managers alike. More investment managers from large to small are turning to the BVI for those reasons and with the BVI constantly enhancing its product – this is likely to continue into the foreseeable future.
This Guide is general in scope and is not intended to be comprehensive. It is not a substitute for legal advice.