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BVI Hedge Funds
Hedge Funds Domiciled in the BVI
Make up Approximately one quarter of all Offshore
Hedge Funds established Worldwide
A mutual fund is subject to regulation in the BVI if it pools investor funds for the purpose of collective investment; is open ended and; the equity interests that are redeemable entitle the holder to receive an amount calculated by reference to the value of a proportionate interest in the net assets of the fund.
Closed-end funds are not subject to direct regulation in the BVI.
BVI Hedge Funds
Hedge funds domiciled in the BVI make up approximately one quarter of all offshore hedge funds established worldwide. This popularity is due to the many advantages of establishing an investment fund in the BVI including a tax neutral environment and a stable political and economic jurisdiction committed to remaining fully compliant with all supra-governmental bodies. Additionally, there are no regulatory restrictions on investment policies or requirement to appoint local directors, local functionaries or local auditors.
Types of Funds
There are a number of BVI fund products suited to everyone from the startup manager setting up an incubator fund to established institutional fund managers with billions under management.
An incubator fund allows emerging managers to engage in a two-year “validity” period to establish a track record and to test its viability. During that period, the fund can operate with light regulation, no mandatory service providers and without conducting an audit. Another benefit of establishing such a fund in the BVI is the fast track approval process, which enables an incubator fund to commence business just two business days after submitting a complete application.
The maximum number of investors during this time is 20 and each one must invest at least US$20,000. The incubator fund’s net assets may not exceed US$20 million at any time. At the end of the validity period, the fund must convert to a private, professional or approved fund. Alternatively, if the fund is not deemed viable it must wind down its operations.
The BVI offers the approved fund for managers who want to establish a private offering to a small group of investors on a longer-term basis. The number of investors is capped at 20 and net assets may not exceed US$100 million. However, there is no minimum initial investment required and the fund is not required to appoint an auditor, a manager or a custodian. It is required to appoint an administrator to ensure there is some suitable oversight of its operations. This type of fund also benefits from the BVI’s fast track approval process and may receive approval to commence business within two days of submitting an application to the FSC.
Private funds do not have a minimum initial investment amount for each investor or any “professional” or “sophistication” test for investors. This makes them popular with start-up managers, allowing a friends and family offering.
To qualify as a private fund, the fund must either have no more than 50 investors or only make a private invitation to subscribe for or purchase fund interests
Private funds must be recognised by the FSC before they carry on business. A fund will be regarded as having commenced its business when it publishes a prospectus or other document inviting to purchase or subscribe for shares of the fund.
The most popular category, professional funds make up approximately 70 per cent of all regulated funds in the BVI. The interests may be made to either professional investors or exempt investors
A professional investor is a person:
– whose ordinary business involves the acquisition or disposal of property of the same kind as the property of the fund; or
– who, whether individually or jointly with a spouse, has a net worth in excess of US$1,000,000.
The minimum initial investment for a professional investor must be at least US$100,000.
Exempted investors, on the other hand, do not have a required minimum initial investment.
An exempted investor includes:
– the manager, administrator, promoter or underwriter of the fund; or
– any employee of the manager of the fund.
A professional fund may carry on its business or manage or administer its affairs for a period of up to 21 days without being recognised under SIBA.
A public fund is generally viewed as a retail product, making the regulatory burden considerably higher than that of a private or professional fund. However, a public fund is not subject to any BVI restrictions on the categories or number of investors it may invite to invest in the fund.
BVI Hedge and Approved Fund
A few years ago, the Incubator Fund and the Approved Fund were introduced in the British Virgin Islands under the Securities and Investment Business (Incubator and Approved Funds) Regulations, 2015. As we thought at the time, these have quickly become popular vehicles in short order for startup and new managers, with more than 50 new funds being established in a short period. Approved Funds being marginally more popular than Incubator Funds. These funds have satisfied a recognised need in the market for a lightly regulated investment vehicle that can easily grow along with a first time or start up manager as their business and assets under management grow.
For many years, a type of closed end structure was used to fill this void, and while those structures may still have their place, the draw back was that they were closed – not in the sense of a limited offering of shares but rather an investor’s right to redeem was restricted. This restriction often caused a manager difficulty in fund raising as even friends and relatives would generally prefer a mechanism to enable them to withdraw their funds on demand if needed or to allow them to vote with their feet if investment strategy was not going to plan.
The Regulations enable Incubator and Approved Funds to be set up and launched on a fast track, cost effective basis with minimal regulatory oversight by the BVI Financial Services Commission. This has proved successful.
An incubator fund has a minimum investment requirement of US$20,000, a cap on net assets of US$20M and limit of 20 investors. An incubator fund does not need to appoint an administrator, custodian, investment manager or auditor.
An approved fund has a net assets cap of US$100M and no more than 20 investors are permitted, but with no minimum investment criteria. An approved fund may operate without appointing a custodian, investment manager, or auditor, but will need an administrator.
Applications for approval as an Incubator Fund or an Approved Fund are made to the Commission and must be accompanied by:
– the constitutional documents;
– details of the investment strategy;
– a prescribed form of investor warning; and
– an application fee of US$1,500.
An Incubator Fund or Approved Fund can commence business 2 days from the date of receipt of a completed application by the Commission.
Duration and Conversion of Hedge Fund
An Incubator Fund has a limited life of two years which can be extended for up to 12 months. An Approved Fund has no such limits. An Incubator Fund can convert to an Approved Fund, a private or professional fund, or may wind up at the end of its term. An Incubator Fund can convert to a private or professional fund or to an Approved Fund by making an appropriate application to the Commission.
In keeping with the cost-efficient approach to these vehicles, service provider requirements are minimal. Each fund is required to appoint an authorized representative in the BVI, and an Approved Fund is required to have an administrator at all times. However, there are no mandatory custody requirements.
There is no requirement for the issuance of an offering document and where the fund determines not to issue one, the required investor warnings can be set forth in a separate term sheet.
Otherwise, an Incubator Fund and Approved Fund are required by the Regulations to:
Pay an annual fee of US$1,000 on or before 31 March of each year
Have a minimum of two directors at all times, one of whom must be an individual
Notify the Commission of any change to any of the information submitted to the Commission in its application; for instance, in relation to it or its conduct (which has or is likely to have a material impact or Significant regulatory impact), directors, etc.
Prepare and file annual financial statements to the Commission (with no requirement for an independent audit)
File bi-annual returns with the Commission
Since the introduction of the Regulations we have had experience establishing a number of these funds and we expect that, as new potential managers learn about these structures, they will continue to prove attractive vehicles to start up managers, family offices and others looking for a simple, quick and cost effective way to establish a lightly regulated investment vehicle.
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