Investment funds in British Virgin Islands: regulatory overview

A Q&A guide to investment funds law in the British Virgin Islands.

This Q&A is part of the global guide to investment funds. It provides a high level overview of investment funds in the British Virgin Islands, looking at both retail funds and hedge funds. Areas covered include a market overview, legislation and regulation, marketing, managers and operators, restrictions and requirements, tax and upcoming reform.

To compare answers across multiple jurisdictions, visit the Investment Funds Country Q&A tool. For a full list of jurisdictional Q&As visit www.practicallaw.com/investmentfunds-mjg.

Contents

Retail funds

1. What is the structure of the retail funds market? What have been the main trends over the last year?

Open-ended retail funds

The majority of investment funds established in the British Virgin Islands (BVI) are non-retail funds. In the BVI, the laws governing investment funds are mainly geared towards attracting sophisticated investors. Investment funds that give investors a right to redeem their interests in the investment fund are defined as mutual funds under the Securities and Investment Business Act 2010 (SIBA). Mutual funds are regulated by the BVI Financial Services Commission (FSC) subject to limited exceptions. There are currently two types of mutual funds that are open to investors regardless of the amount invested, private funds and public funds.

A private fund is restricted either in:

  • Marketing its interests to the public.

  • The number of investors it can have.

Private funds are therefore not typical retail fund products.

Public funds may be used as retail funds as such funds can market their interests to any member of the public in or from within the BVI. Public funds must be registered with the FSC. The public funds market is relatively small with currently around 90 public funds registered with the FSC. There have not been any specific changes related to public funds in the last year.

Closed-ended retail funds

Closed-ended funds (that is funds whose interests cannot be redeemed at the option of the investor), whether retail or not, are currently not regulated by the FSC. In the author's experience it is difficult for closed-ended funds to comply with retail market restrictions in other jurisdictions and the number of closed-ended funds admitting retail investors is statistically not significant. Therefore, Questions 2 to 15 focus on open-ended retail funds registered as public funds under SIBA.

Regulatory framework and bodies

2. What are the key statutes, regulations and rules that govern retail funds? Which regulatory bodies regulate retail funds?

Open-ended retail funds

Regulatory framework. Public funds are regulated by the Securities and Investment Business Act 2010 (SIBA). The Mutual Funds Regulation 2010 (MF Regs) and the Public Funds Code 2010 (PF Code) are secondary legislation issued under SIBA.

Regulatory bodies. The Financial Services Commission (FSC) is the regulatory body for open-ended funds, including public funds.

Closed-ended retail funds

Regulatory framework. There is no regulatory framework for closed-ended retail funds in the BVI (see Question 1, Closed-ended retail funds).

Regulatory bodies. There is no regulatory framework for closed-ended retail funds in the BVI (see Question 1, Closed-ended retail funds).

 
3. Do retail funds themselves have to be authorised or licensed?

Open-ended retail funds

BVI fund. A public fund can be established as a company or unit trust but not as a limited partnership. A public fund carrying on business in or from within the BVI must be registered under the Securities and Investment Business Act 2010 (SIBA). A company or unit trust is deemed to carry on business from within the BVI even if it carries on business outside the BVI, if either:

  • It is incorporated in the BVI (in the case of a company) or governed by BVI laws (in the case of a unit trust).

  • It solicits an individual within the BVI to subscribe for or purchase its fund interests. However, a fund does not solicit an individual where the subscription or purchase is a result of an approach made by the individual to the fund without any solicitation being made by or on behalf of the fund.

A foreign fund (that is, a fund incorporated outside of the BVI in the case of a company or governed by a non-BVI law in the case of a unit trust) does not carry on business in the BVI solely by reason of the fact that it is managed or administered in or from within the BVI, or otherwise appoints a BVI functionary.

A public fund must appoint an investment manager, administrator (see Question 6, Open-ended retail funds), custodian (see Question 7, Open-ended retail funds) and auditor, all of which must satisfy the Financial Services Commission's (FSC's) fit and proper criteria. The FSC also assesses the directors (in the case of a company) or the trustee (in the case of a unit trust) against the FSC's criteria to determine whether they are fit and proper persons to fulfil the contemplated roles (the fit and property criteria).

In addition, to qualify to invite any member of the public to subscribe for fund interests, the invitation must be made in a prospectus registered by the FSC. The prospectus must:

  • Be approved by the board (or the trustee).

  • Provide a full and accurate disclosure of all information that investors would reasonably require and expect to find for the purposes of making an informed investment decision.

  • Comply with the requirements for a prospectus set out in the Mutual Funds Regulation 2010 (MF Regs) and the Public Funds Code 2010 (PF Code).

Section 12 of the MF Regs contains brief requirements for the contents of a prospectus, while the PF Code contains a schedule of more prescriptive contents.

The fund must submit a written application to the FSC for registration as a public fund using the FSC's omnibus application form. An application is typically made at the same time as the application for registration of the fund's first prospectus. The application must be accompanied by a completed Form A for each of the directors of the fund (unless such persons have previously been approved by the FSC's Approved Person's Unit). The prospectus and copies of each of the agreements between the fund and its functionaries must also be submitted. An application fee of US$1,000 is payable for the registration of the fund. An additional application fee for the registration of the prospectus of US$250 is payable. Upon registration of the fund and the prospectus further fees of US$1,500 and US$500 respectively are payable. The annual registration fee for the fund is US$1,500. The FSC's Performance Accountability Policy and Supervisory Service Standards state that a completed application for registration of a public fund should be completed in no more than two weeks.

Non-BVI fund. A non-BVI fund (that is, a fund domiciled outside of the BVI) can seek registration as a public fund or recognition as a recognised foreign fund. It generally only needs to do this if it either:

  • Wishes to solicit an individual within the BVI to subscribe for or purchase its fund interests.

  • Is otherwise carrying on business in or from within the BVI. However, appointing a manager or administrator located in the BVI is expressly excluded from the meaning of carrying on business in or from within the BVI.

A non-BVI fund may be recognised as a recognised foreign fund under SIBA if all of the following apply:

  • It is subject to an authorisation and supervisory regime in the jurisdiction in which it is constituted, which, in the FSC's opinion, provides BVI investors with protection at least equivalent to the protection provided under SIBA for investors in public funds.

  • Adequate arrangements exist for co-operation between the authorities in the home jurisdiction of the fund and the FSC.

  • The fund is being operated and managed in compliance with the authorisation and supervisory regime to which it is subject.

An application must be made to the FSC for recognition as a foreign fund using the omnibus application form. A full explanation must be provided as to how the criteria for recognition are satisfied. An application fee of US$700 is payable and the annual recognition fee is US$1,000.

Closed-ended retail funds

See Question 1, Closed-ended retail funds.

Marketing

4. Who can market retail funds?

Open-ended retail funds

A fund cannot be promoted in or from within the BVI unless the fund is registered or recognised as a mutual fund or a foreign fund (see Question 3, Open-ended retail funds). The person carrying on the promotion may need to be licensed under the Securities and Investment Business Act 2010 (SIBA) to promote the fund. For example, subject to limited exceptions (such as acting for a company within the same group, or providing business to a company for which you act as a director without receiving remuneration), a licence is required under SIBA to:

  • Carry on business as an investment adviser (promotion of a mutual fund by a third party in or from within the BVI may, depending on the circumstances, amount to regulated investment business as set out in SIBA).

  • Arrange transactions in mutual fund interests.

Closed-ended retail funds

See Question 1, Closed-ended retail funds.

 
5. To whom can retail funds be marketed?

Open-ended retail funds

Public funds can be marketed to any member of the public both in and outside of the BVI (subject to foreign regulations). However, the offer must be made by way of a registered prospectus (see Question 3).

A recognised foreign fund is permitted to market its interests in the BVI in accordance with the authorisation and supervisory regime of its home jurisdiction.

Closed-ended retail funds

See Question 1, Closed-ended retail funds.

Managers and operators

6. What are the key requirements that apply to managers or operators of retail funds?

Open-ended retail funds

A public fund must have at all times appointed an investment manager and an administrator, which must satisfy the Financial Services Commission's (FSC's) fit and proper criteria (see Question 3, Open-ended retail funds). There is no requirement for either the investment manager or the administrator to be located in the BVI. An investment manager or administrator generally satisfies the FSC's fit and proper criteria if it both:

  • Carries on business in a recognised jurisdiction (the FSC has issued a list of recognised jurisdictions, comprising 41 of the most widely used financial services centres).

  • Meets the local requirements to carry on the business including, where applicable, holding any licence (however, if there is no local requirement to hold a licence, this does not prevent the functionary from satisfying the FSC's fit and proper criteria).

An investment manager or administrator requires a licence under the Securities and Investment Business Act 2010 (SIBA) if it is a BVI entity or has a physical presence in the BVI.

Closed-ended retail funds

Carrying on business as a closed-ended fund is currently not regulated (see Question 1). However, a BVI investment manager or adviser of a closed-ended fund requires a licence under SIBA or the Investment Business (Approved Managers) Regulations 2012 (Approved Manager Regulations). An administrator requires a licence under SIBA to provide certain activities for closed-ended funds. A non-BVI company acting as investment manager, adviser or administrator to a BVI closed-ended fund does not generally require a licence, unless it carries on business through a physical presence in the BVI.

Assets portfolio

7. Who holds the portfolio of assets? What regulations are in place for its protection?

Open-ended retail funds

A public fund is required to appoint a custodian in the BVI or a recognised jurisdiction. The custodian must be functionally independent from the investment manager and the administrator and meet the Financial Services Commission's fit and proper criteria (see Question 6, Open-ended retail funds).

Closed-ended retail funds

See Question 1, Closed-ended retail funds.

Legal fund vehicles

8. What are the main legal vehicles used to set up a retail fund and what are the key advantages and disadvantages of using these structures?

Open-ended retail funds

Legal vehicles. A public fund can be formed as a company or a unit trust.

Advantages. A company limited by shares registered under the BVI Business Companies Act (BCA) is by far the most common type of legal vehicle used. Investors are issued with shares in the company. The BCA is widely admired for its flexible and comprehensive company regime.

Disadvantages. A unit trust formed under BVI laws is also flexible (like a company), but it does not benefit from the backing of company legislation. Unit trusts issue units.

Closed-ended retail funds

Legal vehicles. See Question 1, Closed-ended retail funds.

Advantages. See Question 1, Closed-ended retail funds.

Disadvantages. See Question 1, Closed-ended retail funds.

Investment and borrowing restrictions

9. What are the investment and borrowing restrictions on retail funds?

Open-ended retail funds

There are no statutory investment or borrowing restrictions on open-ended funds, including public funds.

Closed-ended retail funds

The position is the same for closed-ended funds (see above, Open-ended retail funds).

 
10. Can the manager or operator place any restrictions on the issue and redemption of interests in retail funds?

Open-ended retail funds

Open-ended funds can agree any restrictions on the issue and redemption of interests with their investors at the time they subscribe for such interests. In addition, the Public Funds Code 2010 (PF Code) requires a public fund to adopt policies and procedures for the issue and redemption of fund interests. The policies must be appropriate for the nature, size, complexity, structure and diversity of the fund and the fund property. They must also meet prescribed minimum criteria set out in the PF Code including the timing of dealing and redemption of fund interests. The introduction of additional restrictions in respect of an investor's existing interest can only be achieved in accordance with the consent mechanisms contained in the fund's constitutional documents.

Closed-ended retail funds

See Question 1, Closed-ended retail funds.

 
11. Are there any restrictions on the rights of participants in retail funds to transfer or assign their interests to third parties?

Open-ended retail funds

There are no statutory restrictions on the ability of investors in open-ended funds to transfer their interests to third parties, although the constitutional documents of the fund will normally contain restrictions.

Closed-ended retail funds

The position is the same for closed-ended funds (see above, Open-ended retail funds).

Reporting requirements

12. What are the general periodic reporting requirements for retail funds?

Open-ended retail funds

Investors. The audited financial statements must be made available to investors with the registered prospectus within six months of the year end.

Regulators. A public fund's audited financial statements must be filed with the Financial Services Commission (FSC) within six months of the year end. A fund must submit an annual return to the FSC by 30 June each year, in relation to the position of the fund as at 31 December of the previous year.

Closed-ended retail funds

Closed-ended funds have no statutory reporting requirements.

Tax treatment

13. What is the tax treatment for retail funds?

Open-ended retail funds

Funds. A fund registered under the Securities and Investment Business Act 2010 is exempt from all provisions of the Income Tax Act. It will not be liable to BVI payroll tax unless it has employees in the BVI. Customary fees paid to directors are generally outside the scope of the payroll tax.

Resident investors. The following are exempt from income tax (Income Tax Act):

  • All dividends and amounts that a fund formed as a BVI company pays to investors (including redemption proceeds).

  • Capital gains realised by investors in relation to fund interests of a fund formed as a BVI company.

There are no estate, inheritance, succession or gift taxes payable in the BVI in relation to shares in a fund. Technically, income tax may apply to income and capital gains arising from interests in funds. However, as the income tax rate is currently zero, and not expected to change, this is academic.

However, as the income tax rate is currently zero (and is not expected to change), this is academic.

Non-resident investors. The following are exempt from payment of income tax (Income Tax Act):

  • All dividends and amounts paid by a fund to non-resident investors (including redemption proceeds).

  • Capital gains realised by non-resident investors from fund interests.

There are no estate, inheritance, succession or gift taxes payable in the BVI in relation to shares in funds.

Closed-ended retail funds

Funds. A closed-ended fund established as a company is exempt from all provisions of the Income Tax Act. The same rules apply as for open-ended retail funds (see above, Open-ended retail funds: Funds).

Resident investors. The same rules apply as for open-ended retail funds (see above, Open-ended retail funds: Resident investors).

Non-resident investors. The same rules apply as for open-ended retail funds (see above, Open-ended retail funds: Non-resident investors).

Quasi-retail funds

14. Is there a market for quasi-retail funds in your jurisdiction?

The author is not aware of any significant market for quasi-retail funds.

Reform

15. What proposals (if any) are there for the reform of retail fund regulation?

The author is not aware of any proposal to reform retail fund regulation.

 

Hedge funds

16. What is the structure of the hedge funds market? What have been the main trends over the last year?

The regulatory regime applicable to investment funds in the BVI differentiates between open-ended and closed-ended funds. Most hedge funds are open-ended funds, regulated under the Securities and Investment Business Act 2010 (SIBA). Open-ended hedge funds are either regulated by the Financial Services Commission as private funds, professional funds or public funds. As at 31 December 2014, there were just under 2,200 funds recognised or registered under SIBA. The majority of these are recognised as professional funds (1,511), followed by private funds (539) and public funds (87). Professional funds require an initial investment of at least US$100,000 subject to certain exemptions. These figures indicate that BVI funds are mostly used as non-retail funds.

Regulatory framework and bodies

17. What are the key statutes and regulations that govern hedge funds in your jurisdiction? Which regulatory bodies regulate hedge funds?

Regulatory framework

Open-ended hedge funds are governed by the Securities and Investment Business Act 2010 and the Mutual Funds Regulation 2010. The Financial Services Commission is the regulator for open-ended hedge funds.

Private funds

A private fund is restricted to either:

  • Having no more than 50 investors.

  • Only making an invitation to subscribe for or purchase fund interests on a private basis.

See also Question 20, Private funds.

Professional funds

In relation to a professional fund:

  • Fund interests can only be issued to professional investors (see below).

  • The initial investment for all investors (other exempt investors) cannot be less than US$100,000 or the foreign currency equivalent.

A professional investor is a person:

  • Whose ordinary business involves, whether for his own account or the account of others, the acquisition or disposal of property of the same kind as:

    • the fund property; or

    • a substantial part of the fund property.

  • Who has signed a declaration that he both:

    • whether individually or jointly with his spouse, has net worth in excess of US$1 million or its foreign currency equivalent; and

    • consents to being treated as a professional investor.

Exempt investors comprise:

  • The manager, administrator, promoter or underwriter of the fund.

  • Any employee of the manager or promoter of the fund.

Regulatory bodies

The regulator is the FSC (see Question 2).

 
18. How are hedge funds regulated (if at all) to ensure compliance with general international standards of good practice?

All regulated funds must have their annual financial statements audited (if not exempted by the Financial Services Commission (FSC)). The audited financial statements must be submitted to the FSC within six months of the financial year end of the fund.

Public funds must adopt detailed pricing and valuation policies. Details of the policies must be made available to investors in public funds.

The BVI has a strict anti-money laundering and anti-terrorist financing regime in place. The BVI government, the FSC and other statutory bodies liaise with regulators in other jurisdictions to ensure compliance with international standards of good practice. All hedge funds are subject to:

  • Anti-money Laundering Regulations 2008.

  • Anti-money Laundering and Terrorist Financing Code of Practice 2008.

This legislation provides a BVI hedge fund with the option to outsource client verification requirements to its non-BVI based administrator if the administrator is based in a recognised jurisdiction (see Question 6, Open-ended retail funds).

 
19. Who can market hedge funds?

The position is the same as for retails funds (see Question 4).

 
20. To whom can hedge funds be marketed?

The position is essentially the same as for retail funds (see Question 5). However, a private fund may either have a maximum of 50 investors or offer interests in the fund on a private basis only.

Investment restrictions

21. Are there any restrictions on local investors investing in a hedge fund?

The position is the same as for retail funds (see Question 5).

Assets portfolio

22. Who holds the portfolio of assets? What regulations are in place for its protection?

A private or professional fund must, subject to limited exceptions, at all times have a custodian appointed (see also Question 7). According to guidance from the Financial Services Commission, an exemption from the custodian requirement will normally be available in the following circumstances:

  • Funds who have appointed prime brokers that perform the same function.

  • Feeder funds in master/feeder structures.

  • Funds operating as fund of funds.

  • Funds in the process of winding down.

  • Funds that invest in esoteric assets.

Requirements

23. What are the key disclosure or filing requirements (if any) that must be completed by the hedge fund?

A private or a professional fund must file any offering document with the Financial Services Commission (FSC) within 14 days of the date of its issue to any investor. Amendments to the offering documents previously provided to the FSC must be notified to the FSC within 14 days.

All regulated funds must submit an annual return for statistical and reporting purposes setting out summary financial information as at 31 December.

 
24. What are the key requirements that apply to managers or operators of hedge funds?

The same rules for retail funds apply (see Question 4).

Any person carrying on business in or from within the BVI as an investment manager, adviser or administrator of a fund must hold a licence issued by the Financial Services Commission.

Legal fund vehicles and structures

25. What are the main legal vehicles used to set up a hedge fund and what are the key advantages and disadvantages of using these structures?

BVI funds are established as:

  • Companies limited by shares (including as segregated portfolio companies) under the Business Companies Act 2010 (BCA).

  • International limited partnerships under the Partnership Act 1996.

  • Unit trusts governed by the laws of the BVI.

The vast majority of BVI hedge funds are established as companies under the BCA. The BCA is widely regarded as cutting edge corporate legislation and provides a modern and flexible regime suitable for use for hedge fund vehicles.

Tax treatment

26. What is the tax treatment for hedge funds?

Funds

See Question 13.

Resident investors

See Question 13.

Non-resident investors

See Question 13.

Restrictions

27. Can participants redeem their interest? Are there any restrictions on the right of participants to transfer their interests to third parties?

The position is the same as for retail funds (see Questions 10 and 11).

Reform

28. What (if any) proposals are there for the reform of hedge fund regulation?

In December 2014, a consultation paper was filed with the Financial Services Commission (FSC) setting out a proposal for the following two new fund products that are designed for start-up and emerging markets and family and friends funds:

  • BVI Incubator Fund.

  • BVI Approved Fund.

In June 2015 new legislation, the Securities and Investment Business (Incubator and Approved Funds) Regulations 2015 (Regulations), created both the incubator fund and the approved fund.

The incubator fund may operate for two years (three years with FSC permission) with no administrator, custodian or manager. Certain thresholds apply, including a maximum of 20 investors; a minimal initial investment from each investor of US$20,000 and an overall cap on the value of the fund's net assets of US$20 million. At the end of its term as an incubator fund (or on exceeding any of the above thresholds), the fund must either apply for recognition as a private or professional fund, or apply for approval as an approved fund, or it must wind-up.

The approved fund regime is geared towards funds of a longer term and with a private investor offering. Its thresholds are a maximum of 20 investors and a cap of US$100 million on the value of the net assets of the fund. The approved fund is not required to appoint an auditor, manager or custodian. It must have an administrator. There is no time limit on the life span of the approved fund.

 

Online resources

BVI Financial Services Commission

W www.bvifsc.vg

Description. The BVI Financial Services Commission is the Territory's single financial services regulator. The BVI FSC website contains links to all relevant financial legislation, policy guidelines, guidance notes and statistics.

BVI Official Gazette

W www.bvigazette.org

Description. The Official Gazette is the official publication of the Government of the Virgin Islands. It is printed by the Gazette Unit, a unit of the Cabinet Office. It is free to register and access legislation online that has been published since 2007.



Contributor profile

Clinton Hempel

Carey Olsen

T +1 284 394 4030
F +1 284 494 4155
E Clinton.hempel@careyolsen.com
W www.careyolsen.com

Professional qualifications. South African Attorney, 1996; England and Wales, Solicitor, 1997; British Virgin Islands, Solicitor, 1999

Areas of practice. Investment funds and private equity; joint ventures and finance regulatory.

Recent transactions

  • Advising on the launch of two multi-billion US dollar hedge funds.
  • Advising a US pension fund manager on investment in a BVI private equity fund.
  • Advising a sovereign fund on investment in a BVI company operating in various Latin American countries in the telecommunications sector.

Languages. English

Professional associations/memberships. Member of the British Virgin Islands Bar Association.

Publications. Private equity in British Virgin Islands: market and regulatory overview Private Equity Global Guide 2015/16 (co-author).


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