Weathering the storm
Contributed by O'Neal Webster
10 August, 2012
Contributed by O'Neal Webster [www.onealwebster.com]
The British Virgin Islands ("BVI") is the world's second largest offshore fund domicile with close to 3,000 registered funds and growing. The global recession impacted the industry somewhat with most funds during that time looking at their balance sheet and redemption issues. In some cases funds were taken to court by investors for a variety of reasons directly caused by the impact of the recession on some funds. That scenario is almost behind us and what we are now seeing is a resurgence in the set up of new funds. More managers have now also seen some of the benefits offered by BVI funds and have or are ready to make the move to a BVI fund. With the updating of BVI funds legislation in 2010 through the passage of the Securities and Investment Business Act, 2010 ("SIBA"), the BVI is well poised to continue on this path of growth.
Definition of a fund
Under SIBA, a "mutual fund" or "fund" (commonly known as an investment fund or hedge fund) 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 (defined as shares in the share capital of a company, an interest in a mutual fund partnership and a unit in a mutual fund unit trust) 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 and managers of such open-ended funds. SIBA does not regulate closed-end funds.
Categories of funds
Funds regulated by SIBA fall within three categories, namely: private funds, professional funds and public funds.
- Private fund - this is a mutual 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 fund interests is made on a private basis.
- Professional fund - this is a mutual fund in which fund interests are only made available to professional investors and the initial investment by all of the investors is not less than $100,000 (or equivalent).
- Public fund - this is a mutual fund that is neither a private fund nor a professional fund.
All private and professional funds must be recognised under SIBA, while all public funds must be registered under SIBA.
Recognition or registration of a fund and acceptance of their functionaries
The 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, auditor , administrator and custodian).
In considering an application for recognition or registration, the FSC will in summary require that the manager, auditor, administrator and custodian of a BVI mutual fund be incorporated in either the BVI, or a "recognised jurisdiction". The list of recognised jurisdictions currently consists of some 40 countries including:
Argentina, Australia, Bahamas, Bermuda, Brazil, Canada, Cayman Islands, China, Curacao, Hong Kong, Japan, Jersey, Luxembourg, Singapore, Spain, United Kingdom and the United States of America.
However, the FSC also has the discretion to accept functionaries incorporated in other jurisdictions if the FSC is satisfied that the jurisdiction has a system of effective regulation of investment business including funds.
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 which allows a great deal of flexibility in terms of structuring funds including the creation of segregated portfolio funds.
- 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 FSC.
- Unit trusts - this can be 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.
Advantages of BVI funds
Some of the advantages of BVI funds include:
- Modern legislation - SIBA (2010), BVI Business Companies Act (2004), Insolvency Act (2003)
- Legal system based on English legal system
- A dedicated commercial court
- No requirement for local directors, functionaries or auditors
- Low cost - attractive to start up and medium size funds
- Efficiency - a private /professional fund can be established within 2 - 5 days if a proper application is submitted to the FSC
- Professional funds can commence trading up to 21 days before being recognised by the FSC
- No restrictions on investment policies and strategies or on performance fees or other arrangements
- Tax neutrality
- Segregated portfolio company funds available
- Exemptions available from the requirement to have an investment manager, custodian or auditor
The BVI is currently in a very good position as it relates to the continued development of the offshore funds industry. It has recent legislation compliant with international standards and just the right level of regulation to give both managers and investors comfort. Clients globally are becoming more aware of the benefits of BVI funds including the fact that BVI funds can use their own auditors as opposed to a requirement for local auditor sign off which is required in some offshore jurisdictions. The ability to commence business up to 21 days before recognition for a professional fund is also a key factor for some managers who want to take advantage of opportunities which may be very time sensitive. Despite the challenges over the last few years the BVI as a fund jurisdiction has weathered the storm and has actually found itself in a very good position to embrace the future.
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