Aug 2024
The Cayman Islands remains the most popular jurisdiction for offshore investment fund set-ups. However the British Virgin Islands (BVI) offers a range of fund products worth considering. In addition, the BVI provides a light-touch alternative to a fully regulated investment manager.
This article provides a high level overview of the different options available.
BVI Investment Funds
Investment funds in the BVI can be incorporated as business companies or formed as limited partnerships or unit trusts. The business company, being a corporate vehicle, is the most common structure used to form an open-ended fund in the BVI. Limited partnerships are popular for closed-ended funds.
All BVI funds (whether open-ended or closed-ended) are, for the most part, regulated under the Securities and Investment Business Act 2010.
Open-Ended Funds
There are a number of different types of open-ended funds. Two that are more institutional grade – ‘Professional Funds’ and ‘Private Funds’ – and two that are lower cost light touch alternatives – ‘Incubator Funds’ and ‘Approved Funds’. The latter two might be good choices for emerging or start-up managers.
Professional Funds and Private Funds
- Professional Funds have no limits on assets under management or the maximum number of investors. However, they may only be offered to professional investors and the minimum initial investment amount is US$100,000, except for exempted investors (e.g. employees of the manager or promoter of the fund).
- Private Funds have no cap on assets under management, there are no investor qualification requirements, and no minimum initial investment per investor applies. However, they may only be offered to a maximum of 50 investors (or potentially more than 50, provided the offer is made on a ‘private basis’ only).
Each fund type must maintain a clear and comprehensive policy for the valuation of fund property with procedures that are sufficient to ensure that the valuation policy is effective. While preparing an offering document would be typical, the Financial Services Commission (FSC) may exempt the fund from preparing and submitting an offering document if it is satisfied as to how information will otherwise be communicated to potential investors.
Each professional and private fund must have at least two directors, at least one of whom must be an individual.
Each must at all times have a fund manager, a fund administrator and a custodian, unless exempted.
In addition, each is also required to have an auditor and is required to provide a copy of its audited financial statements to the FSC within six months after its financial year end.
BVI Funds must comply with relevant anti-money laundering legislation and regulations, including the requirement to have an anti-money laundering reporting officer.
Approved Funds and Incubator Funds
BVI Approved Funds and Incubator Funds are two light touch, low cost alternatives suitable for start-up/emerging managers looking to prove their investment strategy and establish a track record in the most cost-efficient manner.
- Approved Funds: the only mandatory service provider is a fund administrator. No investor qualification requirements apply, and there is no minimum initial investment per investor. Approved funds must provide a written description of their investment strategy and a document containing certain risk warnings to investors, but they are not otherwise required to have an offering document. However, assets under management cannot exceed US$100 million, and the number of investors cannot exceed 20. Upon reaching these thresholds, they must convert to another type of fund (e.g. private or professional fund) or be wound up.
- Incubator Funds: these have no mandatory service providers. However, assets under management cannot exceed US$20 million, and the number of investors cannot exceed 20, with a minimum initial investment of US$20,000. They also have a finite life-span of a maximum term of 2 years (although this can be extended by up to 12 months with permission from the FSC), and upon expiry the fund must be converted into another type of fund or otherwise be wound up.
Each fund type must have two directors, one of whom must be an individual whose resume will need to be submitted to the FSC at the time of application. As well, the fund will need an authorised representative in the BVI.
The benefit of an incubator fund is that it does not require an offering memorandum, licensed investment manager, administrator, custodian or auditor. Rather, investors must only be provided with a written description of the investment strategy and a written outline of the risks, including the risk of investing in an Incubator Fund.
An Incubator Fund must submit semi-annual returns to the FSC confirming its continuing eligibility as an Incubator Fund.
Both types of funds must submit annual returns as well as annual financial statements, although these need not be audited.
Incubator Funds and Approved Funds can be brought to market very quickly. Each can commence business two clear business days after submitting a completed application. The reduced establishment and operating costs, speed to market and the flexibility to appoint only such service providers as the fund itself requires for commercial reasons, make Incubator and Approved Funds welcome additions to the suite of BVI fund products.
Comparison of BVI Open-Ended Funds – Key Characteristics
| Maximum Number of Investors | Minimum Investment per Investor | Investor Qualification? | Maximum AuM | Time Limit on Fund | |
| Incubator Fund | 20 | US$20,000 | No | US$20 million | 2 years (+1 year extension possible) |
| Approved Fund | 20 | None | No | US$100 million | No limit |
| Private Fund | 50* | None | No | No limit | No limit |
| Professional Fund | No limit | US$100,000** | Net worth of US$1 million+ or otherwise “professional investors” | No limit | No limit |
* It is possible to exceed this number if invitations to subscribe are made on a private basis only to specified persons or by reason of a private or business connection.
** There are certain exemptions for persons connected with the manager and promoter of the fund.
Closed-Ended Funds – Private Investment Funds
This category typically includes private equity, real estate, venture capital, infrastructure and private credit funds. In order to be recognised by the FSC, a private investment fund’s constitutional documents need to specify that (i) it will have no more than 50 investors, (ii) an invitation to subscribe for or purchase shares or fund interests issued by the fund is to be made on a private basis only or (iii) shares or fund interests are made available only to professional investors and the initial investment of each investor in the fund (other than certain exempted investors) is not less than US$100,000 or its equivalent in another currency.
An offer or invitation to an investor or a potential investor to purchase or subscribe for fund interests in a private investment fund must be made within an offering document or a term sheet. The offering document or term sheet must clearly indicate that the fund is recognised by the FSC as a private investment fund and contain:
- an indication as to whether (i) the fund is suitable for private investors only and is limited to 50 investors, or any invitation to subscribe for fund interests may be made on a private basis only, or (ii) the fund is only suitable for professional investors and a minimum investment of US$100,000 (or such larger sum as may apply with respect to the fund) is required;
- the investment objective of the fund;
- a written statement that investors do not have the right to redeem or withdraw fund interests on demand;
- the names and addresses of the appointed persons for the fund responsible for management, valuation and safekeeping of fund property; and
- any fees to be paid by the fund.
The fund may choose not to issue an offering document or term sheet subject to providing to the FSC the reason for not doing so and explaining how relevant information concerning the fund and any invitation or offer will otherwise be provided to investors or potential investors.
A simple application form must be completed and submitted to the FSC together with the relevant application fee and basic supporting documentation in respect of the fund, including a copy of the (i) certificate of incorporation or formation, (ii) constitutional documents, (iii) register of directors (if a company), (iv) a curriculum vitae for each director, or director of the general partner or trustee, (v) the offering document or term sheet and (vi) the fund valuation policy.
A new fund may carry on business for a period of 21 days prior to submitting an application provided that such application is made within 14 days of commencing business.
Investment Manager – a BVI Approved Manager
Establishing an investment manager and getting it regulated can be an expensive and time-consuming affair. Many jurisdictions have fairly prescriptive rules governing the regulation of investment managers. One solution may be to set up an “approved manager” in the BVI. These can be used for BVI funds – and there may be benefits for involving only one regulator – but we have also seen these used for Cayman Islands funds.
Registering an approved manager is a relatively straightforward process and an approved manager is not required to have personnel physically located in the BVI. Although regulated by the FSC, its ongoing obligations are limited, which is one of its key attractions.
An approved manager is subject to a cap of aggregate assets under management of US$400 million for open ended funds and US$1 billion for closed-ended funds. It is required to comply with the BVI AML/CFT regime and appoint an AML officer. In addition, it must submit an annual return and financial statements, but there is no requirement for those financial statements to be audited.
The FSC will need to ensure that the people behind the approved manager are “fit and proper”. However the approved manager may commence business if the FSC does not raise any questions in the seven days following submission of a completed application.
Summary
Although the Cayman Islands remains the market leader for offshore funds, the BVI offers interesting options that warrant consideration.
In addition, the BVI ‘approved manager’ regime provides a niche alternative that should be considered by anyone looking for a lightly regulated alternative to a fully regulated investment manager.
We are Here to Help
Tailored professional advice should be sought in respect of individual circumstances. Please reach out to your usual Conyers contact or one of the individuals listed below with any questions regarding structuring a BVI investment fund or a BVI approved manager.
This article is not intended to be a substitute for legal advice or a legal opinion. It deals in broad terms only and is intended to merely provide a brief overview and give general information.