BVI Investment Funds
BVI Hedge Funds constitute approximately 25% of all offshore hedge funds globally.
The British Virgin Islands (BVI) stands as the second-largest offshore jurisdiction worldwide for hedge funds, thriving notably as a preferred location for the establishment of offshore investment funds in general. The BVI’s capacity to provide diverse regulatory frameworks tailored to small to mid-sized hedge fund groups contributes to its appeal, offering an efficient choice for establishing investment managers and advisers within its jurisdiction. This flexibility is among the numerous advantages that solidify the BVI’s position as a premier domicile for offshore hedge funds.
This popularity stems from several advantages, including a tax-neutral environment and a politically and economically stable jurisdiction committed to full compliance with supra-governmental bodies. Moreover, there are no regulatory constraints on investment policies or mandates to appoint local directors, functionaries, or auditors.
Investment funds enjoy protection against insolvency. The fund company does not own the investment assets; they are held separately. In the event of financial difficulties for the fund companies, the assets of the fund remain unaffected. Additionally, both investment funds and fund providers are bound by stringent legal requirements.
When accumulating assets, fund savers adopt a strategy of not placing all their investments in one basket. Instead, they utilize a single investment product to invest in a diverse range of securities, such as shares or bonds from companies spanning different sectors, or in real estate. This legal requirement for diversification mitigates investment risk. Achieving such broad diversification without the use of funds would pose a considerable challenge for private investors.
Fund savers have the option to invest a larger sum at once or contribute regularly to a fund savings plan, often available with a minimum monthly commitment of just a few Euros. Savers can access their funds regularly, typically on a daily basis, with open-ended real estate funds being an exception.
Investment funds stand out as one of the most transparent financial products for savers. Prior to purchasing, individuals can compare different funds through extensive product information. Fund providers regularly update information on fund performance on their websites. Further details can be found in the semi-annual financial reports published by the fund companies.
Types of Funds
Various BVI fund products cater to a range of needs, from startup managers establishing incubator funds to institutional fund managers overseeing substantial assets.
The BVI Incubator Hedge Fund
A BVI incubator fund provides emerging managers with a two-year “validity” period for establishing a track record and assessing its viability. Throughout this duration, the fund can operate with minimal regulatory oversight, without mandatory service providers, and without undergoing an audit. Another advantage of establishing such a fund in the BVI is the expedited approval process, allowing the incubator fund to commence operations within just two business days of submitting a comprehensive application. The maximum allowable number of investors during this period is 20, each required to invest a minimum of US$20,000. The incubator fund’s net assets are capped at US$20 million. Following the validity period, the fund must convert to a private, professional, or approved fund. Alternatively, if the fund is deemed nonviable, it must wind down its operations.
BVI Approved Fund
The BVI provides the approved fund option for managers aiming to establish a private offering to a limited group of investors over an extended period. The fund is limited to a maximum of 20 investors, and its net assets must not surpass US$100 million. Notably, there is no obligatory minimum initial investment, and the fund is not compelled to appoint an auditor, manager, or custodian. However, it must appoint an administrator to ensure appropriate oversight of its operations. This fund type also enjoys the advantage of the BVI’s expedited approval process, potentially gaining approval to commence business within two days of submitting an application to the Financial Services Commission (FSC).
BVI Private Fund
BVI Private Funds lack a mandatory minimum initial investment for individual investors and do not impose “professional” or “sophistication” tests on investors. This characteristic enhances their appeal among startup managers, facilitating offerings to friends and family. To qualify as a private fund, it must either maintain a maximum of 50 investors or exclusively extend private invitations to subscribe for or purchase fund interests. Recognition by the Financial Services Commission (FSC) is a prerequisite for private funds to commence business. The initiation of business is considered when the fund publishes a prospectus or any other document inviting the purchase or subscription for shares of the fund.
BVI Professional Fund
BVI Professional Funds, constituting the most favored category, represent approximately 70 percent of all regulated funds in the BVI. These funds extend interests to either professional investors or exempt investors. A professional investor is an individual:
- Whose regular business involves acquiring or disposing of property similar to the fund’s property, or
- Who, individually or jointly with a spouse, possesses a net worth exceeding US$1,000,000.
For professional investors, the minimum initial investment must be at least US$100,000. Exempted investors, in contrast, are not bound by a mandatory minimum initial investment. Exempted investors include:
- The manager, administrator, promoter, or underwriter of the fund, or
- Any employee of the fund’s manager.
A professional fund is permitted to conduct its business, manage, or administer its affairs for up to 21 days without formal recognition under the Securities and Investment Business Act (SIBA).
BVI Public Fund
A public fund is commonly perceived as a retail product, resulting in a comparatively elevated regulatory burden compared to a private or professional fund. Nevertheless, a public fund is exempt from any BVI limitations regarding the categories or quantity of investors it can invite to participate in the fund.
BVI Incubator and Approved Fund
In recent years, the British Virgin Islands introduced the Incubator Fund and the Approved Fund through the Securities and Investment Business (Incubator and Approved Funds) Regulations, 2015. As anticipated, these funds swiftly gained popularity, particularly among startups and new managers, resulting in the establishment of over 50 new funds in a brief period.
Notably, BVI Approved Funds have slightly outpaced Incubator Funds in terms of popularity. These funds have effectively addressed a recognized market demand for a lightly regulated investment vehicle that can seamlessly expand alongside first-time or startup managers as their businesses and assets under management experience growth.
For an extended period, a closed-end structure was utilized to address this need. However, while these structures may still have relevance, their limitation lies in being closed—not in the sense of a restricted offering of shares but rather in restricting investors’ right to redeem. This restriction often posed challenges for managers in fundraising, as investors, including friends and relatives, generally preferred a mechanism allowing them to withdraw funds on demand or to exit if the investment strategy deviated from the original plan.
The Regulations now permit the establishment and launch of Incubator and Approved Funds on a fast-track, cost-effective basis, with minimal regulatory oversight by the BVI Financial Services Commission, proving to be a successful approach.
BVI Fund Requirements
Incubator funds have a minimum investment requirement of US$20,000, a net assets cap of US$20M, and a limit of 20 investors. Approved funds have a net assets cap of US$100M, with no minimum investment criteria. Both funds have minimal service provider requirements.
Applications for approval as an Incubator Fund or Approved Fund are submitted to the Commission, accompanied by necessary documents and an application fee of US$1,500. Both funds can commence business two days from the date of a completed application.
Duration and Conversion of Incubator Hedge Fund
Incubator Funds have a two-year limited life, extendable up to 12 months, while Approved Funds have no such limits. Conversion and winding down options are available based on the fund’s viability.
Following the cost-effective approach for these entities, the service provider requirements are kept to a minimum. Each fund must designate an authorized representative in the BVI, and an Approved Fund must have an administrator consistently. Notably, there are no compulsory custody requirements. Issuing an offering document is not mandatory, and if the fund opts not to produce one, the necessary investor warnings can be outlined in a separate term sheet. Otherwise, both Incubator and Approved Funds are obligated by the Regulations to:
- Submit an annual fee of US$1,000 on or before March 31 each year.
- Maintain a minimum of two directors at all times, with one being an individual.
- Submit bi-annual returns to the Commission.
- Prepare and submit annual financial statements to the Commission, without the requirement for an independent audit.
- Inform the Commission of any changes to the information submitted during the application process, especially those related to the fund’s conduct or any factors likely to have a material or significant regulatory impact, directors, etc.
Since the inception of these Regulations, we have gained practical experience in establishing several of these funds. We anticipate that, as emerging managers become acquainted with these frameworks, they will persist in being appealing options for start-up managers, family offices, and individuals seeking a straightforward, expedited, and cost-effective means to establish a lightly regulated investment vehicle.
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