The Financial Services Commission (FSC) of the British Virgin Islands (BVI) offers a range of investment funds that are particularly attractive to startup and emerging managers who have typically raised less than three funds with assets under management ranging from USD25-100 million. The BVI’s Securities and Investment Business (Incubator and Approved Funds) Regulations, 2015 specifically allows for the creation of Incubator Funds and Approved Funds to provide more flexibility to smaller and startup financial services businesses.
Approved Funds can be structured as a BVI business company or a limited partnership, limited to a maximum of 20 investors. If investors exceed 20 in any two consecutive months they must apply to the FSC to convert to a Private or Professional Fund.
With an Approved Fund, there is no minimum initial investment requirement for each investor unless the Approved Fund upgrades to a Professional Fund, when certified professional investors need to have subscribed an initial minimum investment amount of at least USD100,000 or another currency equivalent, or top up their existing investment to meet the USD100,000 requirement.
Approved Funds are limited to a maximum net asset of USD100 million, or another currency equivalent. If this threshold is exceeded during any two consecutive months, they must convert to another type of fund, typically a Private or Professional Fund.
Among key advantages of this tailored fund structure are:
- Approved Funds are not limited to a specific lifetime. They aim to provide a solution to open-ended funds that target friends and family, family offices and/or an investor base within a close network to run investment strategies indefinitely without focusing mainly on building a verifiable track record;
- This structure has the advantages of a shorter launch timeframe, fewer regulatory obligations, and fewer required functionaries and service providers, as it can be operated without an investment manager, auditor or custodian;
- There is no requirement to file audited financial statements;
- The Approved Fund can commence business within two days from the date that the FSC receives the application; and
- Although the Approved Fund must have a fund administrator, it is not required to have a custodian or manager.
Numerous benefits accrue from this “lighter touch” regulatory regime:
- Competitive organisational costs and ongoing operational fees;
- No requirements for authorised or share capital. Shares can be issued without par value;
- As there is no time limit for the fund, it provides the management team with a platform that can focus on running the investment strategies without the constraints of time or pressure of upgrading to a more regulated product, unless its performance triggers a mandatory upgrade;
- High level of corporate governance combined with a flexible corporate statute;
- Reduced service provider costs, as there is no need for a custodian, manager or auditor;
- Reduced organisational costs, as there is no need for a private placement memorandum; and
- Fast launch timeframe.
Approved Funds have limited functionary requirements, especially when compared to BVI professional, private or public funds and in other jurisdictions. They only need a summary of terms with a description of the investment strategy and appropriate FSC warnings to investors so they can make an informed decision before investing.
Approved Funds must have at least two directors at all times (one of which must be an individual). As part of the application to the FSC, the directors are required to submit their resumes to check if they are fit and proper persons. Subject to the BVI regime, they are required to have in place anti-money laundering policies and procedures, and conduct client due diligence on their investors.
Approved Funds are also BVI reporting financial institutions for the purposes of compliance with the US Foreign Account Tax Compliance Act (FATCA) and the Organisation for Economic Co-operation and Development’s common reporting standard (CRS) for the automatic exchange of financial account information, and intergovernmental agreements and domestic legislation implementing FATCA and CRS in the BVI.
Additionally, Approved Funds are required to: have a principal point of contact and authorised person; obtain a global intermediary identification number; and register with the BVI financial account reporting system.
GARY SMITH is a partner at Loeb Smith Attorneys in the Cayman Islands, and WENDY AU is a legal director at the firm’s investment funds group in Hong Kong