A BVI Investment Fund registration in 2023 is a type of investment vehicle established in the British Virgin Islands (BVI), which is a well-known offshore financial center.
BVI Investment Funds are commonly used for investment purposes and can take various legal forms, such as mutual funds, private equity funds, hedge funds, and real estate funds.
With an increase in fund formations and overall transactional activity over the previous year, the British Virgin Islands (BVI) fund finance sector has continued to expand.
The BVI is one of the most popular offshore jurisdictions for the formation of investment funds due to its advanced commercial court for quick dispute resolution, worldwide recognition as a well-regulated legal authority, a tax-neutral surroundings, and affordable costs for establishment, launching, and operating investment funds.
BVI FUND FINANCE GROWTH
The BVI fund finance market has grown over the past few years as a result of the expansion into a wider variety of fund types, rising demand from fund sponsors who had not previously used the product in their fund families, record levels of fundraising, and an increase in specialized transaction structures like net asset value (NAV) and hybrid facilities as well as equity commitment deals. All of these factors have contributed to the market’s expansion.
It is evident that lenders have adapted their strategies to be more creative and specialized as sponsors’ and funds’ needs and wants have changed.
New alternative lenders have also entered the market, even as some banks have continued to expand their book of business. As investors prioritize environmental, social, and governance (ESG) considerations more and more, the BVI has also witnessed steadily rising numbers of funds specializing in blockchain and cryptocurrency, as well as funds specializing in climate technology.
TYPES OF BVI INVESTMENT FUNDS
Investment funds may be organized as a unit trust, segregated portfolio company (SPC), limited partnership, or BVI business company.
Companies have historically been the most common vehicle for BVI funds, which is partly attributable to the contemporary and adaptable structure established by the BVI Business Companies Act 2004B, as modified. (BCA).
However, since changes to the British Virgin Islands Limited Partnership Act, 2017 were enacted in accordance with the Limited Partnership (Amendment) Act 2019, partnerships are becoming more and more common for joint venture funds. (together, the LP Act).
Private investment or closed-ended funds, which are classified as businesses, partnerships, unit trusts, or any other BVI entities, make up the great bulk of BVI private equity funds.
- Collect and pool investor funds for the purpose of collective investing and portfolio risk diversification.
- Issue fund interests that entitle the holder to receive money calculated based on the value of a proportionate interest in all or some of the entity’s assets.
A company, partnership, or unit trust is considered an open-ended fund if it gathers and pools investor funds for the purpose of collective investment and issues fund interests that entitle the holder to receive money computed using the value of a proportionate interest in all or a portion of the net assets of the company or other body, partnership, or unit trust, as the case may be, upon demand or within a certain time frame following demand.
The various open-ended fund types include:
- Professional Fund- This type of fund is open exclusively to professional investors who meet certain criteria, such as having a high net worth or being institutional investors. The minimum investment required is usually set at a significant amount, often around US$100,000 or more. Professional funds typically have fewer restrictions and regulatory requirements compared to other fund types.
- Private Fund – A private fund is a mutual fund whose bylaws indicate that it will only have up to 50 investors or that any invitations to subscribe must be extended on a “private basis” only.
- Public Fund – Compared to other fund types, public funds are subject to a higher degree of regulation. They enable retail investors to invest in the fund because they are accessible to the general public. Public funds are often subject to financial authority regulation and must adhere to strict disclosure, reporting, and investor protection rules. Although there may be stronger investment restrictions, these funds are more easily accessible for private investors.
- Incubator Fund – The BVI Incubator Fund is a start-up fund for managers who wish to control costs while building a track record that will enable them to draw enough subscriptions to sustain the funds over the long term. There could be:
- 20 maximum investors;
- a US$20,000 minimum initial investment;
- and US$20 million in net assets.
An advantage of an incubator fund is that documents such as a licensed investment manager, administrator, custodian, or auditor are necessary. Instead, only a written description of the investment strategy and a written summary of the risks, including the risk of participating in an Incubator Fund, must be given to investors. Only a two-year period at a time may be approved for the Incubator Fund. An incubator fund may be turned into an approved fund, a professional fund, or a private fund for managers who have attracted investor interest during the course of the two-year period.
5. Approved Fund – A BVI Approved Fund is an inexpensive hedge fund vehicle that enables management to gather a small group of investors. This fund is affordable and meant to reduce the regulatory burden associated with starting a small fund. An authorized fund may consist of:
- No minimum investment requirement,
- a maximum of 20 investors,
- and net assets worth up to $100 million USD.
COMPANIES FOR BVI INVESTMENT FUNDS IN 2023
Under the BCA, a BVI corporation is incorporated with its own legal identity.
The shares owned by the manager (or its affiliates) can generally have different rights from those of investors, thanks to the variety of share classes that a BVI corporation used as a private equity fund will typically have. It is possible to issue shares with or without a par value.
As shareholders in a BVI corporation, your liability will be limited to the following three things: (i) any outstanding debt on the shares you own; (ii) any obligations specifically stated in the company’s bylaws; and (iii) any obligations to pay back distributions.
SEGREGATED PORTFOLIO COMPANIES
The Segregated Portfolio Companies (BVI Business Company) Regulations 2018, which were previously only applicable to specific regulated companies and open-ended funds, permit a private investment fund and other BVI entities to be formed as an SPC. An SPC is a single business that, like “protected cell” or “segregated account” corporations in other countries, can have its assets and liabilities divided and ring-fenced across various sub-funds or segregated portfolios.
Investors may be granted the right to receive distributions only from the portfolio for which shares have been issued. Similar to this, creditors may agree to exclusively have recourse against assets in a specific portfolio. Private equity funds can now contain many funds within a single centralized entity, saving money and time on administrative tasks.
Partnerships have historically been underutilized in the BVI, despite being a typical form for funds in other jurisdictions. This is partially due to outdated and vague legislation.
The LP Act introduced practical and adaptable measures that were directed at both open-ended mutual funds and private equity in an effort to remedy this. For instance, a Partnership may now decide to choose legal personality and register security interests.
A partnership may be formed under the LP Act with or without a distinct legal personality, making them appropriate as vehicles for the distribution of cash and carrying interests. The decision of whether or not the partnership has legal personality is final for Partnerships formed following the LP Act. All partnerships that were already registered before the new LP Act went into effect may be reregistered with or without legal personality at the general partners’ discretion.
Limited partners are formed by investors. A limited partner may, but is not obligated to, make a contribution to the Partnership according to the terms of the fund’s limited partnership agreement (LPA). The amount of a limited partner’s contribution or unpaid commitment to the partnership will serve as the limit of the limited partner’s liability for the debts and liabilities of the partnership, if any, with the exception of situations where limited liability is lost (such as by holding an office (including a directorship) or acting as a consultant, contractor, or agent of the general partner).
A partnership must also have at least one general partner who will be in charge of operating the partnership. This general partner is frequently under the supervision of the fund manager. The general partner is responsible for any unpaid obligations of the Partnership incurred while they were a general partner unless the LPA expressly states otherwise. Each general partner is responsible when there are many general partners. It’s not necessary for the general partner to be based in the BVI.
The general partner will typically be a limited liability corporation that serves as a “liability blocker” to stop liability from moving higher up the ownership chain.
The BVI trust law recognizes unit trusts. Unit trusts are created through the use of a deed of trust; they are not distinct legal entities. Due to the capacity of firms to issue shares with no par value, the main advantage of offshore unit trusts for private equity vehicles (being that units may be redeemed without issuing new shares) has been diminished, and as a result, this kind of structure is not frequently used.
FUND FORMATION IN BVI
A corporation or partnership can be formed reasonably rapidly when the parties involved agree on the legal documents (a written LPA for a partnership and memorandum and articles for a company) and any other business matters. (normally within one to two working days). The BVI Registrar of Corporate Affairs (Registrar) must receive the following documents before a business can be incorporated:
- memorandum and articles;
- as well as a letter approving their employment from the potential registered agent.
Prior clearance from the British Virgin Islands Financial Services Commission (FSC) is required if the business is to be formed as an SPC. It should take one to two weeks to complete this.
The following documents must be filed with the Registrar in order to form a Partnership:
To create a partnership, the following papers must be submitted to the registrar:
- A declaration confirming the Partnership’s name, address, registered agent, name and address of each general partner;
- a statement of whether the Partnership has an unlimited duration or a fixed term;
- an election by the general partners for the Partnership to be formed without legal personality (the default position is a Partnership with legal personality).
The LPA is not filed and is not otherwise disclosed.
To create a business or partnership in the British Virgin Islands, one must hire a registered agent. The BVI Registry of Corporate Affairs only accepts registration documents from registered agents. (BVI Registry). A certificate of registration, which serves as conclusive proof that the requirements have been satisfied and that the company or Partnership (as applicable) has been established, will be issued by the Registrar if the Registrar is satisfied that the registration requirements for the company or Partnership (as applicable) have been met.
There are no minimum capital requirements for private investment funds, whether they be corporations or partnerships.
REGULATION, LICENSING, AND REGISTRATION
The Securities and Investment Business Act (SIBA), which is overseen by the FSC, is the main piece of legislation governing funds in the BVI. The Private Investment Funds Regulations (PIF Regulations) and the Financial Services Commission (Securities and Investment Business Fees) Regulations 2010 are two additional regulations that augment SIBA. (as amended). In relation to open-ended funds, additional rules apply. This chapter largely focuses on closed-ended structures because the great majority of private equity funds are closed-ended.
Private investment funds, often known as closed-ended funds, were not governed in the BVI before 2020. The BVI revised SIBA on December 31, 2019, bringing “private investment funds” inside the regulatory framework.
If a fund is organized as a business, whether open-ended or closed-ended, it will be registered with the BVI Registry as a BVI entity and the BCA will regulate its corporate affairs. The LP Act will control the corporate affairs of BVI entities constituted as partnerships, and they will be registered with the BVI Registrar of Limited Partnerships.
To be recognized, the fund must submit an application in the approved form to the FSC together with copies of the following documents:
- The constitution, register of directors (if applicable), and certificate of incorporation of the fund;
- the formation or registration of the fund; the valuation policy of the fund;
- the offering document or term sheet of the fund, if the fund plans on releasing such document; and
- a list of each director, general partner, trustee, or the underlying individuals in cases where these organizations are corporate entities, along with a resume or biography for each of them.
When a fund decides not to issue an offering document or term sheet, it must explain why it is doing so and how investors will get important information about the fund. Information required by the PIF Regulations must be included in every offering document or term sheet.
After being incorporated, a company has 14 days to function as a private investment fund before filing an application to the FSC for recognition. The FSC will only recognize BVI private investment funds if they:
- be permitted to have a maximum of 50 investors;
- allow investors to subscribe for or buy fund interests solely on a private basis; or
- only sell fund interests to professionals who have made a minimum initial investment of US$100,000 in each investor.
REGISTRATION OF INVESTMENT ADVISERS AND FUND MANAGERS
When fund managers, advisers, administrators, or appointed individuals are based outside the BVI, they (and their directors and officers) typically do not need to be registered or licensed in the BVI, as long as the fund has no other presence there besides its registered office and agent.
A manager, adviser, administrator, or appointed person will often need to seek an investment business license under SIBA if they are either physically located in the BVI or have a BVI incorporation. Licensees under SIBA are subject to obligations such as filing audited financial accounts, requesting FSC clearance for any change in directors, officers, or substantial stakeholders, for any business conducted outside the BVI, and for any subsidiary establishment.
A simpler alternative to SIBA license for investment managers or advisers with BVI incorporation is to register as an approved manager under the BVI Investment Business (Approved Managers) Regulations. (including no requirement to appoint an auditor).
Investment managers or advisers to closed-ended funds formed in the BVI and whose total assets under management do not exceed US$1 billion are eligible for the approved manager regime (or its equivalent in another currency).
Payment of an initial application cost and a recurring annual charge is required for registration under either the SIBA or the approved manager regime.
BVI SECURITY PACKAGE
With lender-friendly insolvency laws (based on the English legal system) and a straightforward yet effective regulation for secured financing transactions, the BVI is a desirable jurisdiction for financing structures.
According to the BCA, a BVI entity may, by a written instrument, create a mortgage, charge, or other encumbrance over any of its assets located anywhere in the world in accordance with the law of the relevant jurisdiction. The BVI entity shall be bound by the mortgage, charge, or other encumbrance to the extent and in accordance with the provisions of the selected law. The BVI company’s or partnership’s governing documents must be maintained in this case. A security interest shall be recognized in the BVI if the execution and delivery of a foreign law security instrument (Foreign Security instrument) results in a legal charge under the selected foreign law. All registrations, filings, and other activities required or desired to protect the foreign security document’s priority in the British Virgin Islands will have been made at the time of registration with the Registrar, subject to any priority granted to previously registered charges.
A BVI security package would often comprise an equitable mortgage or charge over shares in the BVI company because the majority of BVI investment funds are structured as companies.
However, in order to safeguard a security interest granted by a chargor over shares it holds in a BVI company, the chargor must deliver to the secured party a signed but undated share transfer form and signed directors’ resolutions authorizing the registered agent of the company to register the secured party’s name in the company’s share register.
Under BVI law, a security interest does not need to be “perfected.” It is crucial to make sure that the secured party’s name is entered in the BVI company’s register of members as this document serves as initial documentary evidence of title.
It is wise also to request signed but undated resignation letters from the current directors if the shares of the BVI business total more than 100% or are a sizable enough portion to give the shareholder control of the board. Typically, a BVI chargor will also offer security over:
- Any distributions from the underlying investments are deposited into bank accounts.
- Contract rights under any custodian agreement, including security over the relevant custodian accounts.
- Any other asset security.
Because the aforementioned assets are often not located in the BVI, we would not typically anticipate that the pertinent security instruments for such assets would be subject to BVI law.
When a BVI investment fund or obligor grants security over any of its assets, the secured party should ask that the details of the security interest be publicly registered with the Registrar in accordance with the BCA in order to establish the priority of a security interest made by that BVI company.
The timing of the public registration of the security interest will typically decide priority when there are two security interests pertaining to the same collateral, even though BVI law does not need it in order to perfect the security interest. Constructive notice to third parties is also provided through public registration in the register of registered charges.
A Partnership may be established with or without legal identity, as was mentioned before. When a partnership lacks legal identity, it essentially represents a contractual arrangement between the partners, with the general partner given particular responsibilities and authority over the partnership’s operations and assets.
On the other hand, a Partnership that is registered with a legal personality—the default situation unless the general partners choose not to have a legal personality at registration—will be able to offer security over its assets.
For lenders providing subscription credit facilities to BVI vehicles, the legal status of a partnership and the corresponding function of the general partner would thus have a variety of ramifications for constructing the related security package.
A partnership with a legal personality has the right to make a charge against its assets, including uncalled capital commitments, in writing, subject to the LPA. (Uncalled Capital).
The core of a typical subscription credit facility security package is a limited partner’s obligation to contribute capital, to the extent that they haven’t already been called, and the general partner’s right to call for any uncalled capital on behalf of the partnership (capital call rights).
Under the terms of the subscription agreement, a BVI obligor would be granted security over the Uncalled Capital and/or Capital Call Rights. (rather than the memorandum and articles of association or LPA). Because a formal transfer of contractual rights is not permissible under BVI law, security over contractual rights may only be obtained through an equitable assignment.
KEY DEVELOPMENTS IN THE BVI
- ACCESS TO INFORMATION – The FSC has been maintaining a register of recognized funds since December 2019. This register lists each fund’s service and business addresses (both inside and outside the BVI), authorized representative, date and status of recognition, whether the fund is current on its FSC fees, and any other information the FSC deems relevant. The public will be able to view this information, although the FSC may charge a fee for this service.
Except as stated above, little information about entities established in the BVI is accessible to the general public, and when it is, it is typically only through the FSC’s online database, which requires registration with the FSC in order to access and the payment of fees.
These details include the name and registered number of the company, the registered office, and any publicly disclosed charges against its assets. For corporations, the articles and memoranda (as well as any resolutions changing them) will be accessible.
The general partners’ identities for partnerships shall be disclosed (but not the LPA). Organizations must maintain their submitted information accurately; failing to do so could result in a fine.
A BVI corporation must also submit to the Registrar a copy of its register of directors, along with any updates made within 30 days.
Except when required by a court order, a competent authority’s formal request (made for tax compliance or other law enforcement purposes), or at the company’s election, the register of directors has never before been made publicly available.
However, starting on January 1, 2023, a select group of authorized users of the BVI Registry’s system (often only BVI service providers) will have access to searching for the names of a BVI company’s present directors.
- ECONOMIC SUBSTANCE REGIME – The Economic Substance (Companies and Limited Partnerships) Act 2018, as amended, and the Economic Substance (Companies and Limited Partnerships) (Amendment) Act 2001, collectively referred to as the “ES Act,” are laws that apply to all businesses and partnerships that are incorporated or registered in the British Virgin Islands.
In order to avoid administrative fines and, ultimately, strike-off for noncompliance, all relevant entities that are categorized as “resident” in the BVI and as engaging in a “relevant activity” must show that they have “adequate substance” there.
The “holding company business” and “fund management business” are the two most pertinent operations under the ES Act for the purposes of this chapter; the “investment fund business” is not included on this list of nine “relevant activities.”
The ES Act applies to corporate entities that engage in “holding company business,” which is defined as a “pure equity holding business” (i.e., a BVI entity that only holds equity participation in other entities and only generates dividends and capital gains).
These entities are still subject to the reduced economic substance test, but they are not subject to the full ES Act. In reality, this ought to be satisfied by its continued observance of all applicable legal requirements.
- FORECAST – The forecast for private equity fundraising over the coming years is still positive, and it is predicted that the North American market will continue to dominate given the capacity of top US-based sponsors to raise capital from US-based institutional investors.
The BVI will continue to be a popular destination for UK managers setting up offshore funds with a transatlantic nexus, as well as being important for funds with a focus on North America and Asia.
The necessity for support for the fund’s underlying portfolio firms and the need for fund finance solutions will probably both rise as the industry develops further.
There will be a rise in subscription facilities as well as more specialized NAV facilities, management fee facilities, and hybrid facilities in 2023. It is also expected a continued diversification in the types of fund-level financing and the uses for which such financing is used. A growing number of funds and lenders will surely include ESG into their plans as a result of continued attention to this issue.
ADVANTAGES & DISADVANTAGES OF BVI INVESTMENT FUND REGISTRATION
Here are some advantages and disadvantages of registering an investment fund in the BVI:
- Favorable regulatory environment – The BVI has a well-established regulatory regime for investment funds, which provides a clear and efficient process for registration and ongoing compliance.
- Tax benefits – The BVI has no capital gains tax, no withholding tax, and no income tax for investment funds. This makes it an attractive jurisdiction for tax-efficient investment structures.
- Confidentiality – The BVI places a high focus on secrecy and has strict legislation in place to protect investor information and guarantee the highest privacy and confidentiality.
- Flexible fund structures – Hedge funds, private equity funds, mutual funds, open-ended and closed-ended funds, and other flexible fund formats are available to investors in the BVI.
- Experienced service providers – A variety of professional service providers, including fund administrators, lawyers, and accountants, are easily accessible in the BVI to meet the needs of new investors.
- Geographic location – Due to the British Virgin Islands (BVI) small size and remote location, it might be difficult for fund managers to undertake due diligence and manage assets efficiently.
- Reputation risks – The BVI has previously been accused of participating in money laundering and offshore tax evasion, which may hurt the reputation of investment funds registered there.
- Limited access to EU markets – Despite the BVI’s continued support of a favorable regulatory environment, investment funds may still have to pay compliance costs, especially if they conduct business in other nations. This can prevent them from accessing EU markets.
Reach out to us at Relin Consultants for further assistance.
In the BVI, who oversees investment funds?
Under the provisions of the BVI Securities and Investment Business Act (SIBA), investment funds are governed in the BVI by the Financial Services Commission (FSC).
What kinds of investment funds are qualified for BVI registration?
A variety of investment fund types, including BVI Mutual Funds, BVI Private Funds, BVI Professional Funds, BVI Incubator Funds, and BVI Approved Funds, are available for registration in the BVI.
Are there any particular investing limitations for investment funds registered in the BVI?
Broad regulatory requirements, such as those for diversification, liquidity, and asset valuation, are frequently applicable to investment funds that are registered with the BVI. The BVI regulatory framework does not, however, impose any specific investment restrictions.
What are the tax repercussions for investment funds registered with the BVI?
Investment funds registered in the BVI are typically excluded from BVI taxes like transactional stamp duty, income tax, capital gains tax, and withholding tax. Individual investors in the fund, however, may receive a different tax treatment based on where they reside and the applicable tax regulations.
What are the requirements for ongoing compliance for investment funds registered in the BVI?
Investment funds registered in the BVI are typically expected to comply with ongoing regulatory requirements, such as submitting annual reports and audited financial statements to the Financial Services Commission (FSC), keeping accurate records and books, and following AML/CFT regulations.
Is it possible to invest internationally with a BVI fund?
Yes, because the BVI is regarded as a trustworthy and adaptable jurisdiction for creating investment funds with a global investor base, BVI investment funds are often used for international investment purposes.