Last month, the BVI launched the incubator fund and the approved fund. These fast and low-cost options for managers wanting to set up a regulated fund are a great addition to the BVI funds industry. It is not surprising that everyone is talking about them. If you have missed this, have a read of my last post.
It is taking the internet a bit of time to catch up with the developments in the BVI and I have noticed that much of the general information available on BVI funds is out of date.
For anyone thinking of establishing a new fund in the BVI I have set out a brief guide to each of the BVI fund products below. I try to limit the use of acronyms but you will need to know that the funds industry in the BVI is governed by the Securities and Investment Business Act (SIBA) and regulated by the Financial Services Commission (FSC).
An incubator fund will be restricted to having a maximum of 20 investors, each investing no less than $20,000, and a cap on assets under management of the fund of $20,000,000. The incubator fund is aimed at the start-up manager looking to launch quickly (approval is given within two days of submitting a complete application) with low cost, minimal regulatory hurdles and no mandatory functionaries. It can operate as an incubator fund for up to three years. At that point, if the fund has proved to be viable, it will need to convert to a private, professional or approved fund. Alternatively, it can wind up its operations.
The approved fund is aimed at managers requiring a cost efficient fund with light regulation on an ongoing basis. Approved funds have a cap on assets under management of the fund of $100,000,000 and may have no more than 20 investors. Approved funds will have no obligation to appoint functionaries other than an administrator, keeping the third party costs at a minimum. Like the incubator fund, the approved fund benefits from a fast-track, two day approval process.
Private funds must either have no more than 50 investors or only make invitations to subscribe for or purchase fund interests on a private basis. There is no minimum investment amount per investor, nor any “sophistication” test for each investor. This has traditionally made them popular with start-up managers, allowing a friends and family offering. Unlike the professional fund, private funds must be recognised by the FSC prior to carrying on business.
Professional funds are the most popular category of regulated fund in the BVI. The interests may only be made available to “professional investors” and the minimum initial investment into a professional fund by each investor must not be less than US$100,000 (or the equivalent in another currency).
A “professional investor” is a person whose ordinary business involves dealing in the same kind of property as the fund or who has net worth (individually or with their spouse) in excess of US$ 1,000,000 (which can include real estate).
A useful advantage to the professional fund is that it may carry on business or manage or administer its affairs for a period of up to 21 days without being recognised under SIBA.
Both private and professional funds are required to have two directors (at least one of whom must be an individual) and are required to appoint an investment manager, an administrator, a custodian and an auditor. In certain circumstances, exemptions are available from the requirement to have a custodian, investment manager and/or auditor. They must also keep the FSC appraised of the appointment (or removal) of any prime brokers.
Viewed as a retail product, public funds have a higher regulatory burden placed on them. A public fund must be registered with the FSC before it carries on business and must publish a prospectus which complies with SIBA and the Public Funds Code and which must be registered by the FSC.
Public funds are required to have two directors, both of whom must be individuals. They are also required to appoint an investment manager, an administrator, a custodian and an auditor approved by the FSC. Only an exemption from requirement to have a custodian is available.
Closed-end funds (where the investor is not able to redeem its interests on demand), are not regulated in the BVI and are commonly used for private equity investments, real estate funds or by start-up managers investing their own money to build a track-record.
I find it helps to talk through the options so, whether you are in early discussions or ready to move to the next stage, a friendly funds lawyer at Harneys would be happy to guide you through the process.