Fund numbers in the British Virgin Islands ("BVI") remain steady in 2014 with 53 mutual fund licenses having been granted during the first half of 2014 according to statistics released by the BVI Financial Services Commission.
There are now 1,538 active mutual funds in operation, just slightly down on last year's Q2 figure of 1,567 funds. Of greater contrast is the increase in the number of limited partnerships that have been formed; a total of 27 LPs were recorded in Q22014 compared to 16 in Q2 2013.
The BVI remains highly favoured, especially with China asset managers looking to set up GP/LP structures for hybrid and private equity funds. Just this month, Ogier (BVI) advised DT Asia Investments Limited on an IPO on Nasdaq, raising USD60m. DT Asia Investments incorporated a special purpose acquisition company (SPAC) in the BVI to engage in companies with one or more businesses. Simon Schilder, a partner at Ogier who led the team was quoted as saying: "This IPO is yet another example of SPAC sponsors opting to utilise the BVI as the domicile for their listing vehicle, whether with a view to then seeking a listing in New York on Nasdaq or on the London Stock Exchange."
Part of the BVI's popularity is that the BVI fund is such a well-established and well recognised product among the global investment community. For private equity managers, the BVI has a good corporate statute in the BVI Business Companies Act 2004 (the "BC Act").
"The vast majority of funds are incorporated as business companies under the BC Act and to a lesser extent as limited partnerships under the Partnership Act 1996 (the "Partnership Act"). It is relatively straightforward to set up a limited partnership as the law requires limited information to be contained in the constitutional documents. The limited partnership is formed by the filing of a memorandum of limited partnership with the Registry of Corporate Affairs (the "Registry"). The articles of limited partnership, which is the core governing document of the limited partnership, is a private document and is not required to be filed at the Registry. The manager just needs to keep a copy of articles of limited partnership at the registered office of the limited partnership," explains Valerie Georges-Thomas, Senior Associate at offshore law firm Bedell Group.
"The Partnership Act was enacted in 1996 and has had very little revision since then. The BVI government is looking to review it and make to some amendments to it, most likely in the coming year. The amendments are not expected to significantly alter the characteristics of a limited partnership," adds Georges-Thomas.
Main advantages to the BVI
There are a number of benefits to establishing a fund in the BVI:
• It is a stable, well regulated jurisdiction with the Securities and Investment Business Act 2010 as amended (SIBA) together with the Mutual Funds Regulations 2010 and the Regulatory Code 2009 governing funds and persons carrying out "investment business" in or from within the BVI. The Regulatory Code does not apply to funds.
The BVI government when overhauling its regulatory regime in line with changing global regulatory standards, maintained what worked well under the former regime (the Mutual Funds Act) but extended the scope of regulation to include other persons not previously regulated under BVI law. SIBA basically codified a lot of what developed over time as practice under the former regime; for example, the requirement for funds to have a minimum of 2 directors at all times and the requirement for funds to now file annual audited financials with the Financial Services Commission (FSC).
"SIBA is a robust but flexible regime that accords with international standards so that when considering the BVI as a domicile for their funds, managers can feel confident that they are choosing a reputable domicile with a strong regulatory environment," says Georges-Thomas.
• There are no restrictions on investment strategy or borrowing and also no need for board or members meetings to be held in the BVI or for the directors of a fund to be resident in the BVI. Having said that, corporate governance is taking on much greater importance. Increasingly, there is an investor-led push for managers to appoint independent boards of directors.
At the same time, the fund's constitutional documents can be structured to include controls on borrowing, requirements for regular meetings of investors and other requirements that investors may find appealing. In that way the fund can be tailored to meet the exact needs of the type of investor or investment the investment manager plans on targeting.
• Costs – legal costs are generally significantly lower than other jurisdictions and filing and license fees are also a fraction of what may be charged in other jurisdictions. The reasonable cost factor afforded by the BVI would help managers who may be sensitive to large start up costs.
"Annual license fees are USD1,500 for an Approved Manager running a BVI professional/private fund under the Investment Managers (Approved Managers) Regulations, 2012 as amended (the "Approved Managers Regulations"). An Approved Manager is required to submit an annual return that needs to be filed with the FSC within six months of the end of the calendar year but unlike SIBA-licensed managers, there is no requirement to file audited accounts," confirms Georges-Thomas.
• Stability – An important advantage to the regulatory regime having recently undergone major review and overhaul means that the BVI funds industry is unlikely to see any significant amendments to the regulations, "which would require funds to change the way they are doing business or result in additional costs to meet new compliance standards. I think that any significant change any time soon will likely be designed to further enhance the attractiveness and competitiveness of the BVI as a funds jurisdiction," opines Georges-Thomas.
The legal process of establishing a BVI fund
The legal process for setting up a BVI fund is quite straightforward, particularly if the manager is setting up a standalone private/professional fund or a closed-ended private equity vehicle.
The process involves the preparation of the fund documents and submission of the constitutional documents to the Registry for the incorporation of the entity. Incorporation whether as a corporate vehicle or as an LP is done electronically and is completed within one to two business days.
"Once incorporated, a closed-ended fund can commence business immediately as is it not subject to regulation under SIBA. If the fund is an open-ended fund, it will need to be recognised if it is a private or professional fund or registered if it is a public fund, before it can commence business.
"The application for recognition involves a relatively simple application made to the FSC and once in order, is usually processed and approved within five to seven business days. An application for registration as a public fund is much more involved; here the timescale is typically two to four weeks for processing and approval. There is a fast track process available to a professional fund whereby the fund can commence business once incorporated provided that an application for recognition is submitted to the FSC within 21 days of commencing business.
"If the investment manager of the fund is to be a BVI-domiciled company, it will require a license under SIBA whether the fund is open-ended or closed-ended. Licensing under SIBA can be a protracted process. However, managers who meet the eligibility requirements, where time to market is a factor can apply for approval under the Approved Managers Regulations where the timeframe for approval is seven days and no more than 30 days. The manager will generally be able to commence business seven days after submission of the application to the FSC," explains Georges-Thomas.
Approved Manager regime
The BVI introduced the much anticipated Approved Managers Regulations in 2012; one that provides lighter touch regulation to managers – in particular start-ups – who are keen to be licensed to better appeal to prospective investors yet at the same time do not want to be subjected to the full weight of SIBA.
"It is a welcome development. The full licensing regime under SIBA is substantial. The BVI attracts its fair share of start-up managers so providing this lighter touch approval and oversight by the regulator makes for a more balanced approach to the regulation of the managers"," comments Georges-Thomas.
That this regime exists is testament to the commitment that the FSC and the BVI government have to supporting smaller investment managers. It is basically a win-win situation. Managers avoid the full force of regulation under SIBA, yet at the same time can point to the fact that they are regulated with the FSC, which investors can take succour from.
As of 30 June 2014, there were 43 approved managers registered in the BVI.
From Approved Manager to SIBA Licensee
There are limits as to whom the Approved Manager regime applies. This is based primarily on AuM: USD400m where the manager is providing services to open-ended funds and aggregate capital commitments of USD1bn where the manager is acting in relation to closed-ended funds.
"If a manager under the Approved Manager regime exceeds those caps, it will have to apply for a full license under SIBA. The Approved Manager regime essentially takes account of the relative risk profile of the business carried on striking a balance between flexibility and effective regulation," says Georges-Thomas, adding: "A lot more information needs to be provided in the licensing application for managers under SIBA. The directors have to be approved by the FSC, the manager will have to submit a business plan as well as appoint a compliance officer and issue a compliance manual. It quite a step up from the Approved Manager regime. The SIBA licensing process would typically take four to six weeks, possibly faster depending on how familiar the FSC already is with the manager.
"Once licensed under SIBA, the manager will have to file annual financial statements and meet all of the ongoing obligations that apply under SIBA and under the Regulatory Code."
Having this two-tier regulatory system for managers is a sensible approach and one that should benefit the BVI in the long run.
Some of the more pertinent issues that a manager should think about when looking to establish a BVI fund include the following:
• Selection of legal counsel – there is a lot of expertise on the island;
• Selecting service providers – the manager of a BVI fund is free to choose any service providers they like provided they are located in a recognised jurisdiction. Unlike the Cayman Islands, which requires the sign-off of a fund's accounts by a local auditor, managers of BVI funds are free to use an auditor in their home jurisdiction (e.g. London) although there are international audit firms located in the BVI should a manager wish to avail themselves of someone local;
• Type of fund – will it be open-ended or closed-ended? Managers will need to think about the regulations if open-ended;
• Licensing process – managers will need to think about whether they can meet the FSC's 'fit and proper' criteria if setting up a BVI manager;
• The extent of the documentation – in the case of a start up, whether they will issue an offering document.
Suitability of BVI funds in Europe under the AIFMD
In short, there are no concerns for managers of BVI funds. The BVI has taken the necessary steps to ensure that these funds qualify for marketing in Europe. The BVI has entered into cooperation agreements with ESMA and has tax exchange information agreements (TIEAs) in place with several of the EU's leading Member States in accordance with each country's domestic private placement rules.
An AIFM proposing to market their BVI fund to a Member State(s) may rely on the private placement regimes in the Member State until at least 2018 without having to seek authorisation under the Directive. However, the manager will need to ensure that it complies with disclosure and reporting requirements set out in the Directive and that there is a cooperation agreement between the local regulator (i.e. the FSC) and the financial regulator in the relevant member state. The BVI is not listed as a non-cooperative country by FATF and is a member of the Caribbean FATF.
Georges-Thomas provides the final word of advice to managers who are considering the BVI: "The BVI is a viable jurisdiction for funds in its own right and should be viewed as such. We boast a modern, user-friendly regulatory regime that meets international standards and appeals as much to managers of large and institutional funds as well as small to mid-sized funds. We also have a well-established legal system with the seat of the commercial court based here. There are a large number of industry professionals on island. The BVI is open for business."