New Fund Products in the BVI: Incubator Fund and Approved Fund
The government of the British Virgin Islands ("BVI") has recently published The Securities and Investment Business (Incubator and Approved Funds) Regulations 2015 (the "Regulations") providing for the approval of two new types of investment fund in the jurisdiction, namely the incubator fund and the approved fund. The Regulations come into force on 1 June 2015. The new fund types are designed to provide a fast and cost effective method for managers to start open-ended funds.
The two new fund types complement and enhance the current range of funds and investment business licences offered by the BVI under the Securities and Investment Business Act, 2010 ("SIBA"), which include the recognition of private and professional funds, the registration of public funds and the licensing of most investment business activities. In order to provide more flexibility to smaller capitalised funds such as friends and family and start-up funds, the BVI Financial Services Commission (the "Commission") has created the ability for qualifying open-ended funds to be approved to conduct business within a lighter regulatory framework under SIBA.
Both of the new fund types, which must be limited by net asset value and number of investors, recognise that the economics of starting up and running a small fund can make appointing a full range of service providers to the fund uneconomical and so are designed to give the principals of such funds the choice as to whether they do, in fact, choose to appoint a separate manager and custodian, and, in the case of an incubator fund, an administrator. To counterbalance this, the fund must make robust disclosure of their structure and the risks inherent in not having such service providers.
The incubator fund is designed for managers who are looking to start an investment strategy on a trial basis with sophisticated investors. If the strategy succeeds within the prescribed timescale, the Regulations provide a seamless route for the fund to be recognised or approved as a private professional or approved fund, depending on the manager's future plans for growth of the fund. If the strategy does not succeed, the regime allows for an incubator fund to close down or convert to an ordinary company. The key differentiating criteria for incubator funds over other fund types include:
(a) Only suitable for "sophisticated private investors". Such investors are defined in the Regulations as "a person who has been invited to invest in an incubator fund and the amount of his or her initial investment is not less than US$20,000."
(b) The total number of investors is limited to 20.
(c) Net assets of the fund must not exceed US$20,000,000 or its equivalent in any other currency.
(d) No manager, administrator or custodian is required to be appointed.
(e) No audit required.
(f) Can only be approved for a two year period. It is possible to seek an extension from the Commission for an additional 12 month period. Prior to the end of this period it will be necessary to make an application to the Commission for the fund to be recognised as either a private fund or a professional fund or to be approved as an approved fund.
The approved fund is designed for smaller strategies and friends and family funds and has a higher net asset value threshold and no limit to the length of time if may qualify as an approved fund. It also differs from the incubator fund in requiring an administrator. Key differentiating criteria from other fund types include:
(a) The total number of investors is limited to 20.
(b) Net assets of the fund must not exceed US$100,000,000 or its equivalent in any other currency.
(c) The approved fund must have an administrator, but it is not required to have a manager or custodian.
(d) No audit required.
Further Common Requirements
Directors and Authorised Representative. Both types of fund are required to appoint an authorised representative in the BVI and must have at least two directors at all times, one of which must be an individual. It will be necessary to provide the CVs of any individual appointed to act as director to the Commission as part of the application process.
Risk warnings and disclosures. An application to the Commission for approval of either an incubator fund or an approved fund must include the constitutional documents of the fund, a description of the fund's investment strategy and a written warning to investors, both of which can be contained in the fund's offering document or where it is not proposed to issue an offering document, the description and a warning in the prescribed form must be submitted as separate documents which will be provided to investors. An application for approval of a fund as an incubator fund or an approved fund must be accompanied by the correct fee, currently set at US$1,500. An annual renewal fee of US$1,000 is also payable for both types of fund.
Commencement of business. It will be possible to commence business as an incubator fund or an approved fund two business days following the day the Commission receives a completed application in respect of the fund. A licence will not be provided by the Commission but it will be possible to obtain a certificate from the Commission evidencing the status of the fund.
Financial statements and returns. It is a requirement for both types of fund to prepare and submit to the Commission annual financial statements although there is no requirement that these statements be audited. Such funds will also be required to submit semi-annual returns to the Commission regarding their eligibility to utilise the relevant fund classification.
Conversion. If the number of investors or the amount of investments held by an incubator fund or an approved fund exceeds the limits set out above over a consecutive two month period, the fund must notify the Commission within seven days of this fact and must:
(a) in the case of an incubator fund, submit an application for conversion to a private fund, a professional fund or an approved fund;
(b) in the case of an approved fund, submit an application for conversion to a private fund or a professional fund; or
(c) in both cases, commence the process of liquidating the fund or cease to be a mutual fund (as defined under SIBA) by making the appropriate amendments to the fund's constitutional documents.
The Commission has the power under the Regulations to force a fund to take any of the actions set out above if the fund does not do so within the appropriate time frame.
For more details on these new fund products or on existing fund products in the BVI, please speak with your usual Maples and Calder contact. Alternatively, please feel free to contact any of the individuals listed above.