Investment Funds in the British Virgin Islands

I. Regulatory Framework Overview:

The investment funds industry in BVI is regulated by the Financial Services Commission (the “FSC”) and the primary legislation which governs the mutual funds includes the Securities and Investment Business Act, 2010 (the “SIBA”), the Mutual Funds Regulations, 2010 (the “MFR”) and the Securities and Investment Business (Incubator and Approved Funds) Regulations, 2015 (the “Regulations”).

Closed-ended funds were historically not regulated in BVI as they fell outside the definition of “fund” for the purposes of the SIBA. However, BVI has introduced a new regulatory regime, including the Securities and Investment Business (Amendment) Act, 2019 and the Private Investment Funds Regulations, 2019, for the recognition of private investment funds. There is a 6-month transition period ending on 1 July 2020 applicable for existing close-ended funds which now fall within the definition of a "private investment fund" and so will be required to apply to FSC to become recognised as a private investment fund under this new regulatory regime. II. Investment Funds Vehicles:

The vast majority of investment funds in the BVI are established as a BVI business company limited by shares or a segregated portfolio company (the “SPC”) with the prior approval of FSC, limited partnerships (with the exception of public funds) are the second most popular, while unit trusts are rare.

Investment funds in BVI are also subject to relevant laws and regulations governing the structures of the funds, such as the Business Companies Act, 2004, the Segregated Portfolio Companies (BVI Business Company) Regulations, 2018 and the Limited Partnership Act, 2017. III. Types of Mutual Funds:

The categories of mutual funds that may be established under SIBA and Regulations in the BVI are: (i) professional funds; (ii) private funds; (iii) public funds; (iv) incubator funds; and (v) approved funds. Professional, private, and public funds must be registered or recognized and are regulated by SIBA.

Every BVI mutual fund is required to appoint an authorised representative in the BVI to liaise between the fund and FSC.

With the exception of incubator funds and approved funds (only an administrator required), SIBA generally requires BVI mutual funds to appoint the following service providers, including an investment manager, an administrator, a custodian and an auditor.

Private or professional funds may, in certain circumstances, apply for an exemption from the requirement to appoint an investment manager, custodian and/or auditor.

A. Professional Funds: A professional fund is a fund the interests of which shall only be issued to “professional investors”[1], and the minimum initial investment by each investor must not be less than US$100,000 (or its equivalent in any other currency), unless an investor is an “exempted investor”[2].

A professional fund may carry on its business or manage or administer its affairs for a period of up to 21 days without being recognised under SIBA.

B. Private Funds: A private fund under SIBA is a fund either has no more than 50 investors or makes an invitation to subscribe for shares (or interests of a limited partnership or units of a unit trust) on a strictly private basis, which has to be stated in its constitutional documents. Private funds do not have a minimum initial investment amount for each investor or any “professional” or “sophistication” test for investors. An application has to be filed with FSC before a private fund can carry on business.

C. Public Funds: A public fund is a mutual fund that offers its investment shares to the general public and therefore attracts the highest degree of regulation. The regulatory requirements and licensing procedure for a public fund are more stringent than those for private or professional funds, given the nature of its investors (public funds are for retail investors).

D. Incubator Funds: The incubator fund is designed for start-up investment managers. An incubator fund can have a maximum of 20 investors, each of whom must make a minimum initial investment threshold of US$20,000, and the fund cannot exceed a cap of US$20 million in relation to the aggregate value of its investments.

An incubator fund can operate for a period of 2 years (which may, on application to FSC, be extended by 1 additional year) before it needs to either convert to a more sophisticated structure, such as an approved fund or a private or professional fund, or wind-up its operations.

E. Approved Funds: An approved fund can have a maximum of 20 investors, has no minimum initial investment thresholds and has a maximum cap of US$100 million in relation to the value of investments in the fund.

There is no maximum period of operation; however, if an approved fund exceeds its number of investors or maximum cap on aggregate investors for a period of more than 2 consecutive months, it needs to either remedy this breach within 7 days of the end of such two-month period, or convert to a more sophisticated product, such as a private or professional fund, or wind-up its operations.

[1] A professional investor is a person: (i) whose ordinary business involves, whether for its own account or the account(s) of (an)other(s), the acquisition or disposal of property of the same kind as the property, or a substantial part of the property which is (or will be) owned by the fund; or (ii) whose net worth (in the case of a natural person, either individually or jointly with his/her spouse) exceeds one million dollars in United States currency (USD 1,000,000.00) or its equivalent in any other currency, and who consents to being treated as a Professional Investor for the purposes of investment in the fund. [2] An exempted investor means: (i) the investment manager, administrator, promoter or underwriter of the fund; or (ii) any employee of the investment manager of the fund.