The BVI continues to innovate with its new Private Investment Fund (PIF) regime
By Jeffrey Kirk and Simon Gray – Ever innovative and commercially minded, the British Virgin Islands (BVI) has recently introduced a new regulatory regime for private equity, venture capital and other closed-ended funds – adding to its already well established, cost effective and popular stable of incubator funds and approved funds.
The BVI’s well-established incubator funds have become much sought after in the world of hedge funds and digital funds. In this article, Jeffrey Kirk and Simon Gray discuss some of the core elements of this exciting new regime and the opportunities it provides for the BVI.
The new legislation creates a new category of fund which is required to make a filing with the BVI Financial Services Commission (the Commission”), and which will receive “recognition” by the Commission provided it meets certain criteria. Known as a “private investment fund (PIF)”, this is defined as a company, limited partnership, unit trust or any other body which collects and pools investor funds and issues proportionate fund interests computed according to the net asset value of the fund.
Until now only mutual funds have been regulated. In addition to having the above same two characteristics they also allow their investors to cash out (redeem) their investments at any time. However, PIFs do not allow investors to come and go and instead they are “locked in” until the fund is able to sell its investments. Hence their attraction to the world of private equity and venture capital investing.
A PIF must be recognised by the Commission before it can operate or be promoted, although there is a 21 day grace period from the commencement of carrying on business for making the application for recognition.
The Commission will recognise a PIF if it is satisfies key conditions such as its being lawfully incorporated, registered, formed or organised under either the laws of the BVI or of a country outside the BVI - and this is specified in the constitutional documents of the fund. Furthermore, the fund must have one of the following restrictions: a limit of no more than 50 investors, or subscriptions for fund units must be made on a private basis only, or, the fund interests must be issued only to professional investors with a minimum initial investment (unless the investor is an exempt investor) of USD100,000 and its recognition must not be against the public interest.
A PIF will be obliged to operate in accordance with any restrictions on numbers or type of investors, or on the offering of interests, set out in its constitutional documents, and to maintain financial records. The legislation sets out penalties for any person operating or promoting, or acting as administrator, custodian or manager for, a private investment fund which has not been recognised.
How to obtain recognition
The PIF will need to submit to the Commission an application in the approved form, accompanied by copies of the fund's constitutional documents, register of directors (where applicable) and certificate of incorporation, formation or registration. In addition, it must provide the fund's valuation policy, the fund's offering document or term sheet, where the fund intends to issue such document as well as resumes or biographies of each director, general partner or trustee, or the underlying individuals where such entities are bodies corporate.
Where the fund does not intend to issue an offering document or term sheet, the fund must provide its reasoning for doing so and explain how investors will receive pertinent information concerning the fund. Any offering document or term sheet must include information prescribed by the PIF Regulations including a disclaimer, the investment objectives and details of any fees. The valuation policy of the fund must include details on how valuation information and reports shall be disseminated to investors, but there are no minimum requirements for such reports.
Costs and fees
Application fees for recognition of a private investment fund are currently USD700, with a further USD1,000 (or, if approved after 30 June in any year, USD500) payable upon approval. Renewal fees thereafter are currently USD500 per annum. On approval, the fund is issued with a certificate of recognition, which will remain valid until cancelled or revoked by the Commission.
Once an entity is incorporated, it can operate as a PIF for a period of 14 days before submitting the application to the Commission for recognition, provided that the fund is lawfully incorporated; the fund's constitutional documents contain the restrictions on investors mentioned above, and the fund otherwise meets the requirements of the PIF Regulations.
PIFs are required to nominate entities or individuals responsible for undertaking the management, valuation and safekeeping of fund property. Such appointed persons can be the directors, partners or trustees of the fund, the fund manager or other appointed functionaries and/or independent third parties.
Independence and managing conflicts
The person responsible for managing fund property must be independent from the person responsible for valuations, save that one person may be appointed for both if the fund identifies, manages and monitors any potential conflicts of interest that may arise; and discloses to its investors that one person fulfils both roles, and provides details of how conflicts will be managed.
The safekeeping arrangements required will depend on the type of assets held. The Commission’s guidance provides that the appointment of a traditional custodian or prime broker would not be considered necessary for private equity investments, provided that a sufficiently experienced person is responsible for ensuring that documentation with respect to the fund's ownership of such assets is maintained and safeguarded.
PIFs must also appoint an 'authorised representative' who will act as an intermediary between the fund and the Commission. The authorised representative must be licensed and is usually provided by the fund's registered agent. A PIF established as a company is required to appoint at least two directors, one of whom must be an individual.
Unlike the BVI’s popular Approved Funds regime which save cost by not requiring an Approved Fund to file audited accounts, the new BVI PIFs must file audited accounts, though it is possible to file a request for exemption. The Commission has indicated a number of scenarios in which an exemption may be considered appropriate including: where the fund has limited business activities - generally a net asset value of less than USD1m, with fewer than 30 investors, and where the fund is a feeder fund, investing all assets into a master fund which produces audited accounts.
PIFs are required to keep such records and underlying documentation that are sufficient to show and explain its transactions as well as enabling, at any time, the financial position of the fund to be determined with reasonable accuracy; and make all required filings. Such records must be maintained for at least five years.
All BVI companies are required to maintain their registers, memorandum and articles and all notices and other documents filed by the company in the past 10 years (in each case, or copies thereof) at the office of its registered agent. BVI Limited Partnerships (LPs) are required to maintain their registers (or copies thereof) at the office of its registered agent.
Register of information
The Commission maintains a register of any recognised funds which will identify each funds' service and business addresses - within and outside the BVI, authorised representative, date and status of recognition, whether the fund is up-to-date with its Commission fees and such other information the Commission considers to be appropriate. This information is available for public inspection, for which the Commission may charge a fee.
Other than as set out above, limited information is available publicly about entities established in the BVI and, where information is available publicly, such documents are generally only accessible through the Commission’s online database, which requires registration with the Commission to access and the payment of fees. Such available information includes registered office and agent details, name and registered number and any publicly registered charges over its assets. For companies, the memorandum and articles (and any resolutions amending these) will also be available. For Limited Partnerships (LP), the identity of general partners will be available (but not the Limited Partnership Agreement). Entities are required to keep filed information up-to-date and any failure to do so may result in a fine.
A BVI company is also required to file a copy of its register of directors (and any changes thereto within 30 days) with the BVI Registrar. This document shall not be made public except on an order of the court, on a written request by a competent authority (for tax compliance or other law enforcement purposes) or at the election of the company.
The identities of shareholders in a company and limited partners in an LP, and the amounts of their capital commitments, are not publicly available. However, both a limited partner and a member of a company is entitled to inspect, on giving written notice, the records, the register of limited partners (in the case of an LP and subject to the LPA) and the registers of members and directors (in the case of the company). For an LP, the LPA may restrict these inspection rights. For a company, subject to its memorandum and articles, a director may refuse an inspection request if they are satisfied that it is contrary to the company’s interests. The articles of a company, or the LPA for an LP, may allow for further inspection or information rights for investors.
Although the regulatory regime for closed-ended funds has been introduced in connection with the economic substance initiative, carrying on business as fund (whether closed- or open-ended) is not a “Relevant Activity” for the purposes of the BVI’s economic substance regime, so unless a fund happens to be carrying on some other relevant activity it is not subject to the economic substance regime.
The introduction of the PIF regime is destined to further enhance the BVI’s well-established appeal as an important centre for the offshore fund industry. BVI closed-ended funds have historically been offered and operated subject to limits at least as restrictive as those now set out in the law, so it is unlikely that many funds will have to change what they are doing.
Indeed, as the regime means that BVI private equity, venture capital, and other closed-ended funds are now regulated, this change means that managers will now be able to market BVI private investment funds to investors which are restricted to allocations to regulated funds.
The BVI’s recent whitelisting by the European Union (EU), and the continued upward trajectory of BVI in the list of financial centres, can be expected to add further attraction to the use of BVI funds. The BVI continues to provide a very cost-effective solution providing robust yet proportionate regulation for fund managers. Long may this continue.
Jeffrey Kirk is the Managing Partner of Appleby’s BVI Office. Simon Gray is Head of Business Development and Marketing at BVI Finance.