Philip Graham, partner and head of investment funds at Harneys in Tortola looks at two new fund vehicle structures in the BVI
One of the most exciting legislative developments in the British Virgin Islands this year is the finalisation of the Securities and Investment Business (Incubator and Approved Funds) Regulations, 2015 (the “Regulations”). The Regulations are made pursuant to the Securities and Investment Business (Amendment) Act, 2015 which amends the Securities and Investment Business Act 2010 (SIBA). The Regulations were gazetted on May 18 2015 and brought into force on June 1 2015.
The effect of the introduction of the Regulations is to create two new fund products to complement the existing funds offering in the British Virgin Islands with the bold intention of remaining on the cutting edge of the financial services market. The “incubator fund” and the “approved fund” are both lightly regulated fund vehicles which are primarily aimed at start-up emerging managers and those managing funds for smaller groups of closely connected investors.
The incubator fund
The incubator fund is aimed at managers who do not necessarily have the benefit of seed investor capital but who wish to set up quickly and establish a track record with minimal set-up costs and without having to comply with onerous regulatory obligations. The product is therefore expected to be very attractive to start-up managers who are seeking the best environment to grow their assets under management in the most cost-efficient manner.
Pursuant to the Regulations, the incubator fund is permitted to operate for two years (with the possibility of one additional year) without having to appoint the usual third party service providers, provided it remains within the relevant thresholds applicable to the fund. These thresholds are:
• a maximum of 20 investors;
• a minimum initial investment of $20,000 by each investor; and
• a cap of $20 million on the value of the investments of the fund.
Prior to the end of the two or three-year term (as applicable) or upon exceeding any of the specified thresholds, the fund may either convert the incubator fund into one of the other types of fund vehicles as set out in SIBA or where it is not viable for the fund to continue at the end of its "incubation period," wind up its operations
The approved fund
The approved fund is aimed at managers who wish to establish a fund for a longer term, but on the basis of a more private investor offering, which may appeal to family offices or an investor base of close connections.
It also has relevant thresholds:
• a maximum of 20 investors at any one time; and
• a cap of $100 million on the value of the investments of the fund.
It has similar characteristics to a private fund recognised under SIBA including no minimum initial investment for the investors, but unlike the private fund, the approved fund is not required to appoint an auditor, a manager or a custodian. However, to ensure there is some suitable oversight of the operations of the fund, it is required to appoint an administrator which will be reassuring to potential investors.
Unlike the incubator fund, the approved fund does not have a restricted validity period and can continue to operate as an approved fund for the full duration of its lifetime, unless:
• a decision is made to voluntarily apply to the Commission to recognise the fund as a private or professional fund;
• it is required to convert into a private or professional fund upon exceeding one of the relevant thresholds; or
• it elects to wind up its operations.
Time to market and reduced costs
Recognising the importance of time to market, both of these new fund products have been provided the further flexibility of being able to commence trading within two business days of lodging the application for approval with the Commission.
It is anticipated that the legal costs will be lower than those associated with setting up a private or professional fund, largely because the mandatory information to be contained in the offering documents of these funds, as specified by the Regulations, is greatly reduced, thereby allowing these funds to use short-form term sheets where appropriate.
When you combine this cost saving, together with the option to only appoint the service providers that the manager strictly believes the fund requires, the new regime will provide significant cost savings to an investment manager of one of these funds.
The new products and the Regulations are a welcome addition to the BVI investment funds landscape and will further refine the British Virgin Islands' reputation as a flexible, innovative, attractive and cost-effective jurisdiction for new fund launches. Coupled with the recently introduced “light touch” approved manager product, the British Virgin Islands has now introduced the next frontier in the investment funds market.
Other legislative changes on the horizon
The funds sector is not finished with just the Regulations; there is a distinct possibility that the Segregated Portfolio Companies Regulations, 2005 might be completely updated (and their remit expanded) in 2015, as well as a long awaited update- to the Partnership Act, 1996. Watch this space.
About the author
Philip Graham joined Harneys in 2008 and became a partner in 2011. He heads up the investment funds team in the British Virgin Islands and advises on all aspects of the formation and restructuring of investment fund vehicles. In 2012 Philip was appointed to serve on the BVI Financial Services Commission's Focus Group on the Directive on Alternative Investment Fund Managers (AIMFD). Philip also sits on the Executive Council of the BVI Investment Funds Association.
Before joining Harneys Philip worked in the corporate department of Wragge & Co as a senior associate where he specialised in mergers and acquisitions, public and private fund raisings, venture capital investments, joint ventures, corporate governance and international group reorganisations and structures.
Philip is also a senior editor of The Offshore Funds Blog, a Harneys blog dedicated to explaining how offshore funds work and why investment managers use them.