Matthew Feargrieve: Hedge Funds – British Virgin Islands

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1. BVI Investment Funds: Overview

Investment funds domiciled in the British Virgin Islands (often referred to simply as “the BVI”) are regulated by the Investment Business Division of the Financial Services Commission . The Investment Business Division is responsible for the regulation and supervision of securities and investment business and collective investment schemes, that carry on business in and from within the Territory. The Division ensures compliance with relevant BVI laws, as well as with the territory’s international standards of regulation and supervision.

Matthew Feargrieve

As at 31 March 2013, there were 2,303 open-ended investment funds recognised by or registered with the FSC, of which 1,538 were established as professional funds, 574 as private funds and 146 as public funds. It is not possible to state with any accuracy how many of those 2,303 open- ended investment funds can be classified as “hedge funds”, but the proportion is generally considered to be something in the order of 75%, making the BVI the world’s second largest offshore centre of alternative management after the Cayman Islands.

Closed-ended funds have no obligation to be filed with the FSC and so it is not possible accurately to estimate the number of closed-ended funds domiciled in the BVI. It may be assumed that closed-ended and other types of unregulated fund comprise a substantial proportion of the one million or so companies and limited partnerships registered in the BVI as at 31 March 2013.

As at 31 March 2013 there were additionally 530 licensed providers of investment business
services (the majority of which were management companies appointed by BVI registered
investment funds) and 5 management companies utilising the new “Approved Manager” regime
that was introduced in 2012, and which is considered below.

2. Regulatory Regime. The FSC was established in 2001 as the autonomous financial services regulatory authority in the BVI. In addition to the regulation of financial services, the FSC is responsible for the Registry of Corporate Affairs at which all publicly available documents pertaining to companies and limited partnerships registered in the BVI are maintained.

The Investment Business Division of the FSC administers and enforces the Securities and
Investment Business Act, 2010 (“SIBA”) (which replaced the Mutual Funds Act 1996), the Mutual
Fund Regulations, 2010 and the Regulatory Code, 2009. This is the primary legislation that
governs investment funds in the BVI, the centerpiece of which is SIBA.

The 2,303 investment funds recognized by or registered with the FSC as at 31 March 2013 derive
their regulatory status in the BVI by virtue of being considered “mutual funds”. This definition is
unique to the BVI, bears no resemblance to that term as it is commonly understood in North
America, and is defined in SIBA as a company, partnership or unit trust that:

2.1 collects and pools investor funds for the purpose of collective investment; and

2.2 issues fund interests that entitle the holder to receive on demand or within a specified
period after demand an amount computed by reference to the value of a proportionate interest in the whole or in a part of the net assets of the fund, and includes:

(a) an umbrella fund whose shares are split into a number of different class funds or
sub- funds; and

(b) a fund which has a single investor which is a fund not registered or recognised
under SIBA.

Three points of note flow from this definition:

(1) the reference to single investor funds brings such funds within the definition of “mutual fund” in order to ensure that master funds (which may have only one investor) are brought with the ambit of SIBA;

(2) the definition in SIBA of “fund interests” expressly excludes debt interests, and so funds issuing debt interests are excluded from the licensing and other requirements of SIBA; and (3) closed-ended funds are not brought within the ambit of SIBA.

The following types of mutual fund fall within the SIBA licensing regime:

(1) mutual funds established as BVI entities (companies, limited partnerships and unit trusts);

(2) mutual funds established outside the BVI but which carry on business in the BVI through a branch operation or representative office; and

(3) mutual funds established outside the BVI which promote themselves to persons who are BVI citizens or residents, or who are physically present
in the BVI.

SIBA also regulates:

(1) mutual fund administrators, managers and custodians established as BVI
entities; and

(2) mutual fund management or administrative entities established outside
the BVI but which carry on their business in the BVI.

3. Categories of Mutual Fund. For regulatory purposes, there are three principal types of mutual fund under SIBA: private funds, professional funds and pubic funds.

Private Funds

SIBA defines a private fund as a mutual fund which by its constitutional documents:

3.1 has restricted the maximum number of its investors to fifty; or

3.2 has specified that all invitations to subscribe for interests in the fund shall be made on a
private basis.

On application, a proposed private fund will be expected to demonstrate the "private basis" of offering its shares to prospective investors. SIBA provides that a private invitation to subscribe fund interests will include an invitation:

3.3 to specified persons and which is not calculated to result in fund interests becoming available to other persons or to a large number of persons; or

3.4 by reason of a private or business connection between the fund and the subscriber.
There is an FSC policy guideline that amplifies what may be considered “private” by stating that
"the making of invitations to as many as 300 persons might be considered an offering on a
"private basis" if it can be demonstrated that the person made the invitations to specified persons and had no deliberate intention of making invitations to other persons. The making of invitations to a significantly greater number of persons than 300 would cast doubt upon compliance with the spirit of "private basis" which is embodied in SIBA, on the grounds that a large number of persons is not consistent with what is commonly understood to be; In any case, the private fund will be limited to having at most 50 investors of record.

Professional Funds. SIBA defines a professional fund as a mutual fund whose interests are made available only to professional investors, each of whom (unless considered an “exempted investor”) must invest at least US$100,000 (or currency equivalent) by way of initial subscription.

3.5 a person whose ordinary business involves investment business similar to the kind the
fund is undertaking;

3.6 a person whose net worth (either individually or jointly with a spouse) exceeds
US$1,000,000 (or currency equivalent). In simple terms, therefore, a "professional investor" is (in theory at least) a person who knows what he is doing when investing in the fund, who understands the risks of an investment and can absorb the potential losses arising therefrom. It is for this reason that 1,538 of the 2,303 mutual funds filing with the FSC as at 31 March 2013, amongst which there will be a high proportion of hedge funds, are established as professional funds. It follows that the majority of mutual funds domiciled in the BVI and operating as hedge funds will take the form of professional funds.

An “exempted investor” (to which the US$100,000 minimum initial subscription requirement does
not apply) is (a) the fund’s manager, administrator, promoter or underwriter, or (b) any employee
of the fund’s manager. Unlike a private fund, which must be recognised by the FSC before it commences business (broadly understood to mean publishing a placement memorandum), 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. This ability is subject to some qualification, however:
(a) the fundmust satisfy the criteria for a professional fund, and (b) the fund must comply with and be
managed and administered in compliance with SIBA.

Public Funds. A public fund is one that is neither a private fund nor a professional fund. A public fund offers interests to the general public. Essentially a retail product, this type of mutual fund is accorded the highest degree of regulation.

A public funds must be registered with the FSC before engaging in any business activity in or
from within the BVI. In addition, SIBA requires that its prospectus shall provide "full and accurate disclosure of all such information as investors would reasonably require and expect to find for the purpose of making an informed investment decision". The prospectus is also required to contain a summary statement of investors´ rights, and must be approved and signed by (or on behalf of) the fund directors, who take responsibility for the content thereof.

Because of the retail nature of pubic funds, this article will focus primarily on private and
professional funds.

4. Regulatory Application Process

The application to obtain private, professional or public status is made by the fund to the FSC
using a prescribed form of application form and supported by a number of documents, including:

4.1 the fund’s constitutional documents and certificates of incorporation or registration

4.2 offering document (or explanation as to why no offering document is being issued)

4.3 a prescribed investment warning in the offering document (or if no offering document is
being issued, the investment warning must be provided separately to investors)

4.4 subscription documents

4.5 consent letter signed by the fund’s BVI legal counsel

4.6 relevant service provider appointment exemptions (if claimed): auditor, custodian and
manager must be appointed by the fund unless an exemption is available and is claimed
(see the section entitled “Fund Service Providers”, below).

4.7 US$700 application fee.

The application process for a private or professional fund typically takes one week from the
submission to the FSC of the supporting documents to issue of the FSC’s certificate of
registration or recognition (as applicable).

5. Fund Service Providers

SIBA requires that BVI mutual funds (private, professional, public) must appoint:

5.1 an authorised representative
5.2 a manager
5.3 a custodian
5.4 an administrator
5.5 an auditor
5.6 two directors (minimum).

A private or professional fund must give the FSC at least seven days’ prior notice of a
functionary’s appointment (or retirement or removal). The FSC has the ability to take enforcement action against a fund if its functionaries do not meet the “fit and proper” requirements of the FSC. For these purposes, the FSC has a list of jurisdictions that it officially recognises in order to provide some certainty in relation to those of the BVI fund’s overseas service providers that it will deem as acceptable.

Matthew Feargrieve is an investment funds lawyer with more than twenty years' experience of advising managers of investment funds operating in the leading jurisdictions of the United Kingdom,  Luxembourg, Ireland and the Cayman Islands. He is qualified as a financial services lawyer in the UK, and as a commercial lawyer in the Cayman Islands and the Eastern Caribbean. He is also familiar with the regulation of investment funds and management companies based in Luxembourg and Ireland. Find out more about him on the Matthew Feargrieve website.You can also follow Matthew Feargrieve on Facebook for more legal news and advice.

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