Through the recently published Securities and Investment Business (Incubator and Approved Funds) Regulations 2015 (the “Regulations”), the British Virgin Islands Financial Services Commission (“FSC”) has introduced two new regulated open ended fund products being the Incubator Fund and the Approved Fund.
The Regulations came into force on 1 June 2015 and are designed to complement the already existing fund products offered under the Securities and Investment Business Act, 2010 (“SIBA”).
Funds set up under the Regulations will be subject to a lighter touch regulatory approach and the aim is that such funds will appeal to managers who wish to develop a track record at a reasonable cost and family offices or groups of friends and family investors who wish to pool investments more cost efficiently.
Incubator Fund
The “Incubator Fund” is a start-up fund product which allows fund managers to establish a track record on a cost efficient basis without being subjected to onerous rules and regulations. The key features of an Incubator Fund are as follows:
- It can have a maximum of 20 investors, each of whom must invest a minimum initial amount of US$20,000, and the fund cannot exceed the cap of US$20 million in relation to the aggregate net asset value of its investments – these features can be summarized as the “20-20-20 criteria”
- For so long as it stays within the 20-20-20 criteria, the Incubator Fund can operate for a period of two years (which can be extended by one additional year) before it needs to either convert to a more sophisticated product i.e. an Approved Fund (as detailed below) or a private or professional fund, or wind up its operations
- No requirement to appoint functionaries (e.g. administrator, custodian or manager)
- No requirement to have an auditor
- No requirement for an offering memorandum
- The approval process is fast and the Incubator Fund can commence business two business days following receipt of the application by the FSC
Approved Funds
The “Approved Fund” is designed for a longer term private investor or “friends and family” fund offering. It has a higher net asset value threshold and no limit to the length of time it may qualify as an Approved Fund. It also differs from the Incubator Fund in that it is required to appoint an administrator. Key differentiating criteria from other fund types currently on offer under SIBA include:
- The total number of investors is limited to 20
- Net assets of the fund must not exceed US$100,000,000 (or its equivalent in any other currency)
- The Approved Fund must have an administrator, but it is not required to have a manager or custodian
- No audit required
Ongoing requirements
There are limited ongoing obligations involved for Incubator Funds and Approved Funds:
Financials
Each must submit unaudited financial statements on an annual basis to the FSC and there are returns that must be submitted which summarise information regarding the fund’s status (i.e. the number of investors, total investments, aggregate subscriptions and redemptions, NAV and details of any significant investor complaints).
The directors or general partner will need to confirm that the relevant fund is not in breach of the Regulations. Incubator Funds have to file semi-annual returns (by 31 January and 31 July), and Approved Funds must file annual returns (by 31 January).
Directors
Both the Incubator Fund and the Approved Fund must have at least two directors, one of whom must be an individual.
BVI Authorised Representative
Both the Incubator Fund and the Approved Fund must have a locally based authorized representative (as licensed under SIBA). An affiliated entity of Forbes Hare is on hand to provide assistance in this regard.
Material Changes
Both an Incubator Fund and an Approved Fund need to notify the FSC within 14 days of any changes to the information provided in the approval application or in relation to any matter which is likely to have a material impact on the fund.
Risk Warnings
An application to the FSC 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 (which we anticipate will be the case with the majority of Incubator/Approved Funds), the description and a warning in the prescribed form must be submitted as separate documents to be provided to investors.
Conversion
If the number of investors and/or the amount of investments held by an Incubator Fund or an Approved Fund exceeds the limits set in the Regulations over a consecutive two month period, the fund must notify the FSC within seven days of this fact and must:
- in the case of an Incubator Fund, submit an application for conversion to a private fund, a professional fund or an Approved Fund;
- in the case of an Approved Fund, submit an application for conversion to a private fund or a professional fund; or
- 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.
Fees
An application for approval of a fund as an Incubator Fund or an Approved Fund must be accompanied by an application fee currently set at US$1,500. The annual renewal fee for both an Incubator Fund and an Approved Fund is currently US$1,000.
It is also anticipated that legal costs for the formation of these fund products will be lower than those typically associated with setting up a private of professional fund given the reduction of mandatory information that needs to be included in the offering documentation.
These new products are a positive addition to the jurisdiction and enhance the British Virgin Islands’ reputation as a flexible, innovative, attractive and cost-effective jurisdiction for new fund launches.
| Key contacts |
| Jose Santos
Partner British Virgin Islands DD: +1 284 852 1899 jose.santos@forbeshare.com
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| Catherine Ross
Partner London DD: +44 207 0143 224 catherine.ross@forbeshare.com
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| Stuart Bruce
Associate British Virgin Islands DD: +284 852 1909 stuart.bruce@forbeshare.com
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