(BVI) Investment Funds

8/12/2019 (BVI) Investment Funds

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British Virgin Islands – Investment Funds

Introduction

The British Virgin Islands is the home to the second largest number of regulated investment funds globally,and is becoming increasingly popular as a jurisdiction for the establishment of offshore investment funds.

Advantages

No taxation

There is no taxation in the British Virgin Islands in relation to dividends, interest, rents, royalties,

compensations and other amounts paid by an investment fund to persons who are not resident in theBritish Virgin Islands. All instruments relating to transfers of property to or by the investment fund and allinstruments relating to transactions in respect of the shares, debt obligations or other securities of the fund

and all instruments relating to other transactions relating to the business of the fund are exempt from thepayment of stamp duty in the British Virgin Islands.

No exchange controls

There are currently no withholding taxes or exchange control regulations in the British Virgin Islands

applicable to an investment fund or its members.

Investment worldwide

Provided the trustee is permitted to do so by its trust deed, or the company by its Memorandum ofAssociation, investments of any type may be made anywhere in the world, subject always to the

restrictions of local laws of any applicable jurisdiction.

Government approvals

Other than the requirement outlined below relating to managers, there are no governmental approvals orconsents which need to be obtained, nor any statutory requirements to be complied with in relation to the

issue of units or shares by a British Virgin Islands' closed ended investment fund (as defined below) or thecirculation of offering documentation, provided that there is no solicitation of the members of the public inthe British Virgin Islands.

Open ended investment funds (as defined below) are required to be either recognised as private ofprofessional funds or registered as public funds by the Financial Services Commission (the "FSC") in the BritishVirgin Islands.

Types of investment funds

A British Virgin Islands’ investment fund may be structured as a company incorporated under the Business

Companies Act, 2004 (as amended) British Virgin Islands (the "BVI Business Company")(see ourmemorandum on BVI Companies), an International Limited Partnership formed under the Partnership Act,



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1996 of the British Virgin Islands (see our memorandum on International Limited Partnerships), or a Unit Trust.By far the most commonly used vehicle for both open ended and closed ended investment funds is a BVIBusiness Company.

Closed ended funds

Closed ended funds have a fixed capital and therefore the prices are determined by supply and demand.The units, interests or shares may be issued at a premium or a discount to the net asset value but the capitalremains the same and the shares of the fund do not expand or contract. Most funds are established as

"open ended" and this memorandum primarily concerns that type of fund.

Open ended funds

In an open ended investment fund, the fund is divided into a number of shares, units or limited partnershipinterests ("Interests"), each Interest representing a proportion of the assets held by the fund. Units or shares

may be issued and/or redeemed from time to time as required at their then net asset value.

Under the Securities and Investment Business Act, 2010 of the British Virgin Islands (" SIBA"), an open endedfund (described as a "mutual fund" or a "fund") is defined as a company or any other body, a partnership ora unit trust which:

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

2. issues fund interests that entitle the holder to receive on demand or within a specified period afterdemand 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 company or other body, partnership or unit trust, as the casemay be.

The definition also includes funds which have a single investor which is itself a mutual fund but that mutualfund is not registered or recognised under SIBA (for example a US domiciled fund).

SIBA defines "fund interests" as meaning "the rights or interests, however described, of the investors in amutual fund with regard to the property of the fund, but does not include a debt".

Any investment fund that falls outside the definition of "mutual fund" in SIBA is not required to be registeredor recognised under SIBA.

Registered and recognised funds

Under SIBA, there are four categories of open ended fund that are required to be registered or recognised,being:

1. Professional fund;

2. Private fund;

3. Public fund; and

4. Recognised foreign fund.

The most popular fund category is the professional fund, which comprises approximately 70 percent of all

registered and recognised funds domiciled in the British Virgin Islands.

Professional fund

Professional funds are open ended funds, the constitutional documents of which specify that:



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1. the fund interests of the fund shall be issued only to "professional investors"; and

2. the initial investment of each investor in the fund, other than "exempted investors", shall be not less

than such sum as may be prescribed in the Mutual Fund Regulations (currently US$100,000).

A "professional investor" is a person:

1. whose ordinary business involves, whether for that person’s own account or the acc ount of others,

the acquisition or disposal of property of the same kind as the property, or a substantial part of theproperty, of the fund; or

2. who has signed a declaration that he, whether individually or jointly with his spouse, has net worthin excess of such sum as shall be specified in the Mutual Fund Regulations (currently US$1,000,000)

or its equivalent in any other currency and that he consents to being treated as a professionalinvestor.

An "exempted investor", with respect to a fund, is:

1. the manager, administrator, promoter or underwriter of the fund;

2. any employee of the manager or promoter of the fund

Private fund

Private funds are open ended funds, the constitutional documents of which specify that:

1. the fund is not authorised to have more than fifty investors; or

2. an invitation to subscribe for, or purchase, fund interests issued by the fund shall be made on a

private basis only.

Public fund

Public funds have no investor criteria, but are subject to a higher level of regulatory scrutiny and oversight.

Recognised foreign fund

Recognised foreign funds are those funds which are marketed in the British Virgin Islands and which have

been recognised by the FSC. These fall outside the scope of this brochure.

Structure of Funds

BVI Business Company as an open ended fund

A BVI Business Company may be structured to issue shares which can, subject to certain restrictions, be

redeemed. The rights and obligations of the shareholders, the terms of redemption and method ofvaluation are set out in the company's Memorandum and Articles of Association and the offering

documents.

The management and supervision of BVI Business Companies is undertaken by the directors. The directorsof an open ended fund commonly delegate all day to day management tasks to contractualfunctionaries of the fund. Notwithstanding this, the board retains overall supervisory control of thefunctionaries and the management of the fund.

Authorised Shares



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The maximum number of shares that a BVI Business Company is authorised to issue, and the classes ofshares that may be offered, together with the rights, privileges, restrictions and conditions attaching toeach such class of shares must be set out in the Memorandum of Association of a BVI Business Company.

Typically an open ended fund would have a small number of management shares, held by or on behalf of

the promoters, the remainder of the shares being issued in one of more classes of redeemable

participating shares. Redeemable shares are normally given a nominal par value and are issued at a fairlysubstantial premium. Different classes of shares may be issued to investors to distinguish between interests

in different strategies undertaken by the fund and/or to allow for different redemption rights and fee levels.Series of shares within each class of redeemable shares are commonly issued to allow for differences in feeapportionment caused by the timing of investments in shares in the same class, among other matters.

Different classes of shares may be denominated in different currencies.

A BVI Business Company must at all times have at least one shareholder.

Redemption of shares

To be redeemable, shares must be designated as redeemable at the option of the holder of such shares in

the Memorandum of Association of a BVI Business Company. The Memorandum of Association may alsoprovide that the shares are redeemable at the option of the company.

Participating redeemable shares of a BVI Business Company are usually offered to investors on a regularbasis (commonly monthly or quarterly), and are redeemable at the option of the shareholders at certain

times (often monthly or quarterly) upon a specified period of notice being provided to the company. Theprocess for redemption of shares must be specified in the Memorandum or Articles of Association of the BVIBusiness Company. Often, the company's Memorandum of Association designates shares in a particular

class or classes as redeemable participating shares, and the Articles of Association provide a framework forthe process of redemption of shares, with additional detail set out in the relevant offering documents.Articles of Association of a BVI Business Company would also provide for the manner in which the

redemption price is to be calculated (usually based on net asset value) and whether redemptions may besuspended or redemption gates may be applied.

Directors

A BVI Business Company which is recognised by the FSC as a private of professional fund, must at all timeshave at least two directors, at least one of whom must be an individual.

Public funds must at all times have at least two directors, both of whom must be individuals.

International Limited Partnership

International Limited Partnerships can be used as open ended and closed ended investment funds. Theirmost popular uses are in a closed ended structure, or as a master fund in an open ended master-feeder

fund structure.

In order to be formed, an International Limited Partnership requires at least two partners, one of which mustbe a general partner and the other a limited partner. The general partner need not be domiciled in the

BVI - there are no residency requirements for the general partner. Basic details as to the limited partnershipand the general partner are filed with the Registrar and are available to the public. The limited partnershipagreement (called Articles of Partnership) contains the detail of the manner in which profits, losses andexpenses are allocated between the partners and the terms on which a partner may withdraw itsinvestment from the fund.

The general partner is liable for the debts of the partnership, whereas the limited partner’s liability is limited

to the amount of committed capital agreed to be contributed to the partnership and any other liabilities

provided for in the Articles of Partnership, provided the limited partner does not take part in the



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management of the partnership business. Investors generally invest as limited partners in a limitedpartnership.

The general partner manages the business of the limited partnership, subject to the provisions of the Articlesof Partnership. The general partner is often the investment manager of the fund; however, this need not be

the case and the general partner is generally entitled to delegate the day to day management and

administration of the fund to third parties. Where the general partner is domiciled in the BVI and acts as theinvestment manager, further advice should be sought regarding SIBA licensing requirements.

Unit trust

All assets of a trust are vested in trustees under a trust deed which divides the beneficial ownership of the

Trust Fund into a number of shares (normally described as units) which are usually (but not necessarily)freely transferable and redeemable. The rights and obligations of the trustee and the unit holder, the termsof redemption and valuation rules are all set forth in the trust deed. The trustee of the trust is usually a trust

company and, in the British Virgin Islands, would require to be licensed under the Banks and TrustCompanies Act, 1990, as amended. The investment manager is usually identified as such in the trust deed

and has express powers to manage the unit trust’s day to day investment strategy granted to him. It is

common for the trustee to delegate other day to day functions to third party service providers.

Please contact your usual Walkers contact if you wish to find out more about creating a unit trust structure.

Functionaries and counterparties

Common functionaries of an open ended fund include:

1. an investment manager, who undertakes day to day management of the investments of the fund;

2. an administrator, who administers the accounts of the fund, undertakes anti-money launderingcompliance on behalf of the fund and commonly calculates the net asset value of the fund. The

administrator commonly acts as registrar and transfer agent for the fund; and

3. a custodian, who holds the assets of the fund for safe keeping.

It is also common for the directors to engage an investment advisor, either directly or through theinvestment manager, and for the fund to execute many of their trades through or with prime brokers.

Under SIBA, a registered or recognised fund must, at all times, have:

1. an investment manager;

2. an administrator; and

3. a custodian who is functionally independent from the investment manager and the administrator.

It is possible, in certain circumstances, to apply for the fund to be exempted from the requirement ofhaving an investment manager and/or a custodian.

Each registered or recognised fund is also required to appoint an authorised representative in the British

Virgin Islands unless the fund has significant management presence in the British Virgin Islands. Theauthorised representative’s role is limited to liaising between the fund and the FSC.



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Recognised jurisdictions

The FSC generally recognises and accepts any functionary of a fund that is established and located in a

recognised jurisdiction without requiring any further investigation of the effectiveness of the regulatoryregime in that jurisdiction. The current list of recognised jurisdictions is as follows:

Argentina France Mexico

Australia Germany Netherlands

Bahamas Gibraltar New Zealand

Bermuda Greece Norway

Belgium Guernsey Panama

Brazil Hong Kong Portugal

Canada Ireland Singapore

Cayman Islands Isle of Man Spain

Chile Italy South Africa

China Japan Sweden

Curacao Jersey Switzerland

Denmark Luxembourg United Kingdom

Finland Malta United States of America

Where a functionary of a fund is not established and located in a recognised jurisdiction, the FSC may

recognise and accept the functionary, if it is satisfied that the functionary’s jurisdiction of establishment and

location has a system for the effective regulation of investment business.

Managers, advisors and administrators domiciled in the British VirginIslands

Generally, investment managers, advisors and administrators operating in the British Virgin Islands orthrough a BVI Business Company will be required to be licensed under SIBA. Once licensed, they are able

to provide investment management, advisory and administration services to British Virgin Islands funds andinvestment funds in other jurisdictions, provided they are in compliance with local laws.

The process for obtaining such a license is outside the scope of this brochure. You should contact yourusual Walker’s contact for further information on this.

Offering documents and prospectus

Private and professional funds are generally required to file their offering documents with the FSC onapplication for recognition and must update the offering documents in the event of any material changeto their terms and file the change with the FSC within 14 days of the change. (See our memorandum on

On Going Obligations of Corporate Funds.)



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Public funds are required to have a prospectus which must comply with the terms of the Public FundsCode, among other matters. The prospectus must be filed and approved by the FSC as part of theapplication process. (See our memorandum on On Going Obligations of Corporate Funds.)

Anti-money laundering compliance

All registered and recognised funds are required to comply with the Anti-Money Laundering and TerroristFinancing Code of Practice, 2008 (as amended by the Anti-money Laundering and Terrorist Financing

(Amendment) Code of Practice, 2009, and subsequent amendments thereto) (the "Code"). It is usual forfunds to delegate their compliance obligations to the fund’s administrator, provided the fund’s

administrator is in a jurisdiction listed in schedule 2 of the Code.

The following jurisdictions are listed in schedule 2 of the Code and as being considered by the FSC tosufficiently apply the FATF recommendations:

Argentina France Mexico

Aruba Germany Netherlands

Australia Gibraltar Netherlands Antilles

Bahamas Greece New Zealand

Barbados Guernsey Norway

Bermuda Hong Kong Panama

Belgium Hungary Portugal

Brazil Iceland Russia

Bulgaria Ireland Singapore

Canada Isle of Man Slovenia

Cayman Islands Italy Sweden

Chile Japan Spain

China Jersey South Africa

Cyprus Latvia Switzerland

Denmark Liechtenstein United Kingdom

Dubai Luxembourg United States of America

Estonia Malta

Finland Mauritius



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Annual audit and Mutual Fund Annual Returns (MFAR)

Audit requirements

Funds are required to prepare annual financial statements that comply with any of:

1.

International Financial Reporting Standards (IFRS);

2. UK Generally Accepted Accounting Principles (GAAP);

3. US GAAP;

4. Canadian GAAP; or

5. International recognised and generally accepted accounting standards equivalent to thestandards in (1) – (4), as determined by the directors in case of private and professional funds, or as

may be approved by the FSC in case of a public fund.

Funds are required to appoint and at all times have an auditor for the purposes of auditing its financial

statements, although there is no requirement to have a local audit sign-off.

The fund must provide a copy of its audited financial statements to the FSC within six months of its financialyear end.

The requirement to appoint an auditor and submit annual accounts is subject to a case by case exemptionthat the FSC may grant.

MFAR

All registered or recognised funds must also submit a Mutual Fund Annual Return (MFAR) annually which

comprises aggregated statistical information on the activities of the fund for the preceding year.

The MFAR must be submitted on or before 30 June in respect of the calendar year immediately precedingthe filing.

Costs

The government fees that are payable in relation to the formation of an investment fund are as follows:

1. A company incorporation fee of US$350 (or US$1,100 if the fund is authorised to issue more than

50,000 shares); plus either

(a) a fee of US$1,000 plus an application fee of US$700 for the recognition of the fund as a

professional or private fund; or

(b) a fee of US$1,500 plus and application fee of US$1,000 for the registration of a fund as apublic fund.

2. Annual fees thereafter are US$350 (or US$1,100 as appropriate) per annum for the maintenance ofthe company in good standing; plus either

(a) US$1,000 per annum to maintain the recognition of a private and professional fund; or

(b) US$1,500 per annum to maintain the registration of a public fund.



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If the vehicle used for the fund is an International Limited Partnership, the formation and annual Registryfees would be US$500.

The BVI Business Company or International Limited Partnership also requires a registered agent andregistered office in the British Virgin Islands. We can recommend companies who carry out this service, as

well as companies who will act as Authorised Representative.

Timing

Incorporation / Formation

The incorporation of a BVI Business Company can be undertaken on the day the application for

incorporation together with the incorporation Memorandum and Articles of Associations are submitted;however the stamped documents take from 3-5 days to be returned from the Registry. The timing for theformation of an International limited Partnership is similar, although additional 2-3 days should be allowed

for the stamped Memorandum of Partnership to be returned. The application for recognition or registrationcan only be undertaken once the constitutional documents for the fund vehicle have been returned from

the Registrar.

Recognition as a professional or private fund

The recognition process for private and professional funds generally takes approximately five business days.

If the fund is to be a professional fund, there is the possibility of commencing the business of the fund up to21 days prior to receiving the recognition certificate; in this case the fund must be fully compliant with therequirements for a professional fund and the application for recognition must be filed within 14 days of

commencing business.

Registration as a public fund

The registration process for public funds generally takes between 4 – 6 weeks.

Updated: May 2012

For further information please refer to your usual contact or:

British Virgin Islands - Marianne Rajic, Partner | [email protected] | +1 284 852 2202

Dubai - Daniel Wood, Partner | [email protected] | +971 4 363 7912

Hong Kong - Denise Wong, Partner | [email protected] | +852 2596 3303

London - Deborah Poole, Partner | [email protected] | +44 (0)20 7220 4995

Singapore - Tom Granger, Partner | [email protected] | +65 6603 1694

The information contained in this memorandum is necessarily brief and general in nature and does not constitute legal or

taxation advice. Appropriate legal or other professional advice should be sought for any specific matter.

Documents

(BVI) Investment Funds