Mr. Shameer Jasani
Principal

Shameer is principal of Travers Thorp Alberga’s New Zealand office, in Auckland.

Shameer brings to the firm significant expertise from his years of practice in London and then the Cayman Islands, and over 24 years of legal practice experience overall, specifically in advising Cayman Islands and British Virgin Islands hedge and private equity funds and investment managers on all aspects of open and closed ended fund structuring, formation and ongoing governance and regulatory requirements. More recently, Shameer has worked extensively on advising investment managers and their investment funds, globally, in the Digital Asset space including in Australia and New Zealand.

Shameer also regularly advises strategic and seed investors on pre-IPO financing and advises on acquisitions, joint ventures and a wide range of other corporate and intellectual property law matters.

Investment Fund structuring trends in the British Virgin Islands

The British Virgin Islands (“BVI”) is a popular domicile for a variety of different types of collective investment schemes (i.e. investment funds) and investment managers. As of 31 October 2023, there were a total of 2,120 investment funds registered with the BVI Financial Services Commission (“FSC”)”1. The BVI has long been seen as an attractive and sophisticated alternative to the Cayman Islands, as a jurisdiction for the establishment of investment funds and mangers, in part due to business-friendly environment and robust regulatory standards. In this article, I will look at interesting structuring trends and options in the BVI investment funds market, and look at a summary of the various key products available which contribute to its continued success.

In recent years, strategic initiatives and forward-thinking regulatory policies have propelled the BVI to introduce new products and legal changes, fostering growth in the investment funds market. This adaptability has attracted a broad spectrum of fund managers, from traditional asset managers to specialists in alternative investment strategies.

Diversity in Fund Structures:

One of the hallmarks of the BVI investment funds market is its flexibility in accommodating a wide array of fund structures. From open-end and closed-ended funds to hedge funds, private equity funds, and venture capital funds, the BVI offers a versatile regulatory framework that caters to the unique needs of different investment strategies. This diversity has been a crucial factor in the jurisdiction’s appeal, allowing fund managers to tailor their structures to optimise tax efficiency and regulatory compliance.

The jurisdiction has proactively aligned its regulatory framework with global standards, enhancing transparency and compliance. This dedication to regulatory excellence has not only fostered trust among investors but has also contributed to the BVI’s resilience in the face of a rapidly changing financial landscape.

Of great interest to us is how the BVI is increasingly serving as an excellent compliment to the Cayman Islands, and we are seeing greater client take up on hybrid Cayman-BVI products (covering both investment funds, and investment managers), as well as use of the BVI as an initial start-up zone or stepping stone for more heavily regulated and seeded Cayman products.

Recent key changes

As my colleague, Lucy Anderson discusses in her parallel article on “Key developments and the latest trends in the Cayman Islands”, the Cayman Islands offers a highly sophisticated and regulated investment funds landscape. While the increasing regulation has allowed the Cayman Islands to maintain its status as the leading offshore jurisdiction, it has also made the threshold for entry quite high for new managers, with very little availability of exemption or low regulation products.

At the same time, the BVI has brought in certain products over the last few years (for example, the Incubator Fund and the Approved Fund) which solve for this. The set-up costs are much lower, and the regulation is sensibly lighter (subject to certain thresholds), and accordingly these products are increasingly attractive for new managers.

The Incubator Fund for example does not require the appointment of an auditor or a fund administrator, which are significant cost savings in the early days of a new launch. The Incubator has additional start-up features as set out below. Some key speed to market aspects are the lack of need to have a full offering document, and the fact that the Incubator Fund can commence business after two business days of submission of the application with the FSC.

The Approved Fund is a larger product, and the next in line after the Incubator Fund as a relatively low regulation option for start-up managers. Assets under management cannot exceed US$100,000,000, and an auditor is not required. However there is a requirement to have an administrator.

Closed-ended funds. The Incubator Fund and the Approved Fund are open-ended products. The closed-ended investment funds space has also seen recent legislative changes which have offered the BVI as a good alternative jurisdiction, particularly behind the backdrop of being a lower cost jurisdiction in terms of set up and on-going costs. In 2017, refreshed partnership legislation was introduced in the BVI. Partnership structures are the preferred and more common choice for closed-ended investment funds. The new legislation provides a flexible and modern structuring tool for closed-ended investment funds.

The BVI limited partnership regime contains certain refinements over and above those of certain other popular jurisdictions in the investment fund industry. For example non-domestic entities can serve as the general partner of a BVI partnership, and under the law a non-BVI entity does not need to first register as a foreign company in the BVI to be eligible to act as general partner of a BVI limited partnership (as is the need in some other jurisdictions).

Another key refinement is the ability for BVI limited partnerships to be formed with a separate legal personality – an option that is not available in some other competitor jurisdictions.

Approved Managers. Prior to the introduction of the Approved Manager regime, all BVI managers of open-end funds and closed-ended funds were required to be fully licensed.

The BVI recognised that the risks posed by start-up and existing mid-sized managers of both open-ended and closed-ended funds are generally acknowledged to be lower than for those managing larger sums of investor money, and therefore the application of the same regulatory requirements for all managers can lead to a disproportionate level of regulatory compliance costs for smaller managers. The

Approved manager regime was introduced to address this problem, and it has

become a popular choice. There were 782 managers registered under this regime at the end of October 2023.2.

The regime is popular due to economical incorporation costs, registration fees and ongoing maintenance costs. Furthermore, BVI Approved Managers are not currently subject to economic substance requirements, significantly lowering burden on smaller managers.

A BVI Approved Manager may act as an investment manager or investment advisor to open-ended and closed-ended investment funds. There are some specific limitations, however, which should be considered in each instance. For example, there are assets-under-management limitations: (a) US$400 million in the case of open-ended funds; and (b) aggregate capital commitments of US$1 billion in the case of closed-ended funds.

Trends

As a result of the above, we are seeing some key trends emerging.

  1. Take-up of BVI start-up products

As I have described above, the BVI offers sensible light touch start-up options, and we are seeing increasing take-up on these products.

The BVI’s reputation as a first-class jurisdiction has meant that fund managers and their investors are content to choose the BVI as a jurisdiction for launch.

  1. Approved Managers

The Approved Manager regime has also proven to be an excellent product and solution for clients looking to establish an investment management entity offshore. This is particularly attractive for clients who are multi-jurisdictional in their make up (meaning where the principals are domiciled in multiple jurisdictions, and are looking for a neutral jurisdiction in which to establish their management entity).

  1. Digital Asset Fund Managers

We are seeing increasing number of start-up funds and managers in the Digital Asset space, and such managers are increasingly attracted to the BVI for their investment fund launch because of the points set out in the paragraphs above. Moreover, often the principals, because they operate in the Digital Asset space, naturally come together from multiple jurisdictions and therefore look for an investment management solution in a neutral jurisdiction.

  1. Closed-ended Funds

We are seeing increasing interest in setting up closed-ended funds in the BVI due to the amendments in the partnership law, and the versatility offered by this, and especially the ability to elect to have the partnership fund be registered as a separate legal entity.

  1. Hybrid structures with the Cayman Islands

Two areas where we are seeing hybrid products launched (with products covering the Cayman Islands and BVI) are:

– BVI Approved Managers with Cayman Islands Investment Funds. As I have noted, the BVI Approved Manager regime offers a fantastic solution for investment management offshore. Therefore, fund managers launching Cayman Islands investments, are often pairing this with a BVI Approved Manager.

– BVI start-up investment fund product feeding into a Cayman Islands investment fund (which can take its own direct investors as well), and this may also be paired with an onshore feeder fund. This allows fund managers to take advantage of the more flexible start-up products in the BVI for smaller investors (especially friends and family) while also offering a Cayman Islands investment fund to larger investors, as part of the same structure.

A summary of investment structures in the BVI

Investment funds in the BVI are regulated by the FSC pursuant to the Securities and Investment Business Act (“SIBA”), the primary governing legislation of investment funds in the BVI, and its associated statutory instruments. In particular, SIBA provides a governing framework for five different types of open-ended fund products, along with one closed-ended fund product, and we set out a brief summary herein.

  1. Open-Ended Funds

The BVI offers the following open-ended fund types (noting that all must be registered with the FSC, and that each has different qualifications):

1.1 Incubator Funds

The key features, in summary only, of an Incubator Fund are as follows:

  1. No more than 20 “Sophisticated Private Investors”.
  2. Initial investment for all investors of at least US$20,000.
  3. Assets under management cannot exceed US$20,000,000.
  4. Maximum lifetime of two years (with a possible extension of one year, by way of application to the FSC) after which the fund must be converted into a different product, or the business of the fund must be terminated.
  5. Financial statements are required to be submitted, but they do not need to be audited.
  6. The fund must appoint an authorized representative.
  7. A summary of terms (or offering document in lieu) must be submitted to the FSC as part its application.
  8. Can commence business after two business days of submission of the application with the FSC.

1.2 Approved Funds

The key features of an Approved Fund, in summary only, are as follows:

  1. No more than 20 investors are permitted at any one time (investors do not need to be “Sophisticated Private Investors” or “Professional Investors”).
  2. There are no minimum subscription requirements.
  3. Assets under management cannot exceed US$100,000,000.
  4. No term limit.
  5. Financial statements are required to be submitted, but they do not need to be audited.
  6. The fund must appoint the following service providers:
  7. authorised representative; and
  8. administrator.
  9. A summary of terms (or offering document in lieu) must be submitted to the FSC as part its application.
  10. Can commence business after two business days of submission of the application with the FSC.

1.3 Professional Funds

The key features of a Professional Fund, in summary only, are as follows:

  1. No limits on the number of investors. However, all investors must be “Professional Investors”.
  2. An initial investment for all investors of at least US$100,000 or a foreign currency equivalent (there are certain exemptions available).
  3. No restriction on assets under management.
  4. No term limit.
  5. Audited financial statements are required to be submitted to the FSC within six months of the end of financial year.
  6. The fund must appoint the following service providers (subject to certain exemptions):
  7. authorised representative;
  8. administrator;
  9. fund manager
  10. custodian; and
  11. auditor.
  12. A summary of terms (or offering document in lieu) must be submitted.
  13. Can commence business for a period not exceeding 21 days, and shall submit an application with the FSC within 14 days after the commencement of business.

1.4 Private Funds

The key features of a Private Fund, in summary only, are as follows:

  1. No more than 50 investors are permitted at any one time, or, this number may be exceeded if an invitation to subscribe for, or purchase, fund interests issued by the fund are made on a “private basis” only. Investors do not need to be “Sophisticated Private Investors” or “Professional Investors”.
  2. There are no minimum subscription requirements.
  3. No restriction on assets under management.
  4. No term limit.
  5. Audited financial statements are required to be submitted to the FSC within six months of the end of financial year.
  6. The fund must appoint the following service providers (subject to certain exemptions):
  7. authorised representative;
  8. administrator;
  9. fund manager;
  10. custodian; and
  11. auditor.
  12. A summary of terms (or offering document in lieu) must be submitted.
  13. Can commence business for a period not exceeding 21 days, and shall submit an application with the FSC within 14 days after the commencement of business.

1.5 Public Funds

The Public Funds regime is designed for retail funds, and therefore has significant regulatory requirements (which cannot be covered in this article).

  1. Closed-Ended Funds

Closed-ended funds are registered under the PIF regime. The acronym is used to distinguish between these funds and the open-ended Private Funds.

The key features of a PIF are as follows:

  1. Interests can be offered to either:
  2. no more than 50 investors; or this number may be exceeded if an invitation to subscribe for, or purchase, fund interests issued by the fund are made on a “private basis” only (investors do not need to be “Sophisticated Private Investors” or “Professional Investors”); or
  3. “Professional Investors” only.
  4. There are no minimum subscription requirements.
  5. No restriction on assets under management.
  6. No term limit.
  7. Audited financial statements are required to be submitted to the FSC within six months of the end of financial year.
  8. The fund must have a person (referred to as an “appointed person”) responsible for undertaking:
  9. the management of fund property;
  10. the valuation of fund property; and
  11. the safekeeping of fund property, including the segregation of fund property.
  12. The fund must appoint the following service providers:
  13. authorised representative; and
  14. auditor.
  15. A summary of terms (or offering document in lieu) must be submitted.
  16. Can commence business for a period not exceeding 21 days, and shall submit an application with the FSC within 14 days after the commencement of business.

Conclusion and outlook

The British Virgin Islands has undoubtedly carved a niche for itself in the global investment funds market. The current trends, marked by recent revisions and additions to the product offering within the BVI, and a commitment to global regulatory compliance, position the BVI as a dynamic and forward-looking hub in the world of investment funds. While the BVI investment funds market has experienced significant success, it is not immune to challenges. Increased global regulatory scrutiny, geopolitical uncertainties, and the evolving landscape of international tax regulations will continue to require frequent adaptation and evolution, and we believe that the BVI is well positioned for this.