The BVI has gazetted legislation which has come into force on 31 December 2019, introducing a supervisory regime for closed-ended funds. The legislation has been put forward to comply with European Union requirements; most closed-ended funds will be affected but we do not expect it to adversely affect the promotion or operation of most private equity or other closed-ended funds in the BVI.
The legislation creates a new category of fund which is required to make a filing with the BVI Financial Services Commission ("FSC") in order to receive "recognition" by the FSC provided that it meets certain published criteria. Regulations to supplement the legislation ("Regulations") have already been issued.
The new category of fund is to be called a "private investment fund" and is defined as a company, partnership, unit trust or any other body which:
- collects and pools investor funds for the purpose of collective investment and diversification of portfolio risk; and
- issues fund interests, which entitle the holder to receive 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, partnership, unit trust or other body.
An entity which does not have the above characteristics will not be a private investment fund and will not be affected by the legislation.
The legislation will prohibit the promotion or operation of a private investment fund unless and until it has been "recognised" by the FSC (although there will be a 21-day grace period from the commencement of carrying on business for making the application for recognition, for private investment funds which are compliant in all respects except for recognition when they start business).
The FSC is able to recognise a private investment fund if it is satisfied that the following conditions are met:
- the fund is lawfully incorporated, registered, formed or organized under the laws of the BVI or of a country outside the BVI; and
- the constitutional documents of the
fund specify that:
- The fund is not authorized to have more than 50 investors, or
- An invitation to subscribe for or purchase fund interests shall be made on a private basis only, or
- The fund interests shall be issued only to professional investors with a minimum initial investment (other than for exempted investors) as may be prescribed in the Regulations (currently US$100,000); and
- the fund meets such criteria as may be specified in the Regulations; and
- on recognition, the fund will be compliant with the legislation, the Regulations, and any practice directions applicable to the fund; and
- recognising the fund is not against the public interest.
A private investment fund will be obliged to operate in accordance with any restrictions on numbers or type of investors, or on the offering of interests, set out in its constitutional documents, and to maintain financial records.
The legislation sets out penalties for any person operating or promoting, or acting as administrator, custodian or manager for a private investment fund which has not been recognised.
There is a transitional period to 1 July 2020 during which existing closed-ended funds can make themselves compliant.
The legislation also includes a new provision requiring persons undertaking management functions for new fund entities (including mutual funds as well as private investment funds) to provide notifications to the FSC. This provision will come into force on 1 July 2020.
The principal impact of the legislation is to prohibit private investment funds from operating unless they have filed particulars with the FSC, and received recognition from the FSC. Recognition will only be forthcoming where the fund is limited to a small group of investors, or privately placed, or limited to professional investors. Since most closed-ended funds in BVI are likely to have self-imposed restrictions on eligible investors which comply with these restrictions, the legislation itself is unlikely, in our view, to cause any significant impact upon the private funds industry and we do not anticipate that any Regulations will impose any notable change to the way in which such funds currently operate.
The legislation arises as part of wider discussions with the EU in relation to the BVI's economic substance regime. However, it does not impose any economic substance or reporting requirements. It should be noted that carrying on business as a fund (whether a mutual fund, private investment fund or otherwise) is not of itself a "relevant activity" falling within the BVI's economic substance regime.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.