In response to the requirements of the European Union ("EU"), the BVI has recently enacted the Securities and Investment Business (Amendment) Act, 2019 (the "SIBA Amendment") and the related Private Investment Funds Regulations, 2019 (the "Regulations") that bring closed-ended funds under regulatory supervision by the BVI Financial Services Commission ("FSC"). The new regulatory regime came into force on 31 December 2019.
The SIBA Amendment has introduced a new category of fund called a "private investment fund", which is defined as a company, limited partnership, unit trust or any other body (each, an "Entity") 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 Entity.
While the legislation prohibits the promotion or operation of a private investment fund in or from within the BVI unless it has been "recognised" as a private investment fund by the FSC, a grace period of 21 days (from the commencement of carrying on business) for making the application for recognition will be given to those private investment funds which are compliant in all other respects when they commence business.
In order to be recognised as a private investment fund, an Entity needs to satisfy the following criteria:
- it is lawfully incorporated, registered, formed or organised under the laws of the BVI or of a country outside the BVI;
- the constitutional documents of the Entity specify that: a) it is not authorised to have more than 50 investors, or b) an invitation to subscribe for or purchase interests in the Entity shall be made on a private basis only, or c) the interests in the Entity 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 USD 100,000);
- the Entity satisfies such other criteria as may be specified in the Regulations;
- on recognition, the Entity will be compliant with the Securities and Investment Business Act (as amended), the Regulations, and any practice directions applicable to the Entity; and
- recognising the Entity as a private investment fund is not against the public interest.
A private investment fund will be obliged to comply with and 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 SIBA Amendment 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.
Fund managers should note that for existing closed-ended funds which now fall within the definition of a "private investment fund", there is a six-month transition period ending 1 July 2020 during which such funds are required to apply to the FSC to become recognised as a private investment fund under the new regulatory regime.
The new regime is not expected to have a significant impact on the closed-ended funds industry as most of these funds in the BVI are likely already subject to self-imposed restrictions that meet or exceed those imposed by the new regime. Also, while the new regime results from discussions with the EU in the context of economic substance, carrying on business as a private investment fund (or any other type of fund) is not a "relevant activity" within scope of the BVI's economic substance legislation.
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.