Alternative Investment Funds Guide 2014: British Virgin Islands

1 REGULATORY FRAMEWORK

1.1 What legislation governs the establishment and operation of Alternative Investment Funds?

The Securities and Investment Business Act, 2010, as amended ("SIBA") provides for the regulation of open-ended mutual funds, among other matters. Responsibility for regulation under SIBA rests with the Financial Services Commission (the "Commission") of the British Virgin Islands (the "BVI").

In addition, the Mutual Fund Regulations, 2010 (the "MFR") provide further detail regarding the obligations of mutual funds. Public funds are also subject to the Public Funds Code, 2010.

1.2 Are managers or advisers to Alternative Investment Funds required to be licensed, authorised or regulated by a regulatory body?

A manager or adviser which is established or, in the case of a foreign company, registered in the BVI and which conducts "investment business", whether or not that investment business is carried on in the BVI, will also fall within the scope of SIBA. Managers and advisors holding a full licence under SIBA are regulated by the Commission and are subject to the Regulatory Code, 2009 (the "Code"); managers and advisors approved under the Investment Business (Approved Managers) Regulations, 2012, as supplemented by the Approved Managers (Amendment) Regulations, 2013, (the "Approved Managers Regulations") are regulated by the Commission, but are not subject to the Code.

"Investment business" is defined as being engaged, by way of business, in any activity which is of a kind that is specified in Schedule 2 Part A and is not excluded by Schedule 2 Part B to SIBA. Those activities include managing investments belonging to another person on a discretionary basis, acting as the manager or investment advisor of a mutual fund and advising in relation to investments, if the advice is given to someone in their capacity as investor or potential investor or in their capacity as agent for an investor or a potential investor and the advice is on the merits of that person (whether acting as principal or agent) buying, selling, subscribing for or underwriting a particular security or exercising any right conferred by a security to buy, sell, subscribe for or underwrite a security. "Investments" are defined in Schedule 1 to SIBA and include most forms of shares and stock, debt instruments, options, futures, contracts for differences, and derivatives.

Any person conducting investment business in, or from within, the BVI must be licensed by the Commission or be an approved investment manager or advisor under the Approved Managers Regulations, unless that person is exempt from holding a licence. A licence may be restricted (meaning that securities investment business may only be transacted with particular clients) or unrestricted. A licence may also be issued subject to conditions or may be unconditional.

Schedule 2 Part B to SIBA specifically excludes certain activities from the definition of investment business, although those exclusions are unlikely to apply to a person conducting discretionary investment management or investment advisory activities for a mutual fund.

Under Schedule 2 Part C to SIBA, a person carrying on investment business may be excluded from the requirement to obtain a licence or to be approved under the Approved Managers Regulations. It is unlikely that such exclusions would apply to a person conducting discretionary investment management or investment advisory activities for a mutual fund.

An "Excluded Person" includes:

1. a company carrying on investment business exclusively for one or more companies within the same group;
2. a person who is a participant in a joint enterprise and conducts such investment business for the purposes of, or in connection with, the joint enterprise;
3. a person who is a partner in a partnership and conducts such investment business for the purposes of, or in connection with, the partnership; and
4. a person who is a director of a company and conducts such investment business for the purposes of, or in connection with, the company,

in each case, provided that the person does not otherwise carry on or hold himself out as carrying on investment business, and does not receive remuneration for carrying on the investment business separate from the remuneration the person receives for acting in the relevant capacity specified.

1.3 Are Alternative Investment Funds themselves required to be licensed, authorised or regulated by a regulatory body?

SIBA defines a mutual fund as a company incorporated, a partnership formed, a unit trust organised or other similar body formed or organised under the laws of the BVI or the laws of any other country which:

1. collects and pools investor funds for the purpose of collective investment; and
2. issues fund interests (defined as the rights or interests, however described, of investors in a mutual fund with regard to the assets of the fund, but does not include a debt) that entitle the holder to receive on demand, or within a specified period after demand, 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, the partnership, the unit trust or other similar body, as the case may be, and includes:
   
   
   1. an umbrella fund whose fund interests are split into a number of different class funds or sub-funds; and
   2. a fund which has a single investor which is a mutual fund not registered or recognised under SIBA.

There are three common categories of mutual funds under SIBA; being private, professional and public funds. In addition, foreign mutual funds may be registered as Recognised Foreign Funds. Of the three main categories of mutual fund detailed below, the overwhelming majority are private or professional funds:

The Professional Fund

A professional fund is defined in SIBA as a mutual fund, the constitutional documents of which specify that the fund interests shall only be issued to professional investors and the initial investment by each investor in the fund, other than exempted investors, is not less than one hundred thousand dollars in United States currency or its equivalent in any other currency. A "professional investor" is defined in SIBA as a person: (a) whose ordinary business involves, whether for that person's own account or the account(s) of others, the acquisition or disposal of property of the same kind as the property, or a substantial part of the property of the fund; or (b) who has signed a declaration that he, whether individually or jointly with his spouse, has a net worth in excess of one million dollars in United States currency or its equivalent in any other currency and that he consents to being treated as a professional investor. Exempt investors include the investment manager and promoter of the fund and its employees.

The Private Fund

A private fund is defined in SIBA as a mutual fund, the constitutional documents of which: (a) specify that it will have no more than fifty investors; or (b) that the making of an invitation to subscribe for, or purchase, fund interests issued by the mutual fund is to be made on a private basis only. SIBA provides that, for the purposes of the definition of a private fund, an invitation to subscribe for, or purchase, shares issued by a mutual fund on a private basis includes an invitation which is made: (i) to specified persons (however described) and is not calculated to result in fund interests becoming available to other persons or to a large number of persons; or (ii) by reason of a private or business connection between the person making the invitation and the investor.

The Public Fund

A public fund is a fund recognised by the Commission as a public fund, provided that the Commission is satisfied with the following:

1. the fund is a BVI business company or unit trust that is governed by the trust laws of the BVI and has a trustee based in the BVI;
2. the fund satisfies the requirements of SIBA and where applicable the Public Funds Code with respect to its application;
3. the fund will, on registration, be in compliance with SIBA and any practice directions issued by the Commission and applicable to the fund;
4. the fund's functionaries satisfy the Commission's "fit and proper" criteria;
5. the fund has, or on registration will have, an independent custodian;
6. the fund's name is not undesirable or misleading; and
7. registering the fund is not against the public interest.

1.4 Does the regulatory regime distinguish between open-ended and closed-ended Alternative Investment Funds (or otherwise differentiate between different types of funds) and if so how?

Yes; closed-ended funds are not subject to regulation under SIBA. The key distinction between open-ended and closed-ended funds is the ability of investors to voluntarily redeem or repurchase some or all of their investment prior to winding up. Where long lock-up periods, commonly in excess of five years, are part of a fund's terms, BVI practitioners and the Commission generally consider such investment funds to be closed-ended funds.

1.5 What does the authorisation process involve?

1. The authorisation process for all funds involves the submission of an application form, together with supporting documents and the requisite fee. Documents required to be filed for private and professional funds are:
   
   
   1. an offering memorandum;
   2. the Application Form F100 (Parts 1, 4, and 6);
   3. the certificate of incorporation of the fund;
   4. the constitutional documents of the fund (which must contain the applicable fund disclosure required by SIBA); and
   5. a written consent of each of the fund's lawyer and the fund's auditor confirming acceptance of each of their appointments by the fund.
2. The offering documents of BVI mutual funds must contain certain investment warnings required by SIBA and such information as is necessary to enable a prospective investor to make an informed decision as to whether or not to invest. The subscription documents must contain an acknowledgment by investors, as required by SIBA, that each investor has been provided with an investment warning and, in the case of a professional fund, a confirmation that the investor is a "professional investor" as defined in SIBA.
3. Once the documents have been filed, the Commission will generally recognise a private or professional fund within five to seven business days of submission of the application, provided the requisite documentation is complete and no exemptions have been applied for. A professional fund may commence business up to 21 days prior to receiving formal confirmation of recognition, provided it complies with all other requirements of SIBA and submits an application for recognition within seven days of commencing business.
4. The fee payable on application for recognition of professional and private funds is US$700 and the recognition fee is US$1,000, payable upon recognition and, thereafter, annually by 31 March until the fund's certificate of recognition is cancelled.

1.6 Are there local residence or other local qualification requirements?

There are no local residence requirements. Each recognised or registered mutual fund must, however, appoint an authorised representative in the BVI to represent it when dealing with the Commission.

1.7 What service providers are required?

Private and professional funds must, at all times, have a fund manager, a fund administrator, and a custodian (collectively described, together with investment advisors and prime brokers, as "functionaries"). The custodian of a private fund or a professional fund must be a person who is functionally independent from the fund manager and the fund administrator. The Commission may, on written application made by or on behalf of a private or professional fund, exempt the fund from the requirement to appoint a custodian or a fund manager, and an application for such an exemption can be made together with the application for recognition as a BVI mutual fund or at any subsequent time. However, no exemption is available in respect of the requirement to have an administrator.

A public fund must at all times have a manager, an administrator, and a custodian (unless the fund is exempted by the Commission from the requirement to appoint a custodian). Each functionary of a public fund must be functionally independent from every other functionary of the fund.

The Commission will recognise and accept any functionary of a fund that is established and located in a "Recognised Jurisdiction". The current list of Recognised Jurisdictions is as follows:

Where a functionary of a fund is not established and located in a jurisdiction listed in the Schedule, the Commission may recognise and accept the functionary, if satisfied, upon application, that the functionary's jurisdiction of establishment and location has a system for the effective regulation of investment business, including funds.

Directors

A private fund and a professional fund must at all times have at least two directors, at least one of whom must be an individual. A public fund must at all times have at least two directors. Only individuals can serve as directors of public funds. Although not required, it is becoming market practice for regulated funds to appoint independent directors. Directors of regulated funds are not required to be based in the BVI.

1.8 What co-operation or information sharing agreements have been entered into with other governments or regulators?

The BVI has Tax Information Exchange Agreements ("TIEAs") and similar bilateral and multilateral arrangements with 77 countries as at 28 March 2014 and is on the OECD "white list" with respect to the exchange of tax information. In addition, the Commission has entered into bilateral regulatory co-operation agreements pursuant to the AIFMD with the competent authorities of 26 of the EU and EEA Member States.

2 FUND STRUCTURES

2.1 What are the principal legal structures used for Alternative Investment Funds?

Three types of vehicle are most commonly utilised by BVI investment funds: BVI Business Companies limited by shares; Unit Trusts; and International Limited Partnerships.

The BVI Business Company

The most common vehicle for open- or closed-ended funds formed in the BVI is a BVI Business Company limited by shares.

Shares of the same class in a company rank equally with each other. It is also possible to create separate share classes or separate series within the same share class to distinguish between different fee terms, strategies or asset pools; or to calculate, for example, performance fees payable on a "per investor basis" to mirror the capital account concepts found in US funds. The BVI Business Companies Act 2004 is a flexible and modern corporate statute which provides a clear corporate structure which is ideally suited to structuring investment funds. In addition, BVI Business Companies may be formed as Segregated Portfolio Companies when used as a regulated investment fund, providing separate legally protected asset and liability cells within one corporate vehicle.

The Unit Trust

The concept of a Unit Trust is that subscribers contribute funds to a trustee, who holds those funds on trust whilst they are managed by the investment manager for the benefit of the subscribers, known as unitholders. Each unitholder is entitled to a pro rata share of the trust's assets.

Unit Trusts are relatively uncommon in the BVI and are used (in place of companies) for investors in jurisdictions where participation in a Unit Trust is more acceptable or attractive than owning shares in a company, for example, for regulatory or tax reasons.

The International Limited Partnership

The other major form of investment vehicle available in the BVI is the International Limited Partnership (the "ILP").

The limited partnership concept is similar to that which applies in various states of the United States but a BVI limited partnership does not have a separate legal personality distinct from its partners. Limited partnership structures are popular with United States promoters and their advisers. The general partner of a limited partnership does not need to be a BVI company or person nor does it require to be registered as a foreign company to act as general partner. The general partner is liable for any shortfall between the assets and liabilities of the limited partnership and so it is common to form a special purpose vehicle to act as general partner to a limited partnership.

The limited partnership is commonly used for venture capital and private equity funds with a limited number of investors.

2.2 Please describe the limited liability of investors.

The limited liability of investors in a BVI investment fund depends upon the nature of the vehicle used and whether the investor has agreed to contribute additional funds to that vehicle pursuant to the terms of the constitutional and offering documentation.

With BVI business companies limited by shares, the liability of the investors is limited to the amount unpaid on their shares in accordance with the BVI Business Companies Act, 2010, as amended, or as otherwise provided in the company's constitutional documents.

Limited Partners ("LPs") of an ILP are not liable for the debts or obligations of the ILP under the Partnership Act, 1996 (the "Partnership Act"), (a) save as provided by the terms of the applicable partnership agreement, and (b) subject to the provisions of the Partnership Act (i) providing that an LP who takes part in the conduct of the business of the ILP may lose its limited liability with respect to a third party who deals with that ILP and who reasonably believes such LP to be a GP of such ILP, and (ii) providing for clawback of capital distributions (together with interest) made to LPs within six months of the ILP becoming insolvent.

Investors who are unitholders of an exempted trust must look to the wording of the relevant declaration of trust to provide them with limited liability status and protection.

Despite the limited liability nature of an equity interest purchased by an investor, it is common practice for the subscription and offering documents of BVI investment funds to impose payment obligations on investors over and above the obligation to pay for their investment. Such additional obligations regularly include indemnification for misrepresentations and the requirement to repay excess redemption or withdrawal proceeds which were calculated and paid on the basis of unaudited data.

2.3 What are the principal legal structures used for managers and advisers of Alternative Investment Funds?

The principal structures used are BVI Business Companies.

2.4 Are there any limits on the manager's ability to restrict redemptions in open-ended funds or transfers in openended or closed-ended funds?

Not as a general matter of BVI law; the ability to redeem or transfer equity interests in a fund and any restrictions on such activity will be governed by the constitutional, subscription and offering documents.

2.5 Are there any legislative restrictions on transfers of investors' interests in Alternative Investment Funds?

No, there are no such restrictions.

3 MARKETING

3.1 What legislation governs the production and offering of marketing materials?

There is no obligation to issue an offering document for a private or professional fund, but where a fund does not do so, it is required under the MFR to provide an explanation as to why it will not issue an offering document and explain, to the satisfaction of the Commission, how relevant information concerning the fund and any invitation or offer will be provided to investors or potential investors. Where an offering document is issued, it is required to be filed with the application for recognition, and an updated offering document or supplement must be filed within 14 days of any change being made to the filed offering document.

SIBA and the MFR require that a public fund have a prospectus which complies with and is updated in accordance with the terms of the Public Funds Code, 2010.

3.2 What are the key content requirements for marketing materials, whether due to legal requirements or customary practice?

The customary minimum disclosure requirements include the following:

1. details of the date of establishment of the fund, its registered office, fiscal year, and its directors (or the directors of the general partner or trustee) together with biographies;
2. a description of the fund's investment objectives, policy, and restrictions;
3. a description of the fund's investment manager or adviser, together with biographies of portfolio managers and information regarding remuneration, management and performance fees or allocations;
4. the names and addresses of the fund's other service providers, together with details of the services to be performed and remuneration;
5. the classes of interests available for investment or issue, together with descriptions of any minimum investment, eligibility requirements, and subscription procedures;
6. details of the principal rights and restrictions attaching to the fund's equity interests, including with respect to currency, voting, rights to participate in all or some of the assets of the fund, circumstances of winding-up or dissolution and the procedures and conditions for repurchases, redemptions or withdrawals of such equity interests, including suspensions;
7. the NAV calculation policy; and
8. details of the fund's material risks and potential conflicts of interest.

3.3 Do the marketing or legal documents need to be registered with or approved by the local regulator?

The offering document of a private or professional fund would usually be filed with the Commission as part of the initial application, but no pre-approval is required. In the case of a public fund, the prospectus would be required to be approved by the Commission prior to its registration as a public fund.

An amended offering document must be filed with the Commission within 14 days of any change where there is a continuing offering. Proposed amendments to the prospectus of a public fund must be submitted to the Commission at least 21 days prior to the issue of the revised prospectus.

3.4 What restrictions are there on marketing Alternative Investment Funds?

Recognised or registered mutual funds, including Recognised Foreign Funds, incorporated as a company are not subject to any restrictions on marketing under BVI statute other than those required for it to qualify for recognition or registration, as the case may be. Closed-ended funds incorporated as a company are not currently subject to any restriction on marketing under BVI statute. ILPs are restricted from being marketed to the public in the BVI. All BVI Alternative Investment Funds do, however, remain subject to any securities laws or marketing laws in the jurisdictions in which they are distributed or marketed.

3.5 Can Alternative Investment Funds be marketed to retail investors?

Yes, subject to the US$100,000 minimum investment and "professional investor" qualification requirements for professional funds noted above.

3.6 What qualification requirements must be carried out in relation to prospective investors?

None, save for the requirement that investors in professional funds qualify as "professional investors" as described above and that all investors in BVI mutual funds are subject to screening in accordance with the BVI's anti-money laundering regime.

3.7 Are there additional restrictions on marketing to public bodies such as government pension funds?

No, there are not.

3.8 Are there any restrictions on the use of intermediaries to assist in the fundraising process?

No, there are no such restrictions.

3.9 Are there any restrictions on the participation by financial institutions in Alternative Investment Funds (whether as sponsors or investors) arising from the 2008 financial crisis?

No, there are not.

4 INVESTMENTS

4.1 Are there any restrictions on the types of activities that can be performed by Alternative Investment Funds?

No, there are not.

4.2 Are there any limitations on the types of investments that can be included in an Alternative Investment Fund's portfolio whether for diversification reasons or otherwise?

No, there are no such limitations.

4.3 Are there any restrictions on borrowing by the Alternative Investment Fund?

There are no statutory or regulatory restrictions; however, the fund's constitutional and/or offering documents may restrict leverage for the fund or a class of shares, as determined appropriate.

5 DISCLOSURE OF INFORMATION

5.1 What public disclosure must the Alternative Investment Fund make?

Funds constituted as BVI Business Companies are required to file their memorandum and articles of association with the registry of corporate affairs (the "Registrar"). They are also required to maintain statutory registers but those registers are not required to be filed with the Registrar. Companies and lenders can take advantage of the priority regime for charges by making a public filing with the Registry of any charge over assets of a company entered into by a BVI Business Company.

5.2 What are the reporting requirements in relation to Alternative Investment Funds?

Regulated mutual funds are required to file, in electronic format, audited financial statements within six months of the fund's financial year and a Mutual Fund Annual Return ("MFAR") within six months of the calendar year end. The MFAR provides general, operating and financial information relating to such regulated funds.

5.3 Is the use of side letters restricted?

No. Side letters are commonly used by BVI investment funds although certain considerations should be borne in mind in order to ensure that such letter agreements are compliant with BVI law and consistent with the constitution of the fund, a discussion of which is outside the scope of this chapter.

6 TAXATION

6.1 What is the tax treatment of the principal forms of Alternative Investment Funds?

A fund and all dividends, interest, rents, royalties, compensations, and other amounts paid by the fund are exempt from the provisions of the Income Tax Act in the BVI and any capital gains realised with respect to any shares, debt obligations, or other securities of the fund are exempt from all forms of taxation in the BVI. The Payroll Taxes Act 2004 does not apply to a fund except to the extent that the fund has employees (and deemed employees) rendering services to the fund wholly or mainly in the BVI. No estate, inheritance, succession or gift tax, rate, duty, levy, or other charge is payable with respect to any shares, debt obligation or other securities of the fund. All instruments relating to transfers of property to or by the fund and all instruments 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 the payment of stamp duty in the BVI, provided they do not concern BVI situate land. There are currently no withholding taxes or exchange control regulations in the BVI.

6.2 What is the tax treatment of the principal forms of investment manager/adviser?

The tax treatment for managers and advisors is the same as for funds. See above.

6.3 Are there any establishment or transfer taxes levied in connection with an investor's participation in an Alternative Investment Fund or the transfer of the investor's interest?

No; see above.

6.4 What is the tax treatment of (a) resident and (b) non-resident investors in Alternative Investment Funds?

There are no differences in tax treatment between the two. See above.

6.5 Is it necessary or advisable to obtain a tax ruling from the tax or regulatory authorities prior to establishing an Alternative Investment Fund?

No, it is not.

6.6 What steps are being taken to implement the US Foreign Account and Tax Compliance Act 2010 (FATCA)?

In March 2014 the BVI government initialled a Model 1B (i.e. nonreciprocal) intergovernmental agreement with the United States (the "IGA"). The IGA provides a framework for the implementation of FATCA in the BVI. It is anticipated that the relevant BVI enabling legislation and regulations will be enacted in mid-2014.

At the time of going to press, it is anticipated that under the IGA, a BVI Investment Entity which is a Reporting Financial Institution ("Reporting FI") is required to register with the US Internal Revenue Service ("IRS") either through the IRS registration portal or through manual submission of Form 8957. If successfully registered, a Reporting FI will be issued a Global Intermediary Identification Number ("GIIN"). Obtaining a GIIN is the method by which Reporting FIs demonstrate FATCA compliance as US withholding agents are required to verify the GIIN against lists that will be published by the IRS.

Non-Reporting FIs (under Annex II of the IGA) and non-financial foreign entities are not required to register and may self-certify their status to withholding agents in order to avoid the imposition of any withholding tax.

Investment Entities that submit applications lodged before 25 April 2014 will, if approved, appear on a list published in June 2014, i.e. prior to the deadline for the imposition of withholding tax on 1 July 2014. However, withholding agents are not required to verify GIINs on payments made prior to 1 January 2015 where the payee is a Reporting FI in a Model 1 IGA jurisdiction such as the BVI if the IGA is signed before 30 June 2014. Accordingly, provided the IGA is signed before 30 June 2014, BVI Reporting FIs can effect registration through to the end of 2014 and, if necessary, may self-certify their status to withholding agents after 1 July 2014 to avoid withholding.

6.7 Are there any other material tax issues?

1. US Foreign Account Tax Compliance Act ("FATCA")
   
   The BVI Government has initialled a Model 1B IGA with the US treasury.
2. TIEAs
   
   The BVI has TIEAs and similar bilateral or multilateral arrangements with 77 countries as at 28 March 2014 and is on the OECD "white list" with respect to the exchange of tax information.

7 REFORMS

7.1 What reforms (if any) are proposed?

AIFMD

The broad scope and extra-territorial effect of the EU Directive on Alternative Investment Fund Managers ("AIFMD") captures most types of BVI Alternative Investment Funds, regardless of whether they are open-ended or closed-ended and regardless of their legal structure and investment strategy, with very few exceptions.

There are a number of provisions in the AIFMD that require cooperation agreements to be established between the European Securities and Markets Authority ("ESMA") and the supervisory authorities from the country of origin of non-EU Alternative Investment Funds or Alternative Investment Fund Managers. The Commission has signed 26 co-operation agreements with EU Member State regulators and is actively taking steps to sign cooperation agreements with the remaining EU Member State regulators. Accordingly, the BVI will continue to offer benefits to new and existing Alternative Investment Funds and managers seeking access to Europe in line with the AIFMD.

This article appeared in the 2014 edition of The International Comparative Legal Guide to: Alternative Investment Funds; published by Global Legal Group Ltd, London.

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.