Venture Capital

The legislative provisions applicable in the British Virgin Islands will depend on the type of vehicle employed by the startup, which is typically determined by:

• the nature of its business;
• its activities; and
• the location of its target investors.

While operating companies are typically established in other (often onshore) jurisdictions, many startups choose to incorporate their holding structures in the British Virgin Islands. These holding entities are typically structured as either:

• business companies, governed primarily by the Business Companies Act (this is the most common vehicle); or
• (less commonly) limited partnerships, governed primarily by the Limited Partnership Act.

Additional statutes may apply depending on the activities undertaken by the startup. For instance:

• the Securities and Investment Business Act may be applicable in the case of startups involved in investment business;
• the Virtual Assets Service Providers Act may be applicable in the case of startups involved in Web3 and crypto; and
• local trade licensing and labour and immigration considerations will apply in the case of startups which intend to operate locally within the British Virgin Islands.

Legislative provisions of general application regarding issues such as the following may also be relevant:

• local economic substance requirements;
• the US Foreign Account Tax Compliance Act/Common Reporting Standard;
• anti-money laundering and countering the financing of terrorism (AML/CFT);
• data protection; and
• beneficial ownership.

As the local startup scene is very limited on the ground in the British Virgin Islands, the focus of this Q&A is on international startups which utilise BVI holding structures.

The British Virgin Islands is one of the leading offshore jurisdictions for structuring international transactions for a variety of reasons, including:

• its robust yet flexible and founder-friendly legal environment; and
• its established financial services industry, with well-developed legal frameworks and experienced financial services professionals including:
• • lawyers;
  • accountants; and
  • corporate service providers.

As an indication of the enduring popularity of BVI structures, there were approximately 357,000 business companies registered in the British Virgin Islands as of the end of 2024.

Given that the British Virgin Islands is a leading domicile for offshore investment funds, many of the venture capital and private equity firms which invest in BVI structured startups are already familiar and comfortable with the jurisdiction.

Tax neutrality is also an important consideration:

• BVI legal entities are exempt from taxation in the British Virgin Islands; and
• No taxes are imposed in the British Virgin Islands on foreign shareholders.

(See question 9.1.)

The British Virgin Islands is a common law jurisdiction with English case law having a persuasive role. The Business Companies Act was crafted to incorporate attractive elements of both UK and Delaware company laws (which ensures a degree of efficient ‘transaction fluency’ when dealing with international UK and US legal counsel in particular). The ultimate court of appeal on BVI disputes is the Privy Council of the United Kingdom.

The British Virgin Islands is a British overseas territory and offers a stable political environment, which provides consistency and certainty. It is also recognised as a jurisdiction which is fully committed to implementing and maintaining AML/CFT and tax reporting compliance standards.

As in other jurisdictions, the types of investors that choose to invest in BVI venture capital structures will vary depending on the stage of the business’s growth and maturity.

At the early or pre-seed stage, funding often comes from:

• the founders’ personal networks, such as friends and family;
• angel investors;
• accelerators;
• incubators;
• family offices;
• high-net-worth individuals; or
• early-stage venture capital firms.

As the startup develops and progresses to priced equity rounds, the investor profile typically shifts. At this stage, the major investors become:

• traditional venture capital and private equity firms;
• institutional investors; and
• large corporate venture capital investors.

These investors often specialise in funding businesses at specific stages, whether in early growth or later-stage expansion.

The global nature of businesses utilising BVI structures means that these startups span various sectors. However, the most common industries include:

• technology;
• biotech and healthcare;
• real estate;
• energy and resources;
• asset management; and
• financial services.

More recently, the British Virgin Islands has emerged as a leading offshore domicile for fintech, cryptocurrency and other blockchain and Web3 businesses, and this space in particular has seen significant venture capital activity.

For foreign businesses that adopt a BVI holding structure, investments are usually made directly into the BVI entity. The downstream structure is influenced by legal, tax and regulatory considerations in the jurisdiction where the underlying business operates.

Additionally, investors are advised to seek independent fact-specific tax advice to assess any potential tax implications associated with investing in a BVI structure.

Please see question 1.1. The most common vehicle would be a BVI business company limited by shares, which may be structured:

• with or without par value; and
• with multiple different classes and series of shares (with varying economic and voting rights).

Venture capital investments in the British Virgin Islands are typically structured to align with:

• the fundraising objectives of the startup;
• its stage of maturity; and
• the financial risk appetite of the investors.

In earlier rounds, it is common to see the issuance of simple agreements for future equity (SAFEs) or convertible notes by BVI companies. As the company grows, develops its business and increases in valuation, it usually transitions to priced equity rounds, also referred to as ‘preference share financings’. SAFEs or convertible notes are also frequently used in bridge rounds to provide interim financing between priced rounds.

Although less prevalent than priced equity rounds, some BVI-based startups also engage in venture debt deals. In such cases, the lending typically occurs at the level of the operating business, rather than at the BVI holding company level. These arrangements often involve:

• security being granted by the founders over their shares in the BVI holding company; or
• lenders negotiating warrants issued by the BVI company that can be exercised upon certain trigger events.

The potential advantages and disadvantages of various investment structures are not unique to the British Virgin Islands. The decision on which structure to adopt is influenced by several factors, including:

• the company’s urgency in raising capital;
• investor sentiment;
• dilution considerations; and
• the level of investor protections required.

For example:

• equity structures such as priced rounds can offer strong investor protections and long-term alignment with the company’s growth, but they often lead to significant dilution for existing shareholders;
• convertible instruments such as SAFEs or convertible notes are more flexible and allow for quicker capital raises, but they may provide fewer protections for investors; and
• venture debt, while less dilutive, may impose financial obligations and risks – especially for early-stage startups with limited cash flow.

Ultimately, the choice of structure should balance the needs and expectations of both the company and its investors while aligning with the long-term strategic goals of the business.

While the British Virgin Islands is a tax-neutral jurisdiction, consideration should always be given to onshore issues – specifically the tax, legal and regulatory implications of the jurisdictions of each of the stakeholders involved in the transactions, including:

• the founders;
• the investors; and
• the underlying operating businesses.

While the interests of investors will be broadly aligned, each investor will ultimately have its own risk appetite and have set its own expectations regarding the progress and the time horizon for the investment and ultimately their exit. These factors will ultimately impact the investor rights and protections, and governance and decision-making terms which will be negotiated into the investment documentation.

When pooling investor moneys via BVI venture capital holding entities, careful structuring analysis must be undertaken regarding any potential licensing requirements under the BVI Private Investment Funds Regulations (ie, to avoid licensing as a regulated investment fund, which would not be appropriate for a typical venture capital financing vehicle). Such licensing can often be avoided if the underlying startup is just one single operating business (ie, not a diversified pool of underlying investments).

Once a target has been identified by an investor and a term sheet setting out the proposed commercial terms has been negotiated and executed, due diligence will be carried out on the proposed investment by the investors (see question 4.2). In parallel, legal counsel to the BVI company and the investor(s) will work together to draft and agree the legal documentation and any necessary corporate approvals in relation to the investment.

From a BVI perspective, there are certain steps which will need to be taken at closing. These include:

• amending and restating the memorandum and articles of association of the BVI company to reflect the agreed investment terms;
• updating the register of members of the BVI company to reflect the issuance of the new shares (or the repurchase or transfer of any shares), because the register of members is prima facie evidence of legal title to shares in a BVI company; and
• registering and filing any director appointments or resignations.

Typically, the lead investor(s) will conduct legal, financial and commercial due diligence before proceeding with any investment, although the extent of the due diligence:

• will vary depending upon factors such as:
• • the maturity of the business; and
  • the size of the investment; and
• will be guided by the investor and their onshore advisers.

From a BVI perspective, the investors will want to confirm, among other things:

• that the BVI company is in good standing;
• that the register of members aligns with the capitalisation table;
• the current director and officer appointments;
• that the company is in compliance with all regulatory obligations (eg, economic substance and annual return filings); and
• that there are generally no unforeseen issues from a BVI perspective (eg, the holding and monetising of IP rights, which may be problematic under BVI economic substance rules).

For priced equity rounds, the commercial terms negotiated in the term sheet will be reflected in either:

• a single investment or shareholders’ agreement; or
• various series financing documents – namely:
• • a share purchase agreement;
  • a right of first refusal and co-sale agreement;
  • an investor rights agreement; and
  • a voting agreement.

Certain commercial terms will also be reflected in the memorandum and articles of association of the BVI company, which should be conformed to the accompanying financing agreements. In particular, it is important that all material terms regarding governance and share rights are faithfully replicated in the memorandum and articles of association to ensure enforceability and compliance with BVI company laws.

Legal documentation is usually prepared by the company’s BVI and foreign legal counsel working together.

In each case, corporate approvals at both a board and shareholder level authorising entry into the above documentation and any related actions will also be prepared.

The British Virgin Islands does not have a venture capital association; however, venture capital transactions involving the United States, Latin America and China often use documentation based substantially on the model legal documents produced by the US National Venture Capital Association, which will be adapted to take into consideration BVI-specific requirements. In certain regions, the investment documentation will be governed by the laws of the British Virgin Islands; while in others, it will be governed by foreign law.

The majority of the disclosure requirements during the investment process will be driven by:

• the term sheet that has been executed in relation to the proposed investment; and
• any disclosure against the representations and warranties negotiated in the share purchase agreement as a result of the investment due diligence.

Venture capital deals in the British Virgin Islands involve a range of advisers and stakeholders, each of which plays an integral role in relation to structuring, negotiation and implementation, from initial term sheet to closing.

The principal legal advisers are BVI legal counsel who work alongside international legal counsel (often an international law firm with experience in cross-border venture capital transactions and deal terms) and often additional local legal counsel who may be based where the underlying business actually operates.

Tax advisers or accountants will also play a key role in advising on the tax implications of the investment and any related structuring questions.

The process and corporate approvals required for issuing shares or debt instruments will be governed by:

• the terms of the existing memorandum and articles of association of the company; and
• the shareholders’ agreements (if any) currently in place, which will vary depending on the growth stage of the startup.

Under BVI law, the issuance of shares or debt instruments will require board approval. Shareholder approval may also be required depending on the terms of:

• the existing memorandum and articles of association of the company; and
• the shareholders’ agreements (if any) currently in place.

To the extent that the company has already issued equity to investors, it is likely that any further issuance of shares will require protective provision consent and any rights of first offer to be waived (to the extent that these will not be exercised).

The key commercial terms of any investment will be negotiated and agreed in a term sheet between the company and the investor(s). These will then form the basis for the legal documentation. See question 4.3 in relation to legal documentation.

The term sheet will address various commercial terms, including:

• the size of the proposed investment;
• the company’s valuation; and
• the price per share at which the investor will be investing.

In addition, it will set out:

• the rights which will attach to the series of preference shares to be subscribed (eg, the liquidation preference, the dividend preference and any veto rights);
• any governance rights;
• anti-dilution measures;
• transfer rights and restrictions; and
• information and reporting rights.

In a priced equity round, investors will be issued preference shares. The commercial terms attached to these shares will be a matter for negotiation (typically by the investor(s) leading the financing round), but will usually include:

• a liquidation preference;
• a dividend preference;
• conversion rights;
• anti-dilution protection;
• certain veto rights; and
• board representation.

The rights attaching to the preference shares will be set out in:

• the memorandum and articles of association; and
• the accompanying financing agreements.

It is a basic principle under BVI companies law that all investors in a BVI business company holding shares or equity interests in the same class must be treated equally with respect to their class rights. Therefore, consideration should always be given to the rights being granted to shareholders in any particular class or series.

It is important that all material terms from the financing agreements regarding governance and share rights are faithfully replicated in the memorandum and articles of association to ensure enforceability and compliance with BVI company laws.

It is common to see investors negotiate standard anti-dilution measures into the series financing documentation. These include:

• pre-emption rights in the case of issuance of any additional securities;
• protective provisions or veto rights in relation to the issuance of additional securities with rights pari passu or senior to the existing preference shares; and
• conversion price adjustment mechanisms in the case of certain dilutive issuances.

The liability regime applicable to venture capital investments involving BVI companies is primarily determined by the governing law of the investment agreements. Standard features typically include:

• representations and warranties;
• provisions for disclosure against these;
• negotiated monetary caps;
• time limits; and
• where relevant, agreed carveouts.

Under BVI law, remedies for breaches of representations and warranties are grounded in common law principles. These remedies may include:

• rescission;
• damages; or
• in certain cases, specific performance.

However, specific performance is a discretionary remedy and may only be granted in appropriate circumstances.

Key transfer rights and restrictions will be contained in the investment agreements and the memorandum and articles of association.

The investment agreements will typically contain rights of first refusal if founders, or in some cases investors, wish to transfer some or all of their shares to a third party. Normally, there will be certain exceptions to any such restrictions on transfers. For instance, transfers by a founder to an estate planning vehicle or an investor to a group affiliate will often be permitted. Co-sale and tag-along/drag-along rights are also standard rights granted to investors.

Under the memorandum and articles of association, it is relatively standard that all share transfers must be approved by the board of directors; and sometimes there may be further restrictions on transfers to competitors.

It is common to see share option or share incentive plans implemented at the level of the BVI company to advance the interests of the company and its wider group by:

• providing an incentive to attract, retain and reward employees and individuals performing services; and
• motivating such persons to contribute to the growth and profitability of the business.

Such management incentives typically provide for awards under a share option plan in the form of options or restricted share awards. The share option plan is normally administered by the board of directors unless a specific committee has been established to oversee the same.

It is also not uncommon for some investors to insist that founders enter into a lock-up agreement, with the company being granted a repurchase option in case the founder should leave the company prior to the shares fully vesting.

It is unusual to see venture debt at the BVI holding company level (such lending typically occurs at the level of the operating business rather than the BVI holding company level). However, sometimes:

• security will be granted by the founders over their shares of the BVI company as collateral for the loan at operating business level; and/or
• the BVI company will issue warrants as part of the terms of the debt deal.

How non-equity venture capital investments are treated in case of these events will be a matter for negotiation, but it is not uncommon for such events to trigger repayment or, in the case of convertible debt, conversion.

A BVI company must have at least one director, although there is no requirement that any directors be resident in the British Virgin Islands.

The board of director(s) of a BVI company are collectively responsible for the management of the company. The board may in turn delegate certain power or authority to officers of the company – for instance:

• a chief executive officer or president; or
• a specific committee.

The board will normally be composed of a mix of:

• founders;
• directors nominated by investors pursuant to the investment agreements; and
• sometimes, independent directors.

The investment agreements will often also contain voting rights or protective provision consents ensuring that major investors have input (or veto rights) on certain strategic or key decisions impacting the company.

Individuals serving as directors of a BVI company should always remain mindful of the various duties and obligations that directors have under BVI law.

Such duties are derived under both the Business Companies Act and common law. Key duties include the following:

• to act honestly and in good faith in the best interests of the company;
• to exercise powers for proper purposes;
• to act in compliance with the Business Companies Act and the company’s memorandum and articles of association;
• to disclose interests and avoid conflicts of interest;
• not to fetter discretions;
• not to misuse company property; and
• general duties to exercise care, diligence and skill.

Directors are generally responsible to the company as a whole and not, in the absence of special circumstances, to any member or members in particular (eg, including the investor who has appointed the director in question). For the purposes of describing directors’ duties, the company is generally defined with reference to the interests of both present and future members of the company as a whole. However, if a BVI company is in financial difficulty (often referred to as the ‘zone of insolvency’), the interests of the company may shift to include the interests of its creditors.

A director may be personally liable to the company in damages for breaching their duties. Directors should therefore always consider their duties and responsibilities when charting a course of conduct with respect to the BVI company and its interests.

Although the fact that a decision turns out to be wrong or not beneficial, or causes loss, will not necessarily give rise to liability, if there is the least doubt or concern about a particular approach or action and how it might impinge upon or otherwise interact with the director’s duties and obligations, fact-specific legal advice should be obtained without delay.

This will depend on the terms negotiated for any particular investment, but it is not uncommon for certain strategic matters or matters over a particular monetary threshold to require board approval and/or shareholder approval under the investment agreements and memorandum and articles of association. Any such board approvals may require the affirmative vote of one or more of the investor nominated directors. In light of the duties that directors generally owe to the company as a whole, it may be preferable for certain veto rights to apply at shareholder level rather than board level.

The information and reporting rights of investors usually derive from:

• the investment agreements;
• the memorandum and articles of association; and
• statute.

Information rights typically provide for the provision of financial statements and management reports; whereas reporting rights are very limited under BVI company law and include:

• the memorandum and articles of the BVI company;
• its registers of members and directors; and
• shareholder resolutions.

Major investors may also negotiate the entry into a management rights letter or side letter which may provide for, among other things:

• more frequent reporting; or
• enhanced access to information.

Some investors may also negotiate the appointment of a board observer who may (on a confidential basis) attend board meetings and receive information otherwise shared with the directors.

The most common exit strategies pursued by BVI startups are:

• initial public offerings (IPOs);
• de-SPACs;
• strategic M&A transactions; and
• secondary share sales.

The choice of the most suitable strategy depends on various factors and may take place at the level of either the BVI holding company or one of its subsidiaries.

BVI holding companies are frequently utilised as listing vehicles for IPOs on prominent international stock exchanges. Consequently, many startups structured in the British Virgin Islands opt to list on NASDAQ, the NYSE or the HKEX. Investor rights agreements typically detail:

• the registration rights available to investors, including both demand and piggyback registration rights; and
• the terms and conditions for their exercise.

The investment agreements and memorandum and articles of association in place at the time of the proposed exit will dictate the corporate approvals which will need to be obtained in order to pursue any proposed exit strategy.

The British Virgin Islands is a tax-neutral jurisdiction. BVI legal entities are exempt from taxation in the British Virgin Islands and no taxes are imposed in the British Virgin Islands on foreign shareholders, including with respect to:

• any dividends, interests, rents, royalties, compensation or other amounts payable by a BVI company to persons that are not persons resident in the British Virgin Islands; and
• any capital gains realised with respect to any shares, debt obligations or other securities of a BVI company by persons who are not persons resident in the British Virgin Islands.

Further, no estate, inheritance, succession or gift tax, rate, duty, levy or other charge is payable by persons who are not persons resident in the BVI with respect to any shares, debt obligations or other securities of a BVI company. Except for those withholding taxes that could in certain limited circumstances be imposed pursuant to the US Foreign Account Tax Compliance Act, there are currently no withholding taxes or exchange control regulations in the British Virgin Islands applicable to a BVI company or its shareholders.

See question 9.1.

See question 9.1.

Venture capital investments involve a range of stakeholders, which can lead to tensions and disputes at various stages of a business’s lifecycle. These conflicts are not uncommon and often stem from the complexities of balancing interests among the parties involved.

Typical disputes include:

• disagreements between founders;
• conflicts between the company and departing employees; and
• issues between founders, directors and shareholders.

These are particularly prevalent in situations involving:

• breaches of shareholder agreements;
• financial difficulties; or
• claims of minority shareholder oppression.

In more severe cases, disputes may arise from allegations of fraud, misrepresentation or mismanagement.

To address such disputes, investment agreements generally include well-defined dispute resolution provisions. These clauses outline the procedures for resolving conflicts, frequently opting for arbitration. The choice of arbitration location and governing rules is usually influenced by the jurisdiction of:

• the founders;
• the business; or
• major investors.

Arbitration ensures a structured, efficient resolution process while maintaining confidentiality, which is often preferred. An increasingly popular option for parties to consider is arbitration via the BVI International Arbitration Centre under the BVI International Arbitration Centre Arbitration Rules.

Despite ongoing global macroeconomic uncertainties and persistent challenges in the venture capital landscape, there is cautious optimism for 2025. Key drivers of this outlook include:

• renewed activity in the initial public offering and M&A markets; and
• a notable increase in seed funding.

Greater liquidity in these markets is expected to facilitate further fundraising and investments, particularly in startups utilising BVI structures.

The British Virgin Islands remains strategically positioned to play a pivotal role in the industry’s growth. As a leading offshore fund domicile, it continues to attract fund managers from the United States, Latin America and Asia seeking to raise venture capital and private equity funds. Its reputation for a robust legal framework, tax neutrality and flexible corporate structures is a major draw.

Looking ahead, many startups aiming to secure international funding are anticipated to continue establishing BVI-based holding structures.

We do not expect any legislation which will impact the venture capital industry in the next 12 months.

A new beneficial ownership reporting regime was enacted in the British Virgin Islands in early January 2025 via:

• the Business Companies (Amendment) Act, 2024;
• the Business Companies (Amendment) Regulations, 2024; and
• the Business Companies and Limited Partnerships (Beneficial Ownership Regulations), 2024.

A six-month transitional period applies for existing BVI entities. This reflects the British Virgin Islands’ continued commitment to ensuring an appropriate level of transparency of beneficial ownership information, as it has enhanced the strength of its regime in line with evolving international standards for beneficial ownership transparency and reporting.

At present, the beneficial ownership information filed for a BVI company or limited partnership will not be accessible by the public. However, in accordance with certain commitments made by the BVI government to the United Kingdom and international regulatory authorities, it is expected that legislation will be introduced in the coming months to allow certain persons with a ‘legitimate interest’ to access the beneficial ownership information of BVI companies and limited partnerships. How this ‘legitimate interest’ will be defined and what other conditions will be imposed regarding access to beneficial ownership information are still uncertain.

In any event, all BVI companies and limited partnerships:

• must promptly consider how they are affected by this new beneficial ownership reporting regime; and
• will need to take appropriate steps to ensure compliance (as administrative fines may be imposed for any breaches).

To maximise the opportunities that venture capital offers when utilising BVI structures, both investors and portfolio companies should take full advantage of the jurisdiction’s well-established structures and its strong international reputation for attracting global capital. BVI entities are particularly attractive due to:

• their corporate flexibility;
• their tax neutrality; and
• the jurisdiction’s robust legal framework.

It is therefore crucial for investors and startups to engage experienced legal and tax advisers who specialise in BVI structures. These advisers can help to:

• navigate legal and regulatory requirements;
• mitigate potential risks; and
• optimise tax and operational efficiencies.

By doing so, all stakeholders are better positioned to achieve long-term success in an increasingly dynamic investment environment.