Regulatory Regimes for Closed-Ended Private Investment Funds: BVI

(Originally Published, 17/04/2020)

https://www.ogier.com/publications/comparison-of-regulatory-regimes-for-closed-ended-private-investment-funds-cayman-islands-and-bvi

The British Virgin Islands (BVI), one of the most popular jurisdictions for private equity, venture capital, real estate and credit funds, has recently introduced a new regulatory regime for closed ended private investment funds.

This client advisory discusses the new private investment funds law regime as well as practical implications for fund managers.

Regulatory framework

The Securities and Investment Business Act, 2010 (SIBA) was amended by the enactment of the Securities and Investment Business (Amendment) Act, 2019 (SIBA Amendment Act) and Private Investment Funds Regulations, 2019 (BVI PIF Regulations), which came into force on 31 December 2019. Under the SIBA Amendment Act and BVI PIF Regulations, all "private investment funds" are now subject to registration and regulation by the BVI Financial Services Commission (FSC). For a more detailed discussion of the SIBA Amendment Act and the BVI PIF Regulations, please refer to our briefing:

Introduction of a new regime for the regulation of BVI close ended funds

Which entities are in scope?

A “private investment fund” is defined as a company, a partnership, a unit trust or any other body that is incorporated, registered, formed or organised, whether under the laws of the BVI or the laws of any other country, which:

(a) collects and pools investor funds for the purpose of collective investment and diversification of portfolio risk; and

(b) 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.

Registration requirements

Timing

The SIBA Amendment Act provides that a private investment fund must submit an application to the FSC for recognition within 14 days of commencing business, and prior to receiving its certificate of recognition, it may carry on business for a period not exceeding 21 days.

Documents required

An application for registration with recognition with FSC as a "private investment fund" (in the BVI) must be accompanied by the following:

· a completed prescribed application form;

· a copy of the fund's certificate of incorporation/ formation/ registration;

· a copy of the fund's constitutional documents (memorandum and articles of association/ trust deed/ limited partnership agreement) ;

· a copy of the offering document/ term sheet (as further explained below); and

· an application fee:

o BVI – an initial application fee of US$700, plus a fee of US$1,000 (for recognition on or before 30 June in each year) or US$500 (for recognition after 30 June in each year). Thereafter, the annual fee is US$1,000.

In BVI, the only additional items for an application for recognition as a BVI private investment fund are:

(a) the register of directors (if a company);

(b) a resume/ biography for each director; general partner, trustee or underlying individual where the director; general partner or trustee is a corporate entity; and

Operating requirements

Special Notes

A private investment fund shall at all times have an appointed person responsible for undertaking each of the following:

(a) management;

(b) valuation; and

An Appointed Person may be a person licensed by the FSC or a regulatory authority in a recognised jurisdiction to perform the specified functions; an independent third party with the experience in performing the specified functions; or a director, partner or trustee of the private investment fund. The fund shall identify, manage and monitor any potential conflicts of interest that may arise; and disclose to investors that the Appointed Person responsible for the fund's management function is also the Appointed Person responsible for the valuation of fund property; and details of how any potential conflicts of interest will be managed.

Note that for a BVI private investment fund, if it is intended that the function of valuation or safekeeping of fund property is to be undertaken internally, the Appointed Person must be a director, partner or trustee of the fund.

Number of directors ("four eyes principle")

The BVI PIF Regulations provide that a private investment fund shall have at least two directors, at least one of whom shall be an individual. Applying the FSC's four eyes principle, where one director is an individual and the other director is a corporate entity, it will be necessary to demonstrate that the individual director is functionally independent of the corporate director. This four eyes principle will also be extended to the governance of a general partner or trustee of a private investment fund.

Audit

The financial statements of a private investment fund will not need to be audited by a local BVI auditor, such that the only requirement is that the financial statements be prepared in accordance with an approved accounting standard (IFRS, UK GAAP, US GAAP, Canadian GAAP or such other accounting standard as is equivalent to these accounting standard). Similar to the Cayman Islands, a copy of the fund's financial statements shall be provided to the FSC within 6 months after each financial year end (subject to such extension as FSC may allow). An exemption from the requirement to audit is available and the FSC has issued guidance in relation to the circumstances in which it would consider an application for an exemption.

Valuation

The BVI PIF Regulations provide that a private investment fund shall maintain a clear and comprehensive policy for the valuation of fund property with procedures that are sufficient to ensure that valuation policy is effectively implemented. Unlike the Cayman Islands, specific rules applicable to such valuation policies and procedures (including matters to be covered therein) are expressly provided for within the BVI PIF Regulations. A copy of the fund's valuation policy shall also be submitted to the FSC at the time of the private investment fund's application for recognition and the fund shall provide written notice to the FSC of any amendment thereto within 14 days.

The BVI PIF Regulations further provide that the Appointed Person responsible for a private investment fund's management function shall be independent from the Appointed Person responsible for the valuation process, except that where the private investment fund determines that the management and valuation functions "must be" performed by the same Appointed Person, in which case, as noted above, the fund shall "identify, manage and monitor" any potential conflicts of interest and disclose to the investors details of how such potential conflicts will be "managed". This is somewhat similar to the position under the Cayman PF Law except that (a) the Cayman PF Law does not impose a requirement on the fund to determine that the valuation function "must be" performed by the manager or operator; and (b) according to the Cayman PF Law, any potential conflicts of interest are to be "identified" and disclosed (as opposed to a disclosure as to how they are "managed" as required under the BVI PIF Regulations) to the investors.

Safekeeping of fund assets/ property

As discussed above, a private investment fund must at all times have an Appointed Person responsible for safekeeping of fund property, including the segregation of fund property. The BVI PIF Regulations do not prescribe in detail the duties that apply to the relevant Appointed Person in terms of safekeeping or segregation of fund property. In addition, there is no specific procedure to apply for an exemption from appointing a third-party custodian under the BVI PIF Regulations. However, in circumstances where a fund does not propose to appoint a third-party custodian, the regulatory obligation around safekeeping of fund property will be fulfilled by one of the directors/ partners/ trustees assuming this responsibility (as the Appointed Person).

Cash monitoring

No equivalent requirement under the SIBA Amendment Act or the BVI PIF Regulations.

Identification of securities

No equivalent requirement under the SIBA Amendment Act or the BVI PIF Regulations.

Offering document/term sheet

The BVI PIF Regulations contemplate an offer or invitation to purchase or subscribe for fund interests in a private investment fund to be made within an offering document or term sheet and the BVI PIF Regulations stipulate the contents that should be contained in an offering document or term sheet. The BVI PIF Regulations provide that where an offering document or term sheet is not issued, the fund is required in its application to the FSC to provide the reason for not issuing an offering document/ term sheet, including how relevant information concerning the fund and any invitation or offer will be provided to investors or potential investors. What this means from a practical perspective is that where a private investment fund opts not to issue an offering document or term sheet, for the FSC to accept this, the required regulatory disclosures will need to be contained elsewhere in the fund's constitutional documents and/or subscription agreement.

Authorised representative

A private investment fund must have at all times an "authorised representative" in the BVI to act as the main intermediary between the fund and the FSC, to accept services of notices and other documents, to keep such records (or copies thereof) as may be prescribed, and to submit all documents required and pay all fees payable to the FSC. The concept of an authorised representative in the BVI is not a new one and all entities licensed under SIBA are required to have an authorised representative in the absence of their having a substantive presence in the BVI. The authorised representative role is typically performed by a licensed affiliate of the registered agent. Through one of our affiliates which holds an authorised representative licence, Ogier can act as the authorised representative for any of our private investment fund clients.

Additional requirements applicable to a BVI private investment fund

A BVI private investment fund's constitutional documents must specify that:

· the fund is not authorised to have more than 50 investors; or

· an invitation to subscribe for or purchase, fund interests issued by the fund must be made on a private basis only; or

· the fund interest shall be issued only to professional investors, with an initial investment of each professional investor, other than an exempted investor, not being less than US$100,000.

Transitional periods

There is a six-month transitional period applicable for close-ended funds which were carrying or carry on business as a "private investment fund" immediately before or after the coming into force of the SIBA Amendment Act (being 31 December 2019) and so will be required to apply to the FSC to become recognised as a private investment fund under this new regulatory regime. This six-month transitional period ends on 30 June 2020. The FSC have also orally indicated that any new private investment funds which commence business within the six-month transitional period will similarly need to become recognised prior to the end of the six-month transitional period.

If you would like to discuss any of the above or any specific structure with us, please do not hesitate to speak to your usual Ogier contact.

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