The Securities and Investment Business (Amendment) Act, 2019, which came into effect on 31 December 2019, introduces a new regulatory regime for private equity and other closed-ended funds in the British Virgin Islands (BVI). The legislation created a new category of fund – the "private investment fund1" – which is required to apply to the BVI Financial Services Commission (FSC) for "recognition" by the FSC and will need to meet certain prescribed criteria in order to qualify for recognition. Regulations to supplement the legislation (Regulations) were issued at the same time as the primary legislation. For ease of reference, in this Brief we refer to the legislation and Regulations as the PIF Regime.
1 Not to be confused with an open-ended Private Fund (which is a separate category of fund under BVI law).
Why the change?
The development of the PIF Regime was largely driven by external forces. The European Union, in particular, is looking for additional transparency on the activities of closed-ended funds across the offshore jurisdictions. This has led to local regulatory changes not only in the BVI, but also in the Cayman Islands, Bermuda and other locations. BVI's response is consistent with what has been enacted elsewhere.
Is this a Problem?
BVI closed-ended funds have historically been offered and operated subject to limits that closely match those now set out in the PIF Regime, so it is very unlikely that many funds will have to change what they are doing. The filing requirement introduced under the PIF Regime is broadly the same as the one already applying to many open-ended funds in the BVI, so it is unlikely to prove too difficult or expensive for BVI closed-ended funds to comply. The change will, however, require private equity and closed-ended funds to examine their structure, constitutional documents and appointees to ensure that all requirements are met.
To assist clients in understanding what may be required, we turn first to the definition of a "private investment fund".
What is a "Private Investment Fund"?
A "private investment fund" 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 interests1, 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.
The key factors, which will be immediately recognisable as the key indicia of a fund, are the notions of collective investment, diversification of risk and the ability of investors to receive a return based on the NAV of the entity. An entity which does not have the above characteristics will not be a Private Investment Fund and will not be affected by the PIF Regime legislation. This takes structures and arrangements like holding companies and joint ventures out of scope.
An entity shall not carry on business or hold itself out as carrying on business as a private investment fund in or from within the BVI unless it is recognised as a Private Investment Fund by the FSC or an exemption is available. Upon recognition, the FSC will enter the name of the fund in the Register of Private Investment Funds.
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 organised 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 authorised to have more than 50 investors, or
- an invitation to subscribe for or purchase fund interests shall be made on a private basis2 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 other criteria as may be specified in the Regulations;
- on recognition, the fund will be compliant with the PIF Regime 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.
Appointed Persons and other service providers
Unlike traditional open-ended regulated funds, Private Investment Funds are not required to appoint a fund manager, fund administrator or custodian. However, a Private Investment Fund must designate an "appointed person" to take responsibility for management, valuation and safekeeping of the fund's property. To qualify as an appointed person, the appointee need not be an individual, nor is there a BVI residency requirement. The appointed person may be a person licensed by the FSC or any other regulatory authority in a recognised jurisdiction, or it may be an independent third party, or a director (or partner or trustee, as the case may be) with experience in the specified functions. The appointed person should be independent from the person appointed with responsibility for the valuation process. If they are to be the same person, then procedures must be put into place to avoid conflicts.
If the Private Investment Fund is structured as a company, it must have at all times at least two directors, at least one of whom must be an individual. It must also have an auditor, although the auditor need not be located in the BVI.
A Private Investment Fund must also have an "authorised representative" who is empowered to liaise between the entity and the FSC. In most cases, this is a role taken on by the entity's registered agent (the registered office service provider).
A money laundering reporting officer (MLRO) must also be appointed. This role is typically taken on by a director or the fund administrator (where there is one). It should be noted that a Private Investment Fund is required to "know your customer" and to document how it complies with anti-money laundering requirements. If the entity is required to report under CRS or FATCA, then of course it will need to appoint a person to undertake those reporting tasks.
As mentioned at the outset, the vast majority of private equity or closed-ended funds in the BVI would have had appointees in these roles prior to the new PIF Regime. However, clients are advised to confirm that these roles are properly identified and refresh their documentation to expressly refer to the new regime.
A Private Investment Fund must comply with a number of ongoing obligations, including (but not limited to):
- including in the offering terms the regulatory disclosures required by the Regulations;
- maintaining a clear and comprehensive policy for the valuation of its property;
- providing notification to the FSC within 14 days of certain key changes; and
- maintaining financial records that are sufficient to show and explain its transactions and, at any time, enable its financial position to be determined with reasonable accuracy.
The application fee for recognition under the PIF Regime is US$700. The initial recognition fee is US$1,000 and an annual recognition renewal fee of US$1,000 is payable thereafter.
Treatment of Existing Entities
Existing entities who found themselves within scope of the new PIF Regime were given a transitional period to register. That period expired on 1 July 2020. Relevant entities which are not yet registered are encouraged to seek legal advice immediately, as they are in breach of the statutory requirements.
How Can we Help?
Appleby offers expert advice on all aspects of the PIF Regime and can assist, on a cost effective basis, with reviewing and drafting all necessary documentation to achieve compliance. Our highly qualified funds team works closely with reputable local service providers and can help you navigate the new requirements with relative ease.
1 The term "fund interests" is not defined but is understood to mean shares (in the case of a fund that is a company), partnership interests (in the case of a fund that is a partnership) and units (in the case of unit trust).
2 The term "private basis" is defined quite broadly in the Securities Investment Business Act 2010 in a way that reflects the intention to exclude public offers: "...private basis includes an invitation which is made (a) 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 (b) by reason of a private or business connection between the person making the invitation and the investor."
Originally published by Appleby, 18 August 2020
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.