The new category of fund is to be called a “private investment fund” and is defined as a company, limited partnership, unit trust or any other body which:
- collects and pools investor funds for the purpose of collective investment and diversification of portfolio risk;
- 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; and
- commences its liquidation by reference to a date specified in its constitutional documents (NB this will be the memorandum and articles, limited partnership agreement, unit trust deed or similar, but NOT the offering document).
An entity which does not have all three of the above characteristics will not be a private investment fund and will not be affected by the legislation.
The legislation will prohibit the promotion or operation of a private investment fund unless and until it has been “recognised” by the FSC (although there will be a 21 day grace period from the commencement of carrying on business for making the application for recognition for private investment funds which are compliant in all respects except for recognition when they start business).
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 basis only, or
- the fund interests shall be issued only to professional investors with a minimum initial investment as may be prescribed in the Regulations; and
- the fund meets such criteria as may be specified in the Regulations; and
- on recognition, the fund will be compliant with the 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.
The legislation sets out penalties for any person operating or promoting, or acting as administrator, custodian or manager for, a private investment fund which has not been recognised.
The draft legislation 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.
The exact impact of the draft legislation cannot be fully gauged until draft Regulations are published, however, the draft legislation itself is unlikely, in our view, to cause any significant impact upon the private funds industry and we do not anticipate that any Regulations will impose any notable change to the way in which such funds currently operate.
The legislation arises as part of wider discussions with the EU in relation to the BVI’s economic substance regime, however, it does not impose any economic substance or related reporting requirements. It should be noted that carrying on business as a fund (whether a mutual fund, private investment fund or otherwise) is not an activity falling within the BVI’s economic substance regime.