However, there are now some very specific circumstances where the use of the British Virgin Islands (BVI) provides an attractive alternative, due to differences between recent legislation regulating investment funds and investment management companies in these two jurisdictions. Consideration should be given and appropriate advice should be sought as to what would be the most appropriate jurisdiction for the formation of any particular structure in its specific circumstances, in order to make the best use of any available regulatory arbitrage opportunities.
Single asset funds – club deals or co-investments
As a starting point, we note that legislation in both the Cayman Islands and the BVI has evolved in recent years to introduce greater regulation of closed ended funds.
The Cayman Islands Private Funds Act came into force in 2020 (as amended, Private Funds Act) and requires the registration of closed-ended funds with the Cayman Islands Monetary Authority (CIMA) where they constitute a “private fund” (as that term is defined).
A “private fund” is:
… a company, unit trust or partnership that offers or issues or has issued investment interests, the purpose or effect of which is the pooling of investor funds with the aim of enabling investors to receive profits or gains from such entity’s acquisition, holding, management or disposal of investments, where:
(a) the holders of investment interests do not have day-to-day control over the acquisition, holding, management or disposal of the investments; and
(b) the investments are managed as a whole by or on behalf of the operator of the private fund, directly or indirectly, but does not include:
(i) a person licensed under the Banks and Trust Companies Act … or the Insurance Act…;
(ii) a person registered under the Building Societies Act … or the Friendly Societies Act…; or
(iii) any non-fund arrangements
with “non-fund arrangements” meaning the arrangements listed in the Schedule to the Private Funds Act.
The regime relating to regulation of private investment funds in the BVI was introduced by way of amendments to the Securities and Investment Business Act effected in late 2019.
For the purposes of the BVI regime, a “private investment fund” is:
… 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.
The inclusion of a requirement for “diversification of portfolio risk” means that, if domiciled in the BVI, a club deal or co-investment structure can be formed to make a specific investment in a single underlying asset without becoming a regulated investment fund; there is no diversification of portfolio risk.
Offshore management companies – economic substance
Under pressure from the Organisation for Economic Co-operation and Development, the Cayman Islands and the BVI also introduced legislation in early 2019 requiring an increased level of economic substance to be maintained in their respective jurisdictions for all “relevant entities” (incorporated or registered in their respective jurisdictions) that undertake certain “relevant activities”.
Under both the Cayman and the BVI economic substance regimes, one type of relevant activity is “fund management business”1.The activities of a BVI “approved manager” (being the usual type of BVI offshore management company registered with the BVI Financial Services Commission pursuant to the Securities and Investment Business Act) do not ordinarily fall within the definition of fund management business for the purposes of the BVI economic substance regime. The appointment of a BVI approved manager, including for the purpose of acting as the offshore manager for investment funds domiciled in the Cayman Islands, has increased materially since the introduction of the economic substance regimes.
We add a caveat that a BVI approved manager is subject to certain limits on the amount of assets it is able to manage, specifically USD400 million in open ended funds or USD1 billion in closed ended funds while no such limits are imposed under Cayman law on a Cayman Islands registered person manager).
 For the avoidance of doubt, these economic substance regimes do not apply to investment funds. Rather, they only apply to offshore investment management companies.