General introduction to the regulatory framework
The sole regulatory body in the BVI is the FSC. The FSC is also the parent entity of the BVI Registry of Corporate Affairs (Registrar), which is the body responsible for the registration and oversight of companies and limited partnerships incorporated or registered (as appropriate) in the BVI and, in this way, the FSC has general control over all asset management business carried out in the BVI.
The FSC was established by the Financial Services Commission Act 2001 (FSC Act), which sets out in Section 4 the broad functions of the FSC. Foremost among these are the responsibilities to supervise and regulate those who have been issued licences to carry on financial business by the FSC in accordance with the FSC Act, other relevant legislation relating to financial services and the Regulatory Code, 2009 as amended, and to monitor and regulate, in accordance with relevant financial services legislation, financial services business carried on in or from within the BVI. The FSC has all attendant powers to enforce the relevant legislation against those under its authority and, as a body corporate, has sufficient personality to bring suits in its own name.
The Securities and Investment Business Act, 2010 as amended (SIBA) is the primary legislation that governs the licensing, regulation and supervision collective investment schemes and investment business, as well as controlling the offer of securities to the public in the BVI. The Mutual Fund Regulations, 2010 as amended together with SIBA governs BVI private, professional and public funds. The Securities and Investment Business (Incubator and Approved Funds) Regulations, 2015 as amended together with SIBA governs BVI incubator and approved funds. Asset management vehicles structured as limited partnerships are governed by the Limited Partnership Act, 2017, which came into force on 11 January 2018 (Limited Partnership Act), together with the Limited Partnership Regulations, 2018. The Limited Partnership Act provides a modern and efficient limited partnership structure that appeals to asset managers, particularly those looking to form closed-ended limited partnership fund structures.
Common asset management structures
Investment funds in the BVI are typically structured as private companies, limited partnerships or, less commonly, as unit trusts. As mentioned in Section I, supra, private companies are the overwhelmingly more popular choice for investors, with the total number of active companies registered standing at 389,459, compared with 812 limited partnerships (as at 31 December 2017).
The popularity of BVI companies can be attributed in large part to the flexibility of corporate law in the BVI. There are several types of private company that can be established in the BVI:
companies limited by shares;
companies limited by guarantee, either authorised or not authorised to issue shares;
unlimited companies that are authorised to issue shares; and
unlimited companies that are not authorised to issue shares.
The most prevalent form of BVI fund vehicle is the business company limited by shares. It is conducive to both stand-alone and umbrella funds by the creation of numerous share classes, with each share class forming a separate sub-fund. Apart from distinct participating non-voting investor share classes, funds adopting this structure often establish a non-participating voting management share class for the purposes of operating the fund. This vehicle is also popular in both master–feeder fund structures as well as in open-ended and closed-ended (non-regulated) BVI funds. The shares in a BVI business company may be held by the manager directly or through a trust. The BVI Virgin Islands Special Trusts Act, 2003 (VISTA) provides a unique trust structure, namely a VISTA trust that was specifically developed to act as a commercial trust vehicle for holding voting shares of funds, SPVs and other structured finance vehicles.
There are two other broad categories of companies that can be incorporated: restricted purpose companies (RPCs) and segregated portfolio companies (SPCs). RPCs are most commonly used in sophisticated structured finance transactions, and are therefore beyond the scope of this chapter. SPCs are considered in more detail below.
The law governing the establishment and operation of BVI companies is the BVI Business Companies Act, 2004 as amended (BCA). This law, which was brought into force on 1 January 2005, replaced the 1984 International Business Companies Act (1984 Act), which was the original piece of company legislation that brought the BVI to prominence in the world of international business. The 1984 Act was fully repealed on 31 December 2006, and any companies incorporated under it are now governed by the BCA and the relevant transitional provisions thereunder.
The BCA grants a significant degree of latitude to individual companies for the management of their operations, allowing investment managers to focus on the business of their funds without being constrained by any rigid procedural legal formality. Many provisions are caveated as being subject to the memorandum or articles of association of a company, and therefore some areas that other jurisdictions may see as falling within the exclusive purview of the members of a company (such as amendments of the constitutional documents of the company) can be brought, to one degree or another, within the competence of the directors of a company. Similarly, operations that may entail lengthy processes under the laws of some jurisdictions (such as the forcible removal of a director) can in some circumstances be streamlined by setting out simpler procedures in the memorandum or articles.
Section 120 of the BCA further extends the flexibility afforded to the directors of a company by providing that directors of a company that is a wholly-owned subsidiary may, when exercising powers or performing duties as a director, if expressly permitted to do so by the memorandum or articles of the company, act in a manner that they believe is in the best interests of that company’s parent even though it may not be in the best interests of the company. Similarly, if the company is not a wholly-owned subsidiary, a director may act in a manner that he or she believes is in the interests of one of the company’s shareholders if allowed by the memorandum or articles and with the prior consent of the other shareholders. Where a company is a joint venture vehicle, if allowed by the memorandum or articles, a director may act in the best interests of one or more shareholders, even though it may not be in the best interests of the company itself.
The BCA is also not overly prescriptive as regards company shares. A company may issue shares in multiple classes or series (and, as discussed above, if the articles of a company so permit, new classes or series may be created by the directors without reference to the members) and may issue shares with no par value. Subject to the memorandum or articles of a company, it may also issue fractional shares. One significant development implemented by the BCA was the removal of the concept of ‘share capital’ from companies incorporated under or governed by the BCA. As a result, rules relating to maintenance of capital and the associated issues surrounding reduction of capital do not apply. Significantly, there is therefore no issue with repatriation of cash from BVI companies, as dividends do not need to be paid from distributable reserves or other amounts legally available for the purpose of paying dividends; under the BCA, a company may declare and pay dividends to its members as long as its directors are reasonably satisfied that it will satisfy the ‘solvency test’ immediately thereafter. The solvency test simply requires that the value of the company’s assets exceeds its liabilities; and that the company is able to pay its debts as they fall due. As set out in Section VII, infra, there is generally no withholding tax on dividends declared by a BVI company.
It should be noted that companies incorporated under the 1984 Act and to which the transitional provisions under the BCA apply may still be subject to rules relating to share capital. This situation can easily be altered, however, by the company filing a notice with the Registrar that it wishes to dis-apply the transitional provisions, and adopting a new memorandum and articles of association with the relevant changes.
SPCs are a specific type of company under the BCA that are able to divide their assets between general company assets, on the one hand, and assets of the company’s individual segregated portfolios, on the other hand. In this way, assets of the company that are allocated to one portfolio are not treated as general assets of the company, and are only available to meet the liabilities of that specific segregated portfolio, even though the individual segregated portfolios are not separate legal entities and do not have individual legal personality. Indeed, the BCA imposes an obligation on the directors of an SPC to keep assets and liabilities of the various segregated portfolios separate and distinct both from the general assets and liabilities of the company and from each other segregated portfolio. The directors are also obliged to ensure that any contracts, arrangements or other agreements entered into on behalf of a segregated portfolio are specifically expressed to be entered into for and on behalf of that segregated portfolio. Where the directors fail in this duty and assets or obligations of one segregated portfolio are attributed to another portfolio, the directors are required to re-attribute the asset or obligation, and notify in writing all persons who are affected by the re-attribution. Any person so affected may, within 30 days of receipt of such notice, apply to the court in the BVI for re-attribution of the relevant asset or obligation.
As each segregated portfolio operates independently of the other segregated portfolios, it follows that each segregated portfolio may have its own class of shares (the proceeds of the sale of which form part of the assets of that segregated portfolio). Where a segregated portfolio has its own class (or classes) of shares, distributions may then be made with respect to those shares, and in making such distributions, the directors need only have regard to the solvency of the specific segregated portfolio to which those shares relate.
A company may be incorporated as an SPC, or, if it has already been incorporated, may, upon application, be converted to an SPC by the Registrar. The company must be limited by shares, and must have the prior written approval of the FSC before being incorporated or re-registered as an SPC. The FSC will only give its approval where the relevant company is (or will be) licensed as an insurer under the Insurance Act, 2008; or recognised as a professional or private fund, or registered as a public fund under SIBA. There is a further sub-category: companies that are (or will be) of such classes or descriptions as may be prescribed by regulations made by the BVI Cabinet. At the time of writing, amendments have been proposed and are being drafted so as to extend the purposes for which SPCs may be employed.
The SPC is, therefore, a versatile and efficient way of structuring funds for those who may wish to offer investors the opportunity to divide their investment between (or limit their investment to), for example, certain asset classes, risk exposures or leverage profiles, without having to use the traditional multi-entity umbrella fund structures. Of the 1,499 mutual funds registered or recognised in the BVI, 136 were incorporated or re-registered as SPCs as at 31 December 2017.
The other structure that is commonly used for asset management activity in the BVI is the limited partnership structure. The new Limited Partnership Act provides for the election of legal personality, a model limited liability agreement containing the essential elements required for a BVI limited partnership and for re-registration of existing limited partnerships that were formed under the predecessor legislation, the Partnership Act, 1996 (at any time during a transition period of ten years after the Limited Partnership Act came into force, with any existing limited partnership not having applied for re-registration by the end of that period being deemed to be automatically re-registered on the day after that period expires and then having two years within which to adopt a limited partnership agreement meeting the requirements of the Limited Partnership Act).
The Limited Partnership Act folds the modern BVI partnership provisions into a law that maintains its strong connection to the BCA. This has been a deliberate drafting approach so as to ensure that the BCA, which is well understood and for which the BVI has a growing body of judicial interpretation, can be of assistance in analysing provisions of the Limited Partnership Act.
A limited partnership must have at least one general partner, but can have more, and at least one limited partner. Limited partners may not take part in the management of the limited partnership, otherwise they are at risk of being treated as a general partner and lose the protection of limited liability afforded by their limited partner status. As with other jurisdictions, BVI limited partnerships can ‘stack’, whether in the usual master-feeder relationship, or with one limited partnership acting as general partner or limited partner in another limited partnership.
Limited partnerships are governed by a written limited partnership agreement (LPA). The LPA is not registered or filed with any regulatory authority and is not available to the public. The new BVI Limited Partnership Act provides a modern and efficient limited partnership structure with greater flexibility that will appeal to asset managers, particularly the private equity industry and those looking to form closed-ended limited partnership fund structures.
One final structure that bears mention is the unit trust. Trusts law in the BVI is derived from and largely similar to such law in England. Under a unit trust, the trustee holds the assets of the trust for the benefit of the investors (who will be the beneficiaries under the trust) subject to the terms of a trust deed, which will set out the relative rights and obligations of the trustee and investors. Unit trusts are the least common of the structures considered here, and are typically only used where there are other commercial forces bearing on the structuring of the investment vehicle.
Main sounces of investment
The growth in and granting of investment business licences has continued in the BVI. The FSC’s Statistical Bulletin, Vol. 49, December Q3 2017 records the following figures.
In terms of mutual funds that are registered or recognised (classified as professional, private, public, foreign funds, incubator and approved), the total stands at 1,499, with 136 organised as SPCs and the majority of the SPCs being professional mutual funds (100).
A breakdown of the total registered or recognised funds (1,499) reveals that BVI professional funds remain the most attractive for managers, namely:
six foreign funds;
48 public funds;
340 private funds;
1,007 professional funds;
41 incubator funds; and
57 approved funds.
A total of 426 investment business licences, 51 authorised representative licences and 193 approved investment managers licences have been issued by the FSC up to Q4 2017.
The above figures do not reflect the number of unregulated funds, particularly closed-ended funds, domiciled in the BVI.
The BVI asset management industry is primarily targeted at the international non-BVI, institutional and sophisticated investor market. The preponderance of professional funds is geared solely towards ‘professional investors’. Professional investors are those:
whose ordinary business involves the acquisition or disposal of property, whether on their own account or the account of others, of property of the same kind of property or a substantial part of the property of the fund; or
who either individually or jointly with a spouse, have a net worth in excess of US$1 million (or other currency equivalent).
Professional funds dictate an initial investment of not less than US$100,000 (or other currency equivalent), other than for ‘exempted investors’, comprising investment managers, administrators, promoters or other connected persons, and this reflects the target investor base.
The BVI has traditionally been the jurisdiction of choice for a great number of Asia-based managers and investors. It is estimated that up to 70 per cent of ultimate beneficial owners of BVI vehicles are located in Asia. Notwithstanding that, the BVI has witnessed a broadening of its appeal to other geographic locations, particularly Russia, the Middle East and South America.
Recent experience in the BVI asset management sector has revealed a greater emphasis placed on crypto-asset funds, initial coin offerings (ICOs), token generation events (TGEs) and BVI special purpose vehicles (SPVs) being used and related activity. Cost-efficient start-up funds that appeal to new managers looking to establish a track record, remain a strong feature of the BVI asset management environment and growth in the use of incubator and approved fund vehicles (structures that are not widely replicated among other offshore jurisdictions) represents the appeal of these interesting alternatives to traditional BVI fund structures to start-up managers.
On the opposite spectrum, we continue to see established fund managers launch new funds with greater seed capital than was previously witnessed during the global financial crisis. These have included property focused funds and Islamic funds to cater to the requirements of Middle Eastern investors.
Private equity houses are driving a large part of the growth in BVI incorporations, and particularly in establishing unregulated closed-ended private equity funds.
The BVI Micro Business Companies Act, 2017 (MBCA) came into force on 4 June 2018. The MBCA is aimed at typically small, family-and-friends run businesses without a high degree of corporate sophistication. Micro business companies (MBCA) may not carry on any BVI regulated business, may not have annual turnover of more than $2,000,000 (or its equivalent in any other currency) neither may they have gross assets valued at more than $2,000,000 (or its equivalent in any other currency) nor more than 10 employees.
As mentioned above, the FSC is the sole regulatory body in the BVI. It regulates the insurance industry primarily through the Insurance Act, 2009, the Insurance Regulations, 2009 and the Regulatory Code, 2009. No person is entitled to carry out insurance business without being licensed by the FSC; any persons wishing to carry on insurance business within the BVI (that is, with persons or companies resident in the BVI) must have a specific class of licence authorising this activity. The type of licence that an insurer holds will determine the types of activity that may be carried out, and the amount and quality of the assets to be maintained against prospective liabilities.
There is no specific regulatory regime in the BVI relating to pension funds.
There is no specific regulatory regime in the BVI relating to real property, but it should be noted that any entity that has an interest in land that is situated in the BVI will fall foul of the provisions in the BCA exempting BVI companies from local taxation. Where a BVI company owns land in the BVI, the shares, debt obligations and other securities in that company, and instruments relating to transfers of property to or by that company, will be subject to stamp duty in the BVI. There is, however, no issue with a BVI company holding or dealing with interests in land outside the BVI.
There is no specific regulatory regime in the BVI relating to hedge funds. As hedge funds are typically open-ended, they will fall within the regulatory remit of the FSC under the relevant provisions of SIBA discussed above.
There is no specific regulatory regime in the BVI relating to private equity funds. As private equity funds are typically closed-ended, they will generally fall outside the regulatory remit of the FSC. In the unlikely event that any private equity funds are established as open-ended funds, such funds will fall under the BVI’s mutual funds regulatory regime. As noted above, the new BVI Limited Partnership Act provides greater flexibility and attractiveness as a business structure, with particular appeal to the private equity industry.
There is no specific regulatory regime in the BVI relating to other asset management entities and sectors (including sovereign wealth funds).
A key feature of the investment regime in the BVI is that it is tax-neutral. Under Section 242 of the BCA, companies, amounts paid by them to their shareholders (through, inter alia, dividends, interest, rents, royalties and compensations), and all capital gains realised with respect to shares, debt obligations or other securities of a company, are exempt from income tax. There are no capital gains taxes or other corporate taxes in the BVI relevant to international companies.
Transactions carried out by companies are also exempt from stamp duty unless they relate to land located in the BVI or are carried out by companies that have an interest in any land in the BVI.
Although figures for new incorporations in the BVI have been declining slightly in recent years and the fact that the United Kingdom Parliament has mandated that the BVI, together with other UK overseas territories are to introduce public registers of beneficial ownership in BVI companies by 2020, the outlook of many professionals in the jurisdiction remains optimistic. The BVI continues to dominate offshore new company registration activity by volume.
The boom of the crypto-assets sector in the BVI demonstrates the jurisdiction’s attraction and its ability to remain at the forefront of innovation in the asset management arena, and is expected to contribute to an increase in investment management activity based in the BVI.
1. BVI Financial Services Commission – Statistical Bulletin Vol. 49, December Q4 2017.