It is estimated that there are more than 450,000 active companies incorporated in the British Virgin Islands (BVI) and that more than half of those companies are used in China, Hong Kong and other parts of Asia. While, traditionally, many of these companies have been used as asset holding vehicles, the robust Chinese economy has led to the increased use of BVI companies in China and Hong Kong as hedge funds and other types of investment vehicles. This is no surprise. In today’s economic climate, with new and changing regulations and new trends and investor demands in corporate governance and transparency, flexibility is key; and BVI funds can be structured for maximum flexibility.
BVI funds are governed by the Securities and Investment Business Act, 2010 (SIBA), the Mutual Fund Regulations, 2010 and Public Funds Code, 2010. There are three basic categories of funds under SIBA. They are private funds, professional funds and public funds.
Private funds are limited to 50 investors and can only invite new investors on a private basis. Professional funds are limited to professional investors as defined under the legislation. Essentially, a professional investor is one with a net worth of at least US $1 million or one who is in the business of dealing in investments similar to those with which the fund is concerned. A public fund is, essentially, a retail fund and is open to all members of the public.
Professional funds tend to be the most popular as they are open to a wider investor base than private funds but do not attract the same level of scrutiny as public funds.
While BVI funds can also be set up as limited partnerships or unit trusts, the preferred corporate vehicle is that of the BVI company. The BVI company is a separate legal entity from the investing shareholders and is structured as a limited liability company. BVI companies are regulated by the BVI Business Companies Act, 2004 (“BCA”) which serves to enhance a fund manager’s ability to customise a fund to suit its needs.
One of the key benefits of a BVI fund is that BVI law imposes no restrictions on investment strategy or borrowing. In addition, there is no need for meetings of the board of directors or for members’ meetings to be held in the BVI; or for directors to reside in the BVI; and there is no need for a BVI auditor to sign off on financials. Amendments to the fund’s constitutional documents can also be approved by the directors without the need for members’ approval.
At the same time, a BVI fund’s constitutional documents can be structured to include controls on borrowing, requirements for regular meetings of investors, and other controls that investors may find appealing. A BVI fund can therefore be tailored to meet the exact needs of the type of investor or type of investment that a fund manager will be targeting.
Another major advantage enjoyed by BVI funds is cost. Not only are legal fees significantly lower than in other jurisdictions, but filing and licensing fees are also a fraction of the costs charged in jurisdictions like the Cayman Islands. With most new investments going to larger fund managers with assets under management of US $1 billion or more, it is crucial for new funds or incubator funds to be as cost effective as possible. The reasonable costs of setting up in the BVI help fund managers who may be sensitive to large start-up costs.
Under SIBA, each fund must have an investment manager, administrator, custodian and auditor. However, there is no requirement that any of these fund service providers reside in the BVI. A fund can therefore be set up and run using service providers from just about anywhere in the world. A Chinese fund manager can therefore take advantage of lower costs or relationships built up over the years with providers in China or other parts of Asia.
What’s more, service providers from jurisdictions on the approved list published by the BVI regulator – the BVI Financial Services Commission (BVIFSC) do not need any approval from that body. The approved list includes well-established jurisdictions such as China, Hong Kong and Singapore. The BVIFSC can also, on a case-by-case basis, exempt providers from other jurisdictions, once it is satisfied that those jurisdictions have a proper regulatory regime in place.
As a jurisdiction, the BVI has always been careful to take the steps necessary to comply with international requirements for compliance and regulation while at the same time respecting the needs of its users worldwide. SIBA, which came into force in May 2010, is a reflection of that principle in so far as it complies with the International Organization of Securities Commissions (IOSCO) standards but still leaves a substantial amount of flexibility for fund managers. A collateral advantage of this is that the BVI fund industry is unlikely to see any significant amendments to regulations requiring funds to change the way they are doing business or resulting in additional costs to meet new compliance standards. Any changes will be designed to further enhance the attractiveness and competitiveness of BVI funds.
This article was first published in the BVI International Finance Centre Newsletter; BVI Finance- Asian Special Edition (October 2012)