There are now more than 3,000 investment funds established in the British Virgin Islands (the BVI) and over 400 entities providing investment management and/or administration services to those funds (even though local regulation does not require for BVI funds to be managed or administered from within the territory).
Most investment funds incorporated in the BVI are non-retail open-ended funds, as the laws governing funds in the jurisdiction are mainly geared towards attracting so-called professional investors. Regardless of this, as we mentioned in an article (we) published in IFC Review over a year ago, one of the innovations we saw during 2020 was the new regulatory regime for private equity, venture capital, and other closed-end funds[i].
This new category of regulated funds known as “private investment fund” or simply “PIF” includes any company, limited partnership, unit trust, or other body which collects and pools investor funds, issues proportionate fund interests computed according to the net asset value of the fund but do not allow investors to come and go as they wish. Instead, subscribers are “locked in” until the fund disposes of its investments.
The introduction of the PIF regime, similarly to other innovations such as the Approved Managers Regime, the Incubator, and the Approved funds, etc., has proved very successful for the jurisdiction.
These changes, as we had anticipated, allow the jurisdiction to remain a hive of activity for some time to come, especially when it comes to small to mid-sized hedge funds, emerging managers, family offices, and/or digital assets/cryptocurrency funds whose managers and administrators value working with a flexible, dynamic, reputable, and cost-efficient jurisdiction which offers fund products for all needs.
2021 Regulatory Changes
Unlike in 2019/2020, when we witnessed many changes to the investment funds regulatory framework, in 2021, the government of the BVI focused on the estate planning legislation and introduced five new statutes, making significant changes to various aspects of trust and estate law including the Trustee (Amendment) Act 2021.
The Trustee (Amendment) Act 2021 includes provisions relating to the variation of trusts, court jurisdiction to set aside the flawed exercise of a fiduciary power, strengthening the existing firewall provisions, and introducing extra reserved powers for settlors and constitutes - by far the most modern and cutting-edge piece of legislation dealing with trusts worldwide.
In the funds industry, there are two new regulations worth mentioning, even though they have not brought about significant change.
(A) Annual return reporting requirements for all fiduciary services licensees:
The Financial Services (Prudential and Statistical Returns) (Amendment) Order 2021 came into force on 15 February 2021.
The Financial Services Commission of the BVI (the Commission) has introduced new annual return reporting requirements for certain categories of licensees, including trust companies, investment managers, investment advisors, and fund administrators.
Licensees caught by these new regulatory requirements are now required to prepare and submit an annual return, together with an Anti-Money Laundering and Countering the Financing of Terrorism Return (AML/CFT Return).
Investment managers licensed as "Approved Managers" under the Investment Business (Approved Managers) Regulations 2012 are included amongst regulated entities affected.
The deadline for filing these returns is on or before 31 March of each year. Still, in this first year of reporting, covering the reporting period from 1 January 2020 to 31 December 2020, the deadline was extended to 15 June 2021.
(B) Extension of economic substance requirements to limited partnerships without a legal personality:
The Economic Substance (Companies and Limited Partnerships) (Amendment) Act 2021 (the Amendment), which came into force on 29 June 2021, extends the economic substance regime under the Economic Substance (Companies and Limited Partnerships) Act 2018 (ESA) to the limited partnership without legal personality. Limited partnerships with legal personality were already within the scope of the economic substance provisions by the ESA.
We are discussing the Amendment in this article because it included one interesting change to the ESA. The Amendment adds definitions of "investment fund" and "investment fund business" and expressly excludes investment fund business from being a relevant activity. This is a positive development as it removes some element of doubt regarding the treatment of investment funds vis a vis the ESA (especially those all-equities funds which might have otherwise been considered pure equity holding entities). A significant point to note in this regard is that the definition of "investment fund" is broader than the definitions of "mutual fund" and "private investment fund" in the Securities and Investment Business Act 2010 (SIBA). While all "mutual funds" and "private investment funds" will fall within the new definition of "investment fund", it is possible for other types of collective investment vehicles which are neither "mutual funds" nor "private investment funds" to be "investment funds" as far as the ESA is concerned and thus considered to be conducting "investment funds business".
While 2021 was not a year of many changes to the investment fund regime in the BVI, there have been a few developments worth mentioning. It is always a good exercise to keep up to speed with regards to regulatory changes, in one of the best-regulated jurisdictions, regarding the formation and licensing of collective investment vehicles.
We expect investment managers interested in setting up modern investment vehicles and benefitting from a light-touch and pragmatic regulatory framework, which simultaneously follows international best practices, to continue to choose the BVI as the jurisdiction of preference. In conclusion, the BVI has been a dominant player within the offshore fund industry for decades and the changes it has introduced will ensure that it continues to offer a cost-effective and flexible solution providing robust yet proportionate regulation for funds and fund managers.
Martín A. Litwak
Lawyer specialised in wealth structuring and investment funds. Martín has focused on providing advice to high net worth (HNW), ultra-high net worth (UHNW) and institutional families domiciled in Latin America. His expertise in setting up and/or managing fiduciary structures designed to tackle issues related to the lack of rule of law, the lack of privacy and the fiscal voracity of the countries in which they reside and/or conduct their business activities, as well as his experience in resolving succession issues and/or to ensure that the family assets are well protected makes him one of the foremost lawyers in this field. He has also assisted several Latin American based fund managers with the establishment and licensing of hundreds of investment funds, the majority of them in the British Virgin Islands and the Cayman Islands. Finally, Martín has been very active in multi-jurisdictional mergers and acquisitions, international financial transactions of several types (i.e. private equity/venture capital deals, project financing, structured finance, IPOs, etc.), tax amnesties and the provision of advice in transactions involving crypto-assets and Blockchain (ICOs, STOs, etc.)