The British Virgin Islands: 10-Year Success Story In The Investment Funds Sector

To be eligible for recognition as an Approved Manager under the Approved Manager Regime, an entity must carry on “relevant business”, defined in the above-mentioned Regulations as being an entity acting as an investment manager or advisor to one or more of the following:

(a) BVI private or professional funds duly recognised under the Securities and Investment Business Act, 2020 (SIBA);

(b) BVI close-ended funds;

(c) non-BVI funds that invest substantially all their assets into a BVI fund;

(d) persons affiliated to a fund structure falling within one of the above referred types; and/or

(d) such other persons as the Financial Services Commission of the BVI (the Commission) may from time to time approve on a case-by-case basis.

In addition to the above, an Approved Manager is only permitted to provide “relevant business” to open-ended funds with aggregate assets under management of US$400 million or closed-ended funds with an aggregate capital commitment of US$1 billion.

For some time now, the Approved Manager Regime has been considered as one of the most inventive and cutting-edge regulations for investment managers and has therefore attracted business to the BVI from all over the world.

Three years later, more exactly on 1 June 2015, the Securities and Investment Business (Incubator and Approved Funds) Regulations, 2015 came into force in the BVI, extending this light-touch regulatory approach also to investment funds and enhancing the role of the jurisdiction as an investment funds hub specialising in emerging fund managers and newly formed funds. In this context, it does not come as a surprise that a lot of the funds that are active in innovative industries (such as cryptocurrency, NFTs, etc) are being established and licensed in the BVI.

Ten years have passed since the BVI started this path and, nowadays, it is the second largest offshore jurisdiction for investment fund formation having almost one quarter of the world’s active hedge funds, nearly 600 approved managers and 375,000 active business companies. This means that currently more than US$1.5 trillion of assets are held by BVI structures.

During these years, the BVI has been enacting laws and regulations to be up to date with the best international practices, always ensuring that both entrepreneurs and investors are protected and that their interests and objectives are being taken into consideration.

The most interesting pieces of legislation recently passed are the following:

• The Beneficial Ownership Secure Search System Act, 2017 which requires registered agents to register the ultimate beneficial owner of BVI entities on a secure search system which remains a private database that could be accessed upon request from certain authorities. This balances the interests of the government to fight money laundering with the right to privacy of the individuals and entities using the jurisdiction.
• The Business Companies (Amendment) Act, 2018 and the Segregated Portfolio Companies (BVI Business Company) Regulations, 2018, which allows formation of Segregated Portfolio Companies for non-regulated Business Companies. This has been a convenient business organisation, for example, for companies formed by friends and families to invest in several real estate projects.
• The Economic Substance (Companies and Limited Partnerships) Act, 2018, in force since 2019, and revised in 2020 (the “Economic Substance Act”), which imposed first the need to categorise the activities of the BVI entities and second, the implementation of requirements for entities carrying out one or more relevant activities and being also tax residents of the BVI. It is important to mention that investment funds and approved managers fall outside the scope of the Economic Substance Act.
• The Securities and Investment Business (Amendment) Act 2019 and the Private Investment Fund Regulations, 2019, amending SIBA to regulate the traditional closed-ended funds. This type of entity, which is now called “Private Investment Funds”, came to coexist with the other five types of funds existing in the jurisdiction. It is important to understand that if you are pooling investors’ monies to invest in one project you may be able to continue as a closed-ended fund as previously known, without a licence.
• In 2021, a package of anti-money laundering, combatting the financing of terrorism and countering proliferation financing rules established the newest global standards.

Additionally, on 1 July 2022, the new “Authorisation and Supervision Division” of the Commission became fully operational[i], allowing the Commission to boost its response time and speed up the application process.

Finally, it is really outstanding and noteworthy how the BVI is currently dealing with activities related to crypto assets.

On 10 July 2020, the Commission published the “Guidance on Regulation of Virtual Assets in the Virgin Islands (BVI)” in which the Commission explains that its position is to understand virtual assets as intangible property (the Guidance).[ii]

The Guidance established that, “When determining whether licensing is required for virtual asset related activities, an assessment of the following factors is relevant –

(i) The way the virtual asset (crypto asset) is being used;

(ii) The types of business activities being proposed or conducted;

(iii) Whether the business activities are analogous with those conducted through traditional businesses; and

(iv) The characteristics and business activities (economic substance) relating to an offering/issuance.”

Therefore, many business companies were allowed to issue tokens as a means of financing their projects implementing private initial coin offerings, sale of future tokens and beyond that, on February 2022 the FSC approved the first digital securities and asset exchange named “Fusang Exchange".[iii]

The “4th Annual Global Crypto Hedge Fund Report 2022”[iv] published by PwC (the PwC Report) informed that the estimated value of the total assets under management of crypto hedge funds in 2021 is roughly US$4.1 billion.

Also, according to the PwC Report, “the British Virgin Islands has overtaken the United States as the second most popular location for crypto hedge funds”, being home to 13 per cent of the total amount of crypto hedge funds.

We may celebrate the BVI’s watchful point of view which allows many crypto entrepreneurs and start-ups choose BVI to set-up their innovative businesses.

In summary, the British Virgin Islands continues to provide flexible and clear laws that give confidence to all the stakeholders involved in the financial and business industry, thus enabling an effective expansion of the relevance of the jurisdiction in the investment funds sector.

 

Footnotes:

[i] https://www.bvifsc.vg/news/industry-updates/bvi-fsc-newsletter-june-2022

[ii] https://www.bvifsc.vg/library/guidance-regulation-virtual-assets-virgin-islands-bvi

[iii] https://www.fusang.co/news/fusang-exchange-recognised-by-the-british-virgin-islands-financial-services-commission-bvi-fsc-2

[iv] https://www.pwc.com/gx/en/financial-services/pdf/4th-annual-global-crypto-hedge-fund-report-june-2022.pdf