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BVI Incubator Funds
BVI Fund Types In the BVI regulated funds are categorized as either Incubator Funds, Approved Funds, Private Funds, Professional Funds, or Public Funds. Another option also exists in the BVI as not all companies operating as pooled investment vehicles are subject to the Securities and Investment Business (Amendment) Act 2015 (amending the Securities and Investment Business Act 2010 (SIBA). SIBA regulates only open-ended funds (i.e., those whose equity interests are redeemable at the option of the investor). Consequently, closed-ended "funds" (i.e., whose equity interests are not redeemable at the option of the investor) are not subject to specific regulation in the BVI. The redemption feature represents the key distinction between closed-ended companies operating as "funds", Incubator Funds, Approved Funds, Private Funds, Professional Fund and Public Funds. Learn More About Using a BVI Closed-Ended Company as a Hedge Fund
BVI Incubator Hedge Fund Compliance The Incubator Fund is aimed at the start-up manager looking to launch quickly (approval is given within two days of submitting a complete application) with low cost, minimal regulatory hurdles and no mandatory functionaries (i.e., administrator, auditor, investment manager, etc.) It can operate as an Incubator Fund for up to three years. At that point, if the fund has proved to be viable, it will need to convert to a Private, Professional or Approved fund. Alternatively, it can wind up its operations. The Incubator Fund has four annual compliance obligations. The Incubator Fund files an Annual Return with the BVI Financial Services Commission (FSC) before January 31st. It pays an Annual License Fee of $1,000 to the BVI government by March 31. The Incubator Fund files a Financial Statement before June 30th (or six months after its financial year end) along with a Director's Certificate. The Incubator Fund also files a Semi-Annual Return before July 31st.
We recommend the BVI Incubator Fund as a step beyond the unofficial closed end company fund. Learn More About the BVI Closed-Ended Company "Fund" The Incubator Fund is aimed at managers who do not necessarily have the benefit of seed investor capital but who wish to set up quickly and establish a track record with minimal set-up costs and without having to comply with onerous regulatory obligations. This type of hedge fund option is very attractive to start-up managers who are seeking to grow assets under management in a cost-efficient manner.
Under BVI regulations, the BVI incubator fund is permitted to operate for two (2) years (with the possibility of one additional year) with no service functionaries (i.e. administrator, custodian or investment manager). An auditor is not required to be appointed provided the fund operates along the following guidelines. The fund may have:
a maximum of 20 investors;
a minimum initial investment of US$20,000 by each investor; and
a market cap of (US) $20 million on the value of investments of the fund.
Prior to the end of the two or three-year term (if applicable) or upon exceeding any of the foregoing thresholds, the fund must pursue one of the following options:
Apply for recognition of the fund as a Private Fund or Professional Fund by preparing, amongst other things, an audit demonstrating its current financial position and compliance with the regulations and submitting the application to the Financial Services Commission of the British Virgin Islands (FSC);
Apply to the FSC for approval as an Approved Fund; or
Wind up its operations.
Directors & Authorized Representative Both Incubator and Approved Fund are required to appoint an authorized representative in the BVI and must have at least two directors at all times, one of which must be an individual. It will be necessary to provide the resume of any individual appointed to act as director part of the application process. We can provide BVI professional directors and appoint an authorized representative in the BVI. Contact Us For Help
Risk Warnings & Disclosures An application for approval of either an Incubator Fund or an Approved Fund must include the constitutional documents of the fund, a description of the fund's investment strategy and a written warning to investors, both of which can be contained in the fund's offering document or where it is not proposed to issue an offering document, the description and a warning in the prescribed form must be submitted as separate documents which will be provided to investors. An application for approval of a fund as an Incubator Fund or an Approved Fund must be accompanied by the correct fee, currently set at US$1,500. An annual renewal fee of US$1,000 is also payable for either type of fund.
Commencement of Business It will be possible to commence business as an Incubator Fund or an Approved Fund two business days following the day the BVI receives a completed application in respect of the fund. A license will not be provided by the Commission but it will be possible to obtain a certificate from the BVI evidencing the status of the fund.
Financial Statements & Returns It is a requirement for Incubator Funds and Approved Funds to prepare and submit to the BVI annual financial statements although there is no requirement that these statements be audited. Such funds will also be required to submit semi-annual returns to the Commission regarding their eligibility to utilize the relevant fund classification.
Conversion. If the number of investors or the amount of investments held by an Incubator Fund or an Approved Fund exceeds the limits set out above over a consecutive two month period, the fund must notify the BVI within seven days of this fact and must: (a) In the case of an incubator fund, submit an application for conversion to a private fund, a professional fund or an approved fund; (b) In the case of an approved fund, submit an application for conversion to a private fund or a professional fund; or (c) In both cases, commence the process of liquidating the fund or cease to be a fund by making the appropriate amendments to the fund's constitutional documents.
UBTI Blocker Fund BVI Incubator funds structure as a corporation are useful for U.S. fund promoters that need a "UBTI blocker" solution. For example, U.S. based hedge fund managers expecting U.S. tax-exempt investors to invest in the fund (i.e., retirement accounts and pension funds) should set up an offshore hedge fund in the form of a UBTI blocker company when margin trading is required to execute the hedge fund's trading program. The reason for this is the need for tax-exempt investors to avoid unrelated business taxable income (UBTI) tax exposure. Learn More About U.S. Tax Issues Under U.S. income tax laws, a tax-exempt investors (i.e., as IRA, 401(k) plan, etc.) investing in a financial product that involves borrowing money may be liable for tax on UBTI notwithstanding its tax-exempt status.
Why the British Virgin Islands? The British Virgin Islands (BVI) is an attractive and affordable country for hedge funds. The BVI is a zero tax country and has no capital gains or capital transfer taxes, no inheritance tax, and no sales tax or VAT. BVI is committed to remaining fully compliant with international financial regulatory norms and regulations. There are no regulatory restrictions on investment policies or strategies and there is no requirement to appoint local directors, administrators or auditors. It boasts a full range of professional service providers and very low start-up and ongoing fees and costs.The British Virgin Islands (BVI) is one of the best countries in the world to set up a hedge fund and a licensed investment management business. Presently, it offers start up fund managers more fund options than any other country. In the BVI regulated funds are categorized as either Incubator Funds, Approved Funds, Private Funds, Professional Funds, or Public Funds. Another option also exists in the BVI--the Closed-Ended Company
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You will see from this web site that we supply more information about hedge funds than most books do on the subject. It's great to see that Hannah Terhune's expertise is appreciated by the SEC! This is quite a coup for Hannah, and provides one more piece of evidence as to how she can help you. You can reach her today at hterhune@capitalmanagementservicesgroup.com or at +1 (307) 413-2212 or on Skype at: CapitalManagementServicesGroup.
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Strategic Hedge Fund Planning by Hannah Terhune. Wilmott Magazine Ltd. (Volume 2013, Issue 63, pages 8-11 January 2013).
Trading Foreign Index Contracts? Know the Tax Rules Before You Trade by Hannah M. Terhune and Roger D. Lorence. Stocks, Futures and Options (June 2005).
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