Offering Legal, Tax & Business Services to Investment Managers & Hedge Funds Worldwide 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 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 files reports with the BVI Financial Services Commission (FSC) on January and July 31.
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.
The BVI Approved Manager License Since 2012, the BVI has offered a fund manager regime that supports the smaller and emerging fund manager. It has been a great success. In fact, many Cayman funds are set up with a BVI Approved Manager. In fact, the BVI Approved Manager out-performs the Cayman equivalent (i.e., the Cayman Islands Securities and Investment Business Law (SIBL) Exempted Manager), both with respect to cost (initial and ongoing) and because it has the stamp of being a regulated product, which the Cayman equivalent does not. Moreover, the BVI Approved Manager offers greater flexibility, as a Cayman Exempted Manager is limited to only acting for funds whose investors fall within the definitions of a “sophisticated investor” or “high net worth person” under SIBL. The BVI Approved Manager has no such limitation. Approved Managers must file a report withthe BVI FSC by January 31. Developed as an alternative to the existing regime in which fund managers wishing to do business in the BVI must hold a full license under Part 1 of the Securities and Investment Business Act (SIBA), the Approved Manager law allows eligible fund managers and advisors to submit a simple application to the Financial Services Commission (FSC) and start business seven (7) days later (whereas a Part 1 license will typically take the FSC at least four (4) weeks to process).
The BVI he Approved Manager is regulated by the Financial Services Commission (FSC), its ongoing obligations are limited, which is one of its key attractions. It is required to submit an annual return and financial statements, but there is no requirement for the financial statements to be audited. In addition it must notify the FSC within 14 days if there are any changes to the information contained in its original license application.
An Approved Manager can act as the investment manager or investment advisor to any number of private or professional funds recognized under SIBA as well as any number of closed-ended funds domiciled in the BVI which have the key characteristics of a private or professional fund. The Approved Manager can also act for non-BVI feeder funds into BVI master funds. Although Approved Managers are not restricted to any material extent in the way they carry out business, the regime is crafted to be a ‘licensing regime’ rather than an entirely exempted activity.
An Approved Manager is subject to caps of (i) aggregate assets under management of US $400 million for open ended funds and (ii) aggregate capital commitments of US1 billion for closed ended funds. It can act as investment manager or investment adviser to one or more:
incubator, approved, private or professional fund recognized under the Securities and Investment Business Act, 2010 (SIBA);
closed ended funds domiciled in the BVI with certain characteristics of a private or professional fund;
fund (open or closed ended) domiciled in any Recognized Jurisdiction with certain characteristics of a private or professional fund;
fund (open or closed ended) investing a substantial part of their assets in a fund described in (a), (b) or (c) above; and
other person approved by the FSC on a case by case basis (we have seen this used most commonly for managed accounts).
The Approved Manager license is quick and easy to set up. An application must be submitted to the FSC and the following must be provided:
a copy of the applicant’s constitutional documents;
details of the directors or general partner, any senior officers, the individuals who carry out the day to day investment business functions of the applicant and any person to whom the applicant will delegate any of its investment business functions and a resume or curriculum vitae for each such person;
details of each person who owns or holds and interest in the applicant;
a written declaration by the applicant that each director, general partner, senior officer and person holding a “significant interest” (normally a ten per cent or greater interest) in the applicant is “fit and proper” in accordance with the meaning set out in the Regulatory Code;
a written declaration by the applicant’s authorized representative or legal practitioner that the application for approval as an approved manager is complete; and
the application fee of US$1,000.
The applicant can commence business seven days after submitting its application. An Approved Manager is required to have at least two directors, one of whom must be an individual. The BVI FSC is open to approving applicants where one has fairly limited investment management experienced. This means that the Approved Manager is a viable option for those just starting out in the business.
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 for both local and International Business Companies and there are no capital gains or capital transfer taxes, no inheritance tax, and no sales tax or VAT. Strong confidentiality provisions are another factor behind the historic growth in business company and trust formations. 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.
Hedge Fund Banking and Brokerage Services For either banking or brokerage services, you cannot use your personal account as the hedge fund’s account. The hedge fund needs its own bank and brokerage account. In the United States, bank accounts can be opened over the Internet in some cases with very modest initial deposits. In addition, operating costs—such as monthly bank maintenance fees - are relatively low in the United States when compared to most other countries. Banking in the United States presents a lesser burden to a hedge fund sponsor than banking in most other parts of the world. U.S. banks and brokers generally do not require a hedge fund’s investment manager to be licensed by a regulator in order to open accounts unless the investment manager is based in a jurisdiction that requires such licensing. For these reasons, the United States presents an extremely attractive option for sponsors of smaller hedge funds. Need help with banking and brokerage arrangements? We have solutions! Contact Us for Assistance
U.S. SEC Offshore AlertThe U.S. SEC's 134-page report published in 2003--The Implications of the Growth of Hedge Funds--presents the status of the hedge fund industry as viewed in the United States. What is interesting about this SEC Report is that articles and web content authored by our very own hedge fund attorney Hannah Terhune, JD, LLM (Taxation) (when she was the Chief and only Attorney at GreenCompany.com) on offshore hedge funds was cited on page 10 of the U.S. SEC Report as providing information the SEC Staff found to be valuable in its understanding of the hedge fund industry. For a decade, hedge fund attorney Hannah Terhune has been counted on by the U.S. government and hedge fund organizers worldwide as a source of cutting edge and practical information on hedge fund formations.
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 email@example.com or at +1 (307) 413-2212 or on Skype at: CapitalManagementServicesGroup.
Call Us First We are experts in international hedge funds and tax. Click on any reference below to our leading articles:
Read leading, cutting-edge articles on hedge funds and taxes by Hannah Terhune, hedge fund and international tax attorney. Her articles are widely published on the Internet and recommended by TheStreet.com and other respected media.
Capital Management Services Group, Inc. is recognized by discriminating persons as being one of the foremost legal authorities in the hedge fund industry. Ms. Terhune's numerous articles on hedge funds and international tax matters have appeared in publications worldwide. Read Our Leading Media Content and Articles by Hannah Terhune on Hedge Funds and International Tax Planning, Chances are, if you have read anything related to starting a hedge fund, Ms. Terhune wrote it. Read Our Client Comments and Read About Hannah Terhune on LinkedIn. When you engage us you get a unique combination of securities, tax, and business experience. Give us the opportunity to use our knowledge and experience for you. No client is too large or too small for us. We pride ourselves in providing personal attention to each Client. We provide high quality services at competitive rates. But don't take our word for it, give us a call and let us prove what we can do for you.