Formation of Collective Investments in the British Virgin Islands

June 2000

Whilst the Mutual Funds Act, 1996 as amended by the Mutual Funds (Amendment) Act, 1997 (together “the Act”) seeks to regulate all collective investment schemes and “mutual funds” (as defined by the Act) carrying on business in or from within the BVI, the actual operating vehicles used to establish funds or collective investment schemes derive from other legislation or concepts.

From the definition of what constitutes a “mutual fund” as set out in the Act, the mutual fund vehicle must be established for the purposes of collecting and pooling investor funds and it must issue shares (or their equivalent in other vehicles) that entitles the holder to receive on demand an amount in value which is proportionate to the whole net asset value of the vehicle. In other words, closed end vehicles that do not permit investors to exercise their right to exit or cash in their investment whenever they choose are excluded from regulation under the Act.

There are three main vehicles used in the BVI for collective investment purposes, namely limited companies, unit trusts and limited partnerships and each one will be looked at in turn.

1. Limited Companies

By far the most popular vehicle for establishing a collective investment vehicle is a limited company, but in particular an International Business Company (“IBC”) incorporated under The International Business Companies Act 1984 (Cap.291). The IBC has proved attractive because of its flexible nature, in particular the ability to create a flexible ownership structure with different classes or series of shares and additionally the ability to easily provide for the redemption of its shares. Moreover, share classes can be created with preferred or deferred voting rights and dividend or other participating rights.

The incorporation process is uncomplicated and essentially consists of filing customised copies of the Memorandum and Articles of Association with the Registrar or Companies, which are returned within 2 – 3 days together with a Certificate of Incorporation. 

2. Unit Trusts

Owing to the modern trust law existing in the British Virgin Islands, unit trusts are also a very popular form of collective investment vehicle. In such a structure, the investors or unit holders are the beneficiaries under the trust and pursuant to general trust principles, the trust can, at any time be brought to an end on the collective vote of all the unit holders.

The formation of this vehicle is again, a fairly simple process, which normally entails the trustee and the fund manager executing a customized trust instrument.

Flexible laws in the BVI allow the formation of an IBC to act as trustee, which will only require a restricted trust licence provided the company acts as trustee only of the trusts it lists in the application for the licence. The licence fee and annual fee is US $100.

3. Partnerships

Following the introduction of the Partnership Act, 1996, international limited partnerships have been frequently used as collective investment vehicles, again because of their flexible nature. International limited partnerships are formed by a general partner and at least one limited partner executing Articles of Partnership and by submitting a Memorandum of Partnership to the Registrar of Companies (who doubles as the Registrar of Partnerships). The Articles of Partnership do not have to be filed with the Registrar but for all intents and purposes constitute the essential documents governing the inter partnership relations. Bodies corporate may be the general or limited partner and an international limited partnership may serve as the general partner of another international limited partnership. There is no legal requirement for an international limited partnership to have a local (“BVI”) general or limited partner.

Choice of Vehicle

Whichever vehicle one chooses to use ultimately depends on a variety of factors, including the desired structure of the vehicle, the tax laws and familiarity of the various vehicles in the jurisdictions where the vehicle will be marketed and the cost of establishing the particular vehicle.

Other Structures

Whilst the above vehicles are used to create the vast majority of collective investment vehicles, various themes or variations of the said structures can be utilised to create any one or more of the following:-

(i) an umbrella fund, that is, a fund which is created with more than one sub-fund within. Under BVI law, because the rights of creditors against the fund would apply to all the assets of the fund vehicle (or the trustee in a unit trust), there is some potential risk of cross-liability between several sub-funds, where for example, a single IBC with several different classes of shares is used to create an umbrella fund. This applies irrespective of whether the Memorandum and Articles provide obligations on the directors to segregate assets and liabilities of the vehicle into the respective sub-funds. To the extent therefore that the assets attributable to any one sub-fund are insufficient to discharge the liabilities of that sub-fund, the IBC’s creditors may have recourse to the assets of other sub-funds. Accordingly, when creating an umbrella fund vehicle, it is advisable for entirely separate vehicles to be created to represent each sub-fund which may be held by a central or holding vehicle. Alternatively, it is possible for the persons responsible for acting on behalf of the fund vehicle to contract with creditors whose claims arise in connection with each particular sub-fund on a limited recourse basis, thereby limiting their rights of enforcement to the extent of the assets of the particular sub-fund;

(ii) fund of funds, that is, a fund established to invest strictly in other funds;

(iii) master-feeder fund, that is, a fund used to attract a specific interest group for onward investment into a central master fund;

(iv) multi-manager funds, that is, a fund vehicle which selects different managers to invest a portion or portfolio of the funds assets. Normally, there is one investment adviser or manager which has contracted with the fund and is charged with the responsibility to allocate the fund assets between selected managers after studying their recent investment performance and techniques; and

(v) side by side fund, that is, normally an onshore and offshore fund utilizing the same investment strategy, but each fund is attractive or restricted to a different category or class of person. For example a promoter or fund manager may wish to start up an offshore fund, following the success of its onshore fund, utilizing precisely the same investment strategy, but the offshore fund may be limited to non-United States persons, owing to regulatory and or taxation issues which would otherwise arise.

Different Types of Funds

It is generally thought that hedge funds, which employ sophisticated investment techniques, (often with varying degrees of leverage) constitute over fifty percent of the collective investment vehicles formed in the BVI. Other vehicles have been created with a view to investing in money market investments, interest bearing bonds or securities and stocks or shares. These vehicles are commonly referred to respectively as “Money Market Funds”, “Bond Funds” and “Equity Funds”.

Regulation

Under the Act, all mutual funds or collective investment vehicles are categorised as either “private”, “professional” or “public”. Private and professional funds must apply for recognition whereas public funds must apply for registration.