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BVI Closed Ended 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.
Why a BVI Closed-Ended Company as a Fund? 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). The BVI investment fund industry is regulated by the Financial Services Commission (FSC). SIBA and the FSC regulate only open-ended funds (i.e., those whose equity interests are redeemable at the option of the investor). Consequently, closed-ended company "funds" (i.e., those whose equity interests are not redeemable at the option of the investor) are not subject to specific regulation in the BVI. In the BVI, the redemption feature represents the key distinction between closed-ended companies operating as "funds" and the Incubator Funds, Approved Funds, Private Funds, Professional Fund and Public Funds.
BVI Closed Ended Company "Fund" Do not let the words "closed-ended" confuse you. The BVI closed ended company "fund" can accept investor subscriptions on a continuous basis. The BVI closed ended company "fund" is structured in the same manner as a regulated hedge fund but an investor does not have an absolute right to redeem shares on demand. The M&A is drafted to limit the right of equity investors to redeem shares on demand. Instead, the right to redeem is left to the sole discretion of the hedge fund's director.
Upgrading the Closed Ended Company "Fund" If and when the BVI closed ended company "fund" is allowed to convert to a BVI regulated hedge fund, its M&A is amended to include a right to redeem on demand for the shareholders. In the past, it was a simple matter to convert the BVI closed-ended company "fund" structure to a regulated fund.
Offering DocumentsThe BVI closed ended company "fund" can be launched with or without hedge fund offering documents. When a BVI closed-ended company is used as a fund, it is very important that the restricted redemption rights of investors are fully disclosed in the fund's offering documents. Learn More About Offering Documents
Such restricted redemption rights may cause some prospective investors to be hesitant to invest in the fund. However, when the closed ended "fund" is properly marketed by word of mouth to personal and business associates, friends and relatives, the restrictive redemption rights should not pose a problem. Learn More About Hedge Fund Marketing
UBTI Blocker Fund Closed ended company "funds" 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 “unrelated business taxable income” (“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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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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