Securities and Investment Business (Incubator and Approved Funds) Regulations (Revised 2020)

Summary

These BVI Financial Services Commission regulations create a light-touch regulatory regime for two categories of small, closely-held funds: incubator funds and approved funds. They set out how such funds are approved (via a deemed-approval process rather than full licensing), the investor and asset limits that apply, ongoing operational obligations, and periodic reporting to the Commission.

• Approval process: A fund applies to the Commission using a prescribed form; a complete application (including constitutional documents, investment strategy description, and the required investor warning) is deemed approved and may commence business after 2 business days, subject to the Commission's review.
• Investment warning: No offer to investors may be made unless a prescribed written warning is given, covering suitability, investor/asset caps, lack of Commission supervision, and (for incubator funds) the fund's limited approval period.
• Investor and asset caps: Incubator funds are limited to sophisticated private investors, a maximum of 20 investors, and net assets not exceeding $20,000,000; approved funds are limited to 20 investors and net assets not exceeding $100,000,000.
• Ongoing obligations: Funds must at all times maintain an authorised representative in the BVI, at least 2 directors (one an individual), safekeeping/segregation arrangements for fund property, and (for approved funds) an administrator; a valuation policy must also be maintained and applied at least annually.
• Breach or exceedance of thresholds: If investor numbers or net assets exceed the caps for two consecutive months, the fund must notify the Commission and either convert to a private/professional fund (or, for incubator funds, an approved fund) or begin liquidation/amend its constitution to cease being a mutual fund.
• Forced conversion or liquidation: The Commission may direct a non-compliant fund to convert or liquidate, including where it considers this to be in the public interest.
• Validity and conversion of incubator funds: An incubator fund's approval is valid for 2 years (extendable by up to 12 months), after which it must convert to another fund type, terminate, or otherwise regularise its status.
• Reporting to the Commission: Incubator funds must file semi-annual reports and an annual compliance return; approved funds must file an annual compliance return with fund data; both must notify the Commission of changes in circumstances and material matters.
• Fees and penalties: Applications and renewals require prescribed fees; unpaid renewal fees attract a penalty of $50 per day, up to a maximum of $2,000.

The Commission maintains a public register of incubator and approved funds. Transitional provisions apply the 2019 amendments to existing incubator and approved funds from 1 July 2020, with the increased penalty fee cap applying from 1 April 2020.

Key obligations

• A fund seeking approval must submit a complete application to the Commission including constitutional documents, an investment strategy description, and the required investor warning, together with the prescribed fee.
• No offer or invitation to invest may be made unless investors are given the prescribed written warning, either in the offering document or as a separate document.
• An incubator fund and approved fund must maintain a clear valuation policy for fund property, valued at least annually, with appropriate independence between investment and valuation functions (or disclosed conflict-management measures).
• A fund must notify the Commission in writing within 14 days of any change to information provided in its application, and must notify the Commission of any matter likely to have a material impact on the fund.
• A fund must at all times have an authorised representative in the BVI, at least 2 directors (one an individual), and arrangements for safekeeping/segregation of fund property; approved funds must also have an administrator at all times.
• If director numbers fall below 2, the fund must immediately notify the Commission and restore compliance within 21 days.
• If the authorised representative ceases to act, the fund must immediately notify the Commission and appoint a replacement within 21 days.
• An approved fund must immediately notify the Commission of any change in its administrator.
• If an incubator or approved fund exceeds its investor or asset limits for two consecutive months, it must, within 7 days of the end of the second month, notify the Commission and either apply to convert to another fund type or commence liquidation/amend its constitution.
• An incubator fund must submit a semi-annual report to the Commission no later than 31 July and 31 January each year, and file an annual compliance return no later than 31 January each year.
• An approved fund must file an annual compliance return with the Commission no later than 31 January each year, including specified fund data as at the preceding 31 December.
• A fund that fails to pay its renewal fee when due is liable to a penalty of $50 per day unpaid, up to a maximum of $2,000.

Applies to

incubator funds, approved funds, mutual funds, private funds, professional funds, fund administrators, authorised representatives

Deadlines

• within 14 days of the change occurring: Notify the Commission in writing of any change to information provided in the fund's application
• within 21 days from the date the director requirement was not complied with: Restore the fund's director count to at least 2 (one an individual)
• within 21 days from the date the authorised representative ceased to act: Appoint a replacement authorised representative
• within 7 days of the end of the second consecutive month of exceeding thresholds: Notify the Commission and apply for conversion or begin liquidation/constitutional amendment where investor or asset limits are exceeded
• no later than 31 July and 31 January each year: Incubator fund semi-annual report to the Commission for periods ending 30 June and 31 December respectively
• no later than 31 January each year: Incubator fund and approved fund annual compliance return to the Commission
• 2 years (extendable by up to 12 months): Validity period of an incubator fund's approval before it must convert, terminate, or otherwise regularise status
• 1 July 2020: Effective date of the Mutual Funds (Amendment) Regulations 2019 in relation to existing incubator funds or approved funds
• 1 April 2020: Effective date of the increased maximum penalty fee for late renewal payments