The benefits and advantages of establishing virtual assets businesses in the BVI include:

(1) Stability and reliability. As an autonomous British Overseas Territory that applies English common law rules and principles, it has a well-tested and efficient judicial system, with a final right of appeal to the Privy Council.

(2) Incorporation and maintenance costs. BVI companies are cheap to incorporate and maintain in good standing. There were around 370,000 active BVI companies at the end of 2021, many of which are virtual assets businesses.

(3) Tax neutrality. No income, corporate, capital gains or wealth taxes, withholdings or other similar taxes are imposed on BVI companies as a matter of BVI law.

(4) Exchange controls. There are no exchange controls and restrictions as a matter of BVI law.

(5) Confidentiality. Shareholders and directors of a BVI business company are generally a matter of private record.

(6) Corporate flexibility. The objects, capacity and powers of a BVI company are generally unrestricted. Most decisions can be taken by the board of directors of the relevant company, with only certain matters requiring shareholder approval. There is considerable flexibility to tailor the memorandum of association and articles of association to meet a client’s requirements.

The BVI has not developed a specific regulatory framework for virtual assets. Therefore, whether an entity will need to be licensed or registered with respect to its virtual assets-related activities in the BVI will be determined in accordance with existing financial services legislation.

Firstly, dealing, arranging deals in, or managing investments, providing investment advice, custodianand/or administration services with respect to investments, and operating an investment exchange is regulated under the Securities and Investment Business Act (SIBA).

The BVI Financial Services Commission (FSC) has confirmed that a virtual asset, which is a medium of exchange to which no benefits or rights other than ownership attaches (such as a utility token enabling the holder to purchase goods and services), will generally not constitute an “investment” under the SIBA. Careful consideration will need to be givenif any other benefits or rights are attached to the virtual asset as these will determine whether it then comprises an “investment”.

Secondly, the Financing and Money Services Act (FMSA) regulates the business of international financing and lending in the peer-to-peer fintech market, including peer-to-business and business-to-business markets and the transmission of money in any form, including electronic money, mobile money or payments of money. The FSC has confirmed that the transmission of virtual assets and related products will not be caught by the FMSA. However, a virtual assets business that deals with fiat currency on behalf of customers should carefully consider its position under the FMSA.

Thirdly, the Banks and Trust Companies Act (BTCA) regulates “banking business” – which is defined as the “business of accepting deposits of money that may be withdrawn or repaid on demand or after a fixed period, or after notice, by cheque or otherwise, and the employment of such deposits, either in whole or in part, (1) in making or giving loans, advances, overdrafts, guarantees or similar facilities; or (2) the making of investments, (in each case) for the account and at the risk of the person accepting such deposits.” A virtual assets business and/or exchange with activities that include dealing in or holding fiat currency should therefore ensure it is not inadvertently conducting “banking business” under the BTCA.

Finally, anti-money laundering (AML) legislation in the BVI requires “relevant persons” conducting “relevant business” (such as funds and providers of money transmission services) to establish certain AML policies and procedures. Although certain types of activities (such as ICOs of utility tokens) are unlikely to be caught by these regulations as they do not fall within the scope of investment business under the SIBA, directors should be mindful of the AML framework as a matter of good corporate governance – and as a way of future-proofing the business.

PETER VAS is a partner at Loeb Smith Attorneys in Hong Kong. Other members of the corporate group at the firm who also contributed to this article are GARY SMITH, SANTIAGO CARVAJAL, SANDRA KORYBUT, and VIVIAN HUANG

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In December of 2019, British Virgin Islands (“BVI”) introduced a regulatory regime for the recognition of private investment funds, the Private Investment Funds Regulations, 2019 (the “Regulations”). Under these Regulations, closed-ended funds (including, real estate, private equity and venture capital funds) which were previously not regulated in the BVI, are required to be registered with the Financial Services Commission (“FSC”) as private investment funds prior to carrying on business.

Simultaneously, the FSC published guidelines that extended certain obligations of the Incubator Fund and the Approved Fund to Private Investment Funds, in order to clarify that the ability of a Fund to ensure the protection and security of fund property and the preservation of investors assets is core to a Fund’s operations.

The Regulations require a Private Investment Fund to, at all times, have an appointed person responsible for the safekeeping of the Fund’s assets. Similarly, the Securities and Investment Business (Incubator and Approved Funds) Regulations, 2015 requires Incubator Funds and Approved Funds to have, at all times, appropriate arrangements in place for the safekeeping of fund property.

The safekeeping arrangements that a Private Investment Fund, Incubator Fund or Approved Fund must have in place will depend on the type of assets that the Fund may hold as the FSC considers each safekeeping arrangement based on the particular asset type of the Fund.

A Private Investment Fund, Incubator Fund or Approved Fund is required at the time of applying for authorization or recognition with the FSC, and at all times thereafter, to be in a position to demonstrate that safekeeping arrangements are in place. Where Safekeeping Arrangements have ceased or are altered, the Fund is required to notify the FSC of such changes within 14 days of the cessation or of the changes being made.

These safekeeping arrangements must be disclosed in the offering documents or investor’s warning for each Private Investment Fund, Incubator Fund or Approved Fund. The FSC may request further information and documentation to confirm that the safekeeping arrangements are in place when the application for authorization or recognition is made, or at any time thereafter.

The FSC has divided the type of assets and the corresponding safekeeping arrangements that are required as follows.

Where a Private Investment Fund, Incubator Fund or Approved Fund invests in financial instruments such as stocks, bonds, futures, contracts for difference, options, etc., the Fund should maintain appropriate safekeeping arrangements with an appropriately licensed and/or qualified person with expertise in dealing in such assets. Normally, this person can be a traditional custodian, but administrators and other functionaries or service providers may be engaged for these purposes. A Private Investment Fund, Incubator Fund or Approved Fund may also establish such an arrangement with a prime broker that establishes custodial arrangements for the transactions being undertaken on behalf of its Fund clients.

Where a Private Investment Fund, Incubator Fund or Approved Fund invests in tangible assets such as land, real estate, equipment, private equity, etc., a traditional custodian or prime broker is not required.

However, a Private Investment Fund, Incubator Fund or Approved Fund must ensure that it appoints a person that has the responsibility of securing that documentation with respect to the Fund’s ownership of such assets is maintained and safeguarded according to the Regulations. The Private Investment Fund, Incubator Fund or Approved Fund must warrant that such person has sufficient expertise and resources to carry out the function.

Where a Private Investment Fund, Incubator Fund or Approved Fund operates as a feeder fund (or sub-fund) in a master/feeder fund structure or operates in a fund of funds structure and places all its investments in another fund or in a number of funds, the Private Investment Fund, Incubator Fund or Approved Fund must make sure that a person is responsible for ensuring that the underlying fund or funds have appropriate (i.e. depending on the relevant asset class) custodial or safekeeping arrangements in place in relation to the underlying fund assets and that they understand these arrangements. This person would also be responsible for monitoring the investments in, and redemptions from, the underlying funds.

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This publication is intended to merely provide a brief overview and general guidance only and is not intended to be a substitute for specific legal advice or a legal opinion.

For specific legal advice on the safekeeping arrangements for BVI Funds, please contact your usual Loeb Smith attorney or:

E: gary.smith@loebsmith.com
E: elizabeth.kenny@loebsmith.com
E: vivian.huang@loebsmith.com
E: yun.sheng@loebsmith.com
E: santiago.carvajal@loebsmith.com
E: faye.huang@loebsmith.com
E: sandra.korybut@loebsmith.com
E: robert.farrell@loebsmith.com

The IIF reported that there was an almost four-fold increase to USD160 billion in bonds issuance with a sustainability-linked pricing ratchet in the first six months of 2021 compared against the prevous year. Market participants almost certainly drove this increase because they recognised that implementing a sound ESG strategy facilitates access to new pools of capital and opportunities to lock-in favourable pricing.

For example, SSAB, a Swedish company that aims to be the first fossil fuel-free steel producer, has issued a USD230 million equivalent five-year senior unsecured sustainability-linked bond with a maturity date of 2026. Under the terms of the relevant bond instruments, a redemption premium will be payable at maturity if SSAB fails to meet specific sustainability performance targets linked to greenhouse gas emissions. We expect the volume of sustainability-linked bonds to continue to grow in 2022.

The IIF has also reported that about 85% of all ESG-linked debt issuances occur in Europe and North America. However, there is evidence that ESG-linked debt is gaining traction in other regions. For example, Chinese real estate company Minmetals Land, Japanese real estate group Mori Hills, and India’s Adani Electricity Mumbai have brought, or are reportedly planning to bring, various sustainable and green bonds to market.

In contrast to green bonds, where proceeds are used in certain green projects, general sustainability-linked financings have also been used for various corporate purposes and are based on specific ESG targets, rather than a limited set of green projects. This has further opened the market to a broader spread of issuers, a trend that we expect to continue in 2022.

With a growing focus on ESG-linked products, standards have intensified. While there are now a raft of regulations and proposals in the market, such as the Green Loan Principles, the European Green Bond Standard and the Sustainable Finance Disclosure Regulation, there are concerns that greenwashing may cloud the distinction between genuine ESG-linked debt issuance and opportunism.

Therefore, lenders and other finance parties committed to monitoring compliance with ESG targets must agree on reporting standards with the relevant obligor group, and must ensure appropriate external review mechanisms are implemented.

Companies in the British Virgin Islands (BVI) and the Cayman Islands are widely used in cross-border finance transactions, including those with ESG-linked investing elements. These jurisdictions have various features that make them attractive to lenders and other finance parties, as well as borrowers and other obligors for ESG-linked financings. Some reasons for this are:

• The BVI and the Cayman Islands are widely recognised as creditor-friendly jurisdictions due to the range of self-help remedies available to secured creditors in an enforcement. The BVI also has a straightforward system of registering security interests that protects the priority of security interests.
• BVI and Cayman Islands companies may have unlimited objects and purposes, including in relation to ESG initiatives, and there is significant flexibility in how such companies are structured in terms of capital structure, management roles and shareholder involvement.
• BVI and Cayman Islands companies are subject to low ongoing maintenance costs. Financial statements do not need to be prepared in relation to companies that are not regulated by the BVI Financial Services Commission or the Cayman Islands Monetary Authority.
• Except for the payment of nominal filing fees in connection with the optional filing of a security interest that is granted by a BVI chargor, there are no income, corporate or capital gain taxes, withholdings, levies, registration taxes, or other similar taxes or charges imposed on companies in the BVI or the Cayman Islands in connection with the execution, delivery or performance of finance documents by a BVI or a Cayman Islands company, or the finance parties.

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PETER VAS is a partner at Loeb Smith Attorneys in Hong Kong
Contact details:
T: +852 5225 4920
E: peter.vas@loebsmith.com

The BVI’s Securities and Investment Business (Incubator and Approved Funds) Regulations, 2015 (the “Regulations”) introduced the “Incubator Fund” which provides a streamlined basis for start-up investment managers to establish a track record of managing funds with an open-ended strategy. The Incubator Fund regime under the Regulations does not have some of the more stringent requirements that are found with the more established investment fund options (such as Professional Funds, Private Funds or Public Funds) under BVI law.

The key features of an Incubator Fund are:

1. Limited to total of 20 Investors (Sophisticated Private Investors)

2. US$20,000 Minimum Initial Investment per investor

3. Net Asset Value of Fund must not exceed US$20,000,000 (if it does, the Fund will need to convert to another type of Fund)

4. Duration of the Fund is limited to 2 years (with a possible further 12 months extension available at the discretion of the BVI’s Financial Services Commission (“FSC”) upon application)

5. Summary of Terms with Investors Warning is sufficient and there is no requirement for an Offering Memorandum

6. Financial Statements of the Fund are required to be prepared and submitted to the FSC within six (6) months of the end of the financial year to which they relate but are not required to be audited

7. Can commence business two days from the date the FSC receives the application.

The Incubator Fund shares a number of benefits with the other types of BVI open-ended funds, but have some benefits that are unique and make it especially attractive for start-up managers. These include:

i. providing start up managers with a regulatory platform to develop their investment strategy and build a verifiable track record.

ii. allowing managers to show their performance and capabilities while managing a regulated fund in one of the leading offshore jurisdiction at a much lower cost (set up and operational) than would be the case onshore.

iii. typically has a shorter launch timeframe than other more established open-ended funds.

iv. A ‘lighter-touch’ regulatory regime with fewer regulatory obligations.

v. Fewer functionaries are required as the Incubator Fund may operate without an investment manager, auditor, administrator or custodian (though the fund is required to have arrangements in place for the safekeeping of fund property, which include provisions for the appropriate segregation of fund property).

vi. No need for an offering document, only investor warnings and investment strategy information required.

As introduced above, the idea behind the Incubator Fund is to provide a launchpad for emerging managers to develop their investment strategies over time and put all their resources into growing the fund and their track record. If, after the initial two (2) years (“Validity Period”) the Incubator Fund wishes to continue to carry on business as an Incubator Fund, it must submit a written application to the FSC (at least one month before the end of the Incubator Fund’s Validity Period) indicating that it would like to extend its period of validity for one additional year. The FSC has a discretion as to whether or not to authorise the extension. If an extension is not granted by the FSC or the Incubator Fund is not deemed viable to convert it must proceed to do one of the following: (a) proceed into voluntary liquidation under the BVI Business Companies Act, 2004; or (b) cease to be a mutual fund by taking the necessary steps to amend its constitutional documents.

During the Validity Period, there may be trigger events (e.g. Net Asset Value of the fund has exceeded or is close to exceeding US$20,000,000) which require the Incubator Fund to convert or upgrade to a Private Fund, Approved Fund, or Professional Fund. Incubator Funds which seek to convert to Professional Funds are not required to have their existing investors invest additional proceeds in order to meet the requirement for all investors in a Professional Fund that each such investor must be a professional investor and must have invested at least an initial minimum of US$100,000. On a conversion from an Incubator Fund to a Professional Fund, this requirement would only apply to new investors coming into the fund.

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For specific guidance on the features and benefits of BVI Incubator Funds and submitting an application to the BVI FSC for recognition, please contact your usual Loeb Smith attorney or any of:

E: gary.smith@loebsmith.com
E: santiago.carvajal@loebsmith.com
E: vivian.huang@loebsmith.com
E: yun.sheng@loebsmith.com
E: elizabeth.kenny@loebsmith.com
E: faye.huang@loebsmith.com
E: robert.farrell@loebsmith.com
E: Sandra.korybut@loebsmith.com