Features of the Incubator Fund
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:
– Limited to a total of 20 Investors (Sophisticated Private Investors)
– US$20,000, Minimum Initial Investment per investor
– Net Asset Value of the Fund must not exceed US$20,000,000 (if it does, the Fund will need to convert to another type of Fund)
– Duration of the Fund is limited to 2 years (with a possible further 12 months extension available at the discretion of the FSC upon application)
– Summary of Terms with Investors Warning
– 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
– Can commence business two days from the date the FSC receives the application.
Key Benefits of the Incubator Fund
The Incubator Fund shares a number of benefits with the other types of BVI mutual funds but has some benefits that are unique and it attractive for start-up managers such as:
– Providing start-up managers with a regulatory platform to develop their investment strategy and build a verifiable track record.
– Allows managers to show their performance and capabilities while managing a regulated fund in one of the leading offshore jurisdictions for a much lower cost (set up and operational) than would be the case onshore.
– Typically has a shorter launch timeframe than other more established mutual funds.
– A ‘lighter-touch’ regulatory regime with fewer regulatory obligations.
– Less required functionaries 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).
– No need for an offering document, only investor warnings, and investment strategy information are required.
Validity Period and Conversion
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 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 discretion as to whether or not to permit 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 that require the Incubator Fund to convert or upgrade to a Private Fund, Approved Fund, or Professional Fund. Incubator Funds that 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 such investors must be professional investors and must have invested at least an initial minimum of US$100,000. On conversion from an Incubator Fund to a Professional Fund, this requirement would only apply to new investors coming into the fund.
Source: Loeb Smith