Structuring venture capital deals in the BVI21 Jul 2016
The British Virgin Islands ("BVI") is a popular jurisdiction in which to form venture capital funds and incorporate start-up companies. It is estimated that 60% of all the world’s alternative investment funds are domiciled in offshore jurisdictions such as the BVI. In addition, the BVI is the world’s leading corporate domicile, with approximately 500,000 active companies and over 500 active limited partnerships domiciled in the BVI.
Part of the success of the BVI can be attributed to certain features of BVI companies and partnerships, which include:
- modern and flexible corporate and partnership law;
- exemption from all BVI taxes and stamp duty;
- no foreign exchange controls;
- a high degree of confidentiality;
- limited statutory filings;
- ease of administration and operation; and
- a same day incorporation procedure.
As a result, the BVI is often considered in the venture capital space when forming a venture capital fund or incorporating a start-up company. In addition, the BVI frequently features in venture capital deals where an investment target is incorporated in the jurisdiction.
This briefing outlines some of the general considerations that arise when structuring venture capital deals in the BVI.
Venture capital: structuring the fund
BVI funds can either be regulated or unregulated.
A fund will be unregulated where it is structured as a closed-end fund (such that the investors do not have the right on demand to the return of their interests, calculated by reference to the net asset value of the fund). Most BVI venture capital and private equity funds are structured in this way and our firm has developed a niche in forming innovative incubator funds for venture capital investment.
A fund will be regulated, and therefore require a licence under the BVI Securities and Investment Business Act ("SIBA") where the fund (a) collects and pools investor funds for the purpose of collective investment, and (b) issues shares or similar interests that entitle the holder to receive on demand or within a specified period after demand an amount computed by reference to the value of a proportionate interest in the whole or part of the net assets of the company, partnership or unit trust.
There are three types of fund available under SIBA: a public fund (in which shares are sold to the public); a private fund (in which the fund will not have more than 50 investors or the invitation to subscribe is made on a "private basis"); and a professional fund (which is only available to professional investors, either on the basis that such investor’s ordinary business involves the acquisition and disposal of property similar to the fund or whose net worth exceeds US$1,000,000).
Historically, only regulated funds were permitted to use the word "fund" in their name, although due to recent changes in policy, the BVI Financial Services Commission will permit an unregulated closed-end or private equity fund to use the word "fund" in its name with the prior written consent of the Commission.
Venture capital: structuring the investment
When forming a start-up vehicle or joint venture, or investing into a BVI target, it is important to ensure that the investor’s position is protected. It is also crucial to ensure that the corporate form can be tailored to provide for appropriate control mechanisms, corporate governance provisions, differing share and voting rights, and allow for the expansion and eventual exit from the business. Given the flexibility of BVI law, it is often the chosen jurisdiction for the incorporation of start-up companies and joint ventures.
Some of the advantages of a BVI company include:
- Shares: there is no concept of share capital and a company can have no par value shares. This simplifies many corporate procedures, such as redemptions and distributions, and also allows for the easy determination of the amount and issue price of shares to be issued to investors.
- Share rights: a BVI company can issue different classes of shares with different share rights, on voting, dividends and liquidation. This allows for companies to be tailored to meet the different demands of investors and for control mechanisms to be built in.
- Corporate governance: the constitutional documents of a BVI company can be tailored so that shareholders have the right to appoint certain directors. In addition, a unique feature of BVI law is that a director may, where permitted by the company’s constitutional documents, act in the interests of an appointing shareholder notwithstanding that it may not be in the best interests of the company. This feature allows for directors to overcome common conflicts with fiduciary duties, which often arise in joint-ventures or venture capital funded enterprises.
- Shareholder agreements: BVI law permits shareholders to exercise voting and other rights pursuant to a shareholder agreement. However, in order to avoid potential conflicts between the shareholder agreement and the constitutional documents, and to ensure that any rights under the shareholder agreement are capable of specific performance, it is usual to seek to incorporate the terms of the agreement, where possible, into the constitutional documents of the company.
Venture capital: conducting due diligence on the target
Where investing into a target company that is incorporated in the BVI, it is important to consider what due diligence may be required. Due diligence is a relatively simple and cost effective exercise to undertake early in a transaction and can serve to highlight potential issues that could prove costly if not discovered until later.
Investment into BVI funds
Where an investor is considering an investment into a BVI venture capital fund, proper checks should be carried out to ensure that the target fund is duly incorporated, properly constituted and in good standing. These checks can be made by conducting a search of the public records maintained at the Companies Registry and a search of the records maintained with the Registry of the High Court and Commercial Court, to ensure that there are no pending actions or judgments filed against or by the fund. The Companies Registry search will also reveal whether any notice of the appointment, or resolutions to appoint, a voluntary liquidator have been filed.
Where the fund is regulated, there are various statutory requirements and ongoing obligations to satisfy and a review for compliance with these requirements may be prudent. In addition, checks should be made with the BVI Financial Services Commission to ensure that the fund holds an appropriate licence.
A comprehensive due diligence exercise should include a detailed review of the fund documents, particularly the offering document and the memorandum and articles of association as well as service provider agreements, to ensure that the terms are consistent with BVI law and to check that there are no unusual provisions or "red flags".
Investment into BVI companies
Where a venture capital investor is considering an investment into a BVI target, it is also important to ensure that the target shares have been properly issued and recorded on the books of the company. An early analysis can confirm the ownership of the shares, whether the shares were validly issued and obtained, and whether any security exists over the shares.
Aside from the standard checks of the Companies Registry and the Courts, a search of the Companies Registry may also reveal whether there are any charges over the assets of the company and whether the shares in the target have been charged (assuming that the company has voluntarily chosen to file its register of charges).
During and after the purchase of shares, it is important to ensure that the formalities of any share transfer or issuance have been complied with and that the company has approved and updated its books and records to reflect the acquisition of shares.
An offshore option for Asia venture capital
The venture capital industry in Asia is dynamic and growing, with more new funds and start-ups each year. There are a variety of options available to venture capital in terms of structuring such ventures, and in each case a number of factors must be considered, such as cost, taxation and corporate flexibility. However, where the deal requires a low-cost, flexible and internationally recognised vehicle, consideration should be given as to whether a BVI structure may provide the right solution.