Briefing. A Guide to Investment Funds in the British Virgin Islands. Client briefing. February Anti-Money Laundering. Choice of Jurisdiction

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1 February 2007 Briefing A Guide to Investment Funds in the British Virgin Islands BVI/IF/ The success of the final product is dependant on making many decisions. Whether they are; determining the target market, determining what type of investment fund is required, which compliance and regulatory regime will best suit the circumstances, establishing distribution channels, or introducing systems and procedures to support the operation of the fund, Ogier is in a position to assist you from the outset. FUND CONSIDERATIONS Does the BVI provide the necessary framework? Regulation - The choice of the British Virgin Islands as a domicile for the fund means that the fund will be regulated by the Mutual Funds Act (1996). The BVI Financial Services Commission ( FSC ) an independent regulator - has an excellent reputation. Structure - BVI corporate law allows for companies, limited partnerships or trusts. This may be determined by more complex structuring outside (or within) the fund (with for example umbrella structures, master-feeder structures or the use of Segregated Portfolio Cell companies etc.). The BVI is well known with almost 3,000 active funds and has a good reputation amongst investors and brokers. Operations - For the purposes of most funds the structure must include fund managers and administrators, and in many circumstances custodians. Providers of these services are well established in the BVI. Documents - Depending on the type of fund the regulator will require the submission of different types of offering information for prospective investors to BVI regulators. The market requires consistency from regulators and flexibility in terms of corporate structures. Anti-Money Laundering The British Virgin Islands was amongst the first jurisdictions worldwide to have specific antimoney laundering legislation in The British Virgin Islands mandates some of the highest standards of KYC due diligence but within realistic and practical codes of conduct. Choice of Jurisdiction The following features make the British Virgin Islands a preferred jurisdiction for establishing and administering funds: proximity to the United States and Latin America ease and speed of fund formation (with proper preparation of documents waiting times can be two to four weeks for recognition) range of professional service providers (e.g. legal, audit, and administrative) absence of direct taxation of shareholders or unit-holders in tax undertaking funds or fund management companies reasonable local legal, regulatory, and reporting requirements ongoing dialogue between Government and the private sector to ensure that BVI is aware of, and responsive to, user needs sophisticated legal and judicial system based on English law principles with ultimate appeal to the Privy Council in UK competitive fees in comparison with other international finance funds centres

2 BVI funds are recognized and capable of listing on exchanges including NYSE, TSE, Dublin, Singapore, Luxembourg and Bermuda Growth in this industry has been explosive in the BVI because of its regulatory framework and the features listed above. Business Company and a fund set up as a unit trust organised under BVI law Whereas a company is a separate legal entity from the investing shareholders, a unit trust is not. Some of the more important results of this distinction are Choice of Entity (Investment Funds) Investment Funds can include many kinds of entities for collective investment whether open or closed-ended, dual-purpose, exchange, hedge, venture-capital etc. Closed-ended funds are not regulated by the Mutual Funds Act. Limited Partnerships BVI limited partnerships are established pursuant to the Partnership Act (1996) and operate similarly to US limited partnerships. A limited partnership is formed in the BVI by a general partner and at least one limited partner executing Articles of Partnership and by submitting to the Registrar of Limited Partnerships, a Memorandum of Partnership. The Articles of Partnership do not have to be filed with the Registrar of Limited Partnerships and are really the internal governing document of the partnership dealing with issues such as partnership contributions and withdrawals and the day-to-day running of the partnership. BVI Business Companies The BVI Business Companies Act, 2004 introduces a corporate fund vehicle with limited liability that matches perfectly the constantly evolving needs of the international funds market. The Act is straight forward and flexible with many of the concepts familiar to Delaware company specialists but retaining established English company law features. The Act has introduced the Segregated Portfolio Company into BVI law to ensure that the British Virgin Islands remains a competitive financial market. BVI law requires a single non-resident director for the fund. a) the shareholders of a company benefit from limited liability b) the shareholders of a company have no direct legal or beneficial interests in any of the assets of the company which are instead legally and beneficially owned by the company itself c) the holders of units in a unit trust scheme are the beneficial owners of the trust assets. The capital of a company may be divided into various classes of shares with preferred or deferred voting, dividend or other participating rights and the company may also create and issue loan capital. Although it is theoretically possible for a unit trust to issue units with unequal rights, this is rare in practice. As a result of the fact that a company has the legal status of a separate entity, it enjoys the advantage of perpetual succession. If the shareholders desire to bring the company s existence to an end, they must adopt the statutory winding up procedure set out in the BVI Business Company Act. In contrast, a unit trust scheme may be brought to an end at any time if all the holders of the units collectively entitled to the entire beneficial interest under the trust, direct the trustee(s) to distribute the assets to them pro rata in satisfaction of their rights under the scheme. Types of Funds Once the choice of entity is made there are three types of funds to be established under the Mutual Funds Act: BVI Companies and Unit Trusts Compared The following is a brief comparison of the main differences between a fund set up as a BVI Private no more than fifty investors invitation to invest must be made on a private basis

3 Professional available only to professional investors (defined as persons whose (i) investment is in the ordinary course of business or (ii) net worth greater than US$1 million) initial investment (subscription) must be at least US$100,000 Public generally a listed fund or a fund which fits neither into private nor professional categories Selected Public. where there is an agreement between the investor and the investment service provider and the purpose of the fund is to give effect to the agreement. Professional Services Providers Investment Funds are unique in that they require little manpower as most functions are by necessity divided to avoid any conflict of interest. This regulatory framework often requires that a promoter or sponsor externally acquire quality back-up from fund managers, investment advisors, fund administrators, transfer agents or custodians, as the case may be. Large institutions may and are permitted to provide these divisions within their group structures. Practical considerations and the type of fund dictate to a degree which essential functions are carried out in the BVI. Service providers within the BVI are licensed and regulated either under the Mutual Funds Act or other appropriate legislation. costs are mostly relevant to public retail funds the expense of processing shareholders funds impacts all types of funds. Management Fees The market standards for remuneration of managers and advisors are fees based on (i) the size of the portfolio (asset-based) (i.e. 1-2%) or (ii) performance (i.e. 20% of profit since last high water mark). Funds may contain a hybrid of the two fee structures or even a flat fee. Depending on cash flow requirements fees can be charged on a monthly, quarterly or annualised basis. Administration & Transfer Agency Fees The accounting function, including the pricing of securities, can be performed internally by the promoters with some fund types and in some larger institutions but it is also regularly performed by an external service provider. This structure provides the necessary division to prevent any conflict. Administrator s fees typically are based on size of portfolio administered and range from 15bp to 40bp with minimums imposed. More often than not, the administrator, as independent facilitator, operates as transfer agent. Under BVI company laws a record of the shareholders must be maintained at its registered office in the BVI and accordingly this burden must be assumed by the transfer agent. A transfer agent usually charges on a per transaction or time basis. Expenses such as mail, shareholder enquiry services (call centres), and meetings must be accommodated where appropriate. Having recognised that the BVI is the domicile of choice, consideration should then be given to the selection of a professional service provider. If requested, Ogier is able to provide recommendations. EXPENSES TO BE CONSIDERED IN SETTING UP A FUND Distribution Costs With public retail funds, compliance costs must be considered as well as advertising or marketing expenses, and sales loads or fees charged to an asset base. While distribution Custodial Fees In most cases fees for custody are charged on a transactional basis and on the types of securities handled. Accordingly these can be seen as bank charges in the majority of custodial arrangements. Audit Fees Most BVI funds are required to be audited annually. Four of the five largest audit firms are active in the BVI so although it is not a requirement that the audit be conducted within the territory, this is often the result. Audit fees

4 vary widely depending on the type of fund, structure, traded securities and how frequently traded. Fees generally start at U$6,000. Legal Fees The documentation required is mostly completed by a law firm. Depending on the jurisdiction of the investors and other regulatory considerations (i.e. listing on a foreign exchange), the offering documentation is may be drafted by (i) foreign lawyers and tailored by a BVI firm or (ii) drafted entirely by a BVI firm. Constitutional documentation, registration / recognition statements and other filings are most completed by a BVI firm. Fees for these services generally depend on the complexity of the fund; work required etc. Set-up Expenses & Corporate Fees Promoters or sponsors should always consider printing costs for shareholder reports, prospectuses, fact sheets, office expenses and the like. On set-up the corporate, partnership or trust structures will need to be formed. Costs relating to this can be estimated to start at US$1,200 and US$1,500 for companies and limited partnerships respectively. Trust structures generally start at about US$2,000 for basic unit trusts. Government Fees Application Annual Consent Public Fund 500* Professional/ 350* Private Fund Manager or Administrator 250 1,000 - * For BVI Companies there is no application fee About Ogier Ogier is one of the world's leading providers of offshore legal and fiduciary services employing over 800 professional and support staff. The group has a presence in 11 jurisdictions around the world, namely Bahrain, the British Virgin Islands, the Cayman Islands, Guernsey, Hong Kong, Ireland, Jersey, London, Montevideo, New Zealand and Tokyo. Ogier provides advice on all aspects of BVI, Cayman, Guernsey and Jersey law and associated fiduciary services through a global network of offices that cover all time zones and key financial markets including the rapidly growing Asian and Chinese markets. Ogier continues to be recognised as a leading law firm by the leading legal directories, including Legal 500 and Chambers. Annually thereafter fees paid in respect of these entities can be expected to range between US$1,000 and US$2,000. Director, Partner or Trustee Remuneration These may be individuals or corporations governing the investment company. Remuneration generally takes the form of time based fees and a yearly stipend. Expenses incurred in completing official tasks are in the main paid by the fund (i.e. travel to meetings).

5 Contact details British Virgin Islands Simon Schilder Kitty Chan Hong Kong Duncan Smith London Simon Dinning +44 (0) This client briefing has been prepared for clients and professional associates of the firm. The information and expressions of opinion which it contains are not intended to be a comprehensive study or to provide legal advice and should not be treated as a substitute for specific advice concerning individual situations. Ogier includes separate partnerships which advise on BVI, Cayman, Guernsey and Jersey law. For a full list of partners please visit our website. Please check with the relevant contact listed above for specific details regarding the legal services we offer from each office as we do not always practice the law of the jurisdiction where our offices are located. Please note that the named contact may not be qualified to advise on all the laws practiced from that office.