The Monetary Authority of Singapore (MAS) on 20 October 2017 announced a lighter-touch regulatory regime for qualifying venture capital (VC) fund managers in Singapore. The new regime is aimed at promoting the fund management industry and increasing funding for local early-stage start-ups in Singapore. That said, drawing from the American and European experience, it remains to be seen whether the new regime would be well received by VC managers as well as potential investors into VC funds in Singapore. Interestingly, the definition of a “start-up” is quite broad and there may be scope in certain circumstances for traditional private equity managers, focused on more mature businesses, to seek to qualify in accordance with the regime.
Under the regime, the admission and ongoing requirements applicable to fund managers have been streamlined by, among other things, reducing the qualification/experience requirements and removing the capital requirements and business conduct rules that had previously applied to all fund managers.
For a VC manager to qualify for the regime, the funds it manages must have the following characteristics:
- Each fund must invest in business ventures that are not listed on a securities exchange;
- Each fund must invest at least 80% of its committed capital in securities that are issued by start-ups (i.e., entities incorporated or formed less than ten years before the date on which the fund investment is made);
- Units of each fund may not be available for new subscriptions after the close of fund-raising, and units can be redeemed by investors only at the end of the fund’s life; and
- Units may be offered only to accredited and/or institutional investors.
The MAS continues to maintain oversight of the VC fund manager, and the VC manager will still be required to meet the MAS’s fit and proper requirements as well as comply with other regulations (such as those applicable to anti-money laundering).
Comparison between VC Manager Regime and Traditional Fund Manager Regime
An overview of key characteristics of the VC manager regime as compared with traditional fund manager rules is set out below.
Under the new regime, VC managers can expect an expedited authorisation process with the MAS. Existing fund managers who qualify under the regime can choose either to migrate to the VC manager regime (via a notification process with the MAS) or preserve their existing regulatory status.
Comparative International VC Manager Regimes
The new regime reflects efforts seen elsewhere – such as in the United States under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and the EU under the European Venture Capital Funds Regulations (EuVECA) – to lighten the regulatory burden on VC managers.
One difference is that there are no restrictions on leverage for VC funds in Singapore. In comparison, the United States imposes a 15% leverage restriction on VC funds for VC fund managers relying on an exemption under the Dodd-Frank Act from SEC registration. In the EU, managers of EuVECA funds may not: (i) leverage the fund using any method by which the exposure of the fund will be increased beyond the level of its committed capital (whether through borrowing of cash or securities, the taking of derivative positions or by any other means); or (ii) borrow, issue debt obligations or provide guarantees at the level of the VC fund, where such borrowings, debt obligations or guarantees are not covered by uncalled commitments.
It should be noted that the investment restrictions under the new Singapore regime, limiting investments to companies established during the prior ten years, allows for investments into more mature businesses than are typically targeted by VC funds in the Asia-Pacific region. This provides scope for managers focused on certain private equity strategies to consider using the new regime rather than registering under the existing regime for fund managers. However, such managers would be restricted by some of the criteria described above – for example, they would not be able to invest in listed securities, which would prevent the fund from taking part in a take-private transaction.
The new regime in Singapore is expected to lower barriers of entry for smaller VC managers and increase funding opportunities for start-ups. While some commentators have argued that this lighter-touch regime could negatively impact Singapore’s reputation as a fund management hub, this is not necessarily the case as the new regime reflects efforts consistent with those of other jurisdictions to reduce the regulatory burden on VC managers. Further, VC managers would still need to meet the MAS’s fit and proper requirements as well as comply with other regulations of importance to investors. Accordingly, institutional investors may be generally unconcerned by the changes, as they will largely rely on their own operational due diligence to determine whether a manager has the appropriate level of governance to satisfy such investors’ requirements.
One potential issue relates to the marketing of funds managed/sponsored by a VC manager that is relying on the new VC regime, where the funds are marketed in other jurisdictions that have a local requirement for foreign managers to be regulated in their home jurisdiction. The regulators of such jurisdictions may not view the new lighter-touch regime favourably, especially if managers based in such jurisdictions are subject to more onerous obligations. However, in principle, because the new regime requires VC managers to seek specific authorisation1 from the MAS, it may be expected that most, if not all, regimes that currently recognise MAS-regulated fund managers would also recognise managers authorised under the new VC regime.