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Raising capital by start-ups

The manner in which start-ups in Singapore raise capital is generally in line with other established start-up ecosystems globally.

At the very early stages, a start-up at the seed or pre-seed stage may raise capital from angel investors, incubators, accelerators or early-stage VC funds (particularly those that focus on providing seed or pre-seed stage capital).

At the Series A stage to the later funding rounds pre-initial public offering (IPO), we generally see start-ups raising capital from venture capital firms and corporate venture capital arms of corporates. In particular at the later stages, it is not uncommon to see start-ups raising money from growth capital or private equity firms, sovereign wealth funds or other institutional investors.

It should be noted that the government is also a source of capital for start-ups. For example, the government's Startup SG Equity scheme is a scheme whereby the government will co-invest with independent, qualified third-party investors into eligible start-ups. This scheme aims to stimulate private sector investments into innovative, Singapore-based technology start-ups with intellectual property and global market potential.

At the earlier stages, start-ups may raise capital by the issue of ordinary shares, convertible notes or convertible instruments such as a simple agreement for future equity (also known as a SAFE). From the Series A-fundraising stage onwards, start-ups will typically issue equity in the form of preference shares to their investors. Convertible notes may also be used to close bridging rounds.

In terms of investment agreements, where equity in a Singapore private company limited by shares is issued to investors as part of a fundraising round, the typical investment agreements would include a share subscription agreement and a shareholders' agreement. If there is a new class of preference shares to be issued, the Singapore company would also need to amend its constitution in connection with such fundraising to include the terms of such class of preference shares.

Key terms in the above-mentioned investment agreements would include:

  1. representations and warranties given by the start-up company and, where agreed, its founders, as well as any agreed limitations on liability in relation to claims against the company or its founders, or both; and
  2. the terms of the preference shares to be issued (if applicable): the key terms here would include liquidation preference, anti-dilution adjustment mechanisms and any redemption features (if applicable);
  3. pre-emption rights in relation to new issuances of shares by the start-up, which are customarily required by investors so that they have an option to subscribe for their pro rata share of any new issuances to maintain their stake in the company;
  4. reserved matters, which are certain identified matters that would need specific approval from the board or the shareholders, or both, for such matters to be undertaken by the start-up;
  5. information and access rights to enable the investors to monitor their investment;
  6. board or observer appointment rights; and
  7. exit rights for investors, and any transfer-related rights (such as rights of first refusal, tag-along rights and drag-along rights).

In October 2018, the Singapore Academy of Law Promotion of Singapore Law Committee and the Singapore Venture and Private Capital Association launched the venture capital investment model agreements (VIMA) aiming to help start-ups and investors in Singapore structure venture capital deals more quickly and more cost-efficiently. The VIMA is a set of contracts that aims to provide start-ups with a set of standard documents for early-stage venture capital transactions and are intended to serve as a balanced starting position that can then be customised for each specific transaction. The VIMA suite includes a term sheet, a share subscription agreement and a shareholders' agreement, among other documents.

When a Singapore start-up raises capital, it will generally need to consider whether it triggers any licensing requirements under the SFA. In addition, the start-up should consider if it triggers any prospectus registration requirements under the SFA where it raises funds via the offer of financial instruments such as equities and debentures. Should this be the case, the start-up should consider if it can rely on an appropriate prospectus registration exemption (e.g., where the offer is made to sophisticated persons in Singapore such as accredited investors or institutional investors).

It is possible for start-ups to raise financing via crowdfunding platforms. Start-ups should, however, still consider licensing and prospectus registration requirements (as set out above). In addition, to reduce its own exposure to legal and regulatory risks, the start-up should do appropriate due diligence on the crowdfunding platform (that it wishes to use) to ensure that the crowdfunding platform is appropriately licensed by the relevant regulators. The start-up may also wish to consider if there are any limits to the number of shareholders that it can have (e.g., private limited companies in Singapore can generally only have a maximum of 50 shareholders) and whether its constitution or any agreements with shareholders prevent such crowdfunding.