Anticipated Industry Feedback on Proposed New VC Managers Regime
As part of the broader efforts of the Monetary Authority of Singapore (MAS) to promote financing for enterprise development, the MAS had on 15 February 2017 published a consultation paper proposing a simplified authorisation process and regulatory framework for managers of venture capital funds (VC managers).
The proposed simplified regulatory regime for VC managers (VC Managers Regime) recognises the lower risks they pose, given their business model and sophisticated investor base.
A brief summary of the proposals is set out below, followed by our commentary:
VC managers must only manage funds that meet the following characteristics:
(i) be directly invested in unlisted business ventures that have been established or incorporated for no more than five years at the time of initial investment;
(ii) be closed-end; and
(iii) be offered only to end-investors who are either “accredited investors” or “institutional investors”.
VC managers that meet the proposed criteria for the VC Managers Regime will need to apply and be licensed by the MAS prior to business commencement.
The application will require the particulars of the VC manager, its substantial shareholders, chief executive officer, directors, representatives, and a clear description of its proposed VC fund(s) and activities to be carried out in Singapore.
However, the MAS will not impose admission criteria on VC managers to have directors and representatives with at least five years of relevant experience in fund management.
The MAS will still require all VC managers to meet the MAS’ fit and proper criteria relating to financial soundness, honesty and integrity and reputation.
Exemptions from Certain Ongoing Requirements
The MAS will not impose the following requirements which currently apply to fund managers:
(i) Capital requirements:
(a) no base capital requirement; and
(b) no risk-based capital requirements.
(ii) Business conduct requirements: Not mandatory for VC managers to satisfy the MAS that they have:
(a) in-house compliance capability;
(b) internal audits of their business activities;
(c) independent valuation of the funds managed and independent reporting to investors;
(d) disclosed and will be able to effectively manage and mitigate conflicts of interests; and
(e) accorded priority to customers’ orders and transactions.
(iii) Independent annual audit of the fund manager: VC managers will not be required to submit annual audited financial statements and auditor reports to the MAS.
Once the VC Managers Regime is implemented, new VC managers can expect a much simplified and expeditious authorisation process.
Existing fund managers managing VC funds are required to notify the MAS that it meets all the proposed criteria, and obtain the MAS’ acknowledgement of the notification, before they can operate under the proposed new VC Managers Regime. Alternatively, existing fund managers can choose to maintain their current regulatory status and be subject to the full set of ongoing requirements, even if they meet all the proposed criteria to qualify for the VC Managers Regime.
The MAS proposes that the VC manager must only manage funds meeting certain characteristics. It is anticipated that the industry will likely raise questions over the MAS’ definition of a “VC fund”, in particular the following proposed criteria:
- Five-year limit on portfolio companies: Will the MAS consider pegging the five-year limit to the date the portfolio company commences business as opposed to the date of incorporation?
- Closed-end: The VC fund must be non-redeemable at the discretion of the investor, and must not be continuously available for subscription. The restriction on continuous subscription seems unclear. Will the MAS need to clarify what it means by “continuous”, e.g. would a 2-year investment period with multiple closings be too lengthy?
Other anticipated questions or concerns may revolve around the VC Managers Regime being reminiscent of the Exempt Fund Manager regime which was abolished in 2012.
The new VC Managers Regime echoes the proposals set out in the report by Singapore’s Committee on the Future Economy to enhance the financing ecosystem for start-ups. There is much optimism that the new VC Managers Regime will help anchor VC funds and VC managers in Singapore, and energise the start-up sector.