Singapore's simplified regulations for venture capital fund managers is a measure that will help not only fund managers but also startups, which will continue to see an increase in funding options.
On October 20, 2017, the Monetary Authority of Singapore (MAS) introduced a simplified regulatory regime for venture capital fund managers (VCFM Regime).
The introduction of the VCFM Regime is a welcome development that signals to the market that MAS is able and willing to take bold steps to keep Singapore a vibrant and attractive place, not only for fund managers but also for startups, that will continue to see an increase in funding options.
Why Is the VCFM Regime a Simplified Regulatory Regime?
Under the VCFM Regime, venture capital managers will not be required to:
- Have directors and professionals with at least five years of relevant experience in fund management; and
- Comply with the base capital requirements and business conduct rules that currently apply to other fund managers. For instance, venture capital managers will not be subject to strict rules applicable to other fund managers on, among others:
- Handling of customer assets;
- Independent valuation;
- Conflicts of interests;
- Compliance capability; and
However, venture capital managers will still be required to:
- Be Singapore-incorporated companies with physical offices in Singapore;
- Apply to the MAS for a capital markets services licence for fund management (fund management licence);
- Prove to the MAS that their shareholders, directors, representatives and employees are fit and proper;
- File with the MAS an annual declaration within one month from the financial year-end date and file a notice of change of particulars within 14 days from the date of change, both in the prescribed form; and
- Comply with standard anti-money laundering and countering the financing of terrorism regulations.
In other words, it is significantly simpler to obtain a fund management licence if you intend to operate as a venture capital manager under the VCFM Regime. Venture capital managers’ ongoing compliance obligations are also substantially reduced. Further, unlike registered fund management companies (RFMCs), venture capital managers are not subject to restrictions on the value of the assets under management or the number of investors they provide services to.
How Can You Avail Yourself of the VCFM Regime?
Venture capital managers may only manage funds that meet the following characteristics:
- Invest at least 80 percent of committed capital in securities directly issued by unlisted business ventures that have been incorporated for no more than 10 years at the time of initial investment;
- Invest up to 20 percent of committed capital in other unlisted business ventures that do not meet the sub-criteria set out in the paragraph above;
- Must not be continuously available for subscription, and must not be redeemable at the discretion of the investor; and
- Are offered only to accredited and/or institutional investors.
What Happens to Existing LFMCs and RFMCs?
Licensed fund management companies (LFMCs) and RFMCs may continue to conduct their businesses as they have been.
Alternatively, if they only manage funds that meet the requirements of the VCFM Regime, they may apply to the MAS to transition to the VCFM Regime.
Will LFMCs and RFMCs That Do not Transition to the VCFM Regime Be Disadvantaged?
While the VCFM Regime offers many advantages over the previous regulatory framework, it is unlikely that LFMCs and RFMCS that transition to the VCFM Regime will be placed at a disadvantage First, LFMCs will still be required to service retail investors. Venture capital managers are not authorized to do that.
Second, not all fund managers or investors wish to deal only with one type of fund (i.e., VCFM Regime-compliant funds). While venture capital funds are currently very much in the news, investors generally seek to invest in funds that match their own investment criteria. This may include open-ended funds redeemable at the option of the investors, private equity funds that may invest in companies that are incorporated for more than 10 years, funds investing in listed securities, hedge funds and a myriad of other types of funds.
Finally, we envisage that new venture capital managers, who were not previously a LFMC or RFMC, would not in the initial stages be competing directly against established players. They are likely to be active in newer, earlier stage startups that LFMCs or RFMCs are not comfortable in investing in due to the higher risks involved.