By Vaishnavi Srinivasan, Senior Compliance Officer, Client Services
The Dubai Financial Services Authority (DFSA) recently published a Consultation Paper (No. 133 of July 2020) seeking comments from the industry on new rules proposed to be introduced for applicants wishing to set up a Venture Capital Fund Manager (VCFM) and Venture Capital Funds (VCFs) in the Dubai International Financial Centre (DIFC).
The Consultation Paper (CP) recognises the key role played by venture capital (VC) funding in economic growth in recent years and more specifically in relation to the DIFC’s ‘Future of Finance’ strategy. The DFSA has reviewed rules and requirements in other financial centres including Singapore, the UK and the US and have proposed a new regime that is in line with these jurisdictions.
The key proposals contained in the CP are summarised below:
- VCFs are recognised as a sub-set of private equity funds, however, they are eligible for different treatment considering the nature of investee companies (these usually being start-up firms that are more tech-focused) and the fact that a majority stake in these enterprises is usually being assumed by the VC provider (as opposed to the private equity space that engages in management buy-ins and buy-outs). The DFSA also acknowledge that owing to the high risk/high return investment strategy of VCFs, it typically attracts highly skilled and sophisticated, professional investors who are in a position to fully appreciate the risks and returns involved, thereby allowing regulators to consider exempting VCFMs from compliance requirements that apply to other categories of fund managers.
- The CP provides for VCFs to be set up as Exempt Funds or Qualified Investor Funds (QIF) that are set up as Investment Companies or Investment Partnerships and are closed-ended. The investors are required to be professional clients and at least 90% of committed capital of the fund shall be in unlisted business ventures, which have been incorporated for no more than 5 years at the time of the initial investment. The proposal also requires VC funding to be in the form of equity investments.
- VCFMs are exempted from appointing the following:
- A finance officer
- An internal audit function
- An independent Eligible Custodian to hold fund property (the VCFM can hold property themselves subject to having appropriate systems and controls in place for segregating and safeguarding fund property)
- A number of rules applicable to private equity and other fund managers are disapplied for VCFMs to provide them greater flexibility in investment selection and monitoring (though general, overarching rules and principles will still apply)
- Unlike certain jurisdictions that require individuals associated with a VCFM to have specific skill sets/minimum number of years of experience in a particular area, the DFSA have proposed that while VCFMs need to ensure overall fitness and propriety of the associated individuals, they will not be stipulating any specific conditions and will review each case individually
- The VCFM will be required to be a Domestic Firm (a DIFC incorporated company or partnership and not a branch), however, will not be required to comply with the prudential requirements applicable to other fund managers/Authorised Firms. The CP proposes to only require VCFMs to ensure they have adequate liquid assets and financial resources to meet their obligations. In addition, VCFMs need not submit regulatory returns through the DFSA’s EPRS. They will instead be required to submit period Fund Returns (something the DFSA is seeking to implement soon)
- The licence application process for an applicant seeking to be a VCFM (only) will be a simplified one, similar to the current QIF application process where more reliance is placed on self-certifications by the applicant. The DFSA seeks to revert with a decision on in-principle approval within one week from submission of application, which will cost the applicant USD 2000 (also being the annual regulatory fee for a VCFM)
- In terms of the VCF application, the DFSA will aim to complete the Notification process within two business days. The annual fee for a VCF will be USD 1000
What could this mean for VCs in the DIFC?
The proposed amended rules for VCFMs/VCFs is a positive step for the investing and investment-seeking community in the region, particularly in light of recent developments and interest in fields such as FinTech, RegTech and InsurTech. In these areas, entrepreneurs welcome investment to meet growing demands and offer innovative services and products. This proposal will also assist in marketing the DIFC as a sought-after jurisdiction in the region for the domicile of funds.
The Abu Dhabi financial centre, Abu Dhabi Global Markets (ADGM), already has in place a dedicated regime for those that wish to set up VCFMs/VCFs. This regime is similar to the proposed DFSA one in that ADGM VCFMs are also not required to appoint a finance officer or have an internal audit function; they need not appoint independent custodians or fund administrators for the VC funds they manage and are also exempt from complying with regular prudential and other compliance requirements.
How can we help?
Equiom Corporate Services (Middle East) Ltd has offices in both DIFC and ADGM. Our team consists of experienced compliance professionals who have assisted various firms/new applicants in the DIFC and ADGM with their regulatory licence applications, licence variation applications, drafting/reviewing/updating compliance and AML related policies and procedures, compliance and AML training, and compliance reviews.
We are also able to provide firms in both of these jurisdictions with a Compliance Officer and MLRO services on an outsourced basis, an option we see many firms choose in order to have ready access to a team of experienced professionals and reduce their operational costs. Please contact VaishnaviSrinivasan@equiomgroup.com to discuss further on how we can help you.