Compliance Alert: DIFC eases regulatory framework for Venture Capital set-ups
The Dubai Financial Services Authority (“DFSA”), the financial services regulator in the Dubai International Finance Centre (“DIFC”), recently amended its regulations introducing certain regulatory relaxations to existing and proposed venture capital set-ups in the DIFC.
The amended regulations are covered under various DFSA Rulebooks including General, Prudential Rules, Collective Investment Rules, Glossary and Fee Rulebook. These rulebooks apply to all authorized firms, including the VC Fund Managers and provide detailed regulatory framework and rules that apply in the DIFC.
Before introduction of this amendment, the regulatory framework was same for venture capital and private equity structures.
What is a Venture Capital Fund?
VC Fund is a pool of capital that invests private equity in unlisted start-ups or young SMEs (early stage entities). A VC Fund raises capital from financially sophisticated professional investors. VC Fund Managers co-invests alongside investors allowing growth participation in the fund and alignment of interests with limited partners. VC Funds generally pose lower systemic and contagion risk.
Venture Capital is a significant source of financing available to start-ups and small business to invigorate and sustain economic growth. It is a subset of pools on money available for investment in businesses, known as ‘private equity.’
Typical Fund Structure
What is the Regulatory Regime in DIFC?
In order to set-up a VC Fund in the DIFC, the VC Fund Manager must be authorized and regulated by the DFSA. The activity of VC Fund Manager is categorized as “Managing a Venture Capital Fund”.
The DFSA provides a proportionate, risk-based regulatory framework for VC Fund Managers allowing certain relaxation on regulatory requirement.
What are the basic criteria for qualifying as a VC Fund Manager?
To qualify as a VC Fund Manager, it should be ensured that each VC Fund that it proposes to manage shall always meet the following criteria:
- established in DIFC as Exempt Fund or Qualified Investor Fund
- a close-ended legal structure
- either set-up as an Investment Company or an Investment Partnership (involving General Partner and Limited Partners)
- its investment objective is to invest:
- at least 90% of its committed capital in unlisted business ventures that have been incorporated for no more than ten years at the time of the Fund’s initial investment in each business; and
- by means of Shares, convertible debt or other instruments carrying equity participation rights or reward that are directly issued by the unlisted business ventures
If a fund is classified as a Venture Capital Fund, it will not be regarded as a Private Equity Fund.
What are the mandatory appointments?
- UAE resident Senior Executive Officer (can also act as Licensed Director/Partner)
- UAE resident Compliance Officer & Money Laundering Reporting Officer
Appointment of a Finance Officer is not mandatory.
What are the regulatory relaxations?
A VC Fund Manager is not mandated to appoint:
- Internal Audit
- Custodian (allows self-custody of fund property)
A fund administrator appointment was not mandated (in general) under the earlier regime and this relaxation continues in the new regime.
A VC Fund Manager is exempted from maintaining a minimum capital requirement as required by a traditional Fund Manager. The VC Fund Manager must ensure that it maintains at all times liquid assets and access to financial resources which are adequate to the nature, size and complexity of the business.
Costs for Set-up
The introduction of relaxed regime for Venture Capital structures is one of the steps under the DIFC’s innovation mandate. This regime opens a significant source of funding available to start-ups and small business and provides stimulus in attracting foreign and domestic capital to the DIFC for VC investments.
Whereas this move is welcoming for the VC industry in light of current developments, there is a need for an overall VC eco-system including a direct access of capital and resources from large funds to VC focused funds in order to stimulate and expand the Emirate’s start-up and venture capital ecosystem
How we can help?
We are a team of highly skilled and qualified professionals, specialized expertise as a certified anti-money laundering specialist including a FATF trained legal expert examiner, experience across financial services industry and multiple related fields from reputable jurisdictions.
Our approach places significant importance on ensuring that our clients fully understand their options and we work closely with applicant firms to ensure their business control environment is clearly explained throughout the application. We provide the following services in relation to authorization of a regulated entity:
- VC Fund Manager
- Preparation for application for authorization
- Preparation of Regulatory Business Plan
- Drafting of policies and procedures aligned to the relevant regulatory obligations as per the rulebooks
- Liaising with the regulator for financial services permission and company set-up
- Liaison with registrar for incorporation
- VC Fund
- Review Fund Documentation prepared by legal counsel
- Necessary filings and liaison with the regulator
- Liaison with registrar for incorporation/registration
Value Added Services:
- We also provide mandatory functions of Compliance Officer, Money Laundering Reporting Officer and Finance Officer on an outsourced basis.
- Our team of senior members also act as Non-Executive Board members or Board Committee members assisting in strengthening corporate governance and oversight.
Partner & Head – Regulatory & Compliance Services
Senior Manager – Regulatory & Compliance Services