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VENTURE CAPITAL REGIME IN ADGM

June 18, 2020 by re think in Compliance

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.

Regulatory regime in ADGM

In order to set-up a VC Fund in ADGM, the VC Fund Manager must be authorized and regulated by the Financial Services Regulatory Authority (FSRA) in the Abu Dhabi Global Market (ADGM). The FSRA provides a proportionate, risk-based regulatory framework for VC Fund Managers allowing certain relaxation on applicability of regulatory requirement.

The activity of VC Fund Manager falls under the regulatory perimeter of “Managing a Collective Investment Fund” under the prudential Category 3C.

As of mid-June 2020, there are five VC Fund Managers regulated by the FSRA of which three managers have been established in the last 6 months.

Typical fund structure:

Are there any criteria for Financial Services Permission from FSRA?

To qualify for authorization as a VC Fund Manager, an applicant must demonstrate and ensure that each VC Fund that it proposes to manage shall meet the following criteria at all times:

• Invests directly in equity share capital of unlisted early stage entities
• Close-ended fund structure
• Offered only by way of private placement to professional clients
• Subscriptions limited to USD 100 million, or a higher amount agreed with the FSRA
• Established in ADGM as an Exempt Fund or Qualified Investor Fund

Are there any mandatory appointments?

• A Senior Executive Officer (can also act as Licensed Director/Partner) and a minimum of two Licensed Directors/Partners with relevant experience¹
• Compliance Officer
• Money Laundering Reporting Officer

Appointment of Finance Officer is not mandatory; however, the VC Fund Manager must demonstrate that it has the relevant expertise and resources to prepare/oversee its financial accounts.

Are there any regulatory relaxations?

Independent Appointments

VC Fund Manager are not mandated to appoint following independent functions from governance/control standpoint if certain requirements are met:

• Internal audit
• Custodian
• Valuation
• Fund Administrator

Capital Adequacy

VC Fund Managers are exempted from maintaining a minimum capital which is generally required by a Fund Manager. However, it must be able to demonstrate the ability to meet its liabilities and have adequate financial resources to manage its business affairs.

Appropriate professional indemnity insurance cover must be maintained.

Regulatory costs for set-up

* In light of COVID-19

Any other commercial benefits?

ADGM VCs have access to apply for seeking investments from ADIO Ventures Fund (Ghadan), Mubadala Ventures Fund (Mubadala Ventures) and the ADGM Catalyst Fund (Mubadala Capital) which amounts to a pool of USD 3 billion.

The VC Fund Manager may utilize a flexi desk provided by HUB71 or Regus as opposed to closed office space requirements.

Setting up in HUB71 provides VCs access to a wider eco-system, opportunity to base investee companies in ADGM and ability to apply for HUB71 incentive packages.

Process and Timeline

ADIO’s recent expansion of the scope

Recently Abu Dhabi Investment Office (ADIO), one of the largest investment offices in the Emirates of Abu Dhabi, expanded the scope of its Ventures Fund to attract high-skilled talent and investment in the Emirate. The expanded scope includes:²

• Increased support for growth and expansion of innovation-focused companies in the Emirate
• Participation in Series B and above financing rounds and inclusion of later stage companies
• Investment in established regional and global funds
• Partnering with global accelerators.
• Assess investment opportunities to act as lead investor
• Provision of tailored incentive packages for growth of the companies in the Emirate
• Support Funds beyond new fund managers
• Investment as a Limited Partner in established global funds focusing on MENA based innovation-focused businesses

ADIO’s Dh535 mn Ventures Fund was established in 2019 as an initiative under the Abu Dhabi Government’s Dh50 bn Ghadan 21 accelerator programme to stimulate and expand the Emirate’s startup and venture capital ecosystem.

The Venture Fund has recently invested over Dh60m in various start-ups and fund manager through its Ventures Fund which includes Securrency, Trukker, Sarwa, YACOB and Okadoc – all of these businesses are either based in the Emirate or are expanding into the Emirate.

How can we 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.

Recently, we assisted our client (proposing to be regulated as a VC Fund Manager) in obtaining an in-principle approval from the FSRA within 4 weeks of initiating the application process.

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 authroisation of a regulated entity:

• VC Fund Manager
  • Preparation for application for authorization of
  • Preparation of Regulatory Business Plan
  • Drafting of policies and procedures aligned to the relevant regulatory obligations as per the rulebooks
  • Liaising with the FSRA and ADGM for financial services permission and company set-up
• VC Fund
  • Review Fund Documentation prepared by legal counsel
  • Necessary filings and liaison with FSRA
  • Liaison with ADGM for incorporation/registration

We also provide outsourced services for Compliance Officer and Money Laundering Reporting Officer and Finance Officer.

Authors

Gail Goring
Partner & Head – Regulatory & Compliance Services

Nisha Shah
Senior Manager – Regulatory & Compliance Services

1. A minimum experience of 10 years (SEO) / 5 years (Director/Partner) in either operating a VC Fund / Private Equity Fund or in-depth industry experience in the target sector that the VC Fund intends to invest
2. https://www.investinabudhabi.ae/en/News/Abu-Dhabi-Investment-Offices-Ventures-Fund-expands-to-support-later-stage-innovators