The Venture Capital Fund Management (VCFM) Regime in Singapore
1) The Monetary Authority of Singapore (“MAS”) has enabled a new regulatory framework for the Venture Capital (VC) Industry in Singapore, which took effect on 20th October 2017.
2) The above, considered as a lighter regulatory regime, is expected to bring in several new players into the venture capital space in Singapore, for providing risk capital for start-ups and early stage business ventures. This is part of the Singapore Government’s initiatives to further deepen the ecosystem for supporting entrepreneurship, encourage start-up initiatives and augment Singapore’s status as a leading Financial Centre.
3) In line with the above, MAS has created a new category of Capital Markets Services (“CMS”) Licence, namely the VCFM licence, which has simplified the authorisation process for VC Managers (i) by removing the need to maintain prescribed level of base capital, (ii) being not prescriptive of the track record and experience the directors and representatives and (iii) removing several other requirements that apply to other categories of fund management business.
4) MAS has taken a view that the aggregate size of the VC fund, size of individual investments and the domicile of VC funds are commercial decisions that would be influenced by market factors and fund strategy. Further, MAS has not set a cap on the fund size, or prescribed a minimum investment amount or the domicile of VC funds. Eligible Investors are expected to negotiate safeguards that they require of the VC Manager in their contractual agreements.
5) To qualify, the VC manager must manage funds that meet the following criteria:
(i) should invest not less than 80% of committed capital in securities that are directly issued by an unlisted business venture that has been incorporated for no more than ten years at the time of initial investment;
(ii) can invest up to 20% of the committed capital in other unlisted business ventures that do not meet sub-criterion in 5(i) above; i.e. investees incorporated for more than ten years at the time of the initial investment by the VC Manager, and/or the investment is made through acquisitions from other investors in the secondary market;
(iii) VC fund must NOT be continuously available for subscription, and must NOT be redeemable at the discretion of the investor; and
(iv) the investors in the VC fund are only Accredited Investors and/or Institutional Investors.
6) My thoughts:
(i). Notwithstanding the softer touch of this regulatory framework, the VC Manager should evaluate the overall business requirements and adopt a robust policy for the conduct of the VC business. The minimum standard should be the higher of the two:-
(a) “Requirements that result from the need to run the VC business efficiently” and
(b) “Requirements due to prescribed or expected regulatory and compliance needs”.
(ii) The VC Manager should establish detailed procedures and be meticulous in maintaining the documentation to establish and periodically evaluate the adherence to the Fit and Proper criteria by its shareholders, directors,
management, and all key personnel.
(iii) Though there are no prescribed base capital requirements, the VC Manager should estimate the initial set-up costs and the working capital needs for the periods considered as initial years for running the VC Manager entity (say first 3 to 5 years). This would depend on several factors and some of it would be specific to the type and nature of VC activities to be pursued by the VC Manager. An exercise of this nature can provide a reasonable basis for the capitalisation needs of the VC Manager, in the absence of a prescribed capital requirement.
(iv) As part of the standard setting, there is need to create a suitable framework to address and disclose to investors, matters relating to
(a) potential as well as real conflicts of interest, including disclosure of interests
(b) interested person/related party transactions,
(c) risk mitigation for the VC fund’s proposed underlying exposures, including exposure norms and leverage limits,
(d) functioning style of the Board, whether it is driven by majority consent or unanimous consent of the board members, (e) threshold’s for seeking investors’ approval and setting higher standards of disclosures and business conduct and, so on and so forth.
(v) As part of decision making process and to identify suitable investee targets, the VC Manager needs to continuously develop the universe of suitable investments that conform to the defined space meant for the venture capital business, such as the investee being unlisted, adherence to the 10-year rule etc.
To conclude, “Greater Empowerment” requires higher level of “SelfGovernance” on the part of the VC Manager, both in letter and in spirit.