Comprehensive Guide to SPVs in the ADGM - 10 Leaves
The Abu Dhabi Global Market (ADGM) has been open for business only since October 2015, but it has already garnered much praise and respect over its efforts to differentiate itself through unique offerings. It pioneered the FinTech Abu Dhabi summit, attended by over five hundred global Financial Technology (FinTech) personalities; and has launched a series of collaborations with different companies such as Temenos, Al Ansari, and Mastercard to help forward its FinTech initiative.
Another such initiative is the Special Purpose Vehicles (SPV) regime. The SPV regime is open to a wide variety of uses, from investor-friendly holding structures, to asset separation and transfer.
What is the ADGM?
The Abu Dhabi Global Market is an international financial centre for local, regional and international institutions, established in Abu Dhabi, the capital of the United Arab Emirates, and operational from 2015. It has been voted the ‘Financial Centre of the Year (MENA)” and has continuously brought out innovative solutions for the growing financial services market in the region.
ADGM has three independent authorities – the Registration Authority, the Financial Services Regulatory Authority (FSRA) and ADGM Courts. ADGM entities are established under Common Law. Whereas other jurisdictions codify the English common law, the ADGM has adopted it completely in its original form. This is implemented to help facilitate ease of doing business for foreign investors – a first in the region.
What is an SPV?
Special Purpose Vehicles, or SPVs, are usually established to isolate financial and legal risk by ring-fencing assets and liabilities. SPVs can be established as subsidiaries, project or joint venture vehicles to ensure that only those assets related to a transaction are exposed to the liabilities associated with that transaction.
Features of an ADGM SPV:
An ADGM SPV offers multiple classes of shares, including fractional shareholding, a first for the region. Coupled with an option to completely customise the Memorandum, the ADGM SPV provides a viable option for a range of holding and investment structures.
Other salient features include:
No attestations for corporate documents – certified copies suffice.
No restrictions on nationality of ownership.
Minimum requirement of just 1 shareholder and 1 director – can be non-resident.
One GCC-resident authorised signatory required.
No minimum share capital.
No maximum number of shares.
Click here to read more about ADGM SPV Regulations
What can an ADGM SPV be used for?
The typical uses of an SPV include:
Passive Holding Companies:
An ADGM SPV can be used to hold investments in companies in the United Arab Emirates, Saudi Arabia and any other country in the world. These can be in the form of shares in these underlying entities, conevrtibles, warrants and notes as well. The SPV can derive dividend income from these investments, and also capital gains when divested.
An interesting structure involves setting up the ADGM SPV to hold the shares of an underlying Limited Liability Company in the UAE. LLCs have a 51-49 shareholding structure, governed by UAE Law. If properly setup, the structure can be 'lifted' into the ADGM, thus ensuring that the arrangement is now govened by a more familiar Common Law.
However, it should be noted that ADGM SPVs cannot act as operational holding companies, which means it cannot have employees, office space (other than what is provided by the Company Service Provider sush as 10 Leaves), and generally conduct any activities that can be construed as active management of the underlying investments. In that case, it is recommended to set up an operational holding company in the ADGM.
Can be used by an originating party to securitise loans (or other receivables) by creating an SPV which purchases these assets by issuing debt, secured on these underlying assets. The ADGM allows to register pledges with the Registration Authority, and these pledges will have to be cleared before any share transfers can be affected on the SPV. Do get in touchshould you require more information on how to register a pledge with the ADGM.
Can be used to ring-fence certain investments, permitting financing without leading to an increase in existing debt levels for the parent firm or exposing the parent’s assets (or SPV’s assets) to cross-liabilities.
Real Estate Investments:
Can be used to acquire title to real property and limit recourse of mortgage lenders depending on the location of the asset. In some jurisdictions the sale of the SPV’s shares can result in lower taxes and transaction fees when compared to transferring the asset. Click heretoreadabout how you can structure real estate investments through an SPV in the ADGM.
Click hereto read about how you can structure real estate investments through anSPV in the ADGM
Can be used to transfer assets in conjunction with material agreements. These transfers can be triggered on specific milestones, and also be incorporated into legacy-planning solutions for long-term asset transfers.
An ADGM SPV can be used as part of legacy-planning and inheritance structures, so as to facilitate the smooth transition of assets from one generation to the next. Such structures may also involve the use of ADGM Foundations.
Can be used to raise capital, with credit worthiness determined by the collateral of the SPV, rather than the credit rating of the parent firm.
Can be used to separate Intellectual Property into a separate structure, which has minimal liabilities and can be used to raise funds and enter into license agreements with third parties. Here is an article that has details on how you can hold intellectual property using an SPV in the ADGM.
Here is an article that has details on how you can hold intellectual property using an SPV in the ADGM.
In cases of joint ventures, can be used to form specific project-based companies. This would reflect agreed management responsibility while legally isolating joint venture partners from risks associated with the joint venture.
Again, in these cases, only passive management of the SPV is allowed, which means that the SPV structures as a joint venture cannot have employees, office space or be seen in general as actively managing the arrangement.
ADGM SPVs as holding structures for GCC startups:
Startups in the region face a daunting task. It is not easy to operate a fledgling company in the region, even with all the incentives that are currently in place for entrepreneurs.
Access to capital is limited, given that banks in the UAE do not lend easily to entities that do not have a proven track record. Startups then end up having to turn to alternate sources of funding, namely angel investors and venture capitalists.
This ecosystem has been steadily growing since 2016, and initiatives such as the DIFC VC Fund Regime are bringing in new VC Fund managers to the country.
Most GCC countries do not yet have very flexible commercial companies regulations. Shareholders are all clubbed into one class of shares, with limited (if any) options to customize the Memorandum and Articles of the company, and options for share pledges and issuance of convertibles such as warrants being virtually non-existent.
In this situation, even if startups manage to access capital, they require an adequate structure so as to onboard investors, while still keeping control of the operational direction of their company.
Here is where ADGM SPVs provide a viable alternative:
Startups can be based in other GCC countries, such as Saudi Arabia and Kuwait, and can hold the shares in these entities through an ADGM SPV. In effect, the operational entity in Saudi Arabia or Kuwait becomes a wholly-owned subsidiary of the SPV in ADGM.
The Memorandum of the SPV can be customized to allow for multiple classes of shares, with different voting, dividend and distribution rights.
Investors can be onboarded in a separate class of shares and founders can maintain control of operational aspects of the startup through a distinct founder share class.
Shares of an ADGM SPV can be pledged, with the pledge being registered in the ADGM Register and share transfers/sales being made conditional to the clearing of this pledge.
This arrangement allows for a structured approach to debt funding.Also, ADGM SPVs are able to issue sophisticated instruments and convertibles including SAFE notes, warrants and the like.
This also allows for access to alternate sources of funding.
Startups, usually the ones that are technology-driven, also need to protect their Intellectual Property, which in many instances, forms the core of their businesses.
The trademark or patents can be registered in the name of the ADGM SPV and specific IP exploitation agreements can allow for the leasing of this IP across operational companies in the UAE, GCC and worldwide as well. Most startups also operate on a lean model.
Attracting talent can be challenging in these cases, given that most startups are unable to provide market-based salaries to employees.
Usually, in these scenarios, startups end up putting in place share-vesting plans (also referred to as ESOPs). These can also be structured using ADGM SPVs, with share-vesting agreements governing the functioning of the plan.
We have consulted many startups in the UAE and other GCC countries, especially in Saudi Arabia and Kuwait, on restructuring their company structures so as to allow for investor on-boarding and share vesting through ADGM SPVs. In these cases, the shares of the existing entity are transferred to newly-setup ADGM SPV, and investors are then onboarded through a multi-class structure. Also, note that the documents of the SPV would have to undergo notarisations and legalisations from the respective GCC embassies, in order to be used in those jurisdictions.
What kind of legal structures are available for an ADGM SPV?
The following main options are available:
1. Private Company Limited by Shares – LTD
A standard private company limited by shares. This is the most common form of registration, and is similar to a UK Limited Company. In fact, the ADGM Companies Regulations are based on UK Companies Regulations, thus leading to more familiarity.
2. Restricted Scope Company – RSC
This offers limited information disclosure on the public register; however, full disclosures would have to be made to the Registrar. To account for the fact that this less stringent approach could prejudice shareholders and creditors, RSCs may only be incorporated as a subsidiary of a public company, or as a family office.
What is the Nexus Requirement?
The UAE issued it’s Economic Substance Regulations (ESR) in April 2019, and there have been changes made to the ADGM SPV requirements, in line with the ESR. Now, the Registrar requires the SPV to demonstrate a satisfactory connection to the GCC region.
This connection can be demonstrated in a number of ways, including documentary evidence that:
The SPV is owned or controlled by a UAE or GCC based private company, family office or individual;
The SPV holds assets that are located in the UAE or the GCC Region (this can be shares in underlying companies in the UAE or Saudi Arabia or anywhere else in the GCC);
The SPV facilitates transactions connected, or provides real or economic benefit, to the UAE;
The SPV’s purpose includes the issuance of Securities that will be admitted to the Official List maintained by the Financial Service Regulatory Authority (FSRA), and / or admitted to trading on a licensed platform that is established in the ADGM.
The SPV can only act as a passive holding company, invest in downstream entities and enjoy dividends and royalties. It cannot carry out any trade or service, and hence cannot issue invoices or have clients.
The SPV will have to demonstrate basic substance within the UAE. Two mandatory requirements are:
a) the authorised signatory will have to be a GCC-resident; and
b) the SPV will have to hold some assets within the UAE. This can be in the form of shares in an underlying UAE-based free zone entity.
These criteria have to be met in order to get authorised. The underlying assets have to be identified, and an undertaking signed that confirms the execution of the stated transaction within 6 months of licensing.
In case of GCC-based transactions, this requirement (b) is waived.
The SPV will not have to prove additional UAE-based substance in case one of the authorised signatories is a GCC-resident, and the investment is made in the GCC.
As Company Service Providers, we are able to provide nominee authorised signatory services for other applicants, who do not have an authorised signatory. Do get in touch for a quote!
ADGM SPVs can be eligible to apply for a Tax Residency Certificate from the Ministry of Finance to avail the UAE’s Double Tax Treaty network. The SPV may need to fulfil certain additional criteria, such as office space and minimum expenditure requirements.
Office space requirements. Do I need to take office space for an SPV in the ADGM?
SPVs are not required to have dedicated physical office spaces; however, they would need to maintain a registered address in the centre. The ADGM allows for the use of the offices of ADGM-based service providers, for this purpose. We provide registered address services in the centre, and would be happy to give you a quote on the various services that we offcer, including company secretarial services.
Can an ADGM SPV have nominees?
A Company Service Provider in the ADGM can provide nominee shareholder, director and authorised signatory services. Such arrangements are governed by a detailed nominee agrement,
Do I need a company secretary?
Using the services of a company secretary to maintain the ADGM SPV is good corporate governance. Also, as per the recently-issued ADGM Company Service Provider regulations, every SPV has to appoint a company secretary. Here are the services that a basic company secretarial service entails:
Systematic corporate status maintenance in accordance with the ADGM requirements.
Maintenance of the company’s statutory registers.
Arranging for mandatory statutory filings of the company’s financial statements with the Registration Authority.
Assistance with the appointment of auditors, if required.
Migration or continuance of existing corporate entities:
ADGM allows for the relocation and re-domicile of companies to ADGM from other jurisdictions. A company which is incorporated outside ADGM may apply for the issuance of a certificate confirming that it continues as a company registered under ADGM Companies Regulations. The company must be authorised to make such an application by the laws of the jurisdiction under which it is currently incorporated.
Why migrate your company into the ADGM?
Many businesses and individuals are seeking the comfort that comes from transferring valuable assets out of jurisdictions on the other side of the world. Migrating overseas SPVs or Holding Companies into ADGM can bring legal ownership of assets to a jurisdiction with internationally aligned robust regulations and for many in the GCC it will mean doing business closer to home, within a reputable legal environment. Clients can also benefit from the use of local, world-class professional advisors with more visible presence.
Can I migrate my company into the ADGM?
If you are interested in migrating your company into ADGM, you should first verify with the relevant agencies whether your current jurisdiction allows for outbound migration. Traditional jurisdictions which permit continuance into another jurisdiction include BVI, Cayman Islands, Jersey and Guernsey, amongst others.
How do I setup my SPV in the ADGM?
Setting up an SPV in the ADGM involves the following broad setps:
Pre-approvals – Submission of a business plan, detailing the structure, shareholders and purpose of the SPV. In case of a holding structure, the downstream investments would have to be identified and details provided in the business plan.
Application – The full application is compiled and submitted to the ADGM, once the pre-approvals are received.
The customised Memorandum and Articles of Association of the SPV is reviewed and signed electronically by the client, and sent across along with standard KYC documents and undertakings.
We can complete the full process online, without the presence of the client.
Receipt of Corporate Documents – The following documents are received, upon successful completion of the process:
The ADGM Company Service Provider Regulations come into effect in April 2021.
All ADGM Special Purpose Vehicles* are now required to appoint a Company Service Provider to carry out company secretarial and registered agent services. The ADGM CSP will be the point of contact between the ADGM Registration Authority and the SPV.
10 Leaves is a Company Service Provider in the ADGM and offers the following services to ADGM SPVs:
Incorporation Agent – assistance in setting up the SPV.
Registered address – providing the registered office.
Provision of directors.
Provision of company secretaries.
Provision of Authorised Signatories.
Provision of nominee shareholders.
Provision of accounting services.
Customisation of the Articles of Association.
ESR Filings and notifications.
Pledge Arrangements and registration.
Translations and attestations.
In addition to the above, we offer corporate and commercial services through 10 Leaves Legability. These include shareholding agreements, IP agreements, Share vesting plans and agreements and ESOPs.
For startups, we offer structuring solutions, including issuance of warrants, SAFE notes, convertibles and maintenance of cap tables.
We provide all our services through a proprietary digital frontend, with a secure digital backend, to ensure that you have a seamless experience, unmatched by competition. As a client, you also have access to our industry-leading media solution that incorporates engaging videos, detailed podcasts and informative publications to keep you updated and informed of the latest developments that affect your company on an ongoing basis.
*some SPVs are exempt, such as entities connected to regulated firms, and those that they are able to demonstrate adequate presence in the UAE.
The SPV regime in the ADGM is well structured, flexible and very cost-effective. Offering an international holding structure, based in a well-regarded jurisdiction, will provide comfort to regional investors, as well as others who wish to conduct business or hold investments in the greater MENA area.
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