Using ADGM SPVs as Holding Structures for Startups

  • 08-04-2019

The Abu Dhabi Global Market, or ADGM, is the world’s newest international financial centre. And we are having a detailed look at doing business in ADGM, though our podcast series covering both regulated financial and non-financial businesses in the centre.

The 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.

The ADGM 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, or SPV, regime. The SPV regime is open to a wide variety of uses, from investor-friendly holding structures, to asset separation and transfer.

Let’s have a closer look at the ADGM first.

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.

Clients who wish to cater primarily to the Abu Dhabi market, sovereign wealth funds and Abu Dhabi family offices may consider setting up in the ADGM.

Some other specific advantages of setting up in the ADGM include 100% foreign ownership, zero tax for 50 years, a risk-based regulatory approach, and a world-class ecosystem of regional and international law and auditing firms, and other professional service providers, such as 10 Leaves.

Well, let’s now dive right into the topic for today.

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:

1. No attestations for corporate documents – certified copies suffice.

2. No restrictions on nationality of ownership.

3. a minimum requirement of just 1 shareholder and 1 director, and both can be non-resident.

4. One GCC-resident authorised signatory is required though.

5. Also, there is no minimum share capital and no maximum number of shares.

So how can we use these flexible structures as holding companies for startups?

Well, 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 free zones 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 setup in any free zone in the UAE, and can hold the shares in these free zone entities through an ADGM SPV. 

In effect, the operational entity 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.

Finally, all of the above do not only apply to the UAE. We have seen a lot of startups in Kuwait and Saudi Arabia also making extensive use of ADGM SPVs to structure their incoming investments and to a great degree to success!

So what kind of legal structures are available?

Most ADGM SPVs are structured as “Private Company Limited by Shares”, which is a standard private company limited by shares, similar to UK Limited Companies. One shareholder & 1 Director companies are permitted. However, the SPV has to appoint at least one GCC-resident authorised signatory, as part of the Nexus requirements.

Restricted Scope Companies, (or RSC) are allowed as well, to certain clients. 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 are the nexus requirements, would be your next question.

The UAE issued it’s Economic Substance Regulations 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:

  1.  The SPV is owned or controlled by a UAE or GCC based private company, family office or individual;
  2.  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;
  3. The SPV facilitates transactions connected, or provides real or economic benefit, to the UAE;

or

  1. 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.

Next, comes tax.

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, in order to access the TRC.

So how does one set this up?

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 our offices as company service providers, for this purpose.

Setting up an SPV in the ADGM involves the following broad steps.

Pre-approvals – Includes 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.

Next comes the 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.            

10 Leaves is a company service provider in the ADGM, and we can complete the full process online, without the presence of the client.

Once done, the corporate documents are received, and well, that’s about it!!

The ADGM SPV, being a product offered by an onshore, transparent jurisdiction, is well received by banks in the region. We can assist in the opening of a bank account with major local banks such as Emirates NBD and Mashreq Bank.

Another question we get asked frequently, is the requirement of a company secretary. It is now mandatory, given the implementation of the ADGM Company Service Provider regime. 

Also, in my opinion, using the services of a company secretary to maintain the ADGM SPV is anyways good corporate governance. Some of the duties of a company secretary include Systematic corporate status maintenance in accordance with the ADGM requirements, the maintenance of the company’s statutory registers, arranging for mandatory statutory filings of the company’s financial statements with the Registration Authority and assistance with the appointment of auditors, if required.

It is recommended that you use our company secretarial services to maintain compliance with the statutory regulations, and annual returns. Do get in touch with us should you need assistance.

So how much does this all cost?

Now this is the best part. ADGM SPVs start as low as US$ 3,500, and that is including our fees as well!!

How can we at 10 Leaves help you?

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 Company Service Provider 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.
  • Assistance in bank account opening.

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. 

So, what are you waiting for?? Get in touch!!

 

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