Investment Token Funds in the DIFC
The Dubai Financial Services Authority (DFSA) recently issued a consultation paper on the regulation of Security Tokens in the DIFC. This paper is one of the two consultation papers that will go on to make the base for the DIFC Digital Assets Regime, thus opening the gateway to a whole new world of exciting and cutting-edge fintech applications using the Distributed Ledger Technology (DLT).
The DFSA then made the relevant amendments to it’s legislation in the end of September, thus creating the framework for the regulation of Security Tokens in the centre.
Part 1 of the DIFC Digital Assets Regime covers Security Tokens. Part 2 is expected to cover Utility Tokens, Exchange Tokens and Stablecoins.
The DIFC Digital Assets Regime will be of interest to issuers of Security Tokens, Authorised Market Institutions that wish to admit Security Tokens to trading, or performing clearing and settlement services, operators of Alternate Trading Systems such as Multilateral Trading Facilities (MTF) and Organised Trading Facilities (OTF) that wish to trade Security Tokens, providers of Digital Wallets who provide custody and storage services for such tokens, technology providers and in general, any licensed firm that wishes to advise, arrange or manage crypto-assets.
What is an Investment Token fund?
Simply put, a Fund is an Investment Token Fund if its main purpose is investing in Investment Tokens. They can also be called Security Token Fund, Share Token Fund or Bond Token Fund, depending on the type of underlying investments. This is a specialist class of funds, and can be an Exempt fund or a Qualified Investment Fund.
What does DIFC consider to be a token, or a crypto-asset?
The DFSA defines a token as a digital representation of value, rights and obligations that are created, stored and transferred electronically, using distributed ledger technology (DLT) or similar technology.
Generally, crypto-assets depend on cryptography and distributed ledger as part of their perceived or inherent value. They are created, stored and transferred using a DLT application, using:
- An address,
- a public key corresponding to that address, and
- a private key, also corresponding to that address.
What does DFSA consider to be a Security Token?
In addition, a Security Token is defined as a token that confers rights and obligations that are:
(i) the same as those conferred by a share, debenture or futures contract (Investments); or (ii) substantially similar in nature, purpose or effect, to those conferred by Investments.
In effect, a Security Token is a token that behaves as a security (equity, debenture, convertible, future, option etc.) and is hence considered by the DFSA as a specified investment.
What is a security?
The DFSA has a list of instruments that they consider a security. In general, a transaction is considered a security if a) there is an investment of money, b) there is an expectation of profit, c) the investment of money is in a common enterprise and d) any profit comes from the efforts of a promoter or third party. This is also commonly known as the Howey Test.
How would the DFSA determine whether a particular Security Token is an Investment or not?
The DFSA aims to take a hybrid approach, where they will make their own assessment of whether the proposed token is a Security Token, based on a self-assessment submitted by the applicant.
What about exchange tokens, utility tokens, payment tokens, stablecoins and other types of tokens?
The DFSA currently regulates only Security Tokens, with additional regulatory guidance for other types of tokens expected in a few months. Until then, other types of tokens will not be considered for the purpose of regulation.
Is this the same as a tokenised investment fund?
Well no. A tokenised fund would involve setting up a fund and tokenizing it’s units for secondary trading on an Alternative Trading System.
What is the Dubai International Financial Centre?
DIFC is one of the world’s top eight onshore financial centers and offers a secure and efficient platform for businesses and financial institutions to reach into and out of the emerging markets of the region. The quality and independence of DIFC’s regulator, the prevailing common law framework, excellent infrastructure and tax efficiencies make it the perfect base to take advantage of the rapidly growing demand for financial and business services in the MENASA region.
DIFC fills the time-zone gap for a global financial centre between the leading financial centres of London and New York in the West and Hong Kong and Tokyo in the East.
Why setup a DIFC Investment Token fund?
The DIFC is a leading financial hub in the region. Besides offering a wide range of financial service activities, the centre also provides an integrated environment and world-class standard of living. It is well regarded in the international community as well.
You can read more about DIFC Investment Funds here:
Here are some specific advantages of establishing in the Dubai International Financial Centre.
LEGAL AND REGULATORY FRAMEWORK
- Legal framework supports cross-border activities
- 100% foreign ownership permitted
- No restriction on foreign talent or employees
- No restrictions on capital repatriation
- Zero tax for 50 years on profits, capital or assets from 2004
- Zero tax on employee income
- Highly regarded, independent regulator
- Independent, English-speaking, common law judicial system
- Distinct from the UAE legal system
- Risk-based regulatory approach
- Central to regional deal making
- High concentration of international firms, investment funds, wealth management firms, banks, and financial institutions
- World-class regional and international law and auditing firms, and other professional services
- The largest fund domicile in the region
- Management offices, holding companies and family offices are located closer to the assets they own or manage
- The Middle East, Africa and South Asia (MEASA) is increasingly the centre of gravity for the global economy
- Dubai plays a central role in the growing South-South trade, principally between Asia and Africa
- Well-positioned to harness the potential of emerging markets
Types of Funds
A DFSA Investment Token fund can be a Public Fund, or a Professional Fund.
Public Funds are open to Retail Clients (as defined by the DIFC), and hence subject to higher levels of regulation. The other features of a Public Fund in the DIFC are:
- No minimum subscription limit;
- Units are offered to the general public;
- Can have any number of unit-holders; and
- Have to comply with IOSCO principles.
Exempt Funds are open only to Professional Clients (as defined by the DIFC). The other features of an EF are:
- Minimum subscription of US$ 50,000; and
- Units are offered to persons only by way of a Private Placement.
Qualified Investor Funds
Qualified Investor Funds are open only to Professional Clients (as defined by the DIFC). The other features of a QIF are:
- Minimum subscription of US$ 500,000; and
- Units are offered to persons only by way of a Private Placement.
Setting up a fund structure in the DIFC
Setting up a fund in the DIFC requires either a) setting up a Domestic Fund Manager or b) licensing an existing fund manager in a recognized jurisdiction, to act as the External Fund Manager of the DIFC fund. Read this article to know more about the licensing process and associated costs.
An Investment Token fund in the DIFC will also need to appoint some service providers to carry out critical functions, such as fund administration and audits. Read this article on the different services associated with maintaining a fund in the DIFC.
Did you know that a Private Placement Memorandum, or PPM, is the key document for DIFC Investment funds? The PPM details material information on the fund and serves as the backbone of the legal documentation involved. Read this article to know more about the documents required for setting up a fund in the DIFC.
We provide turnkey services for Investment Token Funds in the DIFC. From initial consulting, to assistance in authorisations, to assistance in preparation of the legal documentation, 10 Leaves helps you navigate the DFSA Rulebook and submit an application that is comprehensive, complete and compliant.
Our services include assistance in:
- • Reviewing the business model and advice on the applicable regulatory framework;
• Preparation of the Regulatory Business Plan and comprehensive financial projections;
• Preparation of all policies, processes and manuals required;
• Provision of Outsourced Compliance Officer and Outsourced Finance Officer services;
• Finalising the legal structure, including holding company setup and customisation of Memorandums; and
• Finalisation of leased space, bank account opening and obtaining Financial Services Permissions.
A lot of our Fund clients are startups, where experienced fund managers set up their own shop. In these cases, we also assist such teams with corporate and commercial documentation, including fund documentation, through our legal consultancy - 10 Leaves Legability. We assist in the drafting of:
(i.)Fund Private Placement Memorandums
(iii.)Investment management agreements
(viii)Share vesting/ESOP plans
We also assist in the drafting of:
(i.)Crypto-asset Purchase Agreements
(ii.)Crypto-asset Terms and Conditions
(iii.)Key Features Documents for Security Tokens
(iv.)Private Placement Memorandums for Tokenised Funds
(vii.)Simple Agreement for Future Tokens (SAFT)
We also provide services in Luxembourg, Saudi Arabia and Mauritius. For Details, Contact us here.