Guide to the DIFC Crowdfunding Business License - 10 Leaves

DIFC is one of the world’s top ten 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 financial services firm in the DIFC?

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.

There exist opportunities for startups as well. The recent focus on fintech led to the DIFC Fintech Hive initiative, that serves as an accelerator for fintech firms to test their products and pitch it to prospective investors.

Specific Advantages:

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

TAX BENEFITS:

  • Zero tax for 50 years on profits, capital or assets from 2004
  • Zero tax on employee income

COUNTERPARTY CONFIDENCE:

  • Highly regarded, independent regulator
  • Independent, English-speaking, common law judicial system
  • Distinct from the UAE legal system
  • Risk-based regulatory approach

DIVERSE ECOSYSTEM:

  • 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

GEOGRAPHIC EPICENTRE:

  • 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

What is crowdfunding?

The past few years has seen disruptive innovation in financial technology and the financial services sector is changing access to finance in more ways than one. Crowdfunding, as the name suggests, involves sourcing finance from the ‘crowd’, or a large pool of individual investors (mostly retail), as opposed to obtaining finance from a bank or other financial institutions.

At the core of the crowdfunding business is a platform, based on innovative technology, that can be a combination of a website and an app. This platform offers an online marketplace for seekers of finance, and sources of finance (the crowd). Consequently, the DIFC licenses three main types of regulated crowdfunding businesses:

  • Investment-based crowdfunding - where businesses offer equity in return for finance;
  • Loan-based crowdfunding - where issuers offer an interest on monies borrowed under a loan agreement with lenders on the platform; and
  • Property-based crowdfunding - where the platform lists properties in which investors can take fractional ownership.

The DFSA currently does not regulate charity-based crowdfunding platforms, and hence there is no such license available at the DIFC.

DIFC Crowdfunding License

Firms interested in carrying out crowdfunding activities from the DIFC are required to submit applications to the Dubai Financial Services Authority, or DFSA.

The DFSA, for the purposes of authorisation and supervision, categorises the crowdfunding business as a Category 4 entity, with the primary activity of “Operating a Crowdfunding Platform”. The base capital required for a DIFC Crowdfunding license is US$ 140,000.

The DFSA offers three types of crowdfunding licenses:

a. Investment-based Crowdfunding Platform

b. Loan-based Crowdfunding Platform

c. Property-based Crowdfunding Platform

DIFC Crowdfunding Platforms are able to cater to retail clients, with certain additional requirements to ensure retail client protection. For instance, retail investors will only be allowed to invest upto US$ 50,000 in a single calendar year.

Due to the nature of the license, and the recent issuance of crowdfunding regulations, the DFSA places slightly higher entry-level requirements and restrictions on the license itself.

You can also setup in the DIFC with a DIFC Innovation License, which is for non-regulated technology startups. Such a license encourages startups to establish a presence in the region, employ staff and prepare for regulation by then applying to the DFSA for regulatory approvals. You cannot however, carry out regulated activities until a Financial Services Permission has been obtained.

Staffing Requirements:

The DFSA expects that the firm be adequately staffed depending on the scale, scope and nature of the product portfolio that is proposed to be offered from the DIFC. At a minimum, the DFSA would like to see the following appointments:

Board of Directors – a well-organized Board with robust governance policies. The Chair would have to be a non-executive Director.

Senior Executive Officer (SEO) – Senior banking professional with over 10 years of experience, ordinarily resident in the UAE.

Finance Officer (FO) – Senior and suitably-qualified finance professional. In case of a group, the FO can be from the parent company and does not have to be resident in the UAE. This role can also be outsourced.

Risk Officer – This position is usually outsourced, and not mandatory. 

Compliance Officer (CO) - Senior compliance professional with over 10 years of experience, ordinarily resident in the UAE.

Money-Laundering Reporting Officer – Senior AML professional with over 10 years of experience, ordinarily resident in the UAE. This function can be combined with Compliance and one individual can carry out both responsibilities.

The CO and MLRO roles can also be outsourced.

Internal Auditor - Senior and suitably qualified internal audit professional. Usually outsourced to a professional firm.

External Auditor - Senior and suitably qualified external audit firm. The DFSA maintains a list of recognised auditors, and there are 15 such firms at present

 

DIFC Capital requirements

The base capital requirement for a Category 4 Crowdfunding Business license US$ 140,000. Actual capital required will depend on the nature, quantum of business and forecasted annual expenditure, as per the financial model of the proposed firm.

Actually, there are three components of capital - base capital, risk-based capital and expense-based capital. The higher of the three is set to be the capital requirement. These figures are calculated using the financial models that we make for the Regulatory Business Planduring the application process, and so are mostly unique to the company that applies for the license.

The figures given below are for base capital only, and actual capital may vary depending on the business model and the associated expenses and risks. 

In general, for Crowdfunding Licenses, since they hold Client Money - 18/52 of the projected annual expenses of the firm.

Calculation of capital is a detailed process and involves many factors. We recommend that you contact us for more details on the application process and capital calculations.

Can DIFC firms service clients outside the centre, and in the greater UAE?

Yes, they can. Sheikh Mohammed bin Rashid Al Maktoum issued Law No. (5) of 2021 relating to the DIFC, which brought further clarity to the rules governing the promotion and supply of services and products for firms registered in the centre.

The revised law confirms that DIFC-registered entities can supply services and products outside the DIFC, as long as they are primarily provided out of the firm’s premises in the DIFC area. Marketing and promotional activities are also allowed outside the centre.

There may be additional rules to follow, for instance, when actively marketing funds from the DIFC. A passporting regime exists in this case, where the fund manager can register for a passport for the fund to be marketed in the UAE and the ADGM. Do get in touch for more information on this.

 

The DIFC Crowd Funding Application Process

 
DIFC Crowdfunding Application Process 10 Leaves

 

DIFC CrowdFunding Application 2 10 Leaves

 

The DIFC application process commences with formal introductions to the DIFC and the DFSA.

Following the introductory call, a detailed Regulatory Business Plan (RBP) is prepared, along with financial projections, for a quick review by the regulator.

The comments of the regulator are incorporated into the RBP, and a comprehensive application is compiled, comprising policies, processes and other related documentation. The KYC and associated forms of all key individuals are also prepared for submissions.

The formal application is then sent across to the DFSA, who reviews the pack over a period of 7-10 business days, and then accepts it. The detailed review process then commences, and this can take anywhere between 60 and 90 days to complete.

A critical part of this process is the detailed demo of the crowdfunding platform during which the applicant would be expected to demonstrate the crowdfunding solution for review. This is a live demo and takes around an hour, following which the DFSA sends in their comments and asks for additional clarifications.

The regulator maintains communication with the applicant at all times during the review, reverting with an initial review 2 weeks into the application, and then follow-up reviews thereafter. The DFSA also meets with the SEO, FO and CO/MLRO designates, and conducts a detailed interview with them.

An in-principle approval is issued in case the application is successful. The applicant then proceeds to satisfy the in-principle conditions, and this involves the setting up of a legal structure, opening a bank account, and depositing the share capital in the account. Other tasks include finalization of auditors and obtaining professional indemnity insurance for the firm.

Once done, a final submission is made to the DFSA, following which the regulator issues the Financial Service Permissions and the process is then complete. The firm is now open for business.

Costs:

Setting up a DIFC Regulated Firm to operate a crowdfunding platform involves the following interactions:

Dubai Financial Services Authority (DFSA):

The DFSA is responsible for reviewing and approving all applications for financial services.

Generally, there are two components of DFSA fees. One – an application processing fee, and the other, an annual licensing fee.

Application fee: US$ 5,000

Retail Endorsement fee: US$ 20,000

License fee: US$ 10,000 per annum.

Registrar of Companies (DIFC ROC):

The ROC helps to set up the legal structure of the DIFC Regulated Firm. Shareholders can be individual, or corporate. There are many options available, such as ‘Private Company Limited by Shares’ and ‘Limited Liability Partnerships’. In case of Private Company Limited by Shares, the costs for setting up include:

Application for reserving a name (2 working days): US$ 800

Application for Incorporation of a Private Company Limited by Shares (5 working days): US$ 8,000

Commercial License on Incorporation (5 working days): US$ 12,000 (annual fee)

Data Protection:

The data protection notification is part of the process of registering a new entity in the DIFC. The costs involved are as follows:

Registration - US$ 1250

Annual renewal – US$ 500

Office spaces:

Every entity registered in the DIFC is required to lease a physical office. You can choose from the Gate and surrounding buildings, or other buildings within the DIFC, such as Emirates Financial Towers, Central Park, Park Avenue, Burj Daman and Currency House.

Prices vary, depending on the space availed and the building. Here is an indication of the prevailing rates:

DIFC Fintech business centre – from US$ 19,000

DIFC Business Centre – from a two-desk office at US$ 35,000.

DIFC Fitted Offices – from US$ 55 per square foot.

Other buildings – from US$ 32,000 per annum

Visas:

Establishment Card Application – US$ 630

PSA Deposit – US$ 682

Visas (per visa) – from US$ 1,500

PSA Deposit (per visa) – US$ 682

 Visas are issued based on office space availed, and are usually calculated at 80 sq.ft. per visa

Our Services:

We provide turnkey services for DIFC Crowdfunding business license applications. From fintech 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:

1. Reviewing the business model and advice on the applicable regulatory framework;

2. Preparation of the Regulatory Business Plan and comprehensive financial projections;

3. Preparation of all policies, processes and manuals required;

4. Provision of Outsourced Compliance Officer and Outsourced Finance Officer services;

5. Finalising the legal structure, including holding company setup and customisation of Memorandums; and

6. Finalisation of leased space, bank account opening and obtaining Financial Services Permissions.

A lot of our Crowdfunding clients are startups. In these cases, we also assist such teams with corporate and commercial documentation through our legal consultany - 10 Leaves Legability. We assist in the drafting of:

  • Founder agreements
  • Shareholder agreements
  • Investor agreements
  • Share vesting/ESOP plans
  • Client/Supplier/Distributor agreements
  • Employment agreements

 

We also provide services in Luxembourg, Saudi Arabia and Mauritius

 

Get in Touch today! to get more Information on DIFC Crowdfunding Business License

 

 
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