DIFC Venture Capital Funds Regime
The DIFC has in place a path-breaking VC Fund Manager Regime, that promises to add to the current startup ecosystem being built through the DIFC Fintech Hive, the DIFC Innovation Hub and the recently added DIFC Venture Studio Regulations. The regime is a carve-out of the already fast-tracked Restricted Fund Manager regime, that is in place for entities that wish to only manage private funds.
Why setup a Venture Capital Fund 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.
The Dubai Financial Services Authority, or DFSA, acts as the independent regulator of fund managers and investment funds setup in the DIFC, which provides a high degree of comfort to individual and professional investors. The DIFC offers both Domestic Fund Manager and External Fund Manager licenses, both of which allow for the management of Public, Exempt and Qualified Investor Funds. The DIFC Registrar of Companies (ROC) offers multiple fund structures, included open-ended and closed ended investment companies, and GP-LP structures.
With DIFC Funds, Fund Managers can target the GCC market, and the wider MENASA region, taking advantage of the numerous Double Taxation Avoidance Treaties that the UAE has in place. Zero-rate personal and corporate tax also make the DIFC an attractive destination to setup and manage investment funds.
What is the DIFC?
The Dubai International Financial Centre 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.
Who regulates financial services in the DIFC?
The Dubai Financial Services Authority, or DFSA, is the independent regulator of all entities that engage in financial services from the DIFC. The DFSA authorizes and supervises all regulatory activities from the centre.
Does the DIFC have a fund regime?
Yes! Since the late 2000s in fact. While it started slow, the DIFC now has nearly 100 well-regulated and established funds in the centre. There are multiple ways of establishing a fund in the DIFC, both private and public funds.
What is a Venture Capital Fund?
According to Investopedia, Venture capital funds are pooled investment funds that manage the money of investors who seek private equity stakes in startups and small- to medium-sized enterprises with strong growth potential. These investments are generally characterized as very high-risk/high-return opportunities.
What is a VC Fund Manager?
The VC fund manager is responsible for identifying investment opportunities, innovative business models, or technologies, and those with the potential to generate high returns on investment for the fund. It acts as the operator of the fund and manages it’s investments, with the aim of deriving high returns for it’s investors.
What are some typical roles in a VC Fund Manager?
Typical roles in a DIFC venture capital fund manager may include:
1. General Partners/Fund Managers: They are responsible for all investment of the fund. They usually have experience in investment banking and also experience relative to the fund’s investment strategy.
2. Venture Partners/Deal sources: They source investment opportunities for the fund, based on the investment objective, and are paid based on deals they close for the VC Fund.
3. Junior Associates: Junior employees with 1-3 years of experience in investment banking.
4. Entrepreneur-in-Residence: Industry experts who are hired as advisors or consultants to the venture capital fund manager on a temporary basis, often to assist with due diligence or vetting new startup ideas.
What is the definition of a VC Fund as per the DIFC?
The DFSA has listed a few criteria that specify what they consider to be a VC Fund that can be established in the DIFC.
A VC fund would have to:
- Be an Exempt Fund or a Qualified Investor Fund, open to Professional Clients only;
- Be a closed-ended fund;
- Invest at least 90% of it’s committed capital in unlisted businesses, which are not more than 10 years old; and
- Fund the underlying ventures through equity instruments only
VC funds are usually closed-ended, for a fixed tenure and can be structured as Closed-ended Investment Companies or Partnerships.
Read more about DIFC Venture Capital Funds by clicking here.
How does the DIFC operate?
The DIFC Authority oversees all non-regulated businesses in the DIFC. They act as the liaison between the regulator, the Leasing facilities and the Registrar of Companies. They also serve as facilitators, bringing in firms that wish to do business in the region.
The DIFC Courts handle all civil disputes. These are English Courts, and work independent of UAE law for all civil matters.
The DIFC Arbitration Centre deals with disputes that are to be settled under arbitration
The Dubai Financial Services Authority, or DFSA, regulates all authorised firms, Single Family Offices, DNFBPs and Authorised Individuals. It is the independent regulator of financial services conducted in or from the DIFC.
What is the role of the DFSA?
The DFSA is the independent regulator that authorises and supervises all financial service firms in the DIFC. It administers the various laws that form the legal framework, and has powers to enforce these Laws and the associated Rules that apply to all regulated participants within the centre.
In addition to regulating financial and ancillary services, the DFSA is responsible for supervising and enforcing anti-money laundering (AML) and counter-terrorist financing (CTF) requirements applicable in the DIFC.
In fulfilling its mandate as the sole independent financial services regulator for the DIFC, the DFSA performs a number of functions.
- Policy and Rulemaking.
- International Co-operation.
To summarise, the DFSA:
- has Power to enforce the Law and Rules that apply to all regulated participants within the DIFC;
- Strives to detect and prevent money laundering activities within the DIFC; and
- Works closely with the UAE Central Bank for the prevention of money laundering activities.
What is an Authorised Firm?
An Authorised Firm is an entity that has Financial Service Permissions from the DFSA to conduct financial services from the DIFC.
And what is an Authorised Individual?
They are Individuals who carry out defined Licensed Functions within an Authorised Firm. They are usually linked to an Authorised Firm’s management, and/or the provision of its Financial Services. They are required to meet Fit and Proper criteria and expected to continue to meet Fit and Proper critera throughout the period of being authorised by the DFSA.
The list of Authorised Individuals include the Senior Executive Officer, the Finance Officer, the Compliance officer, the Money laundering reporting officer and the risk officer. There may also be senior managers such as portfolio managers, investment managers and chief technology Officers, who are considered critical to the functioning of the Firm, and hence are authorised by the DFSA by undergoing a process of submission and vetting of their qualifications and experience.
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.
DIFC Capital requirements for VC Fund Managers
The DFSA has implemented more flexible requirements for a VC fund under the new DIFC Venture Capital Funds Regime. The firm will not be required to maintain a set amount of capital but would be expected to maintain and have access to financial resources that are adequate to the size and complexity of it’s business.
Does the DFSA specify any mandatory roles or appointments?
The DIFC is a well-regulated jurisdiction, and hence the DFSA mandates some mandatory appointments for all regulated entities.
1. Senior Executive Officer - The SEO will need to demonstrate experience of at least 5 years in financial services, preferably in a well-regulated jurisdiction. He/she will have to be based in the UAE in due course.
2. Finance Officer - Will have to be a qualified finance professional with relevant experience. This person can be based outside the UAE as well.
3. Compliance Officer - Will need to be DFSA -authorised and have relevant experience. This position can be outsourced.
4. Money Laundering Reporting Officer - Will need to be DFSA-authorised and have relevant experience. This position be combined with the Compliance officer position above.
For DIFC VC Fund Managers, the DFSA has dis-applied the requirement of a Finance Officer. In addition to this, it has removed the requirement of a Compliance Officer until capital commitments are received. The Firm would however have to appoint an MLRO at the outset.
What other allowances does the DIFC VC Fund Manager regime offer?
In addition to the above, the DFSA:
- Allows self-custody of fund property;
- Makes the appointment of an investment committee optional;
- Allows VC funds to invest more than 25% in a single undertaking;
- Makes internal audit of the fund manager optional; and
- Applies simpler capital requirements
How much time does it take to set up a VC Fund Manager in the DIFC?
The DFSA currently aims to issue in-principal approvals for Venture Capital Fund Managers in one week after receipt of a complete application. In all, the complete process can be actually completed within a month.
The Fund can be applied for once the VC Fund Manager is licensed. It takes between 2-5 working days to complete the process of registering an Exempt Fund or a Qualified Investor Fund in the DIFC.
Compare that will a full-fledged DFSA application (6-8 months) and a Restricted Fund Manager application (4 months).
The DIFC VC Fund Manager Application Process
The DIFC application process commences with formal introductions to the DIFC and the DFSA.
Following the introductory call, 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 10-12 business days, and then accepts it once the KYC checks are completed and application fees are paid. The detailed review process then commences, and this can take anywhere between two and four weeks to complete.
The regulator maintains communication with the applicant at all times during the review, reverting with an initial review 1 week into the application, and then follow-up reviews thereafter. The DFSA also meets with the SEO 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 mainly involves the setting up of a legal structure. 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.
How much does it cost?
There are two components of fees:
(i.) Application fee: US$ 2,000 for a Venture Capital Fund Manager license application.
(ii.) License fee: from US$ 2,000 for a Venture Capital Fund Manager license application.
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:
(i.) Application for reserving a name (2 working days): US$ 0 (was US$ 800 earlier).
(ii.) Application for Incorporation of a Private Company Limited by Shares (5 working days): US$ 0 (was US$ 8,000 earlier).
(iii.) Commercial License on Incorporation (5 working days): US$ 0 (Year 1), US$ 4,000 (Year 2), US$ 8,000 (Year 3), US$ 12,000 apply from Year 4 onwards.
(iv.) We have special packages for DIFC VC Fund Managers. Do get in touch to discuss.
The data protection notification is part of the process of registering a new entity in the DIFC. The costs involved are as follows:
(i.) Registration - US$ 500.
(ii.) Annual renewal – US$ 250.
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:
(i.) DIFC Co-working Centre – from a dedicated desk at US$ 500 per month – Approved for DIFC VC Fund Managers.
(ii.) DIFC Fitted Offices – from US$ 55 per square foot.
(iii.) Other buildings – from US$ 20,000 per annum.
(i.) Establishment Card Application – US$ 630.
(ii.) PSA Deposit – US$ 682.
(iii.) Visas (per visa) – from US$ 1,500.
(iv.) PSA Deposit (per visa) – US$ 682.
Setting up a fund structure in the DIFC
A Venture Capital 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 VC 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 VC fund in the DIFC.
Launch your VC Fund with 10 Leaves
The fastest way to launch your Venture Capital Fund in the DIFC. We have everything sorted for you, in one seamless solution!
(i.) Structure your VC Fund
Tailor your fund to your needs: investment objectives, liquidity mechanics, waterfall, carried interest, legal structure.
(ii.) Regulatory Authorisations
Liaising with the DFSA to complete the approvals for the fund manager and the VC Fund.
Our legal arm – 10 Leaves Legability, assists in the preparation of all fund documentation including Private Placement Memorandums or PPMs, Investment Management Agreements, Subscription Agreements and Fund Constitutions.
(iv.) Fund Accounting and Administration
Assistance in accounting, VAT advisory, filing of regulatory returns and risk management through our exclusive partners.
(v.) Bank account opening
Assistance in opening bank accounts with leading banks in the UAE.
(vi.) Fund Distribution Consulting
Assistance in completing the required registrations of Fund Passporting for fund distribution in the wider UAE.
(vii.) VC Fund Database Selection
Consultations on registrations and publishing on leading fund databases, for promotions to their extensive curated audiences.
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, Outsourced Risk Officer and Outsourced Finance Officer services;
5. Completion of the Introductory Training as required by the DFSA (through 10 Academy);
6. Finalising the legal structure, including holding company setup and customisation of Memorandums;
7. Provision of Secretarial Services; and
8. Finalisation of leased space, bank account opening and obtaining Financial Services Permissions.
We are a specialized consultancy and Fund Launching Platform, and we simplify the deployment and maintenance of complex legal entities like VC Funds.
Launching a Fund in the DIFC was traditionally an extremely cumbersome process complete with endless paperwork and coordinating with multiple service providers. It was also a very costly affair, with prices north of US$ 40,000 just for fund documentation.
We have digitised and largely automated the process to make it accessible and save you time and money.
Contact us to discuss your fund requirements today!