New DIFC Venture Capital Funds Regime - 10 Leaves

  • 14-08-2020
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.
 
 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

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.

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 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?

1. Typical roles in a DIFC venture capital fund manager may include:

2. 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.

3. 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.

4. Junior Associates: Junior employees with 1-3 years of experience in investment banking.

5. 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.

DIFC Venture Capital Fund Manager Regime:

The DIFC has implemented a path-breaking VC Fund Manager Regime, that promises to add to the current startup ecosystem being built through the DIFC Fintech Hive and the DIFC Innovation Hub. 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

Definition of a VC Fund as per the DIFC:

A VC fund would have to:

  1. Be an Exempt Fund or a Qualified Investor Fund, open to Professional Clients only;
  2. Be a closed-ended fund;
  3. Invest at least 90% of it’s committed capital in unlisted businesses, which are not more than 10 years old; and
  4. 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.

Other benefits:

 In addition to the above, the DFSA:

1. Allows self-custody of fund property;

2. Makes the appointment of an investment committee optional;

3. Allows VC funds to invest more than 25% in a single undertaking;

4. Makes internal audit of the fund manager optional;

5. Removes the requirement for a Finance Officer;

6. Removes the requirement for appointment of a Compliance Officer until initial commitments of capital are required; and

7. Apply simpler capital requirements

 

The DFSA has also reduced the application and supervision fee for Venture Capital Fund Managers to US$ 2,000 each, and US$ 1,000 per annum for the venture capital fund.

Firms interested in managing venture capital funds from the DIFC are required to submit applications to the Dubai Financial Services Authority, or DFSA.

The DFSA has a fast-track process for Venture Capital Fund Manager licenses, which come under Category 3C. The Fund Manager, if approved, can manage domestic (Exempt and Qualified Investor Funds) and Foreign Funds in other jurisdictions as well. In case the firm wishes to also engage in discretionary portfolio management services, it has to go through a full-fledged license process.

The DFSA currently aims to issue in-principal approvals for Venture Capital Fund Managers in one week after receipt of a complete application.

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.
 
What other allowances does the DIFC VC Fund Manager regime offer?
 
In addition to the above, the DFSA:
1. Allows self-custody of fund property;
2. Makes the appointment of an investment committee optional;
3. Allows VC funds to invest more than 25% in a single undertaking;
4. Makes internal audit of the fund manager optional; and
5. 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).

 

Costs:

Setting up a DIFC Regulated Firm involves the following interactions:

Dubai Financial Services Authority (DFSA):

The DFSA is responsible for reviewing and approving all applications for financial services. Costs depend on the activities applied for, which puts the applicant in one of five categories.

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

Application fee: US$ 2,000 for a Venture Capital Fund Manager license application.

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:

Application for reserving a name (2 working days): US$ 0 (was US$ 800 earlier)

Application for Incorporation of a Private Company Limited by Shares (5 working days): US$ 0 (was US$ 8,000 earlier)

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.

We have special packages for DIFC VC Fund Managers. Do get in touch to discuss.

 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$ 500

Annual renewal – US$ 250

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 Co-working Centre – from a dedicated desk at US$ 500 per month.

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

Other buildings – from US$ 20,000 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

DIFC Venture Capital Funds:

A Venture Capital fund makes investments in the equity and debt of privately-held companies, focusing on the long-term potential of the acquisition, much like private-equity firms. These investments are usually made in early startup companies, before the larger Private Equity rounds, and hence these investments are characterized by smaller ticket sizes, and higher risks. Due to the illiquid nature of these investments, 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.

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.

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! 
 
Interestingly, 10 Leaves has managed to get the first two approvals for VC Fund managers under the new regime, with many more in the pipeline. 
 
1. Structure your VC Fund:
Tailor your fund to your needs: investment objectives, liquidity mechanics, waterfall, carried interest, legal structure.
 
2. Regulatory Authorisations:
Liaising with the DFSA to complete the approvals for the fund manager and the VC Fund.
 
3. Documentation:
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.
 
4. Fund Accounting and Administration:
Assistance in accounting, VAT advisory, filing of regulatory returns and risk management through our exclusive partners.
 
5. Bank account opening:
Assistance in opening bank accounts with leading banks in the UAE.
 
6. Fund Distribution Consulting:
Assistance in completing the required registrations of Fund Passporting for fund distribution in the wider UAE.
 
7. VC Fund Database Selection:
Consultations on registrations and publishing on leading fund databases, for promotions to their extensive curated audiences.
 
 
Our differentiators:
 
1. We are a specialized consultancy and Fund Launching Platform, and we simplify the deployment and maintenance of complex legal entities like VC Funds.
 
2. 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.
 
3. 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!

 

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