VC Funds Documents Required
a. formation documents.
b. offering documents;
Formation documents are the documents filed with the Dubai Financial Services Authority (DFSA) and the DIFC Registrar of Companies (ROC) to establish the legal structure of the entities, including the fund manager and the fund vehicle, or the general partner, fund partnership and investment management company.
These usually include application forms, confirmations and the statutory offering documents.
The offering documents are made available to prospective investors prior to the investors committing capital to the VC fund. These documents include the detailed fund disclosures document in the form of a Private Placement Memorandum, the governing documents of the fund that may be the Limited Partnership Agreement or the Fund Management Agreement and the Fund Subscription Agreement.
Internal documents are neither filed with the DFSA, nor provided to investors. These fund documents lay out the rights and responsibilities between the VC fund and the fund manager. The main internal document is the investment management agreement that is signed by the VC fund with it’s fund manager.
Regulatory filings are documents that are needed to be filed with the DFSA and the DIFC ROC from time to time. These include regular reports, confirmations and annual submissions.
Private Placement Memorandum:
A Private Placement Memorandum, or PPM, is the key marketing and disclosures document through which the fund markets its interests to prospective investors. The PPM details material information on the fund and serves as the backbone of the legal documentation involved.
A PPM contains specific information about the terms of the offering, the structure of the investment, the background of the fund manager and related professionals, service providers, statutory and commercial disclosures. Prospective investors make a choice about whether to subscribe to the fund, based on this PPM and other supplementary documentation provided by the investment manager. A condensed form of the PPM, called the term sheet, is usually used as a teaser to gauge interest in the fund. This term sheet mentions specific information and refers to the more detailed PPM.
A typical PPM contains:
- A summary of the offering.
- Investment objectives and strategies.
- Investment methodologies.
- Risk factors.
- Background of the promoters.
- Details on the Investment Manager and advisors.
- NAV calculation methods.
- Tax considerations
- Cross-border marketing disclaimers
- Legal background
- Regulatory rules & regulations that the VC Fund has to adhere to
- Service providers involved in servicing the fund.
A well-prepared PPM should protect the Fund Manager from investor claims of lack of disclosure.
The Constitution of a VC Fund is also called the Articles, or the Memorandum and Articles of the Fund. It governs the internal workings of the Fund and is usually tailored to the Fund PPM. Regulators normally define what they expect to see in a Fund Constitution and this information is required as a minimum.
The DFSA for instance, has a detailed checklist for Constitutionof Domestic VC Funds. Here are some of the details required:
1. Name, place of business, legal form, and specialist class of the Fund.
2. Details of the Fund Manager, Administrator, External Auditor and Legal Counsel.
3. The duration of the VC fund, with all possible extensions in tenure.
4. The fees, charges and other expenses related to the VC Fund, and the basis for determination of such fees.
5. The minimum and maximum (if any) sizes of initial and subsequent subscriptions.
6. Liabilities of Unitholders of the VC Fund.
7. Investment objectives and types of investments.
8. Classes of Unitholders and rights attached to each such class, including redemption rights.
9. Income and distributions.
10. Meetings and oversight arrangements.
11. Termination and suspension of the Fund Manager.
12. Responsibility statements.
Fund Management Agreement:
This agreement is signed between the fund manager and the fund and governs the relationship between the two. It usually details:
- the primary investment objectives and restrictions of the fund.
- the economics of the fund (fees, profits and distributions).
- expenses covered and not covered under the arrangement.
- the possible conflicts of interest and their management.
- the mechanics of capital drawdowns.
- the distribution waterfalls.
- the defaulting provisions.
- reporting mechanisms.
- other standard terms as per the applicable regulations.
A Limited Partnership Agreement is signed in case of a GP-LP structure. This document details:
1. The powers of the general partner;
2. The fees and expenses, including management, performance or other potential fees as well as legal startup costs, brokerage, administration, and audit expenses;
3. Allocations and distributions of profits to all partners, including how profits are calculated and the timing of distributions;
4. Withdrawal provisions, lock-up periods, and distribution dates; and
5. Powers of attorney, that authorise the fund manager to act on the limited partner’s behalf for purposes such as voting on matters, purchase and sale of fund investments, admissions of incoming limited partners, and amendments to fund formation documents and other documents necessary for the operation of the VC Fund.
This agreement is signed between the fund and the investors who subscribe to it’s units. The subscription agreement sets out the terms under which an investor subscribes to the fund and holds non-voting participating shares within the fund structure.
In addition to the terms, the investor will make representations and warranties within the subscription agreement, which can include his/her compliance with the suitability tests (status as a ‘professional investor’as required by most jurisdictions).
In most cases, a subscription agreement forms part of the annexure of the fund Private Placement Memorandum. Some subscription agreements mention a specific rate of return that will be paid to the investor, such as a particular percentage of company net income or lump sum dividend payouts, and related payment dates.
Some fund management agreements allow the fund manager to enter into separate side agreements with investors. A side letter entered into by the fund and an investor alters the terms of that investor’s agreement with respect to its investment in the fund, and its rights and obligations under the fund management agreement.
Side letters are often used to grant special rights and privileges to important investors (e.g., seed investors, strategic investors, those with large commitments, and employees, friends, and family) or to those subject to government regulations.
Many regulators express concern with respect to side letters, since such terms are mostly not disclosed to other investors and can possibly open up possibilities to litigation. Some investors may assert breach of contract claims (for acting outside the bounds of the fund management agreement) or breach of fiduciary duty claims (for treating certain investors more favorably than others).
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