Venture Capital Fund Managers in the DIFC - 10 Leaves

  • 06-07-2020
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.
 

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

DIFC Venture Capital Fund Managers:

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 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.

DIFC Capital requirements:

The base capital requirement for a Category 3C Venture Capital Fund Manager is $70,000, if it manages Exempt (EF) or Qualified Investor Funds (QIF). Actual capital required will depend on the nature, quantum of business and forecasted annual expenditure, as per the financial model of the proposed firm.

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: from US$ 5,000 for a Fund Manager license application.

License fee: from US$ 5,000 for a 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$ 2,000 (annual fee) for two years, US$ 12,000 per annum subsequently

The DIFC has special incentives for 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 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

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.

In the DIFC, Venture Capital Funds are closed-ended and open to only Professional Investors. A DIFC VC Fund can be either an Exempt Fund or a Qualified Investor Fund.

Here are some characteristics of Venture Capital Funds:

  • They seek investments in start-ups or early-stage entities
  • They invest in small ventures, whose shares are not traded publicly
  • They raise funds from professional or accredited investors; and
  • Venture Capital Fund Managers invest own funds alongside investors, thus aligning their interests

Exempt Funds:

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;
  • Can have only 100 or fewer unit-holders; 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;
  • Can have only 50 or fewer unit-holders; and
  • Units are offered to persons only by way of a Private Placement.

Incentives for VC funds in the DIFC:

The DIFC offers a subsidised fee structure for VC fund managers of exempt funds and qualified investor funds. This includes a reduced fee of US$ 2,000 per annum for the commercial license (was US$ 12,000 earlier), and complete waiver of the application fee of US$ 8,000, resulting in a cumulative saving of US$ 28,000 over a two-year period. Costs at the DFSA are also lower – US$ 5,000 application fee and US$ 5,000 annual license fee (as opposed to US$ 10,000 in case of DIFC VC Exempt Funds).

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.

Contact us to discuss your fund requirements today!

 

 

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