Compliance obligation reminders for licensed Venture Capital Fund Managers (VCFMs) - Waystone

      Compliance obligation reminders for licensed Venture Capital Fund Managers (VCFMs)

      Licensed Venture Capital Fund Managers (VCFMs) have various obligations that they must adhere to, and although not the same as other Licensed Fund Management Companies (LFMCs) and Registered Fund Management Companies (RFMCs), there is some cross over.

      General Reminders for Firms to Consider Regarding VCFMs

      We have set out below some general reminders which we would urge firms to consider, in order to ensure compliance with the regulations:

      Category Summary Reminder
      Business activities VCFMs are not allowed to carry on business in any regulated activity other than the management of “venture capital funds”, as defined under regulation 14(8) of the Securities and Futures (Licensing and Conduct of Business) Regulations (SF(LCB)R), and MAS expects VCFMs to focus on venture capital investing. Ensure your business model focuses solely on venture capital investing.

      If your firm provides incidental activities, you must ensure you remain focused on venture capital investing and manage all potential conflict of interests (e.g. not charging fees).

      Fund eligibility criteria
      (due diligence on investments and investors)
      ‘Venture capital funds’ are closed-ended funds offered to accredited and/or institutional investors, where no more than 20% of the committed capital of each fund is invested in ‘non-qualifying investments’.

      To ensure compliance with the requirement to only manage ‘venture capital funds’

      Ensure compliance with the investment restrictions as part of the investment due diligence process.

      Ensure that all investors in the funds meet the definition of ‘accredited investor’ or ‘institutional investor’ under the Securities and Futures Act 2001 (SFA). As part of carrying out due diligence on investors, VCFMs are also required to ensure compliance with the requirements in Notice SFA 04-N02 on the Prevention of Money Laundering and Countering the Financing of Terrorism, and the Securities and Futures (Classes of Investors) Regulations 2018.

      Maintain documentation evidencing that investors satisfied the ‘accredited investor’ definition.

      Complete customer due diligence on investors prior to onboarding; and/or

      Obtain the accredited investor ‘opt-in’ from their investors.

      LFMCs and RFMCs are subject to conduct of business requirements which include the need to have written policies on all areas of their operations, and an effective risk management framework.

      All FMCs are subject to the same requirements in respect of customer due diligence and obtaining the ‘opt-in’ from investors that are accredited investors.

      All FMCs must establish appropriate procedures and processes to mitigate the risks arising from its business operations, and to ensure compliance with all applicable laws and regulations.

      Disclosure to investors Disclosure that VCFMs are not subject to specified requirements. i) VCFMs are required to disclose in writing to all investors that the VCFM is not subject to the conduct of business requirements and financial requirements that apply to LFMCs under the SF(LCB)R and Securities and Futures (Financial and Margin Requirements for Holders of Capital Markets Services Licences) Regulations (SF(FMR)R).

      Note: investors may negotiate for relevant safeguards to be put in place, as part of the contractual agreements between VCFMs and their investors.

      ii) The requisite disclosures to investors can be included as part of the funds’ private placement memorandums (PPMs), and/or investor subscription documents.

      It is important for VCFMs to ensure regulatory compliance at all times, and to ensure the requisite disclosures are made prior to accepting capital commitments from the investor.

      For VCFMs that had been managing existing funds as an LFMC or RFMC prior to becoming a VCFM, written disclosure is also required to be made to the investors in those existing funds.

      VCFMs should take prompt action to ensure regulatory compliance, such as amending the relevant PPM, or by writing to investors separately.

      Policies and internal controls Having formalised policies and procedures. Although VCFMs are not subject to the conduct of business requirements applicable to other LFMCs and RFMCs, as best practice, VCFMs should adopt written policies and procedures to govern the operations in areas such as investment and divestment, valuation, conflict management, cash management, and/or compliance.

      A compliance manual is encouraged to be implemented by VCFMs.

      Governance Segregation of duties and mitigating conflicts of interest.

      All FMCs are required to mitigate conflicts of interest that arise in the course of their business.

      Employees of FMCs may have roles and responsibilities covering both front office and middle/back-office functions. This is often the case for smaller FMCs with fewer employees and a smaller scale of operations.

      These FMCs should be mindful that potential conflicts of interest can arise where there is a lack of segregation of duties between the firm’s business activities and control functions, and accordingly, should implement the necessary processes to ensure conflicts are mitigated. FMCs should also be cognisant of ensuring the clear segregation of duties amongst its employees as the FMC expands its operations/grows its headcount.

      Base Capital Having positive base capital.

      VCFMs are not subject to these risk-based capital requirements.

      VCFMs are required to maintain a positive level of base capital (i.e. a minimum base capital of S$0), to ensure that the VCFM is able to operate as a going concern.

      Avoid having a negative base capital (commonly for a negative base capital, this could be due to the impact of accumulated losses during the early years of the VCFMs’ operations).

      VCFMs are reminded to monitor their base capital on an ongoing basis, and ensure that a positive level of base capital is maintained at all times in accordance with the SF(FMR)R.

      VCFMs with negative base capital are expected to take immediate action to rectify the breach, such as through the injection of additional capital.

      If you have any questions about your regulatory obligations, please reach out to your usual APAC Compliance representative.

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