Fund Management Company, Venture Capital – Singapore Series
Venture Capital Fund Management (VCFM)
A Fund Management Company is a business in which licensed or registered managers manage the funds of affluent individuals and/or large corporations. These managers are responsible for coming up with an investment strategy to generate higher returns on their client’s funds/portfolios.
Although these fund management companies usually target the accredited investors (AI), there also exists retail fund management companies that provide similar services for the common man (Retail investors). This is usually done via a fund vehicle that pools proceed from the retail market. This pooled amount is then used to invest in stocks, bonds or other assets, in accordance to the decided mandate.
Fund managers are expected to have the requisite skills, knowledge and expertise to come up with a strategy that generates greater returns for their client than if they (the client) were to put these funds in typical low-risk instruments such as fixed deposits or savings accounts. For this reason, the Monetary Authority of Singapore (MAS) has set a minimum standard of qualifications required, such as completing the A-Level (or equivalent), having a finance or accounting degree, and passing the CMFAS and any other relevant requirements necessary to demonstrate that these individuals are well equipped to carry out fund management.
There are several types of products and strategies that a fund manager can choose from in order to generate returns for its investors. One of these strategies is the venture capital strategy, as discussed below in this chapter of our series.
Venture Capital
A venture capital is a means by which financing is provided to high growth potential start-ups and/or small businesses by venture capitalists, sometimes also known as angel investors (usually high net worth individuals and venture capital firms) in exchange for equity in the business.
Key Characteristics:
- High Risk – Judging whether a business is going to run well, and yield returns in the long run can be perplexing. Venture capitalists usually invest a large sum of money into these businesses and there is no guarantee that it is bound to do well, therefore making it very risky as there is a possibility of investors losing out all their money in case the business fails and goes bankrupt.
- Illiquidity – Venture capital businesses usually take a long time to start making profits for their investors. This is because the initial stages generally involve more research and development rather than generating revenue. An investor will therefore have to wait for a longer period, as compared to a business that is up and running, until the business they have invested in is able to attract a buy out or issue an Initial Public Offering (IPO) for them to gain returns on their investment.
- Equity participation – Venture Capitalists ask for equity in the business in exchange for their investment. This allows the investors to have a say in managerial decisions of the business. This is generally considered a disadvantage from the company owner’s perspective as they lose a significant amount of control over the business. On the other hand, it could be considered an advantage as these investors could also be experienced in the given market they are dealing with and may bring their business networks and valuable advice to help aid in the venture’s progress.
- Forms of Venture Capital – Although venture capital is usually provided to start-ups, there are different forms of venture capital that can be provided according to the stage the business is in. The five main forms of venture capital include:
a. Seed Capital –Low-level financing provided by the founder’s assets, friends or family for pre-production stage and its main purpose is just to convince venture capitalists why the company’s idea is worth investing in.
b. Start-Up Capital – Following incorporation, the production process has begun and there are a few units ready to be sold. However, money is needed to begin marketing and advertising in order to acquire customers.
c. Early Stage Capital –This funding usually goes towards manufacturing, production facilities and additional marketing. The amount funded here is relatively much higher than previous stages.
d. Expansion Stage –Once the business starts growing (typically in 2 to 3 years), funding is used to expand into additional markets and diversification.
e. Bridge/Pre-Public stage – This stage is generally when the business is just about to go public. Funds received at this stage are used for mergers and acquisitions, price reductions, and financing steps towards an IPO (Initial Public Offering).
Process of obtaining Investment in the form of Venture Capital
- Present business plan to investor – The initial step is to present the business plan to the investor so that they can evaluate your idea and make a decision of whether or not or not to go ahead with the business or not.
- Initial meeting to discuss idea in detail – Once the investor has had a look at the business plan and believes that it looks promising, they will have a meeting to discuss the project in detail to completely understand how exactly the business is going to work.
- Agreements (Transaction documents) and Funding – Following the approval of the business idea by the investor, agreement on the initial commercials and due diligence of the owner and company, agreements, common known as transactions documents such as Shareholders agreement, Share Subscription agreement etc, is drawn up outlining the terms and conditions regarding the funds injected and management of the company.
Regulatory requirements to set up a fund management company to carry out the venture capital strategy
To carry out any kind of fund management in Singapore, you need to be either a Registered Fund Management Company (RFMC) or Capital Markets Services Licensee (CMSL), both of which are governed by the Monetary Authority of Singapore (MAS)
To facilitate start-ups access to capital, The Monetary Authority of Singapore (MAS) has simplified the regulations for managers of venture capital funds (VC managers), this includes shortening the authorisation process for VC manager. The simplified regulatory regime takes into account the extent of contractual safeguards that are already present in typical contracts negotiated by VC managers’ sophisticated investor client base.
To qualify for the VC manager regime, a VC manager has to manage funds that meet the following characteristics including side by side comparison to RFMC requirements :
Tabular Summary
| Requirements | Venture Capital Fund Management (VCFM) | RFMC |
|---|---|---|
| Forms to be submitted | Form 1V (Application for a capital markets services license as a Venture Capital Fund Manager). Note that this is different to Form 1A (Application for a capital markets services licence to provide fund management), which is a general form for CMSL application whereas 1V is specifically for venture capital fund managers. | Form 22A (Notice of Commencement of Business as a Registered Fund Management Company). |
| Amount of Assets under Management | Any amount. | Maximum of S$250 million. |
| The number of Directors & Experience | Have at least two directors, at least one of whom should be full-time and resident in Singapore | Minimum of 2 Directors with more than 5 years relevant industry experience. At least 1 must be Executive and Singapore-resident. |
| Minimum Base Capital Requirements | No specific requirements. | S$250,000 |
| Investor Type | Accredited and Institutional only (no Retail). | Limited to Qualified Investors. |
| Type of Investment | Only in Venture Capital i.e. 80% of the fund’s portfolio should be in companies less than 10 years old | No specific restriction. |
| Number of Investors | No Limits- Accredited Investors or Qualified Investors. | Maximum of 30 investors (which may include up to 15 funds). |
| Compliance Arrangements | This function can be outsourced if the AUM is less than S$1 b. | Can be outsourced as per the complexity and scale of business. |
| Professional Indemnity Insurance | None stipulated so far, but this should be commensurate to the scale, nature and complexity of the specific set up | Encouraged to be maintained. |
| Reporting requirements | Annual | Annual. |
| Risk-Based Capital Requirements | None stipulated so far, but this should be commensurate to the scale, nature and complexity of the specific set up | None. |
How will Argus (now Waystone Compliance) help?
Argus (now Waystone Compliance) provides the full spectrum of services to set up a Fund Management Companies with various business strategies including Venture Capital Fund Management (VCFM) and its ongoing compliance. Our dedicated regulatory compliance team comes with the extensive knowledge, diverse experience and skills to assist you with all your compliance needs.
We can help you with the following:
- Setting up your business –We will incorporate the appropriate structure.
- License Application – We analyse your business type and help you put a regulated business plan together with your license application. We check all relevant documentation to be provided to the MAS prior to submission of your license Application.
- Policy and procedure – We ensure that your policies and procedures are adequately set up to complement your business strategy.
- Risk Management & Corporate Governance –We set up your Risk Management Framework & Compliance Monitoring Plan to ensure that the implemented policies and procedures are executed.
- Ongoing Compliance –We manage your compliance function to ensure ongoing monitoring and support in accordance to specified guidelines, industry requirements and
- Internal Audit – We carry out audits based on your particular requirements, whether this may be in preparation of a Regulator-visit, or to formally review and assess the processes in your firm, amongst others.