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Singapore eases regulation of venture capital funds

The Monetary Authority of Singapore (MAS) plans to introduce faster approvals and lower requirements for the managers of venture capital (VC) funds, to encourage financing for small business development.17 Feb 2017

VC managers are currently subject to the same statutory framework as other fund managers in Singapore, MAS said in a consultation paper.

These fund managers differ from other fund managers, however, as they manage funds that typically only invest in unlisted business ventures that operate for less than five years. They do not usually accept new subscriptions after the close of a fund, with redemption only possible at the end of the fund's life, and investment is only offered to accredited or institutional investors. These differences mean that some rules are less relevant in this case, MAS said.

Startups and investee companies typically make little or no profits in their early years, MAS said.

"The return on investment to VC investors depends primarily on the eventual success or failure of these business ventures at the end of the fund life. While the VC manager is usually involved in nurturing these companies by providing expertise and business networks, there is no guarantee that all the investee companies will take off and succeed. In the worst case, investors in a VC fund can lose a substantial amount or all of their principal at the end of the fund life."

A simplified regime should also take into account that VC investors are typically "highly sophisticated and highly selective of the VC managers that they choose to invest with", and "often negotiate stringent contractual safeguards to protect their own interests", MAS said.

Under the proposed new, shorter authorisation process MAS will concentrate on assessing the fitness and propriety of managers. It will not require VC managers to have directors and representatives with five years or more relevant experience in fund management, or subject them to the capital requirements and business conduct rules that apply to fund managers in general, it said.

Base capital requirements and risk-based capital requirements will be removed, as will the requirement for independent valuation, internal audits and submission of audited financial statements, MAS said.

"VC managers are an essential component of the start-up eco-system," MAS said. "They provide capital and expertise to businesses that are in the startup or early growth phases. Although the VC industry has been growing at a healthy rate, there is room to further expand the size and scope of VC funding available for start-ups." 

"It is important that the VC industry remains sound, has good governance and adequate controls against financial crime, and upholds high standards of integrity. VC managers, their directors and key officers must therefore continue to meet fit and proper requirements and comply with anti-money laundering obligations. MAS will also retain regulatory powers to deal with errant VC managers," MAS said.

Lee Boon Ngiap, assistant managing director of capital markets at MAS, said: "The proposed simplified regulatory regime for VC managers recognises the lower risks they pose, given their business model and sophisticated investor base.  It will allow new VC managers a faster time-to-market and reduce their ongoing compliance burden. We hope this will attract more VC managers and spur them to play a greater role in supporting entrepreneurship and innovation."

Technology law expert Bryan Tan of Pinsent Masons MPillay, the Singapore joint venture partner of Pinsent Masons, the law firm behind Out-Law.com said: "The new rules recognise that venture capitalists are often successful entrepreneurs or former senior technology industry executives, without the traditional finance background, with skills in spotting talent and good business models or technology. This is not unlike the Silicon Valley experience, and represents the tailored approach to innovation the government is taking, rather than a one-size-fits-all solution."

Nathanael Lim, also of Pinsent Masons MPillay said: "The proposed easing of regulations is clearly a step in the right direction, as it demonstrates MAS’s willingness to be sensitive to the unique risk environment venture capital managers operate in."

"The amendments will also help VCs to save on compliance cost, and free up resources for other purposes," Lim said. 

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