10 Leaves

Part 2 of 4

You can also view this episode on You Tube - https://youtu.be/PKSwMsWVzt4

Join me for an engaging discussion with Bishr Shiblaq, LLM, CIFD and Derek Watson from the pioneering N2 Technology on setting up in the DIFC Innovation Hub and being part of an ecosystem that does so much more than just provide a license and a fantastic place to do business...

For startups, and VCs, and everything in between! For More Details, Mail us at: [email protected] or Call us at: +97142778349

Do also tune in to our podcasts on the DIFC Innovation License and the DIFC VC Fund Manager Regime. Happy listening!

Part 1 of 4

You can also view this episode on You Tube - https://youtu.be/PKSwMsWVzt4

Join me for an engaging discussion with Bishr Shiblaq, LLM, CIFD and Derek Watson from the pioneering N2 Technology on setting up in the DIFC Innovation Hub and being part of an ecosystem that does so much more than just provide a license and a fantastic place to do business...

For startups, and VCs, and everything in between! For More Details, Mail us at: [email protected] or Call us at: +97142778349

Do also tune in to our podcasts on the DIFC Innovation License and the DIFC VC Fund Manager Regime. Happy listening!

This episode is also available as a blog post: https://10leaves.ae/publications/difc/difc-digital-investment-management-robo-advisory-license

The DIFC has provisions for both regulated and non-regulated fintech in the Innovation Hub. While they have issued detailed guidelines on Money Services Businesses, there is no such explicit guidance on Robo Advisory licenses.

What are Robo-Advisors?

Robo-advisors are a class of financial adviser that provide financial advice or Investment management online with moderate to minimal human intervention. They provide digital financial advice based on mathematical rules or algorithms, and use technology to interact with more tech-savvy clients, as opposed to the traditional method of relationship-based advisory. This technology allows investment managers to provide tailored investment management services to clients in a cost-effective and scalable manner.

Why Use a Robo-Advisor?

There are many reasons why investors may choose to use robo-advisors as opposed to a traditional portfolio manager or financial advisor including:

Low fees and no conflict of interest: Many Digital Investment Managers charge significantly lower fees compared to traditional financial advisors. Conflicts of interest are minimized, since there is no bias or pressure to push a certain set of products or solutions.

Low minimum requirements: Most financial advisory firms have higher requirements of initial commitments – usually a minimum in excess of US$ 100,000. Robo advisors have much lower entry requirements (some as low as US$ 1,000) and work on volumes.

Availability: Digital Investment Managers are automated and hence available 24/7.

Prominent robo-advisory firms include https://www.betterment.com, https://www.personalcapital.com, and https://intelligent.schwab.com.

The Dubai Financial Services Authority, or DFSA, reviews applications from firms who wish to carry out financial services from the DIFC.

In the absence of explicit guidance, based on our experience with DIFC Robo-advisory applications, the following activities may be applicable, depending on the business model, whether fully-digital, or hybrid.

Firms that sell white-labeled technology solutions to wealth managers are not covered since they do not require financial services permissions.

This episode is also available as a blog post: https://10leaves.ae/publications/adgm/adgm-spvs-as-holding-companies

Why hold assets in an ADGM SPV? What are the benefits and uses?

Flexibility of ownership

Shareholding in operational companies:

Holding shares in operational companies in the name of an SPV, instead of in individual names, helps better manage business-related liabilities, and also provide for potential investments in the business. The UAE mainland, for instance, has a 51%/49% share structure for trading entities. These shares are usually held in individual names.

Holding these shares in the name of ADGM SPVs can provide many benefits, including more robust arrangements, under Common Law, for the relationship between the UAE National and the expatriate partners.

Can ADGM SPVs hold property?

Yes! Investors who wish to purchase property, or have already purchased property, can use ADGM SPVs to hold these assets.

We have seen investors using one SPV per property, primarily when such assets are bought for onward sale. Others use ADGM SPVs to consolidate their portfolios by region (in this case, by Emirate), or by type of property (residential, commercial) etc.

This episode is also available as a blog post: https://10leaves.ae/publications/adgm/adgm-spvs-as-securitisation-vehicles

What are the benefits of setting up a securitisation vehicle in the ADGM?

In the ADGM, securitisation of a wide range of assets, loans, bonds, incomes and risks is allowed. In addition to this, risks related to debt, movable or immovable property, tangible and intangible assets are also allowed to be securitised.

In general, anything that is a store of future income can be securitised in the ADGM.

The ADGM SPV is governed by Common Law, and it’s direct applicability in the ADGM provides legal certainty and comfort to foreign investors. SPVs also have access to the ADGM Courts, which provides a mechanism for registration and enforcement of contracts, again under Common Law.

There are no restrictions on foreign ownership in the ADGM, and so ADGM SPVs can issue 100% of it’s securities and shares to foreign nationals.

The ADGM SPV is a low-cost and flexible vehicle. There are no office-space requirements (the services of an ADGM registered agent would suffice), and multiple classes of shares are allowed.

Also, an ADGM SPV has access to the extensive Double Taxation Avoidance Treaty Network that the UAE has in place with most major countries around the globe. In this case, there are additional requirements to fulfil from the Ministry of Finance.

The ADGM is a zero-tax jurisdiction and there are no corporate, withholding or income taxes in the centre. 100% of the profits of an ADGM SPV can be repatriated.

This episode is also available as a blog post: https://10leaves.ae/publications/adgm/corporate-governance-for-adgm-spvs

Companies established in the Abu Dhabi Global Market are expected to implement and maintain a robust corporate governance framework. These include annual filings, event-driven filings, beneficial ownership controls, and conformance to the Economic Substance regulations that have been implemented all across the UAE.

Basic corporate governance:

At a minimum, corporate governance involves compliance with the rules that are applicable to an SPV, both externally from the ADGM, and internally (Memorandum and Articles of Association) as well. Well-documented corporate governance processes, coupled with adherence to recommended best-practices, allows for the SPVs management to maintain a good relationship with internal and external stakeholders.

This is even more relevant to startups, that seek funding at various stages of their business. Investors give high importance to detailed and customized Articles of Associations, backed by robust secretarial policies, both of which are important when it comes to special purpose vehicles that act as holding companies for these startup entities.

This episode is also available as a blog post: https://10leaves.ae/publications/difc/guide-to-providing-money-services-business-licenses-in-the-difc

The DFSA categorises the range of activities that comprise the Money Services Business into two groups: 1) Arranging and Advising on Money Services and 2) Providing Money Services.

Arranging or Advising on Money Service actives come under a Category 4 license, with a minimum base capital of US$ 10,000.

Money Transmission Services also come under a Category 4 license, with a minimum base capital of US$ 140,000.

Providing or Operating a Payment Account, executing Payment Transactions or Issuing Payment Instruments form the core of a Category 3D license, with a minimum base capital of US$ 200,000.

Issuing Stored Value, in which a firm can issue payment cards to make payments to third-party providers, comes under a Category 3C license, with a minimum base capital of US$ 500,000.

Due to the higher risks associated with these activities, the DFSA places higher entry-level requirements  and restrictions on the license itself.

Chances are that the first point of entry be through the DFSA Innovation Testing License, rather than a full-scale application. This is however, decided on a case-to-case basis.

You can also setup in the D I F C with a D I F C Innovation License, which is for non-regulated technology startups.

Such a license encourages startups to establish a presence in the region, employ staff and prepare for regulation by then applying to the DFSA for regulatory approvals.

You cannot however, carry out regulated activities until a Financial Services Permission has been obtained.

This episode is also available as a blog post: https://10leaves.ae/publications/luxembourg/luxembourg-limited-partnership

Limited partnerships are fund types that usually have illiquid strategies. They have been modelled on partnerships that can be setup in other jurisdictions such as United States, United Kingdom and the Cayman Islands.

Such funds invest into venture capital/private equity, debt markets or real estate. The AIFMD introduced in 2013 was instrumental in helping Luxembourg become a leading jurisdiction for funds that invest in alternative assets.

The partnership comprises a General Partner (LP), usually a SARL, and Limited Partners who are investors. This arrangement is governed by the Limited Partnership Agreement, or LPA. A Luxembourg Limited Partnership is not subject to any asset diversification requirements, nor any specific asset type.

There are three types of Limited Partnerships. The first is a Partnership Limited by Shares, or SCA. Structurally, the SCA is like a Public Limited Company.

The second is the Common Limited Partnership, commonly known as SCS or CLP. And the third, and most frequently used is the Special Limited Partnership, or SLP.

An SCA and a CLP have a legal personality, unlike an SLP. Other notable differences between an SCA and the CLP/SLP strutures is that the latter can be formed in front of a notary or by private deed, and typically governed by the Limited Partnership Agreement, unlike the SCA which comes under Company Law.

Also, the SCA is subject to taxation (but has access to double-taxation avoidance treaties), while the CLP and SLP are tax-passthrough structures.

This episode is also available as a blog post: https://10leaves.ae/publications/adgm/new-adgm-company-service-provider-regime

The Abu Dhabi Global Market (ADGM) has been open for business only since October 2015, but it has already garnered much praise and respect over its efforts to differentiate itself through unique offerings. It pioneered the FinTech Abu Dhabi summit, attended by over five hundred global Financial Technology (FinTech) personalities; and has launched a series of collaborations with different companies such as Temenos, Al Ansari, and Mastercard to help forward its FinTech initiative.

Other such initiatives include the Special Purpose Vehicles (SPV) regime, and the ADGM Foundations regime.

The SPV regime is open to a wide variety of uses, from investor-friendly holding structures, to asset separation and transfer. Foundations provide a mechanism to consolidate holdings of various assets (shares, real property, intellectual property, royalties, etc.) into a single holding entity. This allows for clarity on the transfer of assets during a succession process.

Offering world-class structures was the first step. The ADGM has now taken another significant step in the right direction, with the introduction of the Company Service Provider Framework.

This framework aims to regulate existing corporate service providers, such as 10 Leaves, and addresses certain challenges of administering ADGM SPVs and Foundations, especially those that do not have a significant nexus to the UAE.

The ADGM Company Service Provider will be the point of contact between the ADGM Registration Authority and the SPV.

The ADGM Company Service Provider Regulations come into effect in April 2021.

This episode is also available as a blog post: https://10leaves.ae/publications/adgm/holding-intellectual-property-using-adgm-spv

Identifying valuable IP is a process in itself. Both management and staff have to perform this exercise on a consistent basis, especially in edutech enterprises. Multi-jurisdictional firms may face an additional challenge in coordinating their IP identification efforts.

IP, once identified, should be protected. This exercise is detailed, and involves a thorough analysis of the current jurisdictions where the organisation operates, the associated costs and the risks involved in not moving fast enough. Some jurisdictions, such as the European Union, allow for  a single application process; most others have to be done individually. IP protection costs in the GCC are high (approximate US$ 4,300 per country), and there is no unified system for IP protection, which means that startups often face the dilemma of deciding when to go ahead with registering the IP.

Once protected, the IP has to be exploited. Here again, multiple mechanisms  exist, from internal IP licensing, to third-party licensing for production in the name of the licensor. In case of some activities, such as services, extensive agreements covering IP licensing and payment of royalties have to be put in place.

We had a client operating in three jurisdictions with sales in fifteen others. Each  operational jurisdiction had one piece of IP that was cross-licensed to the others and sold in all 15, thus having a potentially 500 transactions to record in its accounts and contracts management database. Then there are tax and transfer-pricing considerations to add to the mix.

Using an ADGM SPV to hold Intellectual Property has multiple benefits, including:

The ADGM SPV can be structured in a manner where the Intellectual Property is assigned to it using IP Assignment Agreements, and the SPV can then sub-assign this Intellectual Property to subsidiaries/other entities in the UAE and worldwide. The royalties thus derived can be consolidated in the SPV, thus leading to operational and tax efficiencies.