10 Leaves

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

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 Financial Services Regulatory Authority, or FSRA, reviews applications from firms who wish to carry out financial services from the ADGM. Their guidance for Digital Investment Managers includes those operating on fully-digital models, and hybrid models. 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/using-adgm-spvs-as-holding-structures-for-startups

So how can we use these flexible structures as holding companies for startups?

Well, Startups in the region face a daunting task. It is not easy to operate a fledgling company in the region, even with all the incentives that are currently in place for entrepreneurs.

Access to capital is limited, given that banks in the UAE do not lend easily to entities that do not have a proven track record.

Startups then end up having to turn to alternate sources of funding, namely angel investors and venture capitalists.

This ecosystem has been steadily growing since 2016, and initiatives such as the DIFC VC Fund Regime are bringing in new VC Fund managers to the country.

Most free zones do not yet have very flexible commercial companies regulations. Shareholders are all clubbed into one class of shares, with limited (if any) options to customize the Memorandum and Articles of the company, and options for share pledges and issuance of convertibles such as warrants being virtually non-existent.

In this situation, even if startups manage to access capital, they require an adequate structure so as to onboard investors, while still keeping control of the operational direction of their company.

Here is where ADGM SPVs provide a viable alternative:

Startups can be setup in any free zone in the UAE, and can hold the shares in these free zone entities through an ADGM SPV.

In effect, the operational entity becomes a wholly-owned subsidiary of the SPV in ADGM. The Memorandum of the SPV can be customized to allow for multiple classes of shares, with different voting, dividend and distribution rights.

Investors can be onboarded in a separate class of shares and founders can maintain control of operational aspects of the startup through a distinct founder share class.

This is a podcast-only feature!

Startups seeking financing often turn to venture capital firms. These firms can provide capital; strategic assistance; introductions to potential customers, partners, and employees; and much more.

However, venture capital financings are not easy to obtain or close. Entrepreneurs will be better prepared to obtain venture capital financing if they understand the process, the anticipated deal terms, and the potential issues that will arise.

We have a detailed look at VC financing in a series of three podcasts.

This is the last part in the series.

Also have a listen to our podcast on Innovation Licenses in the Dubai International Financial Centre, or D I F C. You can have your own tech startup too!!

This is a podcast-only feature!

Venture investors will want to make sure that the founders have incentives to stay and grow the company.

If the founders’ stock is not already subject to a vesting schedule, the venture investors will likely request that the founders’ shares become subject to vesting based on continued employment, and then become “earned”.

Standard vesting for employees is monthly vesting over a 48-month period, with the first 12 months of vesting delayed until 12 months of service are completed, but founders can often negotiate better vesting terms.

The key issues that the founders negotiate in this regard are the following.

Will the founders get vesting credit for time already served with the company?

Will vesting be required for shares they acquired for meaningful cash investment?

Should a vesting schedule of less than 48 months apply?

Should a vesting schedule apply at all?

Should vesting accelerate, in whole or in part, on termination of employment without cause, or upon a sale of the company?

A form of vesting that is usually acceptable to investors is the so-called “double trigger” acceleration, where vesting accelerates if the company is acquired and if the buyer terminates the founder’s employment without cause after the acquisition.

In our experience, some vesting in early-stage startups is typically required, but the founders will usually get credit for time spent with the company, as long as a meaningful amount of equity is still subject to vesting.

Also have a listen to our podcast on Innovation Licenses in the Dubai International Financial Centre, or D I F C. You can have your own tech startup too!!

This is a podcast-only feature!

Startups seeking financing often turn to venture capital firms. These firms can provide capital; strategic assistance; introductions to potential customers, partners, and employees; and much more.

However, venture capital financings are not easy to obtain or close. Entrepreneurs will be better prepared to obtain venture capital financing if they understand the process, the anticipated deal terms, and the potential issues that will arise.

In this podcast, we provide an overview of venture capital financings.

Actually, in a series of three podcasts.

Lets start by having an overview of Venture Capital Financing.

Also have a listen to our podcast on Innovation Licenses in the Dubai International Financial Centre, or D I F C. You can have your own tech startup too!!

This episode is also available as a blog post: https://10leaves.ae/publications/luxembourg/special-purpose-acquisition-company-spac-options-in-luxembourg

What are Special Purpose Acquisition Companies, or SPACs?

A SPAC is an acquisition vehicle typically created by experts in specific sectors, for example, in technology.

The primary objective of an S PAC is to acquire an existing entity that is in the early stages of filing for an Initial Public Offering, or IPO.

The acquisition is funded by the capital that the S PAC raises from it’s own Initial Public Offering. This capital is then kept in escrow until the target company has been identified. Once done, the process can be completed quickly, hence giving the target entity a quicker and hassle-free route to an IPO.

If an SPAC fails to locate an acquisition, it would have to be liquidated.

The advantage to investors is that they get to seize opportunities quickly, within the protection of a listed entity with all the required adherence to regulation and transparency.

The advantage for the target company is that they get to list quickly, through the merger process.

Because of the nature of it’s operation, S PACs are often called “blank-cheque” companies.

Why establish an SPAC in Luxembourg?

Luxembourg offers many solutions to establish S PACs. The country is a leading jurisdiction for setting up of investment funds and holding companies.

In fact, Luxembourg is the second-largest fund domicile in the world, and the largest in Europe, managing over EUR 5.1 trillion dollars.

Funds setup in Luxembourg can be distributed through the European Union, under the AIFM directive.

A Luxembourg structure also offers comfort to investors, given the good reputation of the jurisdiction, the enhanced protections offered to investors and the existing network of globally-recognised service providers.

This episode is also available as a blog post: https://10leaves.ae/publications/luxembourg/green-funds-and-sustainable-finance-options-in-luxembourg

What are social impact funds?

Social impact and green funds are investment funds that have integrated environmental, social and governance factors (ESG) into their investment process. These ESG funds invest into businesses that are environmentally friendly and have a positive impact in society.

The sustainable and impact investing asset class has recently emerged as a new and growing class of investments. There are different forms of investing to create a social impact, and these include environmentally friendly businesses such as solar or wind energy, start-ups with an ESG agenda or investments in a blue-chip company that largely fulfils ESG criteria.

This sector has seen a considerable growth, as institutional investors and sovereign wealth funds have been under increasing pressure by governments worldwide, to integrate ESG criteria into their investment allocations.

Why set up an ESG fund in Luxembourg?

Luxembourg has been at the forefront of social impact investing and has a long-established track record as a domicile of choice for ESG funds. Luxembourg is also ideally positioned for fund managers to make use of the European passporting rights to distribute the fund across the EU, and also to other markets worldwide.  Also, most globally-recognised service providers have a presence and offer services in Luxembourg.

In fact, Luxembourg has a documented strategy for growing the impact investing sector, and this includes focus on leveraging Luxembourg’s expertise in asset management, alternative funds and sustainable finance. As a result, the country has seen a total market share of over 30% of all social impact investment funds in Europe, over 62% of European impact funds, over 65% of global microfinance assets, as well as being amongst the top four jurisdictions globally, for Islamic funds.

The Luxembourg Government, the Luxembourg Stock Exchange and the European Investment Bank have together established LuxFlag, an independent association for the labeling of funds that invest in the ESG sector.

This episode is a podcast-only feature!

Do also visit us at https://10leaves.ae/publications/difc/new-difc-venture-capital-funds-regime

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.

This episode is also available as a blog post: https://10leaves.ae/publications/adgm/cost-of-setting-up-a-holding-company-in-the-adgm

Consolidation and management of assets is one of the key points of concern for investors worldwide, and even more so in the GCC. A growing investor ecosystem, coupled with the high density of family wealth in the region, call for robust structures that can help high net worth individuals manage their investments. One such structure is an ADGM holding company. This article contains details for an operational holding company, that is, a holding company that actively manages the assets under it. This holding company is eligible for visas and hence can employ staff to carry out their operations.

For a passive holding company, where the objective is to hold shares, Intellectual Property or Real Property, you can read our article on Special Purpose Vehicles in the ADGM.

Why setup a holding company in the ADGM?

The ADGM is an upcoming financial center in the region for business and fintech. ADGM holding companies can be used to hold assets within the UAE, the GCC, or anywhere else in the world. These include real property and shares in other companies in the UAE and worldwide. 

The maximum number of visas you can apply for will depend on both the type of business you plan on setting up as well as the size of the premises you lease in the ADGM.

This episode is also available as a blog post: https://10leaves.ae/publications/adgm/guide-to-the-adgm-category-3c-fund-manager-license

Firms interested in managing funds from the ADGM are required to submit applications to the Financial Services Regulatory Authority, or FSRA.

The FSRA has a fast-track process for Fund Manager licenses, which come under Category 3C. The Fund Manager, if approved, can manage domestic professional (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.

Exempt Funds:

Exempt Funds are open only to Professional Clients (as defined by the ADGM). The other features of an EF are:

Qualified Investor Funds:

Qualified Investor Funds are open only to Professional Clients (as defined by the ADGM). The other features of a QIF are: