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.

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!!