10 Leaves

Part 2 of 4

Join us for an engaging discussion with Sameer Sortur, Regional Director, Founder Institute and Sathish Jeyakumar, Founder - Veehive.ai.

We speak on the Blockchain Trilemma, and how to address the relationship between decentralization, scalability and security while designing blockchain models.

You can also watch this episode here.

Read up more on DIFC Innovation Licenses, and get in touch to be part of the UAE’s premium tech ecosystem.

For More Details, Mail us at: [email protected] or Call us at: +97142778349 or Visit us at: https://10leaves.ae/ or chat with us!

Part 1 of 4

Join us for an engaging discussion with Sameer Sortur, Regional Director, Founder Institute and Sathish Jeyakumar, Founder - Veehive.ai.

We speak on the Blockchain Trilemma, and how to address the relationship between decentralization, scalability and security while designing blockchain models.

Read up more on DIFC Innovation Licenses, and get in touch to be part of the UAE’s premium tech ecosystem.

For More Details, Mail us at: [email protected] or Call us at: +97142778349 or Visit us at: https://10leaves.ae/ or chat with us!

This episode is also available as a blog post: https://10leaves.ae/publications/difc/vc-fund-marketing-and-distribution

The UAE has three jurisdictions of consequence, when it comes to marketing and promotion of investment funds.

There are two financial free zones – the Dubai International Financial Centre (DIFC), which is regulated by the Dubai Financial Services Authority (DFSA) and the Abu Dhabi Global Market (ADGM), which is regulated by the Financial Services Regulatory Authority (FSRA). The rest of the UAE is considered the mainland and the Securities and Commodities Authority (SCA) is the relevant regulator.

Both the DIFC and the ADGM have domestic fund regimes, and so does the SCA. In addition to this, a vast majority of funds distributed in the UAE are foreign funds, mainly Luxembourg and Cayman-registered funds.

This episode is also available as a blog post: https://10leaves.ae/publications/difc/economics-of-a-vc-fund

Of course, it is about the money!

The economics of venture capital funds differ, based on a variety of factors. The most important one being the expertise and track record of the fund manager, based on the number and quality of the deals that have been closed and exited.

It also depends on the overall fee structure of the fund, with factors such as carried interest and catch up, the preferred return of the investors, management fees and other fund-level fees involved, including offsets, and the portfolio company fees paid to the fund manager on a deal-by-deal basis.

The investment investment purpose and structure of the fund, and general market dynamics also play a part to a large extent.

Although the specific vary, there are some basic elements of the economics of a fund common to all VC funds, including:

This episode is also available as a blog post: https://10leaves.ae/publications/difc/venture-capital-fund-lifecycle

Venture capital funds typically have long tenures, beginning the first closing and running for 8-10 years. Fund managers usually seek pre-determined extension periods (2-3 years for example) to allow them for a smooth exit from all investments.

Early termination is also possible, based on certain trigger events.

The lifecycle of a venture capital fund comprises:

This episode is also available as a blog post: https://10leaves.ae/publications/difc/vc-fund-structures-in-uae-vc-fund-formation-vehicles

C funds are typically structured as closed-end investment vehicles. The fund’s prospectus permits it to raise capital commitments during a limited period, that usually ranges from 6 to 18 months. The fund then ‘closes’, that is, does not accept any further investor commitments once this period is completed.

Normally, the commitments are not funded all at once, but are ‘called’ in by the fund manager on an ‘as-needed’ basis, so that investments can be made during the ‘investment period’. These are called ‘drawdowns’, and typically done in 3-4 tranches. Drawdowns should also accommodate the fees and expenses of the fund.

Most funds call for at least 25% of the capital commitments during the time of subscription, with further drawdowns being made in a maximum of 3-4 tranches.

In many countries, venture capital funds are formed as Limited Liability Partnerships, with a General Partner managing the investments – akin to a fund manager in an investment company structure. Commonly known as the GP/LP structure, they are advantageous since they are ‘pass-through’ entities for tax purposes and not subject to corporate income tax. In these cases, all income, profits and deductions are taxed once at the investor level only. Also, the liability of Limited Partners is limited to their capital commitments and share of the fund’s assets.

This episode is also available as a blog post: https://10leaves.ae/publications/difc/private-venture-capital-funds

Private funds are collective investment schemes, formed by investment professionals (called fund managers), who seek to raise capital to make multiple investments in a specified industry sector or geographic region.

These funds are marketed to qualified or professional investors – mostly High Net Worth Individuals, family offices and institutions.

Private funds are essentially “blind pools”.  Passive qualified investors make commitments to invest a certain amount of capital over time, as per the fund’s commitment schedule, entrusting the fund manager to source, acquire, manage and exit the fund’s investments over a set period of time.

Some VC funds can also be setup to invest on a “deal-by-deal” basis. In these cases, the Fund Manager solicits investments from a pool of potentials, for each specific deal that they source. Multiple investors can invest in multiple deals, and there can be some deals that have no common investors.

Such structures are usually seen in very small VC Funds and can get cumbersome to manage once the number of deals increases.

This episode is also available as a blog post: https://10leaves.ae/publications/difc/vc-fund-formation-in-the-uae-vc-fund-formation-introduction

Venture Capital is a relatively new term in the GCC region. While the past five years have seen accelerated progress, generally speaking, access to alternate sources of capital – be it angel, seed, VC or Private Equity, has proved to be more difficult than in more robust ecosystems such as Silicon Valley or Bengaluru.

Nevertheless, the region has seen an uptick in the number of deals that are being closed across the spectrum, and many players are now entering the smaller end of the market – the sub-US$ 5 million deals.

Taking note of this increased activity, the two financial free zones of the United Arab Emirates – the DIFC and the ADGM, have made carve-outs in their existing regulations to accommodate smaller VC players and give them access to a well-regulated ecosystem, at a lower entry price point.

We at 10 Leaves have been excited about these initiatives and have offered competitive advice and legal assistance to startup fund managers who wish to establish a presence in these financial centers.

This episode is also available as a blog post: https://10leaves.ae/publications/difc/difc-compliance-officer-and-work-from-home-considerations

The concept of working from home (WFH) is not a new. Prior to the pandemic, nearly 40% of businesses in the United States and Europe offered some sort of remote work schedules to employees. However, these schedules were more an incentive, rather than the norm. Once or twice a month was ok, unlike in the post-pandemic world where some functions have been allowed to work from home permanently.

So how does this play out in the United Arab Emirates, especially for financial firms in the DIFC? Does the DFSA have any rules or regulations around work-from-home (WFH)?

The short answer is no. While the DFSA does not have any specific rules on work-from-home, financial firms are expected to comply with the DFSA Rules and the internal rules of the firm. Here is where the compliance function takes the lead.

Today’s technology is advanced enough to enable high-speed audio and video connectivity from anywhere in the UAE. However, a compliance officer must review all WFH arrangements to ensure that the requirements as set in the Compliance Policies and Procedures, as well as Business Continuity, Data Protection and IT and Cyber Security Policies are met and complied with on an ongoing basis.

When employees work from home, they are no longer in a corporate controlled environment that is overseen by managers, team leaders, corporate cameras, and area access controls. So, what should A DIFC Compliance Officer keep in mind for WFH workers?

This episode is also available as a blog post: https://10leaves.ae/publications/difc/compliance-support-services-for-difc-authorised-firms

What are compliance support services?

The Dubai Financial Services Authority (DFSA) is the regulator of DIFC financial service firms. It authorizes and supervises financial entities that conduct activities across five licensed categories.

The DFSA mandates three (and in some cases, four) mandatory appointments for all firms that wish to carry out financial services from the DIFC. The Compliance function is one of them.

Financial firms in the DIFC must appoint a Compliance Officer and a Money Laundering Reporting Officer (CO/MLRO) at the time of application to the DFSA. These functions are usually combined for smaller firms and so one individual can be proposed as the CO/MLRO. The DFSA expects an application from an individual with sufficient knowledge, experience, and seniority to perform the role effectively. Also, the Compliance Officer is expected to be resident in the UAE once licensed.

The Compliance Officer thus forms an integral part of the core team that the DFSA reviews and considers when making a authorisation decision.

The DFSA does allow outsourcing of core functions such as Compliance, MLRO and Finance. However, the DFSA does consider the type of financial service, the projected volume of business, additional endorsements (such as endorsements enabling firms to deal with Retail Clients), and the overall team composition before issuing approvals to outsource these functions.

For Category 4 firms and Restricted Fund Managers, this should normally be a straightforward process.

However, the DFSA does not allow for compliance outsourcing in the case of firms that carry out financial activities with higher risks, such as asset management, brokerage or provision of credit. An in-house resource must be hired in these cases. However, as seen above, in-house compliance functions can have some drawbacks, and here is where compliance support services can help bridge gaps.