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Following last year’s inspections of venture capital fund managers, the MAS has highlighted areas of best practice under the regime and reminded all fund managers to take note.
The Venture Capital Fund Manager (VCFM) regime was introduced in October 2017, since which 156 VCFMs have been licensed by the MAS as of 31 December 2022.
VCFMs are subject to a simplified set of ongoing compliance requirements with a view to encouraging growth in the industry. These form a part of efforts to support businesses in the start-up phase and promote funding for enterprise development.
Whilst the MAS aims to be business-friendly, there is always a need to balance growth and development against compliance and investor protection. Hence, the MAS conducted inspections on selected VCFMs between March 2022 and November 2022 which focused on the following areas:
- Scope of business activities – focus should primarily be on venture capital fund management.
- Fund eligibility criteria – investments must meet the MAS’ fund eligibility criteria.
- Disclosures to investors – investors should be notified in writing that the VCFM is not subject to business conduct and financial requirements imposed on other types of fund management companies.
- Governance and Oversight – there should be robust internal controls over business process, code of conduct, conflicts of interest, etc.
Whilst the inspections targeted VCFMs, the MAS expects all fund management companies to review and implement the good practices highlighted in its findings.
Scope of business activities
Observation – the MAS found that the VCFMs it inspected focused on venture capital fund management and did not carry out other types of fund management activities. There were instances where VCFMs provided services considered incidental to venture capital fund management, for instance recruitment services for key positions of investee companies. The MAS also noted that no fees were charged to mitigate the potential conflicts of interest.
Takeaway – VCFMs are reminded to focus on managing capital venture funds and ensure that potential conflicts of interest are fully mitigated. There should be proper policies and procedures in place to address such key business conduct requirements.
Fund eligibility criteria
Observation – The MAS did not find any breaches in respect of exceeding the cap on non-qualifying investments or the onboarding of retail investors.
However, several VCFMs failed to:
- Maintain documentation evidencing that investors fall soundly within the definition of “accredited investor”.
- Obtain the accredited investor “opt-in” from their investors.
- Complete customer due diligence on investors prior to onboarding
Takeaway – The customer categorisation, A/I opt-in, and AML requirements apply in the same way as other types of FMCs. You should have internal processes in place to ensure that you meet the MAS’ expectations in full.
Disclosure to investors
Observation – Some VCFMs did not make the proper disclosures to investors that they’re not subject to all the business conduct and financial requirements imposed on other fund management companies.
Takeaway – VCFMs which have not done so should take immediate action to provide written disclosures to investors, either by incorporating the disclosures as part of the private placement memorandums / subscription documents or submitting a separate notice.
Governance and oversight
Formal policies and procedures
Observation – Whilst VCFMs aren’t subject to all the business conduct requirements imposed on other fund management companies, most implemented policies and procedures on key business processes.
Some, however, did not have written policies and procedures, and adopted informal business processes.
Takeaway – The MAS encourages VCFMs to implement formal policies and procedures to avoid operational risks.
Segregation of duties and conflicts of interest
Observation – Employees in firms which are smaller tend to take on multiple roles. The lack of segregation may give rise to potential conflicts of interest, particularly in investments.
Takeaway – VCFMs should implement formal policies and procedures to deal with potential conflicts of interest and consider having independent committees overseeing conflicts.
Base capital
Observation – VCFMs are required to maintain positive base capital (zero as a minimum) to ensure they are able to operate as a going concern. Many were found to have had negative base capital due to accumulated losses during the start-up phase.
Takeaway – VCFMs are required to maintain positive base capital at all times. Base capitals must be reviewed and monitored on an ongoing basis, with immediate action taken to rectify any requirement breaches.
How we can help
Our specialist team can support you by designing compliance frameworks, and operational policies and procedures addressing VCFM compliance and regulatory requirements. We’re also able to assist you in performing a gap analysis of your existing compliance framework while also providing ad-hoc advisory services on any key regulatory requirement applicable to you.
Get in touch if you would like to discuss further.
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