Revisiting the Singapore v. Cayman dilemma for VC Fund Formation: 4 Key Takeaways
Note: The contents of this article are my takeaways from a panel session that the author moderated on 2 September 2020 titled” VC Fund Formation: Revisiting the Singapore v. Cayman dilemma” which featured the following panelists: Anulekha Samant, Partner, KPMG, Catherine Ross, Partner, Forbes Hare, Nandini Navale, Director, Fundamental Consulting (now Director, Asset Management, KPMG). This has been supplemented by independent research and for the Singapore law specific aspects, review by Jean Foo of Forte Law LLC, a Singapore law practice.
The views and information expressed herein are based solely on the conclusions drawn by the author and (i) has not been confirmed or endorsed by any of the panelists; and (ii) does not constitute advice on Singapore law or Cayman law.
Fund Formation continues to be a hot topic
The topic of VC fund formation has proved to be evergreen one notwithstanding the economic disruption brought about by the COVID-19 pandemic. The fact that several existing investment funds across the spectrum continue to have dry powder to make investments has been well-chronicled. This does not seem to have deterred several first-time fund principals from “joining the (proverbial) party”.
In the VC fund formation space, the interest has at least been partially fueled by the growing general interest among the investment community in alternative asset classes outside of the increasingly volatile public markets. In addition, amidst the renewed focus on digitisation brought about in the aftermath of the COVID-19 pandemic, it is also fueled by the continued interest in “smoking out” the next technology-enabled unicorn in particular.
Singapore v. Cayman has increasingly become a key decision for first-time fund principals
As an international lawyer, it is common to be asked by international clients to assist with the decision on which jurisdiction would be most suitable for the fund set-up in with the top choices increasingly boiling down to Cayman v. Singapore for VC fund set-ups outside of the US.
The reason that this debate has become particularly acute in recent times is because a certain fund structure which was previously only available in Cayman has, as of early 2020, become available in Singapore (further information available here).
This structure is the “variable capital company” or VCC structure in Singapore which is similar to the Cayman “segregated portfolio company” structure. Effectively, these structures allow for a number of “legal compartments” to be be created under the umbrella of a single corporate entity, with each such “compartment” having segregated assets and liabilities that are ring-fenced from the other compartments).
The structure offers certain structural and cost efficiencies.
The introduction of this structure in Singapore was through a new enabling legislative framework — part of a concerted effort by the Singapore government to develop Singapore as a global hub for asset management.
Scope of this article
Whether Cayman or Singapore is a better fit as being the domicile for a fund is of course highly fact-specific. However, this article sets out some overall high-level takeaways on key considerations in both jurisdictions that will assist with this determination.
Note that the underlying assumption here is that:
· both the fund pooling vehicle and the fund manager are established in the same jurisdiction (i.e. Singapore or Cayman).
· the reader already has a basic knowledge of the structural aspects of fund formation which are not covered by this article (eg. whether to set up the fund as a limited partnership or a corporate vehicle, whether or not the GP would act as the investment manager for the fund or appoint another entity to do so on its behalf, the contractual arrangements between the investors (LPs) and the GP and indeed between the fund vehicle and the LPs) and are indeed the subject of a masterclass in themselves.
4 KEY TAKEAWAYS
Regulation doesn’t have to be a thorn in the side.
One of the major differences between Cayman and Singapore used to be that most of the VC/PE funds that were set up in the Cayman were generally excluded from any kind of regulatory registration or formality by dint of being close-ended funds (i.e. investors did not have the “automatic” right to redeem against the fund at any time). Also, the Singapore fund manager licensing regime (the RFMC and the CMS licenses) was considered to be a fairly onerous one. However, there are two game-changing regulatory developments in each of these jurisdictions to be aware of:
· In Cayman, further to the introduction of a new law, close-ended funds now also need to be registered with the Cayman financial services regulator, the Cayman Islands Monetary Authority (CIMA). While the requirements for having certain internal controls on matters such as accounting, valuation, audit etc. (through the appointment of service providers) are now pre-requisites even for close-ended funds at the fund level, in general, the Cayman regime continues to be perceived as fairly “light-touch” in comparison to any onshore jurisdiction.
· In Singapore, one of the requirements to use the VCC structure is that the fund manager must be licensed by the Singapore financial services regulator, the Monetary Authority of Singapore.
Since, 2017, there is a less onerous licensing regime available for VC fund managers in the form of the Venture Capital Fund Management license (“VCFM”) which has generally less onerous requirements compared to the pre-existing fund management licensing categories and has proved to be very popular.
2. Its taxing times all around.
The tax treatment of funds remains a complex issue. Some general points to be aware/mindful of:
· As an offshore jurisdiction, there is generally tax pass-through treatment for income received by investors from Cayman fund structures.
· In Singapore, certain eligibility requirements have to be met (including requirements as to fund size) to benefit from certain schemes which do allow this pass-through status.
· The tax treatment of downstream investments made by the fund is also an important consideration. Through its extensive network of double tax avoidance treaties, a Singapore-domiciled fund that makes investments through a Singapore holdco can, in certain circumstances, get tax benefits for downstream investments into investee companies in jurisdictions covered under the treaties.
3. The comparison is an Apples v. Orange one in certain respects
Many of the queries received from clients on the Singapore v. Cayman comparison are understandably centered around getting a “like-for-like” comparison — unfortunately, this is simply not possible given how different these jurisdictions are. For one, Singapore is an “onshore” jurisdiction and Cayman is an “offshore” one which in itself carries several legal and practical implications.
There are also some nuances to be aware of in relation to both jurisdictions which are often missed out in the comparison exercise:
Residency requirements for fund principals are more of a consideration in Singapore.
o In general, there are no Cayman residency requirements applicable to principals of Cayman funds. Several Cayman-based service providers are however required for Cayman funds.
The newly-introduced “economic substance” requirement generally excludes fund vehicles but could apply to a Cayman-domiciled fund manager and would then necessitate compliance with certain conditions such as engagement of Cayman service providers.
o At least 2 full-time Singapore-based employees are a prerequisite for each of the fund manager licensing categories in Singapore.
EU “blacklisting” of Cayman is a thing of the past.
Cayman did receive some negative press in 2020 around its status as an offshore jurisdiction from a tax perspective further to its blacklisting by the EU. However, as of 6 October 2020, this decision was reversed which is widely acknowledged as re-establishing Cayman’s status as one of the most popular, “tried and tested” jurisdictions for international fund formations and particularly those with US investors.
There are benefits of the Singapore VCC structure outside of the portfolio company structure.
o While the primary benefit of the VCC structure in Singapore is seen as the availability of segregated compartments like the Cayman SPC structure, there are also other benefits which are often missed out. For one, there is now confidentiality around names of directors and shareholders which is not possible under a “regular” Singapore corporate structure.
o One of the key attractions of the Singapore regime at present is that the MAS has introduced a scheme wherein grants of up to SGD 150,000 are available for certain qualifying expenses (including legal and compliance) incurred in connection with a first-time fund set-up on a reimbursement basis until 2023. Further details are available here .
4. Strategizing and planning remains a key priority irrespective of the choice of jurisdiction.
Whatever be the choice of jurisdiction and the fund structure, the old adage of planning and strategizing early remains key.
Here are some specific reasons why this is important:
· Managing legal costs: Planning is an integral part of managing the legal costs of fund formation. The items that most frequently result in busting of the budget are:
o fundamental changes in the deal structure AFTER lawyers start drafting the documents; and
o protracted negotiations with individual investors (typically reflected in side letters to the deal documentation).
· Managing timing costs:
From a timing perspective, one should budget a minimum of 6–8 weeks to set up a fund from start to finish.
This takes into account the many moving parts that go into fund formation including:
o Finalising the PPM (particularly important to showcase the differentiated strategies and strengths of a fund in today’s uber-competitive post- COVID international fundraising market);
o Liaising with any required fund formation service providers such as accounting, compliance, fund administrators to name a few; and
o Marketing/investor engagement which has to be planned around local securities law restrictions and (in the post-COVID landscape) travel restrictions.
Regulatory factors: There are certain challenges from a regulatory perspective to bear in mind which are a direct result of the COVID-19 crisis:
o While both Cayman and Singapore regulators have adapted extremely well to the challenges of the COVID-19 crisis, it is best to plan early given the teething issues around some regulatory processes being forced into a “digitised-only” format; and
o Travel bans and lockdowns also have to be factored into the planning for re-locating key staff to meet onshore residency requirements.