UAE introduces new legal framework for venture capital funds
Aiming to facilitate the work of innovators and attract venture capital funds to the country, the new legal system involves necessary controls and obligations governing the venture capital fund. The new regulation also seeks to bolster the UAE’s innovation enablers and strengthen its position in the international innovation index ranking.
The UAE Government has completed a legal system for venture capital funds as one of the first projects approved by the Government Accelerators initiative launched by H.H. Sheikh Mohammed bin Rashid Al Maktoum, UAE Vice President and Prime Minister and Ruler of Dubai in line with the goals of the UAE National Agenda.
The legal system for venture capital funds was signed Dr. Obaid Saif Hamad Al Zaabi, Acting CEO of the Securities & Commodities Authority (SCA) and in the presence of H.E. Abdullah Sultan Art Shamsi, Assistant Undersecretary for Industrial Affairs at the Ministry of Economy; Huda Al Hashimi, Assistant Director General for Strategy & Innovation - Prime Minister’s Office; and H.E. Ohood Al Roumi, Minister of State for Happiness, Director General of Prime Minister's Office – UAE Government.
The legal system was formulated by a joint effort from the Government Accelerators team consisting of the Ministry of Economy and the Securities and Commodities Authority, which involves necessary regulations and obligations governing the venture capital fund. It also aims to facilitate the work of innovators and attract venture capital funds to the country so as to bolster the UAE’s innovation enablers and strengthen its position in the international innovation index ranking.
H.E. Eng. Sultan bin Saeed Al Mansoori, UAE Minister of Economy, explained that the adoption of regulations and obligations related to legal system of venture capital funds is the result of a close cooperation and partnership between the public and private sectors to boost opportunities for financing innovation-based projects in the UAE, which is essential in achieving the country’s vision of diversified and competitive knowledge-based economy and leadership in innovation.
The Minister added that this decision is a step in the right direction to further promote the competitiveness of small and medium-sized businesses as well as national companies focused on technology and innovation and contribute to achieving the government targets set in the national agenda, and place the UAE as among the top 10 countries in the world in innovation by 2021.
Dr. Obaid Saif Hamad Al Zaabi, Acting CEO, SCA said that the new system contributes to the completion of the regulations and decisions that strengthen the investment climate in local capital markets, as well as the development of the legislative system in accordance with the best international practices. This has helped qualify the capital markets in the country to upgrade to advanced markets.
He explained the importance of the decision in providing a clear and transparent mechanism to support other systems recently issued by the SCA, primarily on investment funds and investment management systems. It will raise the market size of institutional and individual investment for its efficiency and attractiveness to local and foreign investment as well as private investment as it complies with the standards and criteria of International Organization of Securities Commissions (IOSCO) and the European Securities and Markets Authority (ESMA).
H.E Abdullah Sultan Alfan Alshamsi, Assistant Undersecretary for Industrial Affairs at the Ministry of Economy noted that this decision comes as part of the ongoing efforts to develop and institutionalize the financial markets in the UAE, in line with the best international practices.
He added that the legal system for venture capital funds represents a form of funding for leading and innovative projects, including industrial projects based on modern technology. It opens the door for financing small and medium-sized projects and investing in the knowledge economy, pointing out that the formulation of specific bylaws for legal system for venture capital funds and setting performance indices that measure the extent of its impact in the UAE is fundamental towards the development of a knowledge economy based on creativity and innovation. The availability of legal system for venture capital funds is a major step towards the development of a supportive business environment for creative individuals by stimulating the investments in startups which are focused on innovation and increasing their chances of growth. This will enhance competitiveness and add value to the UAE economy.
Positive impact on the investment environment
The new law is expected to bring positive results to the investment portfolios, funds and investors as well as small and medium-sized enterprises (SMEs), as the mechanisms supports the activities of these parties, which are important players in the local capital markets and one of the most important investment channels that support the national economy.
The decision text included a definition of the legal system for venture capital funds and the regulations of investing in it. The fund is defined as a private investment fund that invests in high-risk investments such as start-ups, or new technologies or non-performing projects, or companies with new ideas or innovative ideas in technology or in the company's work fields.
The decision stipulated - if the assets under management (AUM) value is AED 180 million or more – an annual report must be prepared by the IFRS standards and appointing of an administrator to manage risks, and meet the proper criteria requirements and that the exposure to the fund risk must not exceed its net asset value.
However, if the AUM value is less than AED 180 million, then a summary of the annual report must be prepared, and that the exposure to the fund risk must not exceed its net asset value.
In regard to the investments of the legal system for venture capital funds, rule (3) of the decision identified the Fund's three commitments represented by investing at least 70 per cent of the fund's assets in one or more of the following investments:
- Lending to new projects or non-performing ones by not more than 30 per cent of the fund's assets, or to be part of it.
- Equity instruments issued by unlisted companies in the main organizational market or other instruments issued by those companies or subsidiaries, which ends up with ownership of any of these companies.
- Other modules of legal system for venture capital funds, in which the investments of these funds may not exceed 10 per cent of its assets.
- Lending companies referred to in section 2 above, not to exceed 30 per cent of the fund's assets, and that the fund will be an investor in the company, issuer of those instruments.
The second commitment of the fund is represented by the Fund's investments may not exceed 30 per cent of the fund's assets in the investments that may be open to Public Investment Fund’s (Emirates UCITS) investment.
In the case of the fund’s investment outside the UAE, the fund should be committed as well to the same previous investment commitments mentioned above in rule (3) apart from the name of the instrument at the place of issue outside the UAE.
Rule 4 also identified three other commitments of the Fund included conducting periodic evaluation of the Fund's assets and units, at least once a year, and issuing an annual report that includes the Fund's investment components, and the activities that were conducted, the achieved profits or losses during the year, and that the fund’s borrowing ratios and guarantees must not exceed the fund assets.
Government Accelerators fueling the future
The Government Accelerators is composed of joint working teams from the government, private and academic sectors, which work together in key sectors with the aim of expediting the pace of implementing the UAE National Agenda and key strategic government projects. The team works within a dedicated working environment operating under the supervision of a group of trainers, supervisors and global experts providing intensive programs for a short period of time.
The Government Accelerators provide services to support the involved government entities whose main goal is to accelerate the implementation of the National Agenda objectives in the four key areas: national indices, policies, programs and initiatives, and government services by forming a joint working group with various entities in the UAE and help address the challenges in achieving the set goals. The Government Accelerators take advantage of the experiences and innovations worldwide in government leadership and excellence to implement projects using a pioneering and innovative working method that aims to achieve quick results and ensure sustainability.