The Financial Services Regulatory Authority (FSRA) of Abu Dhabi Global Market (ADGM) has introduced a risk-proportionate regulatory framework for managers of venture capital (VC) funds, the first of such framework in the MENA region. With immediate effect on 15 May 2017, VC managers will not be subject to any base capital requirement or expenditure based capital.
In close consultation with industry players, the tailored regulatory framework for VC managers simplifies the applicable regulatory requirements while maintaining the necessary safeguards to ensure that they operate in a safe and sound manner. As part of ADGM’s wider efforts in fostering a vibrant ecosystem for FinTech firms and small & medium enterprises (SMEs), the framework is a further enhancement to ADGM’s funds regime that includes among others, a comprehensive platform for real estate investment trusts as well as a boutique licensing framework for fund managers in the MENA region.
VC funds seek private equity stakes in start-ups or young, small or medium enterprises which typically offer products that are innovative, at the cutting-edge of technology, and possess strong growth potential. VC funds play an important role in nurturing start-up ecosystems by providing funding to early stage companies seeking to launch and grow their businesses. As such, there are economic and other benefits for a tailored regulatory regime to support the activities of VC managers in ADGM to serve the region.
VC funds exhibit certain characteristics that result in them presenting a different risk profile and nature from other funds. Offered only to sophisticated professional clients, VC funds invest in small, minority equity positions in early-stage companies that are not traded on public markets. They are also closed-ended, thereby reducing liquidity risk. In addition, VC managers typically invest their own capital in the VC fund alongside their investors, which align their investment interests with those of investors.
The authorisation criteria and ongoing regulatory requirements under the new framework are set out in the Guidance. The rule changes can be found here.
The FSRA will regularly review and update its financial services rules and regulations to maintain a robust and highly efficient investment platform, and in response to the developments of the local and global markets.