Overview of the VCC regime
Traditionally, many Singapore-based fund managers have established their funds in locations such as the Cayman Islands, Luxembourg and Ireland, with Singapore-based investment vehicles often only being used as holding subsidiaries for the overseas pooled structure. The VCC framework is designed to encourage the domiciliation of funds in Singapore and to level the playing field with those jurisdictions.
The structure of the VCC also draws inspiration from features of fund vehicles found in other jurisdictions, and offers some key operational advantages over Singapore legal entity types that have traditionally been used as funds, such as private limited companies, limited partnerships, unit trusts, business trusts and real estate investment trusts. The VCC can be set up as an open-ended or closed-end fund, and therefore caters to the full spectrum of fund vehicle types, ranging from mutual funds to hedge funds, private equity funds and real estate funds.
The VCC is governed by the Variable Capital Companies Act 2018 and its subsidiary legislation, which took effect on 14 January 2020. The VCC legal framework is principally administered by the Accounting and Corporate Regulatory Authority (ACRA), and VCCs (and where applicable, their sub-funds) must be registered with ACRA. However, the Monetary Authority of Singapore (MAS) – Singapore’s central bank and unitary financial regulator – supervises compliance with the anti-money laundering and countering-the-financing-of-terrorism (AML/CFT) requirements that apply to VCCs, and also regulates the Singapore-based fund managers of VCCs.
While the operation of VCCs is subject to a novel and specific legal regime, the introduction of the VCC has not coincided with more far-reaching material changes to the Singapore legal and regulatory framework. For example, the management and offering of a VCC gives rise to the same licensing and prospectus considerations as other types of fund vehicle, and a VCC can be established either as a regulated fund to be offered to the public in Singapore or as an alternative fund subject to lighter-touch requirements to be offered to non-retail investors.
Benefits of the VCC
The characteristics of the VCC make it a cost-efficient and operationally convenient fund investment vehicle compared with other entity types. Key benefits of the VCC include the following:
- Variable capital structure: Unlike other Singapore legal entities, which have a fixed capital structure (e.g., Singapore private limited companies), the VCC has variable capital, which facilitates investor subscriptions and redemptions.
- Simplified redemptions: Redemptions of capital are not subject to any prior solvency test and can be effected with greater administrative ease than for a Singapore private limited company.
- Greater scope for distributions: Distributions are made out of the net asset value (i.e., share capital) of the VCC, and not out of profits (as is the case for a Singapore private limited company).
- Privacy: A VCC is not required to make its financial statements and shareholder register publicly available (contrary to a Singapore private limited company, which must file these with ACRA, where they can be inspected by the public).
- Single-shareholder and single-asset capability: VCCs can have a single shareholder or hold a single asset. In master-feeder structures, this makes VCCs suitable for use as a feeder or master fund.
- Segregated sub-funds: A VCC can be established on a standalone basis or as an umbrella fund accommodating multiple sub-funds with segregated liability. Sub-funds can be registered and wound up individually, and can sue and be sued individually. The assets of one sub-fund cannot be used to satisfy the liabilities of another sub-fund.
- Re-domiciliation: A foreign pooled fund that is organised as a body corporate can be re-domiciled to Singapore as a VCC (although Singapore law currently does not recognise reverse re-domiciliation of a VCC to a foreign jurisdiction).
- Tax treatment: Existing tax exemptions that are available for Singapore fund managers and their funds have been extended to VCCs.
- Grant support: Under a scheme that is scheduled to run until January 2023, the government is offering grants to cover up to 70 per cent of eligible setup costs, capped at S$150,000 per VCC.
Requirements for VCCs
A VCC is required to appoint a fund manager regulated by the MAS under the Securities and Futures Act (SFA). This may be:
- A licensed fund management company holding permission either to service investors of any type (including retail investors) or to service only “accredited investors” and/or “institutional investors” (broadly, these are sophisticated investors such high-net-worth, regulated and government entities).
- A registered fund management company. This type of manager is subject to lighter-touch requirements than a licensed fund management company, but may only service “qualified investors” (e.g., certain accredited investors and institutional investors) and may only manage up to S$250 million in assets.
- A bank licensed under the Banking Act, a merchant bank approved under the Monetary Authority of Singapore Act, a finance company licensed under the Finance Companies Act, or a company or co-operative society licensed under the Insurance Act, each of which is permitted to carry on fund management activities on an exempt basis, subject to having notified the MAS.
The MAS-regulated fund manager may delegate fund management and operational duties to a sub-manager established and regulated in another jurisdiction, but retains overall responsibility for the fund management duties and must mitigate any conflicts of interests that may arise.
A custodian must also be appointed for the safeguarding of a VCC’s assets. In relation to non-retail VCCs, entities eligible to act as custodians include (among others) banks licensed under the Banking Act, capital markets services licensees under the SFA and entities authorised to act as custodians in a jurisdiction outside Singapore.
Governance and corporate setup
The following key governance and corporate setup requirements apply in relation to a VCC:
- Registered office: A VCC must have its registered office in Singapore.
- Constitution: A VCC is required to have a constitution containing certain mandatory provisions. These include, for example, a prescription for the value of the paid-up capital of the VCC to be at all times equal to its net asset value, and for the shares of the VCC to be issued, redeemed or repurchased at an amount proportionate to the VCC’s net asset value. The constitution also sets out the rights of shareholders. The Singapore Academy of Law (SAL) has published a set of guidelines and two model constitutions, one for open-ended VCCs, and another for closed-end VCCs.1
- Directors and secretary: Responsibility for governance of a VCC lies with its directors, who are subject to fitness and propriety standards as well as statutory and common-law duties comparable to directors’ duties under the Singapore Companies Act. A VCC must have at least one director, who must be ordinarily resident in Singapore. Further, at least one director of the VCC must also be a director or qualified representative of the fund manager appointed by the VCC. The board of directors must prepare a report on the state of affairs, performance and development of the VCC for each financial year. A VCC must also appoint a Singapore-based company secretary.
- Audit and financial statements: A VCC must be audited by a Singapore-based auditor and must prepare its financial statements in accordance with International Financial Reporting Standards, Singapore Financial Reporting Standards or US Generally Accepted Accounting Principles. Where the VCC has sub-funds, financial statements must be prepared for each of these.
- Annual return: A VCC must lodge its annual return with ACRA within seven months after the end of its financial year.
- AML/CFT: As indicated above, VCCs are subject to ongoing AML/CTF requirements, compliance with which is supervised by the MAS. These include a requirement to conduct customer due diligence and to maintain records on transactions and information obtained through such due diligence. A VCC may outsource the implementation of its AML/CTF obligations to its fund manager, but remains responsible for proper compliance with these obligations.
A VCC may be wound up where its shareholders pass a special resolution to this effect, pursuant to a creditors’ voluntary winding-up, or by a court order (e.g., where the VCC is unable to pay its debts). Individual sub-funds may be wound up independently of the umbrella VCC.
For international asset managers prospecting for suitable jurisdictions in which to establish their funds, assessing the pros and cons of Singapore as a potential fund domicile will typically form part of a broader comparative process which weighs up the legal, tax and other business factors in all potentially suitable locations. Fund domiciles that are frequently considered attractive include, for example, the Cayman Islands (known for its permissive tax regime), Ireland (which combines an English-speaking environment with a popular stock exchange listing framework), Luxembourg (a leading cross-border investment fund centre with a concentration of both mutual funds and alternative funds), and Mauritius (commonly seen as a gateway to African investment).
In this international landscape, Singapore, and the VCC framework in particular, is positioned as a strong competitor, owing to the tax and structuring benefits associated with the VCC, as well as Singapore’s political stability, strong rule of law and central location in the Asia-Pacific region.
How we can help
Reed Smith’s funds team has significant experience structuring and establishing funds, documenting service agreements between funds and their functionaries, drafting offering documents, and advising on the regulatory implications of fund management, fund marketing, fund administration and custodial activities. Our expertise covers the full range of investment sectors and fund types, including VCCs. Deliverables with which we can assist include:
- Coordinating and overseeing the registration of VCCs and their sub-funds with ACRA.
- Drafting investment management and investment advisory agreements, including agreements for the delegated appointment of any sub-manager.
Drafting offering documentation, including private placement memoranda and subscription agreements, and preparing all required disclosures (e.g., selling restrictions, accredited-investor opt-in forms, etc.).
- Drafting VCC corporate documentation (e.g., board and shareholders’ resolutions).
- Preparing fund management company licensing applications and fund management company registration notifications to the MAS.
- Documenting the governance and control framework for licensed and regulated fund management companies.
- Assisting fund managers with ancillary matters relating to their operational setup, including employment contracts, outsourcing agreements and corporate documentation.
Reed Smith LLP is licensed to operate as a foreign law practice in Singapore under the name and style, Reed Smith Pte Ltd (hereafter collectively, "Reed Smith"). Where advice on Singapore law is required, we will refer the matter to and work with Reed Smith's Formal Law Alliance partner in Singapore, Resource Law LLC, where necessary.
Client Alert 2020-419
- Available at singaporelawwatch.sg/.