What Are the Restrictions on the Investors a VCFM Can Accept?

Startup investment and innovation are encouraged in Singapore, due to the user-friendly regulations of the Monetary Authority of Singapore (MAS) for VCFMs. On the other hand, this lighter framework sets certain limits and among them is a strict rule on the investors that a VCFM may accept.

MAS ensures that venture capital investments have limited participants by allowing VCFMs to manage money from accredited and institutional investors only. In this article, we discuss the guidelines for those eligible to invest, why such standards exist and what results from not complying. The MAS venture capital licensing framework in Singapore ensures these regulations remain consistent with global investment standards.

1. Overview of VCFM Regulatory Framework

1.1 What Is a VCFM?

A Venture Capital Fund Manager (VCFM) is a company regulated by MAS to manage funds that mainly support early-stage, unlisted startup companies. Generally such investments have serious risks and expect investors to remain committed for the long run. The VCFM investor eligibility requirements in Singapore safeguard the market from inexperienced participants and promote responsible capital management.

1.2 Why Investor Restrictions Exist

Since VCFMs function with greater flexibility in terms of capital, audit and reporting, the MAS has placed firm rules on those able to invest in their funds. They are set up to ensure safety and order.

• Safeguard shoppers from excessive risks when investing
• It is important to make sure sophisticated individuals handle the more complicated forms of investments.
• Keep the financial system secure and the regulations fair. 

2. Categories of Permissible Investors for VCFMs

Singapore’s VCFMs are open to receiving funds from just two types of investors. The difference between VCFM and LFMC licensing in Singapore also explains why retail investors cannot participate directly in VCFM-managed funds.

2.1 Institutional Investors

Institutional investors handle major funds and are believed to have what it takes to assess and handle the risks involved with investing. These include:

• Financial institutions that have been authorized by the government
• Insurance companies
• Sovereign wealth funds are entities that gather money for the government.
• Pension funds
• Maligned organizations tied to government ownership (such as statutory boards)
• Managing large portfolios is what corporations typically do.

Since these investors have strict regulations, the fund manager often just does a light background check on them.

2.2 Accredited Investors (AIs)

As per MAS standards, AIs are individuals or organizations that hold significant wealth. This is to prevent any major losses that the investor might not handle well because of high risk.

MAS identifies someone as an Accredited Investor if they fit one of the following sets of conditions.

• Higher value of personal assets, though the main housing asset cannot be more than SGD 1 million
• At least SGD 300,000 earned in the previous 12 months
• An individual owning net assets worth more than SGD 1 million.

Businesses are required to meet the requirement:

• Total net assets are above SGD 10 million (as audited in the most recent period)

Accredited investors’ wholly owned businesses are classified as AIs by the MAS.

3. Types of Investors a VCFM Cannot Accept

It is prohibited for VCFMs to manage money or collect funds from certain groups of investors.

3.1 Retail Investors

A retail investor is someone who isn’t recognized as an accredited investor or an institutional investor. They cannot purchase VCFM-managed funds because of the following factors:

• It is risky to make venture capital investments because they are liquid and require a long-term commitment.
• Some people who invest in the stock market may not be financially educated or able to accept risks.
• VCFMs are not required to meet the investor protection rules used for retail investors by MAS. 

To admit retail investors, a company would need a Retail LFMC license and face much more stringent rules.

3.2 Non-Accredited High-Income Individuals

Having wealth or experience alone does not qualify anyone as an artificial intelligence in the eyes of MAS. A candidate who is only slightly under the limits will not be accepted by the VCFM.

Financial data for VCFMs should be complete and up-to-date before anyone is categorized as an AI.

3.3 Foreign Investors Not Recognized as AIs

VCFMs should exercise care when dealing with foreign investors. Someone who qualifies as an investor in their own country usually needs to satisfy Singapore’s requirements. There is no guarantee that things are the same in every country’s legal system.

4. Responsibilities of a VCFM in Onboarding Investors

Operators of VC funds are required to follow certain procedures before committing to any funds from investors. This includes:

4.1 Verification of Accredited Investor Status

According to VCFM, it is important to have evidence papers that confirm an investor’s eligibility.

• Financials or summaries from the bank
• Official notices given after tax is deducted
• The account records of companies that have been audited.

After being apprised of the rules, MAS permits investors to choose to operate as accredited investors. Most of the time, the investor must sign a declaration form.

4.2 Maintaining Proper Records

It is important for VCFMs to have evidence of an investor’s eligibility and the investigations made for every investment decision. Records should be accessed by MAS when needed and should remain well-protected at all times.

4.3 Ongoing Monitoring

While it is not necessary for approved investors to re-qualify every year, managers should review any evidence of challenges that could affect a person’s status as an accredited investor.

5. Consequences of Accepting Ineligible Investors

Failure to follow the rules set by investors can put both the VCFM’s license and its reputation in danger.

5.1 Regulatory Sanctions by MAS

If a VCFM has accepted retail or unqualified investors, the MAS can:

• Either suspend or revoke the VCFM license.
• Set monetary penalties or publicly scold the offender
• The manager should take the required actions to reverse the impact on the funds.
• Prevent individuals or the firm from ever managing money again

5.2 Legal and Contractual Risks

Accepting unsuitable investors might result in the VCFM facing legal complaints.

• Violation of a contract or the duty owed to others
• Assuring people that they will face no risks when that is not true
• Breaches of the fund offering documents

Those bringing legal actions can request a rescission, receive compensation or demand damages.

5.3 Investor Exit Challenges

Among the consequences of non-compliance is that the fund might offer early financial settlements to investors which usually leads to issues for venture investors.

6. Comparison with Other Licensing Regimes

One way to learn about the regulations on VCFMs is to see how they differ from the licensing rules for other fund management entities in Singapore. VCFMs may only handle the investments of accredited and institutional investors, not of retail investors. Alternatively, the Accredited/Institutional Licensed Fund Management Company (A/I LFMC) license works much the same way, allowing these fund firms to manage portfolios of hedge funds, private equity investments and family office funds, but typically these firms can only accept investments from accredited and institutional investors. Any fund manager that wants to welcome retail investors must get a Retail Licensed Fund Management Company (Retail LFMC) license. More strict regulations and protections are required because this license gives a manager the option to raise money via mutual funds, unit trusts or REITs which can be bought by the public. Hence, VCFMs have the strictest set of accepted investors, but this gives them fewer regulations to follow.

7. Best Practices for VCFMs

For businesses to handle laws and regulations well, VCFMs should apply the following best practices:

7.1 Establish a Robust Investor Onboarding Policy

The policy as outlined above should feature the following elements:

• Defining investors according to a set of rules
• Documentation checklists
• Persons who need to approve the move

7.2 Implement Compliance Training

All team members in charge of fundraising, marketing or onboarding should be frequently informed about MAS regulations concerning the eligibility of investors and related issues.

7.3 Use Legal and Compliance Support

It is advisable for VCFMs to turn to legal experts or compliance specialists whenever they welcome new investors or initialize new funds.

8. Conclusion to What Are the Restrictions on the Investors

The VCFM licensing process makes it easier to handle investments in new startups in Singapore. But, a major safety feature is that VCFMs are only allowed to have certain types of investors.

To ensure compliance, VCFMs have to deal only with accredited or institutional investors and check and record that information. Accepting investors who do not meet the requirements could result in serious problems with authorities, laws and reputation.

These rules allow VCFMs to establish a lawful and sustainable venture capital business that helps increase innovation in Singapore.