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APAC Update: Observations from Inspections of Licensed Venture Capital Fund Managers

04 April 2023

On 14 March, 2023, the Monetary Authority of Singapore (“MAS”) published a circular which sets out their observations and expectations following inspections of Venture Capital Fund Managers (“VCFMs”) conducted between March 2022 to November 2022.

The purpose of the inspections was to review the practices of VCFMs against the VCFM regime. This included:

  • A review of Business Activities
  • Investor and Investment Fund Eligibility Criteria
  • Disclosures to Investors
  • Policies, Internal Controls, and Governance
  • Base Capital

MAS introduced the VCFM regime in 2017 to facilitate and encourage funding into venture capital and the start up space. The VCFM license requirements, unlike the other fund management licenses in Singapore, are subject to simplified set up and on-going requirements. This does not mean that VCFM licensed managers have it easier, as the review shows that VCFM licensed holders are expected to follow the conditions of the license strictly and to consider implementing a higher standard of governance and compliance when the size of the business calls for it.

Here is a summary of the findings with observations by Apex Compliance Solutions.

1) Business Activities – Focusing on Venture Capital Fund Management

MAS reviewed the business activities of VCFMs to ensure that the focus is on investments into early-stage and growth-stage businesses.

Findings and Observations

The MAS inspection found that no VCFM carried out any regulated activity other than the management of “venture capital funds”. MAS, however, did find instances of incidental activities which were related to providing administrative and support services to portfolio companies. These were provided free of charge.

VCFMs should ensure the core business is focused on managing venture capital funds. The managers cannot carry on the business in any other regulated activity other than managing venture capital funds as per the license. Managers who want to partake in any other regulated activity will have to make the requisite changes with MAS.  MAS reminded managers to ensure that all potential conflicts of interest are fully mitigated.

2) Fund Eligibility Criteria – Due Diligence on Investments and Investors

The MAS review focused on two aspects:

    • Eligibility of the underlying investments meeting the requirements of investments into venture capital where no more than 20% of the committed capital of each fund is invested in “non-qualifying investments”
    • Ensure that investors in the fund meet the definition of “Accredited Investor” or “Institutional Investor” as defined by the Securities and Futures Act 2001. As part of the review, MAS also checked if the managers applied proper AML/CFT due diligence on investors

Findings and Observations

MAS did not find any breaches in terms of the cap on non-qualifying investments, or the onboarding of non-qualifying investors. However, it was found that a few managers:

    • Did not maintain documentation to show as evidence that investors qualified as accredited investors
    • Did not complete due diligence on investors prior to onboarding
    • Did not obtain opt-in from their investors agreeing to the accredited investor (“AI”) status

While it would appear that managers have few issues with ensuring that funds meet the criteria for venture capital funds, the failings in terms of customer due diligence show that MAS expects the same high standard in terms of customer due diligence. This is especially the case around AML/CFT, proper documentation and processes, and ensuring that clients agree to the accredited status via an opt-in declaration.

3) Disclosure to Investors that VCFMs are not subject to Specified Requirements

MAS expects that managers disclose to the investors that VCFMs are not subject to the same business and financial requirements that apply to other licensed fund managers. Some examples include the minimum based capital differences and business requirement required for Capital Markets Services (“CMS”) holders.

Findings and Observations

The MAS review found that most VCFMs inspected had included the requisite disclosures to investors in their offering documents, although MAS did observe that a few VCFM licensed holders did not make the requisite disclosure. MAS also recommended that disclosures should be applied with a change in regulated activity. VCFMs are exempt from requirements by other CMS license holders for fund management, this can be read in Appendix 7.2 of the MAS Guidance – Guidelines on Licensing, Registration and Conduct of Business for Fund Management Companies. These exemptions include not requiring the minimum base capital of S$250,000, , not needing to maintain financial resources in excess of total risk requirements, and no specific requirements for a compliance function.

4) Policies and Internal Controls: Having Formalised Policies and Procedures

Although VCFMs are not subject to the same business requirements as Licensed Fund Management Companies (“LFMCs”) and Registered Fund Management Companies (“RFMCs”) license holders, MAS conducted a survey if VCFM license holders convey how they conducted their business in terms of documented policies and procedures. 

Findings and Observations

Although VCFMs are not subject the same business requirements as other LFMC and RFMCs, MAS found that most VCFMs inspected had policies and procedures in place in areas such as:

    • Investment and divestment
    • Valuation process
    • Conflict Management
    • Cash Management
    • Compliance

MAS found a few VCFMs did not have designated policies and procedures in some areas. Established processes and documents were used to guide their operations.

From the findings, MAS recommends that good practices such as designated policies and procedures should be put in place, especially in key areas of their operations, with periodic reviews to update those policies and procedures.

5) Governance: Segregation of Duties and Mitigating Conflicts of Interest

A review was conducted by MAS on how VCFMs mitigate conflict of interest during their business.

Findings and Observations

The review found that smaller VCFMs with fewer staff had employees that crossed front to back office in their roles. This may result in conflicts of interest.

Good practice for conflicts of interest management and governance should be conveyed via policies and procedures. This should include segregation of duties, risk mitigation of conflicts of interest, and the establishment of committees to discuss issues around governance, advisory and enterprise risk.

6) Having Positive Base Capital

MAS conducted a review on the base capital of VCFMs even though VCFMs are not subject to the minimum base capital requirement of S$250,000 and being able to maintain financial resources in terms of total risk requirements.

Findings and Observations

Although VCFMs are not subject to the same minimum base capital requirements as other CMS license holders, they are still required to maintain a positive level of base capital. This means that VCFMs are expected to top up base capital when accumulated losses result in negative capital.


About Apex Compliance Solutions

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Our Compliance Solutions team covers the key jurisdictions including Singapore. Contact us if you require support on your compliance needs or if you have any questions on how we can assist you in fulfilling your compliance obligations.





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