Introduction

The Monetary Authority of Singapore (the MAS) had on 24 April 2017 concluded its public consultation with various stakeholders on the Singapore Variable Capital Company (S-VACC) concept. The aim of the S-VACC framework is to improve Singapore's competitiveness as a domicile for global investment funds.

While the legislation has yet to be finalised, we will explore the features and usefulness of this proposed structure and if it will be the vehicle of choice moving forward.

What is an S-VACC?

  • The S-VACC would be a company registered with the Accounting and Corporate Regulatory Authority under the existing company incorporation framework and supervised by the MAS through the Securities and Futures Act (the SFA).
  • The S-VACC structure may be used for all types of investment funds (i.e. unit trust funds, mutual funds, hedge funds, private equity and real estate funds) and schemes (i.e. authorised, restricted and exempt) in Singapore.
  • The S-VACC shall only carry out the activity of a collective investment scheme (CIS) as defined by the SFA.

Features

  • The paid-up share capital of the S-VACC shall be at all times equal to the net assets of the S-VACC. The shares of the S-VACC shall be purchased or redeemed only out of the assets of the S-VACC. Therefore, any entry or exit of the S-VACC will be based on the net asset value, except for a listed CIS.
  • The S-VACC will need to have at least two members at all times and their liability will be limited to the amount (if any) unpaid on the shares held by them respectively.
  • The S-VACC must have a minimum of one director who is ordinarily resident in Singapore (who may also be the sole shareholder); and must have at least one director who is a director of the fund management company. For the avoidance of doubt, the sole director may also be the director of the fund management company.
  • The S-VACC may be set up as an umbrella fund or a standalone fund and can be used for open-ended or close-ended structures. The sub-funds must have the same fund manager but may consist of restricted, authorised and / or exempt schemes.
  • Custody of the assets of the S-VACC will be handled by an approved custodian.
  • Anti-money laundering obligations may be outsourced by the S-VACC to the fund manager. However the S-VACC will still be ultimately responsible to the MAS.

Usefulness

Pros

  • The S-VACC will not be required to disclose its register of shareholders to the public but may be required to disclose such information to supervisory and / or law enforcement agencies. Also, the financial statements of the S-VACC will not be required to be publicly accessible. This will afford the S-VACC shareholders increased privacy and anonymity as opposed to the current regimes.
  • It is not necessary to hold annual general meetings, hence resulting in lower operating costs.
  • The S-VACC will be able to benefit from the more than 80 tax-treaties that Singapore is party to.
  • Passporting of funds under the ASEAN CIS will allow the S-VACC to target retail investors in Malaysia and Thailand as well, hence widening the pool of potential investors.
  • Foreign investment funds may be re-domiciled in Singapore, creating more business for service providers.
  • With the S-VACC, the fund's directors will not be required to make solvency statements prior to the repayment of capital. In the past, directors have raised concerns as they may be personally liable for any lapses in the solvency of the fund.
  • The variable capital structure of the S-VACC will allow investors to subscribe and redeem shares or units at will. This will bring Singapore in line with other jurisdictions such as Ireland and Luxembourg.

Cons

  • The S-VACC must be managed by a Singapore-based fund manager who is regulated or licensed by the MAS, unless exempted – i.e. a bank, finance company or insurance company. Therefore, fund managers currently exempt from licensing and registration due to the real estate funds exemption or entities relying on the related party exemption will not be able to use the S-VACC structure. We are of the view that this structure should also be expanded to allow fund managers, who are exempt from regulations (i.e. real estate fund managers and fund managers managing the assets of related parties), to also take advantage of the S-VACC, as allowing such expanded use would not lower any of the existing regulatory thresholds imposed on fund managers.
  • The changes and proposed improvements to make Singapore more attractive for funds to be domiciled here also raise issues of investor protection. The lack of an annual general meeting, the removal of transparency afforded by publicly accessible registers of shareholders or financial statements may result in retail investors bearing the brunt of a fraudulent or negligent fund manager.
  • When such funds are marketed to retail investors in our neighbouring countries, any significant losses to the investors in those countries may result in a political backlash, and may put increased pressure on the authorities in Singapore to hold those responsible to account.

Conclusion

In order for the S-VACC to be the vehicle of choice for global fund managers and to truly increase the competitiveness of Singapore as a fund management hub, we believe that the S-VACC legislation must be expanded to allow for fund managers who are not based in Singapore to take advantage of the S-VACC structure. For example, a US-based fund manager should be allowed to domicile a fund in Singapore using the S-VACC structure, provided the fund manager and the fund meet the regulatory thresholds.

In respect of the Singapore-based fund managers, we believe that the S-VACC will be the future vehicle of choice given its flexibility.

The proposed framework offers increased opportunities for cross-border collaboration, growth for stakeholders in the fund industry and a wider investor base for fund managers to tap on. However, while the S-VACC framework increases the competitiveness of Singapore and improves the ease of doing business in Singapore as a fund manager, it also reveals the potential pitfalls for inexperienced investors.

Disclaimer

Our views expressed in this article are based solely on the consultation paper and draft legislation issued by the MAS on 23 March 2017.

Dentons Rodyk acknowledges and thanks senior associate Vyasa Arunachalam for his contribution to the article.

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