Variable Capital Company – the rising star

December 2020 | EXPERT BRIEFING | FINANCE & INVESTMENT

financierworldwide.com

The Variable Capital Company (VCC) Singapore fund structure went live in January 2020 and has been a resounding success with more than 140 VCCs incorporated at the time of writing. It has rapidly become a main discussion topic for fund managers (hedge, private equity (PE), venture capital (VC) and alternatives) as well as wealth managers, single family offices and multi-family offices, both in and outside Singapore.

The main attributes of a VCC

The VCC is a new legal structure that provides a superior option to existing fund or collective investment scheme (CIS) structures (ie., corporation, limited partnership and unit trust).

A VCC is governed by the new VCC Act and regulated by the Accounting and Corporate Regulatory Authority – for establishment and administrative purposes – and the Monetary Authority of Singapore (MAS) – for anti-money laundering and countering the financing of terrorism (AML/CFT) purposes. It must currently be used only as a fund and can adopt one of the following fund structures: (i) traditional or alternative funds; (ii) retail or restricted funds; and (iii) standalone fund, or an umbrella entity with multiple sub-funds with segregated assets and liabilities.

A VCC is able to redeem shares and pay dividends using its net assets. This allows a VCC to be flexible in distributions and return of capital (in contrast with a corporate fund).

It must appoint a fund management company (FMC) that is licensed or registered by MAS, or is an exempt financial institution in Singapore, and it must have sufficient mandatory Singapore substance (i.e., Singapore registered office, Singapore resident company secretary and auditor, and at least one resident director).

In addition a VCC must have minimum regulatory compliance, meaning: (i) at least one director must be a director or registered representative of the FMC; (ii) all directors must be fit and proper persons; and (iii) it must comply with AML/CFT requirements, although these can be outsourced to the FMC of the VCC or a regulated financial institution in Singapore.

Finally, a VCC can dispense with annual general meetings of its shareholders, can maintain only a private register of shareholders, and can use Singapore Financial Reporting Standards, Singapore Financial Reporting Standards (International), or Statement of Recommended Accounting Practice 7 (for retail VCC), or International Financial Reporting Standards and US Generally Accepted Accounting Principles.

Many of these attributes make the VCC a standout choice for fund managers and family offices. In addition, the flexibility for subscriptions and redemptions improve liquidity preferred by some investors. The substance requirements naturally fulfilled by the VCC and location of the VCC in the same international financial centre where the fund manager or family offices reside make absolute sense in terms of efficiency, cost savings and compliance in an ever-changing and complex regulatory and reporting landscape. As such, many clients have opted for the VCC in the last few months and we expect the trend to continue.

Redomiciliation

The VCC Act allows foreign corporate funds (e.g., a Cayman segregated portfolio company or a British Virgin Islands (BVI) protected cell company) to redomicile to a VCC if it has positive net assets and remains solvent for 12 months from the date of application. The applicant must submit the requisite forms and documentation for inward redomiciliation. This feature allows the fund managers to retain the foreign fund’s track record, investors and bulk of the structure and fund documentation without redemptions, transfers and the hassle of launching a new fund.

Retail VCC

VCCs may be offered to retail investors, although based on observations, the vast majority of VCCs so far have been offered to accredited investors and institutional investors. We understand that the authorities and the industry are working hard to promote retail VCC products.

VCCs offered to retail investors must meet additional requirements, including operational requirements for custodians, provisions to be included in a VCC constitution and certain VCC contractual agreements, and mandatory disclosures in VCC prospectuses. The custodian is required to safeguard the rights and interests of the VCC’s shareholders and disclose the risk of cross-cell contagion to shareholders of VCCs. The custodian must also notify MAS within three business days upon discovering any breach of laws or regulations relating to the VCC or FMC, take custody and control of all VCC assets, ensure all VCC assets are accounted for, and ensure all VCC assets are distinct from its own and those of its clients.

Tax incentives and government subsidy

The VCC is treated for tax purposes in Singapore as a company and a single entity. Tax incentives applicable to funds under sections 13R and 13X of the Income Tax Act are extended to VCCs. The financial sector incentive scheme for fund management and goods and services tax remission for funds are also applicable to VCCs, provided that all applicable incentive conditions are met. These incentives essentially make the VCC substantially tax neutral and very attractive for fund managers and investors. In addition, the government has made known its strong support for the VCC by handing out a very generous subsidy for expenses incurred when launching a VCC or redomiciling into a VCC.

How does the VCC compare with offshore funds

Contrary to rumours in the market about the shortcomings and uncertainties of the VCC, we are of the view that the VCC is a finer, newer, compliant, clearly defined and future ready fund vehicle meant for investment funds and family offices based in an independent, sustainable and safe international financial centre. This view is endorsed widely by fund managers, large institutional investors and family offices, judging by the success of VCCs and increasing demands and enquiries about VCCs. In our opinion, the VCC’s structure and features are very similar to the Cayman segregated portfolio company (SPC). However, we find that it is easier, faster, more convenient and less expensive to operate and maintain s VCC. In addition, much of the regulatory (including AML/CFT and common reporting standards) and substance requirements are already fulfilled by the Singapore regulated fund management company and the relevant financial institutions servicing the funds.

There are additional obvious benefits. First, having everything (including the process, documentation and professionals) located in one central business district in Singapore – a safe, stable and reputable international financial centre and asset and wealth management hub. Second, the availability of a tax neutral fund structure pursuant to tax incentives approved in writing by local regulators. Third, the opportunity to benefit from more than 80 double-tax agreements. Finally, substantial cost savings (e.g., offshore directors, offshore agents, offshore registered office, offshore shell fund manager, hefty offshore regulatory registration fees and annual fees).

Moving forward

A VCC can be used by fund or asset managers, wealth managers, PE, real estate, VC managers and multi-family offices. It can be used for traditional, alternative, PE, real estate and VC funds. It can also be used as an alternative to retail unit trust funds. The initial success for private VCC funds is very encouraging and the support from institutional investors and family offices bodes well for the VCC regime. We believe the trend will remain strong and the shift from conventional offshore segregated portfolio company fund and protected cell company fund structures to private VCC funds in Singapore will continue. The VCC is no longer merely a talking point but has become a key option for fund managers, investors and family offices. It will become even more attractive when the VCC regime is refined and further developed in the near future.

Tan Woon Hum is a partner at Shook Lin & Bok. He can be contacted on +65 6439 4898 or by email: woonhum.tan@shooklin.com.

Tan Woon Hum

Shook Lin & Bok