CMI 02/2023 Observations from Inspections of Licensed Venture Capital Fund Managers

In view of a recent review of the practices of venture fund capital management companies, the Monetary Authority of Singapore (MAS) has published a new circular (CMI 02/2023). Therein, the Authority outlines the findings from such review and sets out best practices and expectations in this context.
The review thereby focused on the following key issues:
(1) the focus on venture capital fund management (VCFM) business: In this context, MAS observed that all VCFM firms exclusively performed VCFM-related business as required by the Venture Capital Fund Management Regime. None of the reviewed firms was conducting other regulated activities. While some companies also provided advisory services in this context, they did so without charging any fees in an effort to avoid conflicts of interest. MAS concludes by noting that all firms must „ensure that their core business remains focused on managing venture capital funds, and where incidental activities are carried out, that all potential conflicts of interest are fully mitigated“.
(2) investment and investor due diligence: MAS thereby examined VCFM’s compliance with the investor restrictions (accredited or institutional investors only) and the 20% limit for „non-qualifying investments“. Latter limit was observed by all VCFMs; no breach was detected, so MAS. However, the Authority did notice that some VCFMs failed to check the credential of investors when on-boarding clients. Also, some failed to properly store and maintain documents that evidence investors eligibility as „accredited investors“ and to get the „opt-in“ consent from investors to be treated as „accredited investors“. Therefore, MAS reminds firms to set up adequate policies and procedures to (a) check the eligibility of investors, (b) document and keep on record evidence of such eligibility, and (c) ensure to receive WRITTEN consent to the „opt-in“ and maintain records of such consent.
(3) disclosures to investors to inform that VCFMs are NOT subject to certain conduct of business requirements and financial requirements that apply to licensed fund management companies: Specifically, MAS looked at whether or not venture capital fund management companies had properly disclosed this fact in their (potential) investors PRIOR to the commitment of any investor funds. Some firms actually failed to comply with this disclosure rule which also applies to existing investors – so MAS – if a licensed fund management company subsequently becomes a venture capital fund management company as well. Therefore, MAS strongly urges firms to contact their investors as soon as possible to make adequate disclosures.
(4) policies and procedures to ensure adequate oversight over business processes and the management of conflicts of interest: In this context, MAS observed that most VCFMs had written policies and procedures in place that govern their business operations (e.g. in areas of valuation, cash management, investment strategies, or conflicts of interest). MAS also found some VCFMs relying upon process descriptions, instead of „formal“ policies. Particularly smaller firms tend to use this practice. MAS once again emphasizes the need to have these policies and procedures in place, especially in view of the obligation to separate certain duties within firms to prevent conflicts of interest.
To conclude, MAS also briefly notes the capital requirements of VCFM; venture capital fund management companies are obliged to maintain a positive base capital >0. It is therefore mandatory that they continuously monitor their base capital. Firms can expect that – in the event of a breach of this requirement – MAS will take PROMPT action.