Venture capital investment in Singapore: market and regulatory overview

Private equity (PE) and venture capital (VC) investments differ in several key areas:

VC investments take the following form:

PE investments take the following form:

VC and PE investment has increased since 2015. In 2019, Singapore authorised 45 new VC funds to operate under the Venture Capital Fund Manager (VCFM) regime. Enterprise Singapore reported:

Investment is likely to remain high because of the government's efforts to promote Singapore as the region's innovation and start-up hub. These efforts include co-funding schemes where the government matches private capital investments, for example SEEDS Capital's (the investment arm of Enterprise Singapore) initiatives. In January 2019, SEEDS Capital appointed seven co-investment partners to catalyse over USD65 million of investments in agri-food tech start-ups (see www.enterprisesg.gov.sg/media-centre/media-releases/2019/january/seeds-capital-appoints-seven-partners-to-co-invest-in-agrifood-tech-startups). In July 2019, SEEDS Capital and one of these partners, Openspace Ventures, made their first round of investment in Nutrition Technologies to build the largest high-tech commercial-scale insect protein production facility in South-East Asia (see www.enterprisesg.gov.sg/media-centre/media-releases/2019/july/nutrition-technologies-raises-series-a-funding-from-openspace-ventures-and-seeds-capital-to-set-up-southeast-asia-largest-insect-protein-production-facility).

In March 2020, Doctor Anywhere, a regional technology-led healthcare company headquartered in Singapore completed its Series B funding round worth USD27 million. This Series B funding round was led by Square Peg, the largest venture capital fund in Australia. Co-investors include EDBI, the investment arm of the Singapore Economic Development Board, and IHH Healthcare, a leading international healthcare provider. This funding round is one of the largest raised by a Singapore health-technology start-up in less than two years (Doctor Anywhere).

In June 2020, GoPlay, Gojek's on-demand video streaming service, secured its first independent funding round led by ZWC Partners, Openspace Ventures, Golden Gate Ventures, Ideosource Entertainment and Redbadge Pacific. This is the first publicly announced capital raise of a Gojek group company independent of its parent company PT Aplikasi Karya Anak Bangsa (also known as Gojek).

Early-stage companies obtain funding from:

Start-ups in industries with high-growth potential are typically attractive targets for VC investors, for example the technology sector including:

Activity in these sectors has grown in recent years. See above, Market trends.

In October 2018, the Singapore Academy of Law and Singapore Venture Capital & Private Equity Association launched the Venture Capital Investment Model Agreements (VIMA), a set of standard form documents for use in seed rounds and early-stage financing. The VIMA aim to reflect, guide and establish current industry norms, strike a reasonable balance among the incoming investor(s), the investee company and its founders, and reduce transaction costs and time. The VIMA include a:

An increasing number of VC deals in Singapore are being closed using the VIMA (Singapore Law Gazette and Singapore Law Academy). There is a growing acceptance in the South-East Asian region that Singapore law is well crafted to meet the legal needs of businesses, and that the VIMA enhance Singapore's status as a regional VC hub, particularly because the documents incorporate Singapore law as the governing law and Singapore as the chosen dispute resolution forum. The use of the VIMA also complements the simplified regulatory regime for VC managers introduced in 2017.

The income tax system encourages VC and PE investment. Under the one-tier corporate tax system, once corporate income tax is paid by a Singapore tax-resident company, shareholders are not taxed on dividends paid by that company. The comptroller exempts tax-resident companies from tax on foreign-sourced dividends if all of the following conditions are satisfied:

There is no capital gains tax on gains derived from the disposal of capital investments. A divesting company's gains from the disposal of ordinary shares in an investee company are tax exempt if:

It does not apply to disposals of unlisted shares in investee companies that trade or hold Singapore immovable properties (unless they are property developers). From 1 June 2022, this exemption does not apply to disposals of unlisted shares in investee companies that trade, hold or develop immovable properties in Singapore or abroad.

VC funds, partnerships, foreign-incorporated companies and Singapore variable capital companies (VCC) approved by Enterprise Singapore (ESG) for the Section 13H tax incentive are exempt from tax for up to 15 years on specified income from the following investments:

The Section 13H tax incentive can be extended by ESG for a period not exceeding five years.

To qualify for this tax exemption, VC funds must, inter alia:

Approved VC funds can claim remission of tax incurred on goods and services expenses at a fixed recovery rate.

A qualifying foreign investment fund vehicle is automatically exempt from tax on specified income derived from designated investments. These funds must be managed by a Singapore fund management company holding a capital markets services (CMS) licence for fund management (Securities and Futures Act (Chapter 289 of Singapore) (SFA)) or that is exempted from holding a CMS licence. The comptroller can impose a financial penalty on an investor in the fund if they are not a qualifying investor. Qualifying investors that are not liable to pay the penalty include:

The Offshore Fund Incentive Scheme runs until 31 December 2024.

Funds constituted as a company incorporated and resident in Singapore or a VCC can apply to the MAS for tax exemption on specified income derived from designated investments, provided that they meet the conditions of the Resident Fund Incentive Scheme. To qualify the fund must:

The comptroller can charge an investor in the fund a financial penalty if they are not a qualifying investor. The qualifying investor criteria are similar to that for the Offshore Fund Incentive Scheme.

Funds can be approved for the Resident Fund Incentive Scheme up to and including 31 December 2024.

Funds can apply to the MAS for an income tax exemption on specified income from designated investments. There are no restrictions on investors in the Enhanced-Tier Fund Incentive Scheme and other types of fund vehicles can be used for example, limited partnerships and VCCs. To qualify the fund must:

Master and feeder funds and special purpose vehicles within a master-feeder fund structure can apply for this scheme and meet the economic criteria on a collective basis, subject to conditions being met.

Funds can be approved for the Enhanced-Tier Fund Incentive Scheme up to and including 31 December 2024.

VC funds source funding from accredited investors and/or institutional investors, for example:

The government also provides seed funding to selected VC funds to invest in Singapore-based early-stage technology start-ups through initiatives including the National Research Foundation's Early Stage Venture Fund.

VC funds are typically structured as limited partnerships. Limited partnerships are regulated by the:

A limited partnership must consist of at least one general partner and one limited partner. Limited partnerships do not have a separate legal personality and can only enter into contracts, hold assets and be party to legal proceedings through their general partner. The general partner is responsible for the day-to-day management and running of the business. The general partner has unlimited liability for all the partnership debts and obligations assumed during their tenure. A limited partner is not personally liable for debts or obligations beyond the amount of their agreed contribution, provided they do not participate in the management of the partnership.

VC funds often invest in portfolio companies directly alongside other VC funds. Their investment is usually limited by their regulations that restrict concentration of funds in a single asset or single investment. VC funds typically do not invest into other blind pool investment funds or other VC funds.

The average duration of a VC fund is ten years, although the term of the fund can be extended by up to two years if the general partner decides that an extension is necessary or advisable to divest the fund's investments.

The common investment objectives of VC funds are to invest in growth-stage companies and realise long-term capital appreciation for their investors. They achieve their objectives by taking a role with respect to the management and operations of portfolio companies, growing these portfolio companies and exiting them, either through a trade sale or an initial public offering (IPO).

The average return of a VC fund is 20% a year and a VC fund typically seeks to exit investments between five to seven years after an investment period of four to five years. The typical timeline requested by VCs for the investee company to undertake a qualifying IPO is about five to six years from the date of the completion of the investment. VC funds tend to have a sectoral focus, for example information technology, business-to-business technology, deep technology and related sectors that demonstrate the potential for high growth. In addition, VC funds are typically subject to certain investment restrictions. For example, a VC fund is usually prohibited from investing in public securities, derivatives, other "blind-pool" investment funds or real estate, without the approval of the investors.

Tax-driven VC funds that derive income from or receive income in Singapore must be careful not to fall foul of the general tax anti-avoidance provisions. These funds must ensure that any arrangements carried out are for bona fide commercial reasons and do not have the avoidance or reduction of tax as one of their main purposes.

Most VC funds are structured as limited partnerships. The limited partnership acts as a feeder fund to pool the commitments of investors, and makes investments through a master holding vehicle in the form of a limited liability company. The Singapore-domiciled master holding vehicle enables the fund structure to access Singapore's network of comprehensive double taxation agreements in the jurisdictions where the investee portfolio companies are located, therefore enabling the fund to pay lower withholding taxes on capital gains, dividend or interest income from its investments.

Fund management is a regulated activity and a VC fund manager requires a CMS licence issued by the MAS. The Venture Capital Fund Manager (VCFM) regime is a lighter touch regulatory regime for VC funds. To qualify, managers can only manage funds that meet all of the following criteria:

When offers of interests in the fund are made to investors, VC funds must comply with prospectus and registration requirements and available exemption conditions. Generally, offers of interests in a fund to any person in Singapore require a prospectus registered with the MAS. If the VC fund is characterised as a collective investment scheme, the collective investment scheme needs to be authorised (if the scheme is constituted in Singapore) or recognised (if the scheme is constituted outside Singapore) by the MAS. A manager or an adviser offering interests in a fund usually relies on one of the following exemptions from the offering requirements:

(SFA (Offering Requirements).)

The general partner and the limited partners typically enter into a limited partnership agreement. This is the limited partnership's constitutional document and governs the relationship between the partners. The limited partnership agreement usually contains provisions that specify the:

VC funds usually acquire a minority stake in the investee company through a direct subscription of preference shares because preference shares enjoy certain rights and benefits over ordinary shares. For example, in a liquidation event (including both actual and deemed liquidation events), preference shareholders are usually paid before and in preference to ordinary shareholders out of the company assets and funds available for distribution.

As a form of bridge financing, VC funds can also invest using convertible loan agreements, where investors make a cash investment in exchange for the right to receive shares in the investee company at a discounted rate or cash proceeds (or other applicable assets) on certain triggering events or after a certain time.

There are no regulatory restrictions or foreign investment notification or approval requirements applicable to investments in Singapore-incorporated companies, except for companies that operate in certain sectors, for example newspaper and broadcasting. (These restrictions are applicable to all investors, not only foreign VC funds.)

VC investments are typically in private company start-ups, and therefore the regulations governing the offer and sale of securities are less onerous than those for public companies. Private investee companies will need to comply with the Companies Act (Chapter 50 of Singapore) (Companies Act) and also need to follow the provisions in the investee company's constitutive documents. However, there are regulatory approvals or notification requirements for ownership of shares exceeding prescribed thresholds in companies operating in certain regulated sectors including:

Public filings with the Accounting and Corporate Regulatory Authority are required when investee companies:

VC funds value investee companies in many ways. Common considerations include:

Valuations can be in the investee company's local currency or the foreign investor's currency, although they are most commonly in USD.

Investors carry out legal, financial, tax and/or commercial due diligence. Factors including the investment amount, costs, time constraints and the investee company's scope of business and operations affect the type and scope of due diligence undertaken by investors. Legal due diligence is often conducted on an "exceptions-only" basis. This entails looking out for red flags, onerous and/or unusual contractual provisions or material provisions which may restrict or prohibit the transaction. The due diligence typically covers the following areas relating to the investee company:

The principal legal documents used in a VC transaction are:

Contractual protections for VC investors (who are likely to be minority shareholders of the investee company) include:

In addition to contractual protections, minority shareholders are protected against acts of oppression, injustice and discrimination or having their interests as shareholders disregarded by the majority controllers of the company (Companies Act).

See Question 11, Forms of interest.

As holders of preference shares, investors can have the right to preferential dividends, preferential rights on the occurrence of liquidation events and/or the option to redeem the preference shares into cash for ease of exit.

The extent of a VC investor's control over the management of an investee company is often a matter of commercial negotiation, which largely depends on the bargaining position of the parties. Parties commonly negotiate for rights relating to board representation and shareholders'/board-reserved matters.

Common restrictions on the transfer of shares include:

Some of these restrictions are protective mechanisms for minority shareholders (see Question 20). These provisions are commonly included in the shareholders' agreement and mirrored in the company's constitution. It is also common for parties to include carve-outs or exceptions to these restrictions where the proposed transferee of shares is an affiliate or other "permitted transferee".

Minority investors can negotiate for protective contractual provisions in the event of a proposed sale of shares by the other shareholders. Protections which are commonly negotiated include:

For more details on co-sale rights and liquidation preference rights, see Question 26.

Investors typically ask for pre-emption rights over the issue of new shares, exercisable in subsequent financing rounds or otherwise. These rights are usually exercisable on a pro rata basis. Investors can also require any proposed issue of new shares to be a reserved matter requiring their consent. This offers investors protection against potential dilution of their stake in the company, as they can veto proposed issues of shares in circumstances where they cannot exercise their pre-emption rights to take up their pro rata portion of the new shares (due to budgetary constraints or other reasons).

The following consents/approvals are required for the investee company:

The above shareholder approval thresholds for the issue of new shares and amendments to the constitution are the general legal minimum approval requirements for a Singapore company. It is possible for higher thresholds to be set out in the company's constitution, particularly where the company has already held financing rounds and prior investors have negotiated for reserved matters relating to the issue of new shares and amendments to the company's constitution.

Ownership of shares exceeding the prescribed thresholds in companies operating in certain regulated sectors is subject to certain regulatory approvals and notification requirements (see Question 11).

The legal expenses and disbursements of VC investors incurred in the negotiation, preparation, execution and performance of the principal legal documents of the investment are usually capped at a small percentage of the total investment amount or fundraising round. Expenses above this cap are typically paid by the VC investors. In some cases, the investee company and/or its founders are liable to pay the expenses incurred by the VC investors when the investment is not made because the investee company or its founders withdraw from negotiations. Expenses reimbursable due to the deal being aborted are also capped.

Founders and employees can be incentivised with an employee share option scheme that gives them the right to purchase shares in the company in accordance with a cliff and vesting schedule. Share options are typically exercisable by paying an exercise price to the investee company, and are often subject to transfer restrictions. Founders and employees can also be given cash-based incentives pegged to the performance of the investee company.

Share option gains are taxable in the year that the founder/employee exercises the option. If there is a selling restriction, the gains are taxable in the year that the selling restriction is lifted. The taxable amount is the open market price of the share on the date of exercise (or the date the selling restriction is lifted, where applicable) minus the exercise price. If share awards are given to founders/employees, gains are taxable in the year that the shares vest in the individual. If there is a selling restriction, the gains are taxable in the year in which the selling restriction is lifted. The taxable amount is the open market price of the share on the date of vesting (or the date the selling restriction is lifted, where applicable) minus the exercise price.

There are generally no corporate tax consequences of offering share options or awards.

In addition to locking-up the transfer of the founders' shares (see Question 19), investors impose restrictive covenants on the founders for as long they remain shareholders and for a certain period of time afterwards.

Generally, restrictive covenants are prima facie unenforceable unless:

Restrictive covenants must only go as far as is necessary to protect the enforcing party's legitimate proprietary interest. Their enforceability depends on the facts of the case, for example the geographical area of restraint, nature of restraint (for example, the types of businesses the party being restrained can enter into) and length of restraint.

Non-solicitation restrictions are also only enforceable if they are no wider than is reasonably necessary to protect the enforcing party's interest in safeguarding the investee company's customer goodwill or key employees.

VC investors can negotiate for the following exit mechanisms to realise investments in an unsuccessful start-up company:

A minority shareholder's exercise of co-sale rights is dependent on there being a third-party buyer. Contracts usually stipulate that shares sold as a result of the exercise of co-sale rights must be "on terms no less favourable" than the terms on which the majority's shares are sold. However, this clause does not protect minority investors from receiving an undesirable valuation for the sale of their shares. One less common solution is to stipulate a price floor for shares sold when exercising co-sale rights.

The redemption of preference shares is subject to certain restrictions (Companies Act). A start-up must have profits available to effect a redemption of shares (this is unlikely for an unsuccessful company, since start-ups are generally not profitable and/or are in the "cash burn" stage). Shares cannot be redeemed out of the capital of the company unless the directors have made a solvency statement in relation to the redemption (Companies Act).

Liquidation preference rights are triggered in a defined liquidation event. A liquidation event typically includes a:

A liquidation preference is the amount that must be paid to preference shareholders before distributions can be made to ordinary shareholders. Negotiable features of a liquidation preference include:

The forms of exit for an unsuccessful company are equally applicable for a successful company (see Question 26). For example, investors can exercise liquidation preference rights in the event of a profitable trade sale or secondary buyout which qualifies as a liquidation event. Investors can also exit via a qualifying IPO (often benchmarked against a pre-agreed minimum pre-money valuation of the company). A successful IPO exit is contingent on external factors including market conditions (especially if parties have expectations regarding the pre-money valuation of the company) and regulatory and listing approvals. As listings and IPOs are heavily regulated, completing a listing and an IPO can take between six months to one year or more, depending on any issues that are encountered during the listing process.

The exit mechanisms (see Question 26 and Question 27) are typically built into the investee company's constitution and/or a shareholders' agreement that requires the investee company to deliver an exit within a pre-agreed period of time.

Singapore recently introduced a new form of corporate vehicle, the VCC, that is governed by the Variable Capital Companies Act 2018 (No. 44 of 2018). They were introduced to encourage fund managers to domicile their investment funds in Singapore and complement the existing investment fund structures available. Some key features of a VCC include that they can be: