Venture capital (‘VC’) is widely recognized as a crucial driver of economic growth, job creation, and commercialization of cutting-edge technology. In the Singapore context, the VC industry is particularly crucial to its economy due to the country’s need to transition into an innovation-driven, knowledge-based and future-ready economy. The creation of a vibrant VC market is also in line with Singapore’s current Smart Nation drive.
Recognizing the importance of VC, the Singapore government has implemented various policies aimed at developing the local VC market. For example, with effect from 20 October 2017, VC fund managers in Singapore will be subject to a simplified authorization process and regulatory regime. These efforts have achieved some success, with Singapore currently being the largest VC center in Southeast Asia. Nevertheless, Singapore is only the 6th largest VC market in Asia, lagging behind traditional rivals like China, Hong Kong, South Korea, India and Japan. Hence, there is more that can be done to grow the Singapore VC market.
My forthcoming paper entitled ‘Venture Capital in Singapore: The Way Forward’ seeks to fill a gap in the literature by examining Singapore’s VC market from a legal perspective. This paper examines the existing regulatory framework governing venture capital in Singapore. Specifically, the paper discusses the present legal structures and tax policies, and highlights their inadequacy in encouraging fund managers to domicile their funds in Singapore. The paper proposes several reforms that will improve the operating environment for venture capital funds. The suggestions made in the paper could be valuable to other countries that are also attempting to promote the formation and growth of a VC sector.
The paper concludes that while the existing regulatory and legal infrastructure in Singapore shows a concerted effort to create a VC-friendly environment, there are various improvements that can be made. These include (1) reforming the business vehicles for funds; (2) improving the tax environment for VCs; and (3) improving the exit environment for VCs.
First, in terms of the business vehicles for funds, while introducing the Singapore Variable Capital Company (S-VACC) is a welcome step, Singapore should also revise the current limited partnership regime to offer greater attraction to fund managers that wish to domicile the funds as Singapore limited partnerships. Currently, Singapore adopts the aggregate approach, such that the Singapore limited partnership is not a separate legal entity. This distinct feature would reduce the limited partnership’s attractiveness to investors and negatively affect the take-up rate of the limited partnership structure in Singapore. It is suggested that Singapore should consider adopting the entity approach to provide a better reflection of commercial reality and promote consistency with legal developments in other jurisdictions, including British Virgin Islands and Delaware.
Second, although there are a number of tax relief options for funds in Singapore, the paper suggests that Singapore should attempt to increase its attractiveness as a domicile location by improving its legal structures and relaxing its tax regime. In recalibrating its tax regime, Singapore must strike an appropriate balance between enhancing its attractiveness for funds to domicile in Singapore, and maintaining a level of taxation which allows for reasonable gains for Singapore. For example, Singapore can consider implementing further tax incentives such as offering complete income tax exemption for qualifying VC funds. However, Singapore should be slow to extend complete tax exemption beyond VC investors to VC fund managers. This balance would allow Singapore to become a more attractive domicile location while also allowing Singapore to derive tax revenue from this arrangement through the corporate income tax levied on the fund managers.
Third, while the introduction of the dual class stock (DCS) structure in 2018 is a welcome change which may improve the attractiveness of IPOs of VC-backed companies on the Singapore Exchange (SGX), the proposed changes may not go far enough. Singapore has proposed to allow the DCS structure on the Mainboard, but not the Catalist board which is targeted at younger companies with growth potential that do not yet meet the Mainboard’s stringent listing requirements. The paper suggests that extending the DCS structure to the Catalist board would allow a wider range of exit options for VC-backed companies.
Ultimately, whether Singapore can create a robust VC market will turn on whether all the elements discussed in the paper can work together effectively and seamlessly. Beyond reforming the regulatory and legal environment, there is also a need to foster a more robust entrepreneurship culture.
Lin Lin is an Assistant Professor at the Faculty of Law, National University of Singapore.