Variable Capital Companies (VCC) is a specialised legal framework designed to improve processes within the investment and fund management industries. From its benefits to the steps needed to establish a VCC, we’ll bring you through the details of a VCC to help you understand how it works.
INTRODUCTION
Variable Capital Companies (VCCs) have emerged as a trendsetter in the ever-evolving investment and fund management industries. This groundbreaking corporate structure has redefined how investment entities operate, as well as the way investors and fund managers carry out their duties. Not only does it promote flexibility, but it also upholds stringent regulatory standards that enhance investor interest protection. In Singapore, the VCC framework seamlessly integrates regulations with the interests of investors, creating a secure and reliable environment that instil trust among all stakeholders.
AN OVERVIEW OF VARIABLE CAPITAL COMPANIES
Singapore launched the VCC framework to enhance its competitiveness as a global hub for investment funds, attracting both local and foreign fund managers by offering a modern and flexible solution. It functions similarly to the open-ended investment company structure in the United Kingdom, where shareholders enjoy greater fluidity when entering or exiting a fund.
As VCCs continue to gain momentum, they are poised to play a pivotal role in shaping the future of the fund industry, not just in Singapore but on a global scale. With VCCs, fund managers can tailor their structures to suit changing market conditions and investor preferences, achieving unprecedented agility in an ever-changing financial landscape.
Having explored the concept of VCC, the following section delves deeper into VCC’s practical applications and how they are shaping the future.
What is VCC?
VCC is a specialised legal framework designed for the establishment and operation of investment funds. It is a versatile structure that has found its place in various asset classes, including hedge funds, private equity, real estate, venture capital, and a range of other investment strategies. In this section, we will learn more about what VCC is in detail, particularly its unique characteristics.
Flexibility Across the Spectrum
One of the standout features of VCCs is their flexibility. Unlike traditional investment funds with a fixed capital, VCCs allow fund managers to issue and redeem shares based on market demand. This means they can easily adjust the size of the fund in response to changing market conditions and personal preferences. For example, during periods of high investor interest where more shares can be issued, investors can redeem shares when they want to exit. This keeps the fund and market demand aligned.
Investor Protection at the Core
Furthermore, VCCs also prioritise investor protection, which is essential in the world of finance, where trust and security are paramount. Within the VCC framework, stringent investor safeguards are meticulously upheld, fostering confidence among those looking to invest in these funds.
Singapore's Modern Framework
Singapore is at the forefront of promoting VCCs, actively seeking to attract both fund managers and investors. The city-state boasts a modern and adaptable framework for organising investment vehicles, making it an enticing choice for businesses in search of an ideal setting for efficient fund management.
What Can VCC Be Used For?
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Investment Funds
Pooling funds from multiple investors to invest in a diversified portfolio of assets
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Asset Management
Managing and allocating capital across different asset classes
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Domiciliation
Allowing fund managers to structure investment funds in a tax-efficient and regulatory-compliant manner
An Overview of the VCC Structure
VCCs are surging in popularity as a versatile and highly efficient investment vehicle. This section will take a closer look at their structure and why they are a compelling choice for businesses.
1. Incorporation: A Seamless Process
Establishing a VCC mirrors the process of incorporating a company. It all begins with the fund manager or sponsor, who initiates the incorporation and submits the necessary documentation to the relevant regulatory authority.
2. Share Classes and Sub-Funds: Tailored Flexibility
VCCs host multiple share classes and sub-funds under a single legal entity. Each share class can possess unique characteristics, such as varying voting rights and dividend preferences. Simultaneously, every sub-fund can pursue its distinct investment strategy, manage its assets, and handle its liabilities autonomously. The flexibility of the VCC structure allows businesses to adapt and cater to a diverse range of investor preferences and objectives.
3. Directors and Management: Expert Governance
VCCs are governed by a board of directors, responsible for steering the fund's strategic decisions and overseeing its day-to-day operations. Typically composed of individuals with expertise in finance, investment, and legal matters, this board keeps the fund's activities in line with its objectives, maintaining credibility and transparency.
4. Custodian and Administrator: Expertise in Safekeeping
VCCs often enlist the services of a custodian bank and fund administrator. The custodian bank is a financial institution that provides services related to the safekeeping and management of financial assets on behalf of institutional investors. On the other hand, the administrator handles various administrative functions, which can vary depending on the size of the VCC, its structure and its objectives. These roles are crucial as they ensure the security and efficient management of the fund's resources.
5. Investment Manager: Strategic Decision-Making
The investment manager, also known as the fund manager or sponsor, plays an important role in a VCC. They are responsible for making investment decisions on behalf of the fund, including selecting assets, executing trades, and managing the fund's portfolio.
6. Investors and Shareholders: Liquidity and Flexibility
Investors in a VCC hold shares representing their ownership and participation in the fund. This means they can issue and redeem shares to enter or exit the VCC fund as needed, while flexibly allocating their capital across various investment opportunities and asset classes. As such, their investments and financial goals are aligned.
7. Fund Documentation: Informed Decision-Making
Like other investment vehicles, VCCs provide detailed documents, such as a summary prospectus or offering memorandum. These documents present comprehensive insights into the fund's investment strategy, associated risks, fees, and other relevant information. Thanks to this transparency, potential investors are empowered to make informed decisions.
A Closer Look at Singapore Variable Capital Company (VCC) and Cayman Islands Segmented Portfolio Company (SPC)
In the dynamic landscape of investment management and corporate structuring, two specialised entities stand out: the Variable Capital Company (VCC) and the Segregated Portfolio Company (SPC). Both are designed to facilitate investment management and funds, yet they possess unique features that set them apart. Understanding these differences is crucial for businesses considering setting up an investment fund or corporate structure.
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1. Differences
Jurisdiction is essential in shaping the landscape of financial structures and investment vehicles.
The Singapore VCC, as its name implies, operates within the robust financial regulatory framework of the nation. It leverages Singapore's strategic location, renowned financial stability, and favourable business environment.
On the other hand, an SPC is a legal structure commonly utilised in offshore financial centres like the Cayman Islands and Bermuda. It capitalises on the region's long-standing reputation as a tax-efficient and flexible jurisdiction for fund structuring. For businesses seeking an efficient corporate setup, an SPC can prove to be an ideal choice.
2. Similarities
Different structures may be subject to distinct legal and regulatory requirements. Gaining insight into these disparities is crucial for ensuring compliance.
The VCC offers the flexibility to create multiple sub-funds under a single legal entity, facilitating the segregation of assets and liabilities among these sub-funds. Each sub-fund operates independently within the overarching VCC structure.
Similar to the Singapore VCC, the SPC possesses the capability to establish segregated portfolios, each maintaining legal distinctiveness from other portfolios and the company's general assets. This setup provides an extra layer of protection and isolation for the assets within each portfolio.
i. Legal Entity Status
The legal entity status of VCC and SPC dictates their treatment under the law, making understanding this distinction vital for safeguarding personal assets from business-related liabilities.
With the VCC, it is important to note that each sub-fund is not considered a separate legal entity distinct from the VCC itself. Despite asset segregation, they remain part of the VCC's unified legal structure. For both VCC and SPC, each segregated portfolio is not considered a separate legal entity.
ii. Versatility
Before embarking on their establishment, it is important to identify what VCC and SPC can offer to address financial needs and enhance versatility and convenience.
Particularly, the VCC’s adaptability in capital management enables the redomiciliation of foreign funds, making it an attractive option for international businesses. Additionally, certain types of income can also benefit from favourable tax incentives within this framework.
Conversely, SPC users are free to structure investment portfolios with unique characteristics. Within a single SPC entity, different portfolios can adopt distinct investment strategies and risk profiles, thereby opening up opportunities for diversification.
iii. Redomiciliation
Redomiciliation, also known as domestication or redomicile, is a legal process that allows a company or legal entity to transfer its domicile or place of registration from one jurisdiction to another while retaining its existing legal identity and corporate history.
The VCC presents an inviting environment for foreign funds, providing pathways for their re-domiciliation to Singapore This can be accomplished through the conversion of existing funds into VCCs or the establishment of new VCCs. Similarly, the Cayman Islands SPC also extends re-domiciliation options, simplifying entry into the financial realm of the Cayman Islands.
Establishing a VCC
For businesses looking to harness the power of a VCC’s unique structure, VCC establishment is the first crucial step. Here is a step-by-step guide to the process of setting up one.
Step 1: Apply for a New VCC Name
Just like any business venture, the setup process begins with a name. Companies will need to decide on a unique business name and register it. However, it is important to note that the chosen name cannot bear a striking resemblance to an existing business, nor can it feature obscene or misleading language.
Step 2: Apply for Your VCC Registration
The process of registering a VCC entails a distinct set of requirements.
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A Resident Director
Every VCC must appoint a resident director to signify a local presence at the helm.
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A Qualified Representative
Mandatory compliance with regulatory requirements necessitates the appointment of a qualified representative. The primary aim is to enhance governance and oversight within the VCC.
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A Permissible Fund Manager
Having a qualified fund manager in place is essential for successfully navigating complex financial markets, assessing risks, and optimising investment strategies.
Besides enlisting the personnel to run the VCC, it is also necessary to provide a local office address, **ID number, ID type and nationality, as well as in-principle approval obtained from other authorities (if any). Generally, the application takes up to 14 days to process.
** In Singapore, the following identification documents are commonly accepted for registration:
1. National Registration Identity Card (NRIC)
This is applicable for Singapore citizens and permanent residents.
2. Passport
Foreigners and individuals without an NRIC can use their passport as a valid form of identification.
3. Employment Pass (EP) or S Pass
For foreign employees working in Singapore, their Employment Pass or S Pass issued by the Ministry of Manpower can be used as valid identification for business registration purposes.
However, it is important to note that the specific requirements and accepted forms of identification can vary. For the most accurate and up-to-date information, it is advisable to consult the official website of the Accounting and Corporate Regulatory Authority (ACRA) of Singapore or seek guidance from a professional business registration service.
Step 3: Get Your Business Profile
Once the VCC is successfully incorporated, businesses will receive a Business Profile, complete with a Unique Entity Number (UEN). This UEN is the VCC's identification number, vital for conducting transactions with government agencies.
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Additional Requirements for VCCs
After understanding what is required for VCC setup, businesses must also adhere to these additional requirements:
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The capital of a VCC must align with its net assets.
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VCCs are subject to the Securities and Futures Act and must adhere to the same requirements as investment funds.
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An annual external audit of the VCC's accounts is mandatory, requiring audited financial statements to adhere to international standards (IFRS, US GAAP, or Singapore FRS).
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Tax Issues and Considerations
Understanding the tax landscape is a fundamental aspect of responsible financial management and governance for VCCs operating in Singapore. This knowledge empowers VCCs to thrive within the dynamic and globally interconnected financial environment.
(a) Statutory Tax Rates
VCCs, like locally incorporated companies, are subject to statutory corporate taxes. In Singapore, the rate stands at 17% currently. The single-tier tax system means dividends paid to shareholders are not taxed.
(b) S13O and S13U for Singapore Fund Management Companies
Tax incentive schemes like Section 13O and 13U of the Income Tax Act, offer opportunities for attracting high-net-worth individuals and families to set up their family offices.
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VCC Grant Scheme
The Variable Capital Companies Grant Scheme (VCCGS) initially launched on January 15, 2020, for a three-year period until January 15, 2023, played a significant role in promoting the adoption of Variable Capital Companies (VCCs) in Singapore. Starting from January 16, 2023, the VCCGS has been extended and will be in effect until January 15, 2025. Following the extension, the VCCGS is now referred to as the Extended VCCGS.
During the Extended VCCGS period, the Financial Sector Development Fund (FSDF) will provide a co-funding of 30% for qualifying expenses incurred with Singapore-based service providers for eligible services related to the incorporation or registration of a VCC. The grant is capped at a maximum of S$30,000 per application.
*The Extended VCCGS is available only to first-time qualifying fund managers that must not have previously incorporated a VCC or successfully re-domiciled a foreign corporate entity as a VCC and must not have previously applied for the VCCGS.
GUIDE TO SETTING UP A VCC
Benefits of VCCs for Fund Managers and Investors
Navigating the intricacies of modern finance demands innovative solutions, and a VCC can be the game-changer in this aspect. Here is how this revolutionary mechanism is addressing the evolving needs of both fund managers and investors.
1. Operational Efficiency
Managing funds can impose a significant administrative burden on fund managers, consuming time and resources. This encompasses navigating complex regulatory landscapes, complying with legal requirements, and overseeing financial management. Fortunately, VCCs step in to streamline these processes, liberating valuable time and resources for fund managers that can then be reinvested in generating returns for investors.
2. Investor Access
VCCs come with another standout advantage: the ability to attract a wide range of investors, including both institutional and retail ones, as well as domestic and international interests. Therefore, fund managers can target diverse segments of the market more easily. Moreover, the broad and diversified investor base bolsters the credibility and appeal of VCC funds. The diversity suggests that the fund has the potential to weather different market conditions, adapting to changing investor needs and enhancing its stability.
3. Cost Savings
Managing multiple investment funds can lead to administrative and operational inefficiencies. VCCs overcome these hindrances by consolidating multiple funds under a single umbrella, allowing fund managers to share common infrastructure and resources. This includes back-office functions such as compliance, accounting, legal services, and reporting. This collaborative approach reduces duplication and the accompanying costs.
4. Cross-Border Distribution
Singapore's extensive network of double tax treaties with numerous countries positions it as an alluring hub for cross-border investment endeavours. VCCs operating in Singapore can leverage these treaties to facilitate cross-border distribution and investment. As a result, the complexities surrounding regulatory compliance and taxation are simplified, reducing barriers to international expansion for fund managers and enticing global investors.
5. Liquidity
Liquidity stands as a fundamental pillar of investor confidence and satisfaction, guaranteeing that their investments remain adaptable and responsive to their diverse needs and the ever-evolving financial markets. In contrast to traditional closed-end funds, the structure of VCCs offers investors the liquidity they require. This enables them to buy additional shares or redeem their existing ones as needed, allowing for portfolio adjustments aimed at risk reduction.
Key characteristics of a VCC
This unique legal entity features a range of benefits for businesses seeking effective fund management. These are the key characteristics of a VCC.
1. Legal Status and Distinct Roles
The separation of rights and obligations is a fundamental aspect of the VCC structure, which means it is entirely independent of its directors or shareholders. This distinct legal status ensures that the VCC’s day-to-day management and decision-making processes are not directly influenced by the personal interests or actions of its directors or shareholders. This autonomy streamlines decision-making, contributing to increased flexibility and efficiency.
2. Ownership Structure
When it comes to ownership, a VCC follows a familiar setup similar to that of a standard private limited company. Shareholders possess legal ownership of the VCC. With no upper limit on the number of shareholders and a minimum requirement of just one shareholder to set up a VCC, it becomes an accessible option for businesses of varying sizes and organisational structures. Moreover, should a shareholder decide to divest their investment, the VCC offers the flexibility for shareholders to sell their shares back to the VCC itself.
3. Liability of Shareholders
VCC shareholders are only liable to the outstanding amount on their shares. In simpler terms, their financial responsibility is confined solely to the capital they have invested in the VCC, shielding them from additional liabilities.
4. Types of Securities
A VCC operates through the issuance of shares, with each share corresponding to a unit of the Collective Investment Scheme (CIS). The CIS, also known as a Collective Investment Vehicle (CIV) or a Mutual Fund in some regions, represents an investment fund that pools together money from multiple investors to collectively invest in a diversified portfolio of securities or other assets. In Singapore, investors can participate in a diversified pool of assets and investments managed by the VCC. It’s worth noting that VCC members are also effectively treated as if they hold units in a CIS managed by the VCC, providing exposure to a broad range of investment opportunities, ranging from stocks and bonds to real estate and other securities, depending on the objectives and strategy of the CIS.
Learn more: Singapore's New SFO Rules Aim to Attract High-Quality Investors [Citywire Asia]
Registration of a VCC Sub-fund
When incorporating an umbrella structure for a VCC, it is vital to register each of the sub-funds individually with the Accounting and Corporate Regulatory Authority (ACRA), although they are not considered separate legal entities. To complete the registration for each sub-fund, businesses will need to furnish the following information:
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The Unique Entity Number (UEN) and name of the umbrella VCC.
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The proposed name of the sub-fund.
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The date of the formation of the sub-fund.
Businesses will also need to take note of these:
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The Monetary Authority of Singapore (MAS) may request a name change for sub-funds if necessary, requiring a new name selection.
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The processing time for the application can take a maximum of 14 days.
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There is a registration fee of S$400.
Meanwhile, note that this VCC fund registration process is only specific to umbrella VCCs. For VCCs that are not under an umbrella structure, sub-fund registration is not necessary.
Learn more: Family Offices Use VCC Sub-Funds to Manage Assets [Citywire Asia]
Questions Businesses May Have
1. Can a VCC be used for both open-end and closed-end funds?
Yes, a VCC can be established as either an open-end or closed-end fund, depending on the investment strategy and objectives.
2. How are VCCs regulated in Singapore?
VCCs are regulated by the Monetary Authority of Singapore (MAS) under the Variable Capital Companies Act. They must comply with regulatory requirements, including licensing, reporting, and governance standards.
3. Can foreign funds be converted into VCCs?
Yes, foreign corporate funds can be re-domiciled to Singapore and converted into VCCs, subject to certain conditions and regulatory approvals.
CONCLUSION
The Variable Capital Company (VCC) has emerged as a dynamic investment fund vehicle in Singapore, bridging the gap between traditional corporations and investment funds. In doing so, it empowers both fund managers and investors in navigating the ever-evolving financial landscape.
Learn more: Fund Vehicles in Singapore - A Comparison
Thanks to its versatile framework, the structuring of various investment strategies is made possible. Its umbrella structure enables the creation of multiple sub-funds, each with its distinct investment objectives and strategies. This segregation of assets and liabilities demonstrates a robust framework for managing various fund types, from open-end to closed-end funds, including hedge funds and private equity funds.
In addition, this flexibility underscores the VCC's ability to meet diverse needs of the fund management and investment sectors, setting it apart as a forward-looking solution in the financial industry.
VCC HUB is committed to providing useful resources for Fund Managers in understanding the key advantages that a VCC provides, on top of timely regulatory updates, supporting and supplementing the collective knowledge and conversations surrounding VCCs.
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