Opportunities for Venture Capital Investments in Singapore in 2018

by Dentons
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Dentons

[co-author: Xuan Rong Liow]

Introduction

Heading into 2018, we look back on several key developments in the legal landscape in the past year that we expect will provide new opportunities for venture capital funds in Singapore. We also share our thoughts on promising trends in venture technology and emerging growth companies in the year ahead.

A more favourable legal landscape

Simplified rules for managers of venture capital (VC) funds

The Monetary Authority of Singapore (MAS) had on 20 October 2017 announced a simplified regulatory regime for VC fund managers. Previously, the qualifying criteria demanded, inter alia, VC fund managers to have at least five years of management experience, high capital capabilities and imposed onerous terms in relation to business conduct – with the new regime, such minimum qualifying criteria have been removed. This will attract a new set of VC managers and contribute to Singapore’s vibrant start-up and growth stage market. For further details on such changes, please see our earlier article (Venture Capital fund managers may begin operations in record time in Singapore).

Redomiciliation

On 11 October 2017, Singapore formally adopted a re-domiciliation regime that allows certain foreign companies to be registered as a Singapore company limited by shares. With the enactment of new “Transfer of Registration” provisions under Part XA of the Companies Act (Chapter 50 of Singapore), foreign start-ups may find it compelling to re-domicile in Singapore to capitalise on its unique position as a reliable and efficient international business hub with access to various Asian markets, as well as its favourable tax regime.

In addition to increasing the pool of potential investee companies, the re-domiciliation regime will be a boon for investors who may be reluctant to invest directly into a foreign jurisdiction whose laws may be comparatively complicated or uncertain. Instead of requiring the founders of the foreign start-up to incorporate a new Singapore holding company and to effect various transfers of assets and shares to the Singapore entity, start-ups can make use of the re-domiciliation regime to transfer the registration of their existing entity to a Singapore company to facilitate the investor’s equity investment, without the hassle of operational disruptions. This also dovetails the general preference for Singapore as a forum for dispute resolution in the region.

Enhanced Debt Restructuring Regime / Super-priority for Rescue Financing

A suite of debt restructuring reforms consolidated in the Companies Act came into force on 23 May 2017. The enhanced debt restructuring regime is a hybrid that builds upon existing legislation and combines key features of Chapter 11 US Bankruptcy Code provisions. With at least six workout cases filed in the Singapore courts to-date and a new Insolvency Bill to be enacted in 2018 that will further streamline and update its insolvency laws, Singapore will continue its push to establish itself as a debt restructuring hub in Asia and beyond.

Of particular interest to funds and corporates would be the super-priority for rescue financing enhancements to the scheme of arrangement and judicial management regimes (under Sections 211E and 227HA of the Companies Act respectively). Singapore courts can now order that the debt arising from rescue financing be accorded super-priority over existing debt, which should encourage the injection of critical funds to salvage distressed companies and envigorate the debt recovery market. Investors looking to capitalise on such opportunities to bridge the lending gap will do well to follow this space and related nascent jurisprudence closely.

MAS Regulations

Against the backdrop of continuous technology disruptions in the financial industry (and beyond), MAS has created a conducive ecosystem for financial technology (FinTech) experimentation in Singapore. MAS’ aim is for innovations to be tested and developed in a safe and well-defined regulatory sandbox before wider adoption locally and abroad.

It was announced at the Singapore FinTech Festival organised by MAS in November 2017 (where over US$2 billion of capital was available for investment in start-ups) that MAS will expedite sandbox application assessments and further loosen the regulatory boundaries for solutions where the risks do not outweigh the potential benefits to consumers. Its recent venture with the Association of Banks in Singapore (ABS) in developing blockchain prototypes for more efficient inter-bank payments would also benefit all stakeholders looking to ride on the FinTech wave, including in the spheres of cybersecurity, payment gateways and digital currencies. With MAS continuing the drive to establish a thriving FinTech ecosystem, investment in this sector should remain relatively steady in 2018.

Promising Technology Trends

Legal Technology (LegalTech)

Consider a reality where legal contracts are enforced by machines; or a world where ‘intelligent legal assistants’ provide real-time updates on case law and legislation from jurisdictions worldwide. From America to Asia, start-ups and law firms have jumped on the bandwagon, transforming access to legal developments and services.

Dentons recently launched Nextlaw Labs and its investment arm Nextlaw Ventures, LegalTech ventures jointly focused on incubating, investing in, developing and deploying new technologies to transform the business and practice of law. Nextlaw Ventures’ portfolio of legal technology innovators include ROSS Intelligence, a leading artificial intelligence company that leverages IBM Watson-powered cognitive computing to refine expert legal research and which had secured US$8.7 million in Series A funding in October 2017.

In Singapore, Singapore Academy of Law (SAL) has swung to the rhythm of LegalTech, with the official launch of the Future Law Innovation Programme (FLIP) in January 2018. Not only does FLIP aim to encourage innovation in Singapore’s legal practice, the launch of its FLIP Accelerator (touted as South East Asia’s first LegalTech accelerator program) will boost the growth and development of LegalTech start-ups in the region. Dentons Rodyk is a featured international law firm participant - in line with our strategy of redefining the client experience and leveraging technology to promote seamless collaboration.  

Property Technology (PropTech)

Reports show that investment in PropTech has been steadily rising on a global scale, and that in recent years PropTech start-ups in Asia-Pacific have secured more investments that their American and European counterparts (close to US$5 billion in funding since 2013). In addition to PropTech that is developed primarily for consumers (such as property portals with virtual-reality tours, data analytics and market research), blockchain technology has already been adopted by some countries for their land registriesDedicated funds that have been set up by various property and construction groups in Singapore to invest exclusively in start-ups in the PropTech vertical are also indicative of PropTech’s growing prospects.

Deep Technology (DeepTech)

DeepTech start-ups focus on developing technology based on unique scientific and/or engineering innovation and are built around intellectual property that is proprietary or hard to replicate, compared to the ubiquitous consumer technology companies that rely mainly on existing technology. While consumer technology companies continue to expand, the potential for unabated growth is theoretically limited by technology that is only available today as well as the risk of market saturation.

Investors are looking to DeepTech start-ups as an alternative. Amongst various other initiatives, SGInnovate, a Singapore government-owned innovation platform, unveiled late last year its “Deep Tech Nexus” Strategy for 2018 to develop the DeepTech ecosystem in Singapore, with a focus on three technology areas: (i) artificial intelligence; (ii) blockchain; and (iii) medical technology (discussed below).

Medical Technology (MedTech)

The interplay of technological advances, aging populations and vast areas of unmet medical needs in many Asian countries herald a new era of MedTech start-ups, and Singapore has been identified as being well-positioned to act as a gateway to tap into the MedTech industry in the region. A recent boost for MedTech start-ups and emerging growth companies was provided in June 2017 when the Singapore Exchange Limited (SGX) and ETPL, the commercialisation arm of the Agency for Science, Technology and Research (A*STAR), signed a two-year memorandum of understanding, making it more accessible for MedTech companies to tap on innovative technologies and access growth capital from private and public capital markets to grow their businesses.

Conclusion

VC and private equity investment in South East Asia have been on a upward trend in recent years as funding in Asian companies continue to increase globally, according to public reports. In light of the developments and technology trends discussed above, we believe there will be ample opportunities in Singapore as well as the region.

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