The world of Venture Capital is often described as a ‘Black Box’ by founders, entrepreneurs, and onlookers. This complexity escalates significantly for those attempting to raise a VC fund, where navigating the intricate realms of domiciles, Limited Partnership Agreements (LPAs), and fund structures becomes a formidable challenge. One of the issues faced by fund managers is how to choose a domicile. This entire process is shrouded in mystery and fund managers often end up spending most of their time researching the many intricacies of this process rather than engaging with LPs.
Domicile: The legal residency of the fund.
Limited partners (LPs): Investors in the fund.
Limited partnership agreement (LPA): Agreements which set forth the parameters of the partnership.
For example:
Funds must return 100% of the investors capital, thereafterthe remaining profits are split 80:20, (called ‘Carry’).
Typically fund managers can use 2-3% of the fund as management fees for rent, salaries, and other operational expenses.
Our Top 3 Domiciles in the Americas, Europe and Asiaare…
Important note: We typically advise managers to prolong domiciling their funds until having met with their LPs. Try to get 10%+ hard and 10%+ soft commitments from your LPs before considering a domicile. More often that not, LPs with large commitments to the partnership dictate where a fund is domiciled and managers are forced to re-domicile.
If you are thinking of setting up a VC fund within the US, your LPs will most likely expect you to domicile within Delaware. Most LPs in venture capital funds are US citizens and prefer their funds to domicile in the US.
VC Labs very own agreements and ‘Decile Launch‘ has been designed specifically for fund managers who wish to domicile in Delaware.
Sign up here and join the waiting list to automate your fund structuring.
Delaware provides highly attractive fund structures, including ‘limited partnerships’ (LPs) and the less common ‘limited liability companies’ (LLCs). Its global popularity as a domicile has surged, particularly in response to increasing regulatory trends worldwide.
VC Lab Co-founder and CEO Adeo Ressi says:
The clear trend is to domicile in the US, and we are seeing funds from all around the world move their domicile to Delaware, from Asia to Africa and Europe.
Note: It takes around 6 months to get a license in Singapore and around 2 months in most European domiciles. In stark comparison, an entity can be formed in a single day in the State of Delaware, provided an additional same-day turn around fee is paid.
Adeo goes on to explain that the introduction of Know Your Customer (KYC) and Anti Money Laundering (AML) regulations has led to most domiciles becoming heavily regulated and sluggish in their processes.
In terms of the costs of setting up and maintaining an Alternative Investment Fund (AIF), Delaware is a great choice. It costs $200 plus an additional $50 to file and receive an official formation certificate. There are also a plethora of legal and tax advisories with varying cost structures for fund managers to consider.
The downside of Delaware comes from the Securities and Exchange Commissions (SEC) ruling that fund marketing material can only be presented to accredited investors and that a third party must verify all investors which are solicited are accredited. This results in increased costs and risk taken on by the partnership.
Luxembourg is a very popular destination for AIFs in Europe and is highly regarded by LPs across the world. It has the second highest AUM in the world following Delaware.
Luxembourg fund vehicles are a key advantage for those looking for flexibility in speed to market, taxation as well as cross border fund distribution and raising of capital. Through these vehicles, fund managers have the option of different levels of regulation which affect said factors. For example, the RAIF vehicle is tailored to get to market quickly, with the option to convert into a more regulated SIF or SICAR vehicle in the future.
Note: New KYC regulations introduced by the CSSF have substantially increased the time it takes to form all of the fund vehicles available to managers and is a trend we can see across Europe.
European managers need to consider where their LPs are based. If they’re located in multiple European Union jurisdictions, then you might have to obtain an EU marketing passport, which is an additional arduous and time consuming process that takes multiple months.
Luxembourg has high costs associated with setting up a fund (up to 2-3x more than the USA). Due to the many one-off fees and the subscription costs, this domicile can prove too expensive for smaller funds. Usually this domicile is favored by larger, more established funds in Europe who have greater assets under management and can justify the high legal & advisory fees as well as fully take advantage of the tax benefits and treaties.
Note: Although Luxembourg has an extensive double treaties network, smaller funds may not have a use for such a thing, as smaller funds tend to focus on local deals and raise from local investors. For newer / smaller funds in the region, domiciles such as the Netherlands and Estonia are emerging as very compelling options.
Singapore comes out as a clear favorite for both LPs and fund managers in Asia.
Singapore enjoys a thriving tech ecosystem onset by both government incentives / policies as well as a highly technical workforce. The current administration’s efforts, such as the recent tax incentive scheme, has steadily made Singapore rather popular with LPs and VCs in the region.
The bustling economy of Singapore has particularly allowed sectors such as fintech, biotech and manufacturing to thrive. Infact, the entire APAC ecosystem enjoys incredible growth and increasing prosperity. This city-state has become a tech hub and the number one choice in the region for funds looking to invest in markets such as India. Interestingly, Chinese investors prefer the Cayman Islands as a domicile.
Tip: Funds with a significant share of Chinese investors tend to be domiciled in the Caymans. If you are mainly raising from Chinese investors then be prepared to domicile there.
Though a regional favourite, it takes a long time to establish a fund in Singapore in comparison to European and American domiciles, however in the APAC region Singapores offerings are second to none with great fund vehicles and tax treatments.
Note: In the APAC region, Australia and New Zealand based fund managers typically opt to domicile local.
Estonia is a fantastic tech hub with one of the highest ratio of unicorns per capita in the world.
Estonia is currently suffering from success as supply of skilled labour cannot keep up with the demand from its quickly growing ecosystem. In conjunction with the government, the national regulator has implemented pro-tech policies such as its immigration laws to allow highly qualified foreign workers quick access into the country. Additionally, the introduction of other policies has helped the ecosystem to become a global leader. The introduction of the LPF by the EFSA, has adopted the best features from UK and Luxembourg
vehicles is another example of the proactiveness of the regulator and their catering towards ‘Small AIFs’.
It should be noted that due to the ease of managing and setting up crypto centric funds, Estonia has recently faced a wave of questionable funds being domiciled in the country, accused of fraudulent activities. The EU and independent governing entities have put restrictions on Estonian fund activities across Europe for the time being. In response, Estonia has begun setting up additional barriers and safety measures and investigating said funds.
Tip: As of September 2021 the difficulty in obtaining a license from Estonia has radically increased.
To launch a fund in Estonia, managers have to go through two processes. Firstly you must gain approval from EFSA and the FIU. Funds need a To gain approval from the FIU, funds need a compliance officer on their payroll on top of the state fee of €3,300.
Estonia’s swift response to this has been impressive and though in the short term, achieving a license is proving difficult for new funds, said policy in the long term can prove beneficial for the domiciles reputation and overall success.
In the Americas Ontario also has a growing and developing start-up and VC ecosystem.
Ontario is the domicile of choice by many Latin American and local managers. The ecosystem is picking up pace and continues to receive record levels of investment. This domicile offers tax efficient codes and less regulation than most domiciles. Ontario is also highly regarded amongst LPs and GPs alike. The transparent (closed) limited partnership structure means that capital gains flow through to the investors. The funds quick turn around / formation makes it an even more attractive domicile overall. Canada has relatively low costs associated with forming and maintaining funds.
Tip: VC funds in Canada may be exempt from both accreditation and minimum investment regulations.
The Decile Group develops industry-leading offerings to transform venture capital into an ethical force for good in the world, including VC Lab, Decile Hub, Decile Partners and Decile Capital.
Fund Domicile – Hong Kong Hong Kong is increasingly becoming an attractive domicile in Asia following the introduction of a new limited partnership structure with low setup costs.
