The DIFC Venture Studio Regulations 2023: A New Regulatory Framework for Innovative Start-ups
Corporate Structuring / UAE
Izabella Szadkowska Partner,Corporate Structuring
Noff Al KhafajiSenior Counsel,Corporate Structuring
Sabeeha MoollaProfessional Support Lawyer.Corporate Structuring
The Dubai International Financial Centre (DIFC) is a leading financial hub in the Middle East, Africa and South Asia region, offering a robust and dynamic legal and regulatory environment for businesses operating in or from the DIFC. In line with its vision to foster innovation and entrepreneurship, the DIFC has recently introduced a new regulatory framework to support the development of start-ups in the DIFC. The Venture Studio Regulations 2023 ("Regulations"), which came into force on 26 April 2023, provides a streamlined and flexible process for establishing and sponsoring New Ventures in the DIFC, as well as converting them into fully-fledged companies once they achieve certain milestones.
These Regulations do not replace or supersede the general provisions of the DIFC Companies Law; instead, they complement and augment them, offering a tailored and adaptable framework for Venture development within the DIFC. In addition, the Regulations outline specific guidelines and limitations for Venture Studios and Venture Studio Companies.
This article will highlight some of the key features of the Regulations and provide an overview as to why entrepreneurs and investors should take advantage of this opportunity. It also addresses some of the potential challenges/risks involved in setting up a Venture Studio and how to mitigate them.
A Venture Studio is a company incorporated or continued in the DIFC for the sole purpose of sponsoring New Ventures and establishing Venture Studio Companies in the DIFC and all matters ancillary thereto. A New Venture is a start-up business that a Venture Studio wishes to, or has agreed to, sponsor pursuant to a Venture Sponsorship Agreement.
Venture Studios can help New Ventures by providing them with the necessary resources, expertise, and guidance to develop ideas into a viable and scalable business and can sponsor up to 20 New Ventures at any one time, subject to the Registrar of Companies' (“ROC”) approval.
The Regulations indicate that a Venture Studio can only be established by a Qualifying Applicant.
This begs the question as to who is a Qualifying Applicant?
A Qualifying Applicant must be a Qualifying Person that can satisfy the DIFC Registrar of Companies that it has sufficient experience and resources to conduct Venture Building as a business.
A Qualifying Applicant must also ensure that the Venture Studio will be Controlled by one or more Qualifying Applicants (i.e., they have the power to secure that the affairs of the Venture Studio are conducted in accordance with their wishes).
It can be implied that a Qualifying Applicant is expected to have some expertise and capacity in sponsoring and establishing start-up businesses in the DIFC.
In line with its vision to foster innovation and entrepreneurship, the DIFC has recently introduced a new regulatory framework to support the development of start-ups in the DIFC. The Venture Studio Regulations 2023 ("Regulations"), which came into force on 26 April 2023, provides a streamlined and flexible process for establishing and sponsoring New Ventures in the DIFC, as well as converting them into fully-fledged companies once they achieve certain milestones.
To establish a Venture Studio in the DIFC:
A qualifying applicant must apply to the ROC and demonstrate that it has sufficient experience and resources to conduct Venture Building as a business.
A Venture Studio must obtain a licence from the ROC and comply with the relevant laws and regulations applicable to registered persons in the DIFC, unless specified otherwise in the Regulations. A Venture Studio must also file a "Venture Sponsorship Agreement" with the ROC for each venture it sponsors and obtain a commercial permission for such venture.
A Venture Studio is responsible for ensuring that the Ventures it sponsors comply with the applicable laws and regulations, including those relating to anti-money laundering, counter-terrorist financing, sanctions, and ultimate beneficial ownership.
A Venture Studio must also separately account for and hold on trust the funds raised by or attributable to each venture and use them only for the business of that venture.
A Venture Studio may raise up to USD 10 million in aggregate for each Venture unless the ROC grants an exemption.
A Venture Studio may sponsor and obtain a commercial permission for a Venture for a period of 24 months only unless the ROC grants an extension for a further 12 months. Upon, or prior to, the expiry of the commercial permission, a Venture Studio must either terminate the Venture Sponsorship Agreement and the sponsorship of the residency visa of each entrepreneur or establish the venture as a Venture Studio Company.
Upon expiry of the start-up period, a Venture Studio Company shall automatically convert into a private company in the DIFC that falls outside the scope of the Regulations and shall be subject to all the requirements under the relevant laws and regulations applicable to registered persons in the DIFC. A Venture Studio Company may also apply to the ROC to have its licence suspended and its name struck off the public register, or for voluntary wind-up, at any time.
The Regulations provides a flexible and supportive framework for Venture Building in the DIFC, with various benefits and obligations for the Venture Studio, the New Venture, and the Venture Studio Company. Some of the benefits of setting up a Venture Studio include:
Access to the DIFC's world-class infrastructure, legal system, and business network.
Ability to sponsor and mentor multiple ventures and entrepreneurs at the same time, creating a diversified portfolio of potential businesses.
Ability to raise funds for the Ventures from various sources, including angel investors, venture capitalists, and crowdfunding platforms, subject to the ROC's approval and the applicable laws and regulations.
Ability to convert the Ventures into Venture Studio Companies and retain a stake in them, or exit them through a sale, merger, or IPO, subject to the ROC's approval and the applicable laws and regulations.
Ability to benefit from the DIFC's incentives and initiatives for start-ups, such as the DIFC FinTech Hive, the DIFC Innovation Hub, and the DIFC Innovation Licence.
However, setting up a Venture Studio also involves some challenges and risks, which investors should be aware of, which include:
Challenges in meeting the eligibility criteria and the ongoing obligations of a Venture Studio, (having sufficient experience and resources, filing Venture Sponsorship Agreements, obtaining commercial permissions, ensuring compliance with the applicable laws and regulations, accounting for and holding on trust the funds raised by or attributable to each venture).
Managing the expectations and interests of the Ventures and the entrepreneurs, as well as the potential conflicts of interest or disputes that may arise.
Protecting the intellectual property rights and confidential information of the Ventures and the Venture Studio, as well as complying with the data protection and privacy laws and regulations.
Mitigating the market and operational risks associated with the Ventures, such as the lack of product-market fit, the competition, the regulatory changes, the customer acquisition and retention, the scalability, the profitability, and the sustainability.
Dealing with the termination or change of status of a Venture Studio or a Venture Studio Company, which may affect their rights and liabilities under the relevant laws and regulations.
An overview of the set-up requirements is summarised as per the below table:
Requirement
Venture Studio
Normal Limited Liability company
Control by Qualifying Applicants
Yes
No
Name requirements
Must include "Venture Studio", "Venture Builder" or "Venture Builder Studio"
No specific words or phrases required
The Regulations offer a new opportunity for entrepreneurs to develop their ideas or Ventures in the DIFC with the support and guidance of a Venture Studio. The scheme provides a flexible and supportive framework for Venture Building in the DIFC, with various benefits and obligations for the Venture Studio, the New Venture and the Venture Studio Company. However, setting up a Venture Studio also involves some challenges and risks, which can be mitigated by seeking professional advice and assistance, conducting thorough due diligence and market research, implementing effective governance and compliance policies and procedures, adopting best practices and industry standards for the protection and management of the intellectual property rights and confidential information, and the data protection and privacy, monitoring and evaluating the performance and progress of the Ventures and the entrepreneurs, and planning and preparing for the conversion or exit of the Ventures and the Venture Studio Company.
If you are interested in establishing a Venture Studio, sponsoring a Venture, understanding the benefits of being sponsored, or incorporating a Venture Studio Company in the DIFC, or if you have any questions or concerns about the Regulations, please contact our offices for expert advice and assistance. We have extensive experience and expertise in advising clients on the DIFC legal and regulatory framework and can help you navigate the requirements and opportunities of the Regulations.
For further information,please contact Izabella Szadkowska, Noff Al Khafaji and Sabeeha Moolla.
Published in January 2024
