Singapore Fact-File Part 1:
Business Formation for Individuals
1.9 Singapore Venture Capital
Venture Capital Structures
Venture capital involvement is also a possibility, and there
are several different ways in which this can be achieved.
They are as follows:
- Seed financing: Provided ahead of the launch of the business,
and allows for the development of the business concept,
the creation of a business plan, market research, and finally,
bringing the product in question to the market. This type
of investment usually requires a fair amount of involvement
and support on the part of the venture capital firm, and
is therefore generally a less popular option, except for
specialist firms. However, government involvement in this
area via the SPRING Startup
Enterprise Development Scheme (SEEDS) may increase the
attraction for third party investors.
- Start-up financing: Does what it says on the tin, really.
Start-up financing is designed to support small businesses
through the product development period, and with initial
marketing. Smaller start-ups are less likely to be of interest
to VC investors, but as with seed financing, there are some
specialist firms that may be willing to invest.
- Early stage financing: Designed to provide support during
the manufacturing and sales process to businesses that have
developed their product, but are not yet profitable. Government
assistance is available in this area via the Early
Stage Venture Funding Scheme.
- Development/Growth financing: Designed to assist in the
expansion of an existing company.
The way in which the financing is provided to the business
will vary according to the arrangement that is reached with
the venture capital firm or business angel. However, as a
general guide, investors (public or private sector) may become
involved in an individual's business in several ways, including
the following:
- Preference shares: Holders of preference shares receive
priority with regard to the payment of dividends, and receive
a fixed dividend amount. However, they have no voting rights.
(Only of interest to incorporated businesses)
- Ordinary shares: Voting shares and non-voting shares are
available; both offer an equal share of the profits, but
the latter are usually less valuable, as they do not allow
the shareholder to vote on policy matters, or on the composition
of the company's board. (Only of interest to incorporated
businesses)
- Debentures: A type of medium to long-term loan, repayable
at a fixed rate of interest, which can be secured or unsecured.
In the case of a limited company, convertible debentures
can be converted to equity shares, at a future point.
- Secured loans: Loans provided with an asset belonging
to the borrower as security; the lender, in case of default,
can claim the asset.
- Unsecured loans: Usually offered based on the borrower's
credit rating, unsecured loans can be personal (with the
individual responsible for repaying the loan), unsecured
business loans (with the business responsible for repaying
the loan), or unsecured business loans with a personal guarantee
(where the individual giving the guarantee is responsible
for repaying the loan if the business defaults).
The Singapore Venture Capital
and Private Equity Association (SVCA) was formed in 1992,
and aims to promote and foster growth in the sector by facilitating
networking, both domestically and internationally, organising
conferences, disseminating information on topics of interest
to venture capital and private equity investors, and providing
information in a variety of areas.
In July 2010, SPRING, the Singaporean development agency for
growing innovative companies and fostering small and medium
sized enterprises in the country, announced that the Angel
Investors Tax Deduction (AITD) scheme, trailed in the budget
earlier in the year, had been launched.
The AITD is a tax incentive that aims to stimulate business
angel investments into Singapore-based start-ups, and to encourage
more angel investors to add value to these start-ups. It will
be effective for qualifying investments made from March 1,
2010 to March 31, 2015, both dates inclusive.
Under the scheme, an approved angel investor who commits a
minimum of SGD100,000 of equity investment in a qualifying
start-up within a given year will enjoy a tax deduction, at
the end of a two-year holding period, based on 50% of his
investment costs, subject to a cap of SGD500,000 of investments
in each year of assessment.
For angel investors to qualify for the tax incentive, the
individual must make the investment as an individual. Investment
made via corporations, trusts, institutionalised funds and
other investment vehicles are not eligible.
The investor must also demonstrate an ability to nurture investee
companies by possessing at least one of the following criteria:
at least three years of experience in early-stage investments;
at least five years of entrepreneurial track record; or at
least eight years of corporate senior management experience.
Suitable investors have been able to apply for eligibility
under the AITD since July 1.
For an investee company to qualify for the tax incentive,
it must, on the date of first investment, be a private limited
company incorporated in Singapore for no more than three years
and whose shares are not listed on any stock exchange in Singapore;
and have at least 50% of its total issued share capital beneficially
held by no more than 20 individual shareholders. The approved
investor is required to take up a board seat/advisory role
for the entire holding period of the investment (minimum 2
years).
The approved investor must commit at least SGD100,000 within
12 months from date of becoming an approved investor, into
an eligible investee company. The cash investments may be
made in newly-issued shares for raising fresh capital; in
newly-issued preference shares, where there would be no fixed
or guaranteed dividend payment on the preference shares for
the two-year holding period; and in newly-issued convertible
loans, where there would be no interest payment or right of
redemption on loans for the two-year holding period.
The approved investor should possess no more than 50% shares
of any investee company within the two-year holding period.
This also takes into account the potential shareholding should
a convertible loan be converted into shareholding.
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