ADGM introduces regulations governing SPVs and foundations

The Abu Dhabi Global Market (“ADGM”) has introduced a regulatory framework governing the appointment of Company Service Providers (“CSPs”) by special purpose vehicles (“SPVs”) and foundations.

Last October, the Registration Authority of the ADGM issued a consultation paper which proposed a regulatory framework governing the use of CSPs in the ADGM. The public consultation commenced against a backdrop of success in, and increasing demand for, incorporating SPVs and foundations in the ADGM.

The outcomes of the proposals which were subject to a public consultation have recently been introduced pursuant to a series of amendments to the ADGM’s regulations - namely, the Companies Regulations 2020, the Commercial Licensing Regulations 2015 and the Foundations Regulations 2017. The legal framework governing CSPs in the ADGM is, as of 12 April 2021, in effect.

Pursuant to the amendments to the legislation introduced by the ADGM, SPVs and foundations in the ADGM, unless exempt, are now required to appoint a CSP which is licensed to operate in the ADGM. CSPs in turn must comply with a host of regulations governing, amongst other things, record-keeping and the safeguarding of client money. SPVs, foundations and CSPs, along with their officers and councillors, will be held liable for failures to satisfy the regulatory requirements introduced, and may be subject to fines.

In this update, we summarise the key regulatory provisions which apply to SPVs, foundations and CSPs in the ADGM and the applicable transitional period deadlines which must be met. We also consider the effect these changes may have on the SPV regime generally in the ADGM.

SPVs and foundations must have a CSP (unless exempt)

Under the new regulations, SPVs and foundations must, unless exempt, at all times have a CSP. A CSP, is defined as a person licensed in the ADGM to provide company services. The “provision of company services” includes the following:

• acting as an incorporation agent in connection with the incorporation of an entity in the ADGM;
• providing company services to an entity incorporated or registered in the ADGM;
• acting as a registered office provider to an entity incorporated or registered in the ADGM;
• providing directors, company secretaries, registered agents or other offices to an entity incorporated or registered in the ADGM; or
• providing nominee shareholders of companies to an entity incorporated or registered in the ADGM.

An SPV, however, will be exempt from the requirement to appoint a CSP if it is a subsidiary undertaking of any of the following:

• a person exempt from the requirement to obtain a licence in order to practise a controlled activity in or from the ADGM;
• a person authorised to undertake a regulated activity in the ADGM;
• a person licensed or regulated by the UAE Central Bank;
• a company whose shares are admitted to trading on a regulated market in the UAE (including the ADGM); or
• a company that has demonstrated to the satisfaction of the Registrar an adequate presence in the UAE, having regard to (amongst other things) the company’s assets, turnover and employees in the UAE, as well as its governance, policies and procedures.

Similarly, a foundation will be exempt from the requirement to appoint a CSP if it demonstrates, to the satisfaction of the Registrar, substantial resources, experience and personnel in the UAE, along with adequate governance, policies and procedures.

The applicable deadlines for SPVs and foundations (unless exempt) to appoint a CSP depend on the date on which they were incorporated and registered (respectively):

• If incorporated or registered prior to or on 17 March 2021, such SPV/foundation must have a CSP at the earlier of its next commercial licence renewal date or 11 April 2022.
• If incorporated or registered after 17 March 2021, but before 12 April 2021, such SPV/foundation must have a CSP at, or by no later than, its first commercial licence renewal date.
• If incorporated or registered after 12 April 2021, such SPV/foundation must have a CSP from the date of incorporation or registration (as applicable).

An SPV must give notice to the Registrar within 14 days from a person becoming or ceasing to be a CSP. Notice of a person having become a CSP of an SPV must include the CSP’s consent to act in that capacity (in the prescribed form). In the event an SPV gives notice to the Registrar of a person ceasing to be a CSP, such notice must either include details of the SPV’s new CSP or a statement that such company is no longer non-exempted. 

Regulatory obligations of CSPs, SPVs and foundations

The new legal framework introduces a sweep of provisions which CSPs of non-exempted SPVs and nonexempted foundations must comply with.

Namely, CSPs must maintain the records that SPVs and foundations are required to keep (i.e. the company’s books). CSPs must also act as a registered office provider to those SPVs and foundations, unless a different registered office is expressly permitted by the Registrar.

CSPs are now authorised, by virtue of law, to represent SPVs and foundations in their dealings with the Registrar. CSPs are, accordingly, required to undertake all filings on behalf of SPVs and foundations pursuant to the ADGM Companies Regulations 2020, Commercial Licensing Regulations 2015 and Beneficial Ownership and Control Regulations 2018.

In turn, SPVs and foundations are required to make available to their CSPs all documents and information as is required to enable the CSP to comply with its regulatory obligations. 

Furthermore, CSPs which operate client accounts must also comply with regulatory requirements governing payments into, and the segregation and withdrawals of, client money. CSPs are also subject to client reporting and record keeping requirements with regards to the holding of client funds. Such provisions have been introduced to safeguard the risk of the misuse or misappropriation of funds, as well as fraud.

Commentary

The introduction of specific standards and obligations on CSPs in the ADGM, which follow international best practice and intend to give rise to a robust framework for the operation of SPVs and foundations in the ADGM is a welcomed development. The new legal framework aims to address the challenges and mitigate any risks that may be posed to the ADGM as a result of the global demand for ADGM-based SPVs, which has brought with it an increase in the establishment of entities in the ADGM that do not have a direct connection to the ADGM or to the UAE. By virtue of the introduction of the new regulations, the establishment of SPVs or foundations in the ADGM without any anchoring in the UAE in effect will no longer be possible.

The new regulations will also provide the ADGM Registration Authority with relevant information on the extent of the recourse to nominee structures via the ADGM, which are widely used for making investments in the GCC. Although the investment climate in the ADGM will not immediately be impacted by the new regulations, further amendments to the legislation may be enacted in the future depending on the ADGM’s longer term objectives. It remains to be seen to what extent the added layer of regulation, and the associated costs thereof, will dampen or enhance the appetite for SPVs or foundations in the ADGM.