DIFC is one of the world’s top eight onshore financial centers and offers a secure and efficient platform for businesses and financial institutions to reach into and out of the emerging markets of the region. The quality and independence of DIFC’s regulator, the prevailing common law framework, excellent infrastructure and tax efficiencies make it the perfect base to take advantage of the rapidly growing demand for financial and business services in the MENASA region.
DIFC fills the time-zone gap for a global financial centre between the leading financial centres of London and New York in the West and Hong Kong and Tokyo in the East.
What is crowdfunding?
The past few years has seen disruptive innovation in financial technology and the financial services sector is changing access to finance in more ways than one. Crowdfunding, as the name suggests, involves sourcing finance from the ‘crowd’, or a large pool of individual investors (mostly retail), as opposed to obtaining finance from a bank or other financial institutions.
At the core of the crowdfunding business is a platform, based on innovative technology, that can be a combination of a website and an app. This platform offers an online marketplace for seekers of finance, and sources of finance (the crowd). Consequently, the DIFC licenses three main types of regulated crowdfunding businesses:
- Investment-based crowdfunding - where businesses offer equity in return for finance;
- Loan-based crowdfunding - where issuers offer an interest on monies borrowed under a loan agreement with lenders on the platform; and
- Property-based crowdfunding - where the platform lists properties in which investors can take fractional ownership.
The DFSA currently does not regulate charity-based crowdfunding platforms, and hence there is no such license available at the DIFC.
DIFC Loan Crowdfunding License
The DFSA has specific requirements for Loan Crowdfunding licenses. Only corporate borrowers can be listed on these platforms; individual borrowers are not allowed.
DIFC Loan Crowdfunding Platforms can cater to Retail Clients, with certain additional requirements to ensure retail client protection. For instance, retail investors will only be allowed to invest up to US$ 50,000 in a single calendar year, and US$ 5,000 to a single borrower. Such restrictions do not apply to Professional Clients and Institutions who may use the platform.
Firms interested in carrying out loan crowdfunding activities from the DIFC are required to submit applications to the Dubai Financial Services Authority, or DFSA.
The DFSA, for the purposes of authorisation and supervision, categorises the crowdfunding business as a Category 4 entity, with the primary activity of “Operating a Crowdfunding Platform”. The base capital required for a DIFC Crowdfunding license is US$ 140,000.
Due to the nature of the license, and the recent issuance of crowdfunding regulations, the DFSA places slightly higher entry-level requirements and restrictions on the license itself. The applicant will have to demonstrate a working model of the platform at the time of authorisation, and a fully functional product before final licensing.
You can also setup in the DIFC with a DIFC Innovation License, which is for non-regulated technology startups. Such a license encourages startups to establish a presence in the region, employ staff and prepare for regulation by then applying to the DFSA for regulatory approvals. You cannot however, carry out regulated activities until a Financial Services Permission has been obtained.
The DFSA expects that the firm be adequately staffed depending on the scale, scope and nature of the product portfolio that is proposed to be offered from the DIFC. At a minimum, the DFSA would like to see the following appointments:
(i.) Board of Directors – a well-organized Board with robust governance policies. The Chair would have to be a non-executive Director.
(ii.) Senior Executive Officer (SEO) – Senior banking professional with over 10 years of experience, ordinarily resident in the UAE.
(iii.) Finance Officer (FO) – Senior and suitably-qualified finance professional. In case of a group, the FO can be from the parent company and does not have to be resident in the UAE. This role can also be outsourced.
(iv.) Risk Officer – This position is usually outsourced, and not mandatory.
(v.) Compliance Officer (CO) - Senior compliance professional with over 10 years of experience, ordinarily resident in the UAE.
(vi.) Money-Laundering Reporting Officer – Senior AML professional with over 10 years of experience, ordinarily resident in the UAE. This function can be combined with Compliance and one individual can carry out both responsibilities.
(vii.) The CO and MLRO roles can also be outsourced. Do get in touch with us to discuss this in detail.
(viii.) Internal Auditor - Senior and suitably qualified internal audit professional. Usually outsourced to a professional firm.
(ix.) External Auditor - Senior and suitably qualified external audit firm. The DFSA maintains a list of recognised auditors, and there are 15 such firms at present.
DIFC Capital requirements
The base capital requirement for a Category 4 Loan Crowdfunding Business license US$ 140,000. Actual capital required will depend on the nature, quantum of business and forecasted annual expenditure, as per the financial model of the proposed firm.
Actually, there are three components of capital - base capital, risk-based capital and expense-based capital. The higher of the three is set to be the capital requirement. These figures are calculated using the financial models that we make for the Regulatory Business Planduring the application process, and so are mostly unique to the company that applies for the license.
The figures given below are for base capital only, and actual capital may vary depending on the business model and the associated expenses and risks.
In general, for Crowdfunding Licenses, since they hold Client Money - 18/52 of the projected annual expenses of the firm.
Calculation of capital is a detailed process and involves many factors. We recommend that you contact us for more details on the application process and capital calculations.
Can DIFC firms service clients outside the centre, and in the greater UAE?
Yes, they can. Sheikh Mohammed bin Rashid Al Maktoum issued Law No. (5) of 2021 relating to the DIFC, which brought further clarity to the rules governing the promotion and supply of services and products for firms registered in the centre.
The revised law confirms that DIFC-registered entities can supply services and products outside the DIFC, as long as they are primarily provided out of the firm’s premises in the DIFC area. Marketing and promotional activities are also allowed outside the centre.
There may be additional rules to follow, for instance, when actively marketing funds from the DIFC. A passporting regime exists in this case, where the fund manager can register for a passport for the fund to be marketed in the UAE and the ADGM. Do get in touch for more information on this.
The DIFC Application Process
The DIFC application process commences with formal introductions to the DIFC and the DFSA.
Following the introductory call, a detailed Regulatory Business Plan (RBP) is prepared, along with financial projections, for a detailed review by the regulator.
The comments of the regulator are incorporated into the RBP, and a comprehensive application is compiled, comprising policies, processes and other related documentation. The KYC and associated forms of all key individuals are also prepared for submissions.
The formal application is then sent across to the DFSA, who reviews the pack over a period of 15-20 business days, and then accepts it once the KYC checks are completed and application fees are paid. The detailed review process then commences, and this can take anywhere between 90 and 120 days to complete.
A critical part of this process is the detailed demo of the loan crowdfunding platform during which the applicant would be expected to demonstrate the crowdfunding solution for review. This is a live demo and takes around an hour, following which the DFSA sends in their comments and asks for additional clarifications.
The regulator maintains communication with the applicant at all times during the review, reverting with an initial review 2 weeks into the application, and then follow-up reviews thereafter. The DFSA also meets with the SEO, FO and CO/MLRO designates, and conducts a detailed interview with them.
An in-principle approval is issued in case the application is successful. The applicant then proceeds to satisfy the in-principle conditions, and this involves the setting up of a legal structure, opening a bank account, and depositing the share capital in the account. Other tasks include finalization of auditors and obtaining professional indemnity insurance for the firm.
Once done, a final submission is made to the DFSA, following which the regulator issues the Financial Service Permissions and the process is then complete. The firm is now open for business.
Setting up a DIFC Regulated Firm to operate a loan crowdfunding platform involves the following interactions:
Dubai Financial Services Authority (DFSA)
The DFSA is responsible for reviewing and approving all applications for financial services.
Generally, there are two components of DFSA fees. One – an application processing fee, and the other, an annual licensing fee.
(i.) Application fee: US$ 5,000.
(ii.) Retail Endorsement fee: US$ 20,000.
(iii.) License fee: US$ 10,000 per annum.
Registrar of Companies (DIFC ROC)
The ROC helps to set up the legal structure of the DIFC Regulated Firm. Shareholders can be individual, or corporate. There are many options available, such as ‘Private Company Limited by Shares’ and ‘Limited Liability Partnerships’. In case of Private Company Limited by Shares, the costs for setting up include:
(i.) Application for reserving a name (2 working days): US$ 800.
(ii.) Application for Incorporation of a Private Company Limited by Shares (5 working days): US$ 8,000.
(iii.) Commercial License on Incorporation (5 working days): US$ 12,000 (annual fee).
The data protection notification is part of the process of registering a new entity in the DIFC. The costs involved are as follows:
(i.) Registration - US$ 1,250.
(ii.) Annual renewal – US$ 500.
Every entity registered in the DIFC is required to lease a physical office. You can choose from the Gate and surrounding buildings, or other buildings within the DIFC, such as Emirates Financial Towers, Central Park, Park Avenue, Burj Daman and Currency House.
Prices vary, depending on the space availed and the building. Here is an indication of the prevailing rates:
(i.) DIFC Fintech business centre – from US$ 19,000.
(ii.) DIFC Business Centre – from a two-desk office at US$ 35,000.
(iii.) DIFC Fitted Offices – from US$ 55 per square foot.
(iv.) Other buildings – from US$ 32,000 per annum.
(i.) Establishment Card Application – US$ 630.
(ii.) PSA Deposit – US$ 682.
(iii.) Visas (per visa) – from US$ 1,500.
(iv.) PSA Deposit (per visa) – US$ 682.
(v.) Visas are issued based on office space availed, and are usually calculated at 80 sq.ft. per visa.
Why setup a financial services firm in the DIFC?
The quality and independence of DIFC’s regulator, the prevailing common law framework, excellent infrastructure and tax efficiencies make it the perfect base to take advantage of the rapidly growing demand for financial and business services in the Middle East, Africa and South Asia region, which comprises 73 countries with an approximate population of 2.9 billion and a nominal GDP of US$ 9 trillion.
DIFC fills the time-zone gap for a global financial centre between the leading financial centres of London and New York in the West and Hong Kong and Tokyo in the East.
DIFC is home to the region’s largest financial ecosystem of more than 29,900 professionals working across over 4,200 active registered companies.
This makes up the largest and most diverse pool of industry talent in the region.
Here are some specific advantages of establishing in the Dubai International Financial Centre.
LEGAL AND REGULATORY FRAMEWORK
- Legal framework supports cross-border activities.
- 100% foreign ownership permitted.
- No restriction on foreign talent or employees.
- No restrictions on capital repatriation.
- Zero tax for 50 years on profits, capital or assets from 2004.
- Zero tax on employee income.
- Highly regarded, independent regulator.
- Independent, English-speaking, common law judicial system.
- Distinct from the UAE legal system.
- Risk-based regulatory approach.
- Central to regional deal making.
- High concentration of international firms, investment funds, wealth management firms, banks, and financial institutions.
- World-class regional and international law and auditing firms, and other professional services.
- The largest fund domicile in the region.
- Management offices, holding companies and family offices are located closer to the assets they own or manage.
- The Middle East, Africa and South Asia (MEASA) is increasingly the centre of gravity for the global economy.
- Dubai plays a central role in the growing South-South trade, principally between Asia and Africa.
- Well-positioned to harness the potential of emerging markets.
How does the DIFC operate?
The DIFC Authority oversees all non-regulated businesses in the DIFC. They act as the liaison between the regulator, the Leasing facilities and the Registrar of Companies. They also serve as facilitators, bringing in firms that wish to do business in the region.
The DIFC Courts handle all civil disputes. These are English Courts, and work independent of UAE law for all civil matters.
The DIFC Arbitration Centre deals with disputes that are to be settled under arbitration
The Dubai Financial Services Authority, or DFSA, regulates all authorised firms, Single Family Offices, DNFBPs and Authorised Individuals. It is the independent regulator of financial services conducted in or from the DIFC.
What is the role of the DFSA?
The DFSA is the independent regulator that authorises and supervises all financial service firms in the DIFC. It administers the various laws that form the legal framework, and has powers to enforce these Laws and the associated Rules that apply to all regulated participants within the centre.
In addition to regulating financial and ancillary services, the DFSA is responsible for supervising and enforcing anti-money laundering (AML) and counter-terrorist financing (CTF) requirements applicable in the DIFC.
In fulfilling its mandate as the sole independent financial services regulator for the DIFC, the DFSA performs a number of functions.
- Policy and Rulemaking.
- International Co-operation.
To summarise, the DFSA:
- has Power to enforce the Law and Rules that apply to all regulated participants within the DIFC;
- Strives to detect and prevent money laundering activities within the DIFC; and
- Works closely with the UAE Central Bank for the prevention of money laundering activities.
What is an Authorised Firm?
An Authorised Firm is an entity that has Financial Service Permissions from the DFSA to conduct financial services from the DIFC.
And what is an Authorised Individual?
They are Individuals who carry out defined Licensed Functions within an Authorised Firm. They are usually linked to an Authorised Firm’s management, and/or the provision of its Financial Services. They are required to meet Fit and Proper criteria and expected to continue to meet Fit and Proper critera throughout the period of being authorised by the DFSA.
The list of Authorised Individuals include the Senior Executive Officer, the Finance Officer, the Compliance officer, the Money laundering reporting officer and the risk officer. There may also be senior managers such as portfolio managers, investment managers and chief technology Officers, who are considered critical to the functioning of the Firm, and hence are authorised by the DFSA by undergoing a process of submission and vetting of their qualifications and experience.
We provide turnkey services for DIFC Loan Crowdfunding business license applications. From fintech consulting, to assistance in authorisations, to assistance in preparation of the legal documentation (through 10 Leaves Legability), 10 Leaves helps you navigate the DFSA Rulebook and submit an application that is comprehensive, complete and compliant.
Our services include assistance in:
- Reviewing the business model and advice on the applicable regulatory framework;
- Preparation of the Regulatory Business Plan and comprehensive financial projections;
- Preparation of all policies, processes and manuals required;
- Provision of Outsourced Compliance Officer, Outsourced Risk Officer and Outsourced Finance Officer services;
- Completion of the Introductory Training as required by the DFSA (through 10 Academy);
- Finalising the legal structure, including holding company setup and customisation of Memorandums;
- Provision of Secretarial Services; and
- Finalisation of leased space, bank account opening and obtaining Financial Services Permissions.
A lot of our Loan Crowdfunding clients are startups. In these cases, we also assist such teams with corporate and commercial documentation through our legal consultany - 10 Leaves Legability. We assist in the drafting of:
- Founder agreements.
- Shareholder agreements.
- Investor agreements.
- Share vesting/ESOP plans.
- Client/Supplier/Distributor agreements.
- Employment agreements.
We also provide services in Luxembourg, Saudi Arabia and Mauritius.
Get in touch today! to know more about DIFC Crowdfunding Business License.