Funding Success: The Rise Of Venture Capital Investment In The UAE
The pandemic has equally wrecked the progress of international investment markets, mainly impacting the start-ups. But, surprisingly enough, while the pandemic outbreak also hit the UAE’s start-up market, it has still managed to thrive the storm relatively well. As of recent reports, start-ups in the MENA region have attracted over $1.2bn in funding in H1, a 64% year-on-year growth. Among these, the UAE has secured the most significant transactions accounting for 26% of the total deals in the region, indicating a rise of venture capital investments in the country.
The UAE is well aware that SMEs are eager and curious to expand their business growth to other countries across the Middle East by tapping into the venture capital investment group. Therefore, to support these businesses and to enhance a nourishing business environment in the country, the UAE, over the years, has been making ongoing efforts to adjust the regulatory frameworks and any other relevant legislations or finance infrastructure to attract and increase venture capital in the country.
The presence of a robust legal and institutional framework to govern investment activity in any economy improves investor confidence, which creates momentum in equity capital flows and enhances the overall market attractiveness. It also helps in addressing investors’ concerns for protecting their rights and enforcement of contracts. In general, a robust legal environment strongly influences the size of a country’s capital markets and the ability of local companies to raise and receive external financing.
Besides these regulatory drivers, the rise of venture capital in the UAE is also influenced by technology becoming an exciting asset, i.e., digital assets. The UAE provides a secure environment for its adoption and use.
To encourage foreign VCs that are looking to fund companies operating inside the UAE, the government has eliminated any prior approval for transitions, as long as the VCs are invested outside a regulated sector like banking or telecommunications. In addition, the UAE government amended the federal companies law, which now allows foreign direct ownership of some limited liability companies. This is facilitated by removing the requirement of 51 percent of local sponsorship that existed before the amendments were made.
In addition to these, the UAE continues to support the formation of VC funds, be it onshore or offshore. Onshore VC funds can be processed after gaining the relevant license and complying with the Securities and Commodities Authority (SCA) regulations. Whereas for offshore VC funds, the UAE free zones present a range of choices for fund structure that are led through a rapid process underpinned by rules.
Dubai International Finance Center (DIFC) and the Abu Dhabi Global Market (ADGM) are also believed to be critical players contributing to the rising VC investments in the UAE. These two players have received international recognition for their efficient, proactive approaches and innovative techniques for attracting investments into and within the country. One of their moving initiatives is forming VC funds through the DIFC and the ADGM that offer tax incentive schemes, including a tax-free VC fund. Specifically, the DIFC has also taken off the pressure on the VC investors by removing the compulsion for internal audits and exempting the funds from maintaining a minimum capital requirement.
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