What legal issues do you need to look out for when starting a business in Singapore? Confidentiality and non-disclosure, legal structure, financing, employees and licences: this article will cover some of these aspects.
Confidentiality and Non-DIsclosure
Being a prospective founder of a startup and business owner, I know that the good business idea is a treasured possession. It’s important to protect that from potential competitors; protect the first-mover advantage. Yet, at the nascent stage, you would need to share the idea with different people: potential partners, potential investors, potential employees, potential users, market surveys and focus groups etc.
It’s therefore critical to ensure that confidentiality obligations are attached to your communication of the business idea. Expressly state before you communicate your business idea or plan that what you are about to share is confidential. If possible, ensure that this notice is in writing. This could be as simple as a text message or an email. When conducting a market survey or focus group, be sure to begin with a notice about confidentiality and to allow respondents an opportunity to decline participation if they don’t accept such terms. A non-disclosure agreement (NDA) or confidentiality agreement may be executed between you and the person you are sharing data or information with. For a free sample of a non-disclosure agreement or NDA, please write to me at ron[at]ronaldjjwong.com.
I have met several entrepreneurs who register their businesses as the simplest option, sole proprietorships, simply because they don’t understand what the other options are. That’s unfortunate because after they understand what the other options are, they spend money changing the legal structures of their businesses. Different legal structures are appropriate for different scenarios and considerations.
Click here for a table setting out the possible options of legal structures and significant factors or considerations relating to each.
It’s important to note that there are different considerations for each business, for which different legal structures may be more suitable than others.
If you have sufficient capital to invest in your new business, then this won’t be an issue. Nevertheless, if your business grows, you will at some point require more capital and thus may have to turn to external sources of funds to finance your business. Different legal issues arise in the different forms of financing.
Generally, financing may be broadly categorised into 2 types:
- equity financing: the financier gets a stake in the business, e.g. shares; and
- debt financing: the financier loans money to the business for interest and security.
For equity financing, you may turn to angel investors, venture capitalists, private equity funds, etc. It’s important to negotiate the terms of their investment and involvement before committing to accepting any such funding. Some such investors may demand taking a significant interest in the business. For some investors, they are able to bring their expertise, mentorship, networks and other value to the business other than financing.
For non-company entities, equity financing may mean giving the investor not only an interest in the profits of the business, but also a management role. For instance, an investor may want to be joined as a partner (converting a sole proprietorship into a partnership) in a partnership.
For companies, there are two main types of equity financing:
1. private limited companies: private share arrangements; and
2. public companies: public offering of securities (Initial Public Offering [IPO]) by listing on a securities exchange, e.g. SGX mainboard or SGX Catalist.
Private Share Arrangements
Under private share arrangements, there may be two scenarios. First, the company allots new shares to the investor. The investor’s funds are injected into the company as capital. Second, the existing shareholder sells shares to the investor. The investor’s funds are not necessarily injected into the company as capital. In either scenarios, several legal issues would arise and which would have to be addressed by properly drafted binding legal documents.
For instance, if new shares are allotted to the investor, a Subscription Agreement and also a Shareholders’ Agreement should be drawn up to govern the rights and obligations as between the shareholders. The Subscription Agreement may include warranties (in favour of the investor) on for example:
(a) the financial position of company, e.g. its balance sheet and profit margin;
(b) whether the company has complied with regulatory requirements;
(c) title to, and condition of, the company’s key assets (e.g. intellectual property);
(d) trading and contractual matters, e.g. the validity of key contracts;
(e) employment matters, e.g. whether there are any employment disputes or the commitment of key employees or personnel of the company;
(f) tax compliance.
The Shareholders’ Agreement should specify things like whether the founder or original owner of the business should enjoy a right to anti-dilution of shares, or an entrenchment of directorship. The investor may also want to have a right to representation on the company’s Board of Directors. Other possible terms include: regular provision of company information to shareholders; right to appoint Board members; dividend policy; non-competition clauses; restriction or pre-emption rights on the transfer of shares; deadlock in decision-making by Board members or shareholders. Further or in the alternative, the company’s constitutional documents, e.g. the Articles of Association, may have to be amended accordingly.
If the existing shareholder sells shares to the investors, a Sale and Purchase Agreement has to be executed between shareholder and investor; share certificates have to be cancelled for new ones to be issued and share transfer forms have to be executed and lodged.
Public Offering of Shares: Initial Public Offering (IPO)
Under public offering of securities, the company’s shares would have to be listed on the stock exchange. The Securities and Futures Act and the Securities and Futures (Offers of Investments) (Shares and Debentures) Regulations (the “SFR”) regulate the offering of shares in Singapore.
Where the shares offered are intended to be listed on the Singapore Exchange (Securities Trading) (“SGX-ST”), the listing criteria and continuing listing requirements provided in the Listing Manual of the SGX-ST (the “Listing Manual”) apply. The SGX-ST is also the regulator of companies who apply to list their shares on the secondary Catalist Board. There are of course certain requirements for listing on the SGX Main Board.
There is also a profitability and market capitalisation test. Thus, an issuer must satisfy one of the following requirements:—
(a) Minimum consolidated pre-tax profit (based on full year consolidated audited accounts) of at least S$30 million for the latest financial year and has an operating track record of at least three years.
(b) Profitable in the latest financial year (pre-tax profit based on the latest full year consolidated audited accounts), has an operating track record of at least three years and has a market capitalisation of not less than S$150 million based on the issue price and post-invitation issued share capital.
(c) Operating revenue (actual or pro forma) in the latest completed financial year and a market capitalisation of not less than S$300 million based on the issue price and post-invitation issued share capital. Real Estate Investment Trusts and Business Trusts who have met the S$300 million market capitalisation test but do not have historical financial information may apply under this rule if they are able to demonstrate that they will generate operating revenue immediately upon listing.
In terms of financial position and liability,
(a) The group must be in a healthy financial position, having regard to whether the Group has a positive cash flow from operating activities.
(b) Prior to listing, all debts owing to the group by its directors, substantial shareholders, and companies controlled by the directors and substantial shareholders must be settled. For the purposes of this paragraph (b), reference to debt includes third party indebtedness (including contingent liabilities for guarantees and indemnities) incurred by the group for the benefit of the directors, substantial shareholders and companies controlled by the directors and substantial shareholders. This rule does not apply to debts owing by the subsidiaries and associated companies of the issuer to the group.
(c) While the surplus arising from revaluation of plant and equipment can be shown in the books of the issuer, such surplus should not be capitalised or used for calculating its net tangible assets per share.
If a company does not wish to be listed on the Main Board, or does not meet the criteria for listing on the Main Board may seek a listing on Catalist, which has more flexible criteria. The key requirement is that the company must be sponsored by an approved sponsor of Catalist. Catalist companies are listed based on the sponsor’s assessment that they are suitable. The SGX-ST does not set extensive minimum quantitative entry criteria, but sponsors will use their own deal selection criteria. Typically, the listing applicant must be able to show that it is engaged in a business which is expected to be viable and profitable, with prospects for future growth and expansion. It will normally be expected to show that it requires funds to finance a project or the development of a new product, which have been fully researched and costed. A sponsor is typically an investment bank or other licensed financial institution.
You will of course need talent and manpower to get your business going. I think it’s important for the terms of employment contracts to deal with issues such as:
(a) non-compete and non-solicitation clauses, also known as restrictive covenants. These are prima facie unenforceable under the law unless they’re reasonable in scope and extent. Hence the need for legal advice on how to draft a clause which can withstand the scrutiny of the court should a dispute arise;
(b) confidentiality and intellectual property over information and data obtained / produced in the course of employment;
(c) employee stock or share options. The company should set aside a certain number of shares as comprising the employee stock pool. There is typically a lock-in period for the employees before they are eligible for these option stocks. Once the employees are granted the company’s shares, there may be another lock-in period before they may sell the company’s shares. This incentivises retention of talent.
Also, you may need foreign talent or manpower. In this regard, please see this article on the different immigration and work passes for foreign employees.
Certain types of businesses require special licences issued by different government agencies. Here is a list of some of such licences.
- Hotels: Hotel-Keeper’s Licence from the Hotels Licensing Board
- Spas or similar businesses: Massage Establishment Licence
- Employment Agency: Employment Agency Licence from Ministry of Manpower (MOM)
- Publishing: Newspaper Permit, Printing Press Licence, Online Publishing Licence
- Supermarkets: Supermarket Licence from the National Environment Agency (NEA) pursuant to the Environmental Public Health Act; Tobacco Retail Licence from the Health Science Authority (HSA)
- F&B: food shop licence, mobile food wagon licence or pet cafe licence from the National Environment Agency (NEA); Liquor Licence from the Liquor Licensing Board; Halal Establishment Licence from MUIS (Islamic Religious Council of Singapore)
- Import/Export of Food: application for Registration Number with the Food Control Division of AVA (Agri-Food & Veterinary Authority of Singapore); Central Registration Number, a general import / export licence from Singapore Customs
- Real Estate Agency: Estate Agent Licence from the Council of Estate Agents (CEA)
- Cleaning: Cleaning Business Licence from the National Environment Agency (NEA)
- Waste Management: General Waste Collector Licence
- Travel Agency: Travel Agency Licence from the Singapore Tourism Board
- Financial Services: Capital Markets Services Licence or the Financial Advisers’ Licence from the Monetary Authority of Singapore (MAS) pursuant to the Securities and Futures Act and Financial Advisers Act; various other codes e.g. Code on Collective Investment Schemes
- Telecommunications: Telecommunications Dealer’s Licence (Class or Individual)
- Pharmacy: Certificate Of Registration of a Pharmacy from Health Sciences Authority (HSA)
- Medical: Private Hospitals and Medical Clinics Act; Medical Clinic Licence from Ministry of Health (MOH); Licence to Keep or Possess an Irradiating Apparatus for Use Other than Sale from the National Environment Agency (NEA);L4 Licence to Keep or Possess Radioactive Materials for Use Other than Sale; L6 Licence to Use, Handle and Transport Radioactive Materials (Other than Sale); Hazardous Substances Permit (Permit To Buy, Store & Use Hazardous Substances); Certificate Of Registration of a Pharmacy from the Health Sciences Authority (HSA); Medical Advertisements and Sales Promotion Permit
- Education: Registration with Ministry of Education; Registration with Council for Private Education; Childcare centre licence
Other miscellaneous licences:
- Non-Residential TV Licence; General Radio Communication Licence
- Localized Private Network Licence
- Localized Radio Communication Licence
- Wide Area Private Network Licence
- Licence to Discharge Trade Effluents
- Advertisement Licence
- Petroleum / Flammable Materials Storage Licence
- Swimming Pool Licence
- Money Changer’s Licence
- Remittance Licence
- Moneylender’s Licence
Goods and Services Tax (GST)
If your business has an annual revenue of SGD 1 million or more, you must be registered with IRAS (Inland Revenue Authority of Singapore) to charge Goods and Services Tax (GST). GST is a tax on the consumption of goods and services; the tax is paid when money is spent on goods or services, including imports. If your business has an annual revenue of less than SGD 1 million, you may voluntarily, but would not be required to, register for GST. GST is presently fixed at 7% of the price of goods or services sold.
When you file with IRAS for your business’ GST return, the GST that you charge your customers is deducted from the GST that your business had to pay for its supplies of goods or services. The difference in those two amounts would be the amount of GST that your business will have to pay IRAS, or would be the amount that IRAS refunds to you.
Funding, Grants, Incentives
Every new business could do with funds for a leg-up to take off, expand, scale up, and evolve. The Singapore Government has various funding programmes, grants and incentives for businesses. Here are a few of them.
- SPRING Singapore’s Equity Investment programmes:
- Business Angel Scheme (BAS)
- SPRING Startup Enterprise Development Scheme (SPRING SEEDS)
- Sector Specific Accelerator (SSA) Programme
- SPRING Singapore’s grants for first-time entrepreneur
ACE Startups Grant
- For tech start-ups: SPRING Singapore’s Technology Enterprise Commercialisation Scheme (TECS)
- SPRING Singapore’ Capability Development Programme for SMEs to adopt technology innovation capabilities
- Early Stage Venture Fund (ESVF) by the National Research Foundation (NRF)
- Technology Incubation Scheme (TIS) by the National Research Foundation (NRF)
- IDM Jump-start and Mentor (i.JAM) by the Media Development Authority (MDA)
- Productivity and Innovation Credit (PIC)
- Workforce Development Authority (WDA) subsidies for skills upgrading and employee education