Many SG startup founders always aspire to grow their startup into a Unicorn. This is an admirable ambition and given that our partner has experience advising 2 of them in Singapore, we would like to share some of the key legal pitfalls that such unicorn startups (SG Startup Company) need to avoid to scale successfully.
Legal Pitfall #1 – Non-Compliance with the SFA in Singapore when carrying out fund raising activities for their companies
Some startups are born with rich founders who can fund the initial expenses (Scenario 1).
Other startups are funded through fools, friends and family which will each invest small amounts of money in the company (Scenario 2). When a Scenario 2 company undergoes fund raising, did you know that the startup and its directors need to be aware of the requirements for a prospectus under the Securities and Futures Act (Cap. 289) (SFA) in Singapore?
Case Study #1
On 7th Oct 2019, the Business Times reported that the Singapore director of Brandz Group Pte Ltd was jailed for 15 months for raising funds from investors in the form of a convertible loan without issuing a prospectus. When speaking to your fund raising lawyer, do check with them whether they are familiar with the requirements for compliance with the SFA.
Case Study #2
There was a startup client raised funds from many diversified investors and many of them were not accredited investors. In this case, the law firm had to advise them on their compliance obligations under the SFA and they manage to rectify some previous breaches.
Legal Pitfall #2 – Failure to comply with the Employment Regulations in Singapore
Many startup founders are not familiar with the requirements for obtaining of employment passes for their employees and CPF payment obligations and as a result will be given fines and potential jail terms for breaching their legal obligations.
An example in the news is Daniel Ong and Jamie Teo who were charged in the Twelve Cupcakes wages case who underpaid their employees.
Legal Pitfall #3 – Failure to comply with Companies Act obligations
Many business owners love to spend money on growth plans but fail to appoint a proper company secretary and auditor to look after their company’s filing obligations with ACRA.
Case Study #3
It was reported on 22 Feb 2019 that Tan Hang Song a company director was hit with a record fine for failing to hold annual general meetings and not filing the annual returns of 9 companies and he faced 54 charges. He was also disqualified from acting as a director of companies for 5 years.
The solution to such compliance breaches is to appoint a proper law firm and company secretary to comply with the necessary Companies Act provisions/regulations.
Legal Pitfall #4 – Failure to get legal advice when close to Insolvency
Under the Insolvency Restructuring and Dissolution Act 2018 (IRDA), directors cannot carry out “wrongful trading”. A company is deemed to “trade wrongfully” if it incurs debts or other liabilities, when insolvent (or becomes insolvent as a result of incurring such debts or other liabilities), without reasonable prospect of meeting them in full.
The courts are empowered to declare that any person who was a knowing party to a company’s wrongful trading be personally liable for its debts or liabilities if found guilty without the need to establish criminal liability. The previous regime was viewed as unsatisfactory as criminal liability had to be found as a prerequisite before the making of an application to impose civil liability against the officer of the company.
Case Study #4
Under the old regime (before the IRDA), on 30 July 2020, it was reported in the Straits Times that the former general manager of Genneva, a gold investment company which owed its customers gold bars worth almost $45 million in total, was sentenced to 56 months’ jail. Had the general manager taken legal advice and carried out pre-emptive insolvent liquidation of his own firm, he may not have to go to jail for this.
Legal Pitfall #5 – Intellectual Property
Most tech companies have code as their intellectual property so such companies should design their business model to protect their intellectual property.
Case Study #5
A startup company was running an AI software. It met a larger potential client who wanted them to house their software on their server. The startup company decided correctly that had they done so, the larger company could potentially reverse engineer their code so instead decided to use a secure application programming interface (API) to interface with the larger company instead and close the deal. For such a case, a good tech lawyer would be able to advise the startup on the business model that can work but yet protect their intellectual property (and thus the valuation of the startup).
In conclusion, most companies face legal pitfalls as they expand and grow. A good corporate lawyer with an appreciation of such legal issues would be able to advise the startup company properly if such commercial lawyer is engaged early in the transaction.
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