Reasons for Proposal
To allow startups to become unicorns and large enterprises, various forms of scale-up funds such as investment and financing are needed from the early to later days of startups. However, it is difficult to meet the various funding needs of enterprises with the current system.
This Act aims to prepare the basis for convertible notes to attract seed money for startups in their early days and venture debts for growing enterprises in their middle days and allow venture investment funds to establish investment companies to attract large-scale investments for growing enterprises in their later days.
In addition, to ensure soundness for the asset management of private investment funds and protect investors, this Act aims to prevent anyone not qualified as an executive member of a private investment fund such as those who have not reinstated their rights after declaring bankruptcy or those whose sentence is not yet served after being sentenced to fines or more severe punishment for violating applicable financial laws from becoming such an executive member, disclose such facts concerning any executive member who manages a certain amount of capital contributions, reinforce management and supervision in the current system, and supplement shortcomings therein.
Furthermore, while the current Act defines investment obligations and activity restrictions for early startups under accelerators, if accelerators have cross-ownership in small and medium startup investment companies, investment obligations and activity restrictions apply together, which may excessively restrict their investment activities. Hence, this Act aims to improve how investment obligations apply to accelerators and change from applying activity restrictions to both accelerators and small and medium startup investment companies to applying the restrictions only to companies. As the current Act defines “small and medium startup investment companies” as “companies which do business mainly in venture investment,” this Act aims to change their name to “venture investment companies” to be more in line with their definition. It also aims to ease registration requirements to allow limited companies and limited liability companies under the Commercial Act to establish small and medium startup investment companies.
Furthermore, this Act aims to determine investment obligations differently for any venture investment fund which acquires or merges a small and medium company or startup or purchases assets including equity owned by another venture investment fund by considering their uniqueness and impose administrative disposition for any venture investment fund which does not comply with such investment obligations.
Details
A. Change the definition of a simple agreement for future equity (Article 2 subparagraph 1 item d)
Change the definition of a simple agreement for future equity from “acquiring equity through a simple agreement for future equity” to “entering into a simple agreement for future equity.”
B. Newly insert convertible note in the definition of investment (Article 2 subparagraph 1 item e newly inserted)
Newly insert convertible note which meets the requirements set by the Notice of the Ministry of SMEs and Startups as an agreement that requires the issuance of unsecured convertible bonds.
C. Newly insert venture debts (Article 2 subparagraph 12 and Chapter 8 Article 70-2 newly inserted)
Newly insert the basis for venture debts, which allow obtaining the rights to a small amount of equity in exchange for providing debts with low interest rates from lenders to entities which have received or will receive venture investment.
D. Change the name of small and medium startup investment companies (Articles 2, 37 through 51, 63, 67, 72, 74 and 75, 77, and 80)
Change the name to venture investment company since the current Act defines “small and medium startup investment companies” as “companies which do business mainly in venture investment.”
E. Reinforce qualification requirements for executive members of a private investment fund (Article 12 paragraph 3)
Ban minors, wards/limited guardians, those who have not reinstated their rights after declaring bankruptcy, and those who are sentenced to a fine or greater punishment for violating applicable financial laws and for whom five years have yet to elapse after the execution of such sentence is complete or exemption from the execution of such sentence is made definite from becoming an executive member.
F. Update a reason to dissolve a private investment fund (Article 18)
Include a situation where all executive members cannot continue to work due to registration/authorization cancellation under other applicable laws as a reason for dissolution.
G. Disclose a private investment fund (Article 21-2 newly inserted and Articles 30 and 80)
Disclose information about the statement or management of the total amount of capital contributions managed by executive members above a certain amount prescribed by Presidential Decree and impose administrative fines for not complying with the foregoing or falsely disclosing it.
H. Strengthen administrative disposition against an executive member of a private investment fund (Article 22)
Issue a business suspension order, corrective order, or warning against an executive member for violating applicable laws within the past 6 months.
I. Define investment obligations for accelerators with cross-ownership in small and medium startup investment companies (Articles 26 and 51)
Apply no direct investment obligations to small and medium startup investment companies, new tech business companies, and limited (liability) companies where accelerators have cross-ownership while newly inserting obligations to establish a venture investment fund for startups.
