Methods for Venture Company Fundraising to Increase... Advanced Venture Finance Techniques to be Implemented on the 21st

[Image source=Yonhap News]

The 'Advanced Venture Finance Techniques,' which institutionalize conditional equity conversion contracts and investment-contingent loans, will take effect from the 21st. A new foundation has been established to actively channel private investment funds into growth capital for startups and venture companies.

The Ministry of SMEs and Startups announced that the amendment to the Enforcement Decree of the Venture Investment Promotion Act, which serves as the basis for the advanced venture finance techniques, was approved at the Cabinet meeting on the 12th. The advanced venture finance techniques were first proposed in March 2021. The National Assembly's Industry, Trade, and SMEs Committee merged bills originally introduced by Representative Kang Hoon-sik of the Democratic Party and Representative Choi Hyung-doo of the People Power Party in March. The bill passed through the Legislation and Judiciary Committee and other processes, was approved by the National Assembly in May, and will be fully implemented starting on the 21st.

With this amendment, the institutionalization of investment-contingent loans, the establishment of investment purpose companies by venture funds, and conditional equity conversion contracts are expected to somewhat reduce the financial burden on ventures and startups. Investment-contingent loans are a system that allows early-stage startups to alleviate financial burdens before receiving follow-up investments by granting small amounts of new stock subscription rights to lending institutions such as banks and receiving low-interest loans. Next year, the Korea SMEs and Startups Agency plans to pilot a dedicated fund of 50 billion KRW for investment-contingent loans.

Previously, venture funds faced borrowing restrictions, but from now on, venture funds can establish investment purpose companies that can borrow from financial institutions. This provides a means to utilize large-scale investment funds, facilitating so-called 'big deals.' The Korea Technology Finance Corporation will support the activation of the system by operating an 'investment matching guarantee program' that guarantees financial institution borrowings of investment purpose companies.

Conditional equity conversion contracts are an investment system where investors first lend to early-stage companies whose valuation is difficult to determine and then acquire convertible bonds that can be converted into equity upon investment rounds when the company valuation is established. This is expected to make investment decisions in early startups easier and attract private investment funds. The Korea Venture Capital Association plans to prepare and distribute standard contracts to widely utilize conditional equity conversion contracts in venture investments.

In June, the Ministry of SMEs and Startups also amended the Venture Investment Act to rename venture capital companies as venture investment companies, abolish the obligation for new stock investment in M&A funds, and relax restrictions on listed stock investments, easing investment-related regulations.

Minister Lee Young of the Ministry of SMEs and Startups stated, “The introduction of advanced venture finance techniques will resolve growth capital difficulties for startups and serve as an opportunity to further advance the venture investment ecosystem. We plan to continue communicating with the industry and provide necessary support and institutional improvements to invigorate the venture investment market.”