"To Revitalize Venture Market M&A, CVC Regulations Must Be Relaxed"

[Asia Economy Reporter Eun-gyeol Lee] Corporate Venture Capital (CVC) is emerging as a measure to revitalize mergers and acquisitions in the venture market.

According to the National Assembly Legislative Research Office's report on "Issues and Improvement Measures for CVC Deregulation" on the 3rd, global companies such as Google, Microsoft, and Intel are strategically fostering CVCs to strengthen investments in high-growth-potential venture companies. CVCs are venture capital firms established as subsidiaries by large corporations. The business community and venture investment industry explain that CVCs contribute to the venture market by investing more strategically than general venture capital to promote investment expansion and mergers and acquisitions (M&A) of promising early-stage startups for the growth of the parent company.

However, in South Korea, participation of large corporations in the startup M&A market is restricted to prevent economic power concentration in large corporations. Although there are no regulations on the introduction of CVC itself, the government restricts the operation and investment of CVCs by general holding companies citing the principle of separation of banking and commerce under the Fair Trade Act. To prevent economic power concentration through low shareholding or infringement of minority shareholder rights in subsidiaries, general holding companies, not financial holding companies, must secure more than 40% of shares to make the venture company a subsidiary when investing.

The business community and venture investment industry are demanding deregulation, arguing that CVC regulations raise the investment threshold for venture companies and may hinder venture revitalization. In particular, the venture industry believes that as long as the large corporations' overexpansion and financial investments aimed at capital gains are properly regulated, the venture market will circulate positively through open innovation and M&A by large corporations via CVCs. A representative from the Korea Venture Capital Association said, "If the principle of separation of banking and commerce under the Fair Trade Act is gradually relaxed and improved, economic innovation can be promoted through technology partnerships and expanded M&A between large corporations and startups," adding, "We hope that market-friendly policies will be prepared so that CVCs can be activated in the future."

Considering the industry's continuous demands, the government is promoting a plan to allow CVCs on a limited basis. Park Young-sun, Minister of SMEs and Startups, stated that in the case of a wholly owned subsidiary established by a general holding company, forming a fund solely with its own capital does not violate the separation of banking and commerce principle, and that the requirements for introducing CVCs will be reflected in the amendment process of the Fair Trade Act. Previously, to improve CVC regulations, the government ministries jointly announced the "Improvement Plan for Venture Holding Company System to Revitalize M&A," but the venture holding company system had stringent requirements and was used in only about one case.

Meanwhile, the global CVC investment scale has shown continuous growth, increasing by about 38% from $10.6 billion (KRW 12.28 trillion) in 2013 to $53 billion (KRW 61.4 trillion) in 2018.

This content was produced with the assistance of AI translation services.