Venture Ecosystem Dramatically Shifts to 'Private Sector-Centered' Model

Promulgation of the Act on Promotion of Venture Investment and the Amendment to the Special Measures for the Fostering of Venture Businesses Act

[Asia Economy Reporter Kim Cheol-hyun] The two major laws supporting the venture ecosystem, the "Act on the Promotion of Venture Investment" and the amendment to the "Special Measures Act on the Fostering of Venture Businesses," have been promulgated. It is expected that South Korea's venture ecosystem will shift significantly to a private-sector-centered model.

The Ministry of SMEs and Startups (Minister Park Young-sun) announced on the 11th that the two major laws supporting the venture ecosystem and driving innovation?the Act on the Promotion of Venture Investment (hereinafter referred to as the Venture Investment Act) and the amendment to the Special Measures Act on the Fostering of Venture Businesses (hereinafter referred to as the Venture Business Act)?have been promulgated.

The promulgated Venture Investment Act is the first legislative bill proposed since the launch of the Ministry of SMEs and Startups. It consolidates the investment systems scattered across the "Small and Medium Enterprise Startup Support Act" and the "Venture Business Act" into a standalone law. The bill reflects the intention to recognize and nurture venture capital and angel investors as key players in the venture ecosystem. By introducing new investment systems and prohibiting fund managers from demanding priority loss coverage, this law serves as a significant opportunity for domestic venture investment levels to leap forward in line with global standards.

Key provisions of the law include the first-ever regulation of conditional equity purchase agreements under domestic law. This contract links the calculation of investment share ratios to the company valuation assessed by subsequent investors. It is widely used in Silicon Valley, USA, for investing in early-stage startups where company valuation is difficult. For startup planners (accelerators) who discover promising early-stage companies and provide initial funding and nurturing, the law allows the formation of venture investment associations if they meet certain qualifications such as professional personnel and capital. This enables qualified startup planners to raise large-scale funds, thereby expanding funding supply to early-stage startups.

Additionally, the investment obligation ratio (40% or more) for founders and venture companies, which was previously applied to individual venture funds, will now be applied to the total assets managed by specific venture capitals such as small and medium enterprise startup investment companies. This change allows venture funds to specialize and scale up as early-stage funds, follow-up growth funds, etc. Furthermore, the professional angel investor verification system, which was operated by the Ministry of SMEs and Startups' public notice, has been reorganized into a professional individual investor system and elevated to legislation under the "Venture Investment Act." To establish an advanced venture investment system, the law fundamentally prohibits the mistaken practice of fund managers prioritizing loss coverage of venture funds. This law will be fully enforced six months after the establishment of subordinate statutes.

The amendment to the "Venture Business Act" aims to create a vibrant venture ecosystem led by the private sector by completely overhauling the venture business verification system from a government-led approach to one where the private sector evaluates and verifies venture companies. It also expands the scope of the venture startup leave system to include researchers at local government-funded research institutes. First, public institutions such as the Korea Technology Finance Corporation (Kibo) and the Small and Medium Business Corporation (SBC), which have been evaluating companies' technological and business feasibility and determining venture company status based on guarantee and loan performance, will be boldly abolished. Instead, a privately composed "Venture Business Verification Committee" will focus on reviewing and verifying the innovation and growth potential of venture companies, completely reforming the venture business verification system.

Moreover, researchers at local government-funded research institutes in the science and technology field and employees of public institutions will also be eligible for venture startup leave, enabling talent in the public sector to more easily challenge venture startups. The provisions related to the venture business verification system in the amendment will be implemented one year after promulgation, once the private venture business verification evaluation system is established, and the expansion of the venture startup leave system will be enforced three months after promulgation.

The venture industry expects significant effects from the promulgation of these two major venture laws at a time when venture investment surpassed 4.3 trillion won last year for the first time, breaking the 4 trillion won mark and setting a record high, and angel investment also reached an all-time high, marking the full realization of the second venture boom. The venture investment and angel investment performance last year is analyzed as the result of combined efforts by the government and private sector, including the large supplementary budget for the Korea Fund of Funds in 2017, the expansion of personal investment income deductions in 2018, and the inflow of private investment driven by technological advances in the Fourth Industrial Revolution fields such as healthcare and AI. The enactment of the Venture Investment Act is expected to stimulate voluntary private investment once again. Additionally, since the sales scale of venture companies ranks second in South Korea's business world, the amendment to the Venture Business Act is expected to further strengthen the inflow of innovative and growth-oriented venture companies verified by the private sector.

An official from the Ministry of SMEs and Startups stated, "With the promulgation of these two fundamental laws forming the basis of the ecosystem, a foundation is laid for the second venture boom to spread further. It will also contribute to transforming South Korea's venture ecosystem into a private-sector-centered model like Silicon Valley and advancing it to a global standard level." The Ministry added, "We plan to gather opinions from all sectors related to ventures during the process of preparing subordinate statutes to ensure that the effects of institutional improvements are felt, and we will make every effort to ensure there are no disruptions in the implementation of the laws."

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