Government Initiatives
Venture Business
Special Assistance and Exceptions
Variation from Basic Corporate Law
Tax Benefits
Pre-Initial Public Offering Financing
Venture Capitalists
Legal Instruments
In 1997 the government implemented legislation to promote venture businesses, the most important of which is the Special Law for the Promotion of Venture Businesses. This law has been effective since October 1 1997 and will remain in force until December 31 2007. Its main purpose is to establish the fundamental principles for the development of venture businesses (eg, financial assistance, tax benefits, exceptions to general corporate laws, assistance to research and development and establishment of venture valleys).
In order to address other aspects of venture businesses, the government also implemented:
- the Law for the Assistance of Small and Medium-Sized Enterprises Start-up;
- the Law for the Financial Assistance to New Technology Enterprises;
- the Finance Business Specialized in Lending Law; and
- the Law on Limitation of Special Tax Treatment.
Based on this policy drive and other socio-economic factors, the trading system KOSDAQ (which was incorporated into the regulatory framework of securities through the 1997 amendment of the Securities Transaction Law) enjoyed great success during 1998, 1999 and early 2000. In 1999, for example, while the number of initial public offerings at the Korea Securities Exchange stood at only 16, 114 companies (comprising venture and non-venture businesses) went public through KOSDAQ. Further success was apparent with the significant addition of mutual funds under the newly enacted Mutual Funds Company Law.
During 1999 KOSDAQ-registered companies financed W6.4 billion through issuing new shares and selling corporate bonds over 306 times. In December 1999 daily trading figures for KOSDAQ were more than W2 trillion. Despite the fact that the KOSDAQ market has experienced a downturn during the latter half of 2000, the number of newly registered companies for 2000 stands at 140.
Under the Special Law for the Promotion of Venture Businesses there are four categories of venture business. One overriding element is that the businesses must fall within the definition of 'small and medium-sized enterprises' in the Small and Medium-Sized Enterprises Basic Law. This law provides specific limitations on the maximum number of permanent employees and the size of assets on a per industrial sector basis. The four categories of venture business are:
- venture capital;
- research and development;
- new technology commercialization; and
- miscellaneous.
Venture capital
A company is considered to be a venture capital business if (i) the amount of investment of certain qualifying venture capital accounts is at least 20% of the paid-in capital of the company or (ii) the stock subscription price is at least 10% of the paid-in capital. The investment can be made in stock, convertible bonds or warrants. The qualifying venture capital investments are made through:
- small and medium-sized investment companies and investment funds under the Law for the Assistance of Small and Medium-Sized Enterprises Start-up;
- new technology financiers and new technology investment funds under the Law for the Financial Assistance to New Technology Enterprises and the Finance Business Specialized in Lending Law;
- the Korea Venture Investment Fund; or
- the Dasan Venture Company.
Research and development
A company is considered to be a research and development venture business if the amount of research and development accounts for at least 5% of annual gross sales revenue.
New technology commercialization
If a company is engaged in commercializing patents, utility models, high technology which is licensed abroad (which all qualify for tax exemption), or other knowledge or technology supported by various statutes, the Venture Business Vitalization Committee may designate it as a new technology commercialization venture business.
Miscellaneous
If a company is engaged in commercializing less advanced technologies, the Agency for Technology and Standards, the SM Industry Promotion Corporation or Korea Technology Credit Guarantee will evaluate the relevant technology. Upon evaluation the company may be considered to be a miscellaneous venture business.
Special Assistance and Exceptions
Most public funds can invest up to 10% directly to venture businesses or indirectly through small and medium-sized enterprise investment funds, new technology investment funds or domestic venture investment funds.
In addition to these funds, the Dasan Venture Company is used to further facilitate investments in venture business. The Korea Technology Credit Guarantee Fund guarantees the debts of venture businesses prior to guaranteeing those from non-venture businesses.
Under the Foreign Investment Promotion Law, notification requirements for foreign equity investments concerning continuous economic relationships with a domestic legal entity may be satisfied by filing a notification to a foreign exchange bank. An investment in small and medium-sized enterprise investment fund or domestic venture investment fund qualifies as a foreign investment for continuous economic purposes, and so a simple notification suffices.
Furthermore, investment in a listed venture business is exempt from the restrictions on acquisition of securities listed on the Korea Securities Exchange under Article 203 of the Securities Transaction Law. Thus, foreigners may invest in listed venture business without being subject to any caps.
Variation from Basic Corporate Law
The minimum paid-in capital of a venture business is W20 million. The revised Commercial Code allows any joint stock company to adopt a stock option plan. Nonetheless, differences remain between the stock option for venture businesses and joint stock companies. For example, joint stock companies may grant stock options only to its officers and employees, although venture businesses may also grant stock option plans to outside researchers, legal counsel or accountants. The cap on these stock options is 50% of the outstanding shares. Any stock option plan must be reported to the Korea Securities Dealers Association and the Small and Medium-Sized Enterprises Administration.
The Law on Limitation of Special Tax Treatment provides for a number of tax benefits such as exemption of acquisition tax and registration tax or stamp duty, special deductibility of certain reserves, and investment tax credits relating to small and medium-sized enterprises and research and development in general. These tax benefits have been further expanded for venture businesses. Thus, for certain venture businesses the corporate income tax is reduced by one-half for the next five years. They are also free from acquisition tax and registration tax for the two years after incorporation and one-half of property tax and composite land tax are waived for the first five years of incorporation.
Pre-Initial Public Offering Financing
The Special Law for the Promotion of Venture Businesses provides for the possibility of special tax benefits on (i) an individual's direct investment to venture business or (ii) indirect investment made through other venture capitalist funds and 'angel investment partnerships'. According to the Law on Limitation of Special Tax Treatment, if an investment is made to a venture business of seven years or less by the end of 2000, the business shall be credited with up to 30% of its taxable income for the year during which the investment is made, or for one of two following taxable years. However, if the investment is recovered by way of transferring the stock or redemption within five years, the tax credit is recouped.
The Law for the Assistance of Small and Medium-Sized Enterprises Start-up provides support for small and medium-sized enterprise investment companies. In order to be recognized as such, a company must be a joint stock company with the paid-in capital of W10 billion with the purpose of investing in new enterprises of seven years or less. Once a small and medium-sized enterprise is duly registered with the relevant administrative body it can borrow public funds and issue bonds up to 10 times its paid-in capital and retained earnings. Investment in companies defined as 'big conglomerates' under the Anti-Monopoly and Fair Trade Law and/or investment in financial institutions are not permitted.
These investment companies can also organize a small and medium-sized enterprise investment fund as a partnership with other investors. Under these partnership agreements, the investment fund must have a general partner who bears unlimited liability, and limited partners.
Legal instruments for investment in venture businesses are classified in the Commercial Code as common stock, preferred stock and convertible bonds. Due to a dearth of legal authorities regarding the relationship between common and preferred shareholders or convertible bondholders, a clear picture has yet to emerge regarding the precise classification of the various instruments that may be used. Nonetheless, the various features of convertible preferred stock or bonds such as preference in dividend payment, liquidation preference, adjustment of conversion price and redemption have been adopted. It appears that separate agreements on lock-up, drag-along, tag-along or right of first refusal may also be made.
For further information on this topic please contact Young-Cheol Jeong at Woo, Yun, Kang, Jeong & Han by telephone (+822 528 5200) or by fax (+822 528 5228) or by e-mail ([email protected]).
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