[Bliss News][Contribution] Revisiting Public Offering Regulations for Startups Raising Funds through Venture Capital in Korea
2 Dec 2024
A paper titled "Revisiting Public Offering Regulations for Startups Raising Funds through Venture Capital in Korea" by Narae Lee, attorney at Bliss Law Office, has been published in the Journal of Korean Commercial Law Association (Vol. 43, No. 3, 2024).
This paper analyzes the appropriateness of applying public offering regulations when startups raise funds through venture capital funds (VC funds) and proposes legal measures to enhance investor protection. The key points are as follows:
Under the current legal framework, there is an ongoing debate on whether public offering regulations under the Capital Markets Act should apply when VC funds investing in startups have more than 49 limited partners who do not qualify as accredited investors.
In this paper, Attorney Lee proposes an approach that separates the formation process of VC funds from the fundraising process of startups. This approach ensures that public offering regulations are applied in accordance with the actual entity soliciting investment and the nature of the investment solicitation.
Currently, the Korean Financial Supervisory Service (FSS) does not recognize VC funds as legal entities. Instead, it considers them as contractual aggregates, interpreting the applicability of public offering regulations based on the number and characteristics of the VC fund’s limited partners. However, through this study, Attorney Lee argues that VC funds with blind fund characteristics should be assessed based on the private placement process at their formation stage, where general partners solicit investments from limited partners, who subsequently acquire partnership interests. A key factor to consider should be whether the formation of the VC fund complies with private placement regulations under the Capital Markets Act.
In the subsequent stage, when a startup secures funding from a VC fund that was formed through private placement, Attorney Lee suggests that VC funds should be recognized as separate legal entities and classified as accredited investors. Under this approach, the applicability of public offering regulations to the startup should not be determined by the number and characteristics of the VC fund’s limited partners but rather by the VC fund itself as an accredited investor.
Nonetheless, she emphasizes the need to strengthen VC fund-related regulations to protect general investors who may be exposed to startup investment risks through VC funds. She suggests that legal safeguards should be put in place, such as limiting eligible VC fund investors to professional investors or accredited individual investors under VC-related laws. Additionally, general partners of VC funds should be required to assess the suitability of investors based on their investment experience and expertise. They should also provide clear risk disclosures when soliciting investments and regularly update limited partners on the fund’s investments and operations until liquidation.
Through this study, Attorney Lee highlights the necessity for a more practical and precise legal interpretation of startup fundraising through VC funds. She anticipates that her research will contribute to discussions about revising the Capital Markets Act.
A paper titled "Revisiting Public Offering Regulations for Startups Raising Funds through Venture Capital in Korea" by Narae Lee, attorney at Bliss Law Office, has been published in the Journal of Korean Commercial Law Association (Vol. 43, No. 3, 2024).
This paper analyzes the appropriateness of applying public offering regulations when startups raise funds through venture capital funds (VC funds) and proposes legal measures to enhance investor protection. The key points are as follows:
Under the current legal framework, there is an ongoing debate on whether public offering regulations under the Capital Markets Act should apply when VC funds investing in startups have more than 49 limited partners who do not qualify as accredited investors.
In this paper, Attorney Lee proposes an approach that separates the formation process of VC funds from the fundraising process of startups. This approach ensures that public offering regulations are applied in accordance with the actual entity soliciting investment and the nature of the investment solicitation.
Currently, the Korean Financial Supervisory Service (FSS) does not recognize VC funds as legal entities. Instead, it considers them as contractual aggregates, interpreting the applicability of public offering regulations based on the number and characteristics of the VC fund’s limited partners. However, through this study, Attorney Lee argues that VC funds with blind fund characteristics should be assessed based on the private placement process at their formation stage, where general partners solicit investments from limited partners, who subsequently acquire partnership interests. A key factor to consider should be whether the formation of the VC fund complies with private placement regulations under the Capital Markets Act.
In the subsequent stage, when a startup secures funding from a VC fund that was formed through private placement, Attorney Lee suggests that VC funds should be recognized as separate legal entities and classified as accredited investors. Under this approach, the applicability of public offering regulations to the startup should not be determined by the number and characteristics of the VC fund’s limited partners but rather by the VC fund itself as an accredited investor.
Nonetheless, she emphasizes the need to strengthen VC fund-related regulations to protect general investors who may be exposed to startup investment risks through VC funds. She suggests that legal safeguards should be put in place, such as limiting eligible VC fund investors to professional investors or accredited individual investors under VC-related laws. Additionally, general partners of VC funds should be required to assess the suitability of investors based on their investment experience and expertise. They should also provide clear risk disclosures when soliciting investments and regularly update limited partners on the fund’s investments and operations until liquidation.
Through this study, Attorney Lee highlights the necessity for a more practical and precise legal interpretation of startup fundraising through VC funds. She anticipates that her research will contribute to discussions about revising the Capital Markets Act.
The full paper is available on the Korea Citation Index (KCI) website.