South Korea Revises Rules to Introduce New Venture Capital Investment Vehicle

South Korea's government has approved a rule change paving the way for the introduction of a new form of venture capital investment vehicle named "Business Development Companies" (BDCs), which will focus on investments in startups and innovative companies.

Under the revised FSCMA (Financial Investment Services and Capital Markets Act), BDCs will be required to invest at least a certain portion (e.g. 60 percent) of their assets in startups and innovative companies. They will be operated by professional entities as closed-end funds with terms of at least five years, and listed on the KRX (Korea Exchange).

BDCs will help innovative companies to raise funds stably for a longer period of time through investment and other forms of financing such as loans, while also allowing investors to easily liquidate their investment, the FSC (Financial Services Commission) said in a notice on Friday (27 May).

With borrowing and lending made available through BDCs, the scope of support extended to invested companies will be expanded and capital supply will be tailored to the needs of invested companies, thereby ensuring stability in asset management. BDCs will be required to invest a portion of their funds in safe assets and apply an investment cap to limit their exposure to a single investee.

A licensing system will be introduced for BDCs to ensure they are managed by entities that can ensure capability and responsibility in their investment practices. Regulators will work to strengthen investor protections by establishing a seed-funding requirement and expanding the scope of disclosures that will be required. In due course, a minimum required capital pool size (e.g. KRW 30 billion) will be established to enable the formation of more sizable and effective venture capital.

The government expects BDCs to help provide a more stable way of raising funds for early-stage businesses, channel market liquidity to productive sectors of the economy, and promote sound practices for investment in non-listed companies.

The FSC said FSCMA revisions to enable the introduction of BDCs will be submitted to the National Assembly in May or early June this year. The government has pledged to ensure prompt approval and passage by the National Assembly.

In the second half of this year, the FSC will consult with relevant institutions and market participants to draw up further details on the planned introduction of BDCs.