South Korea moves to curb unfair venture investment contracts

Venture investment associations will be barred from demanding early repayment of invested funds without justifiable cause, and contract terms that impose excessive price adjustments on securities held by investors following a failed initial public offering will also be restricted under a newly approved law.

The Ministry of SMEs and Startups said Tuesday the cabinet approved an amendment to the Act on Promotion of Venture Investment, commonly known as the Venture Investment Act.

The core of the amendment is a prohibition on managing partners of venture investment associations entering into investment contracts that impose excessive burdens on portfolio companies through unfair terms.

Specifically, the amendment restricts conditions that allow early recovery of invested funds on the grounds of changes in a company's performance indicators without justifiable cause, as well as early repayment demands made without granting any grace period.

Contract terms that excessively adjust the price of securities held by investors — known as refixing — due to reasons such as a failed IPO are also classified as unfair investment contract conditions. When a contract contains such unfair terms, only those specific terms will be rendered invalid rather than the entire contract, and the amendment establishes grounds for administrative action against managing partners who violate the rules.

Regulations on major shareholders of venture capital firms will also be tightened. Offering or receiving money, goods, or entertainment with the intent to exert undue influence over a venture capital firm — whether by a major shareholder or a related party — will be prohibited. The amendment broadens the regulatory scope beyond contracts between portfolio companies and venture capital firms to cover improper interference by interested parties in the decision-making processes of venture capital firms.

The Ministry of SMEs and Startups has been working to reform the system to address the longstanding problem of ventures and startups — which tend to have less contract experience and weaker negotiating power than investors — being saddled with unfavorable contract terms.

In June, the ministry revised the standard venture investment contract following a forum on improving venture investment contract culture, which brought together ventures, startups, venture capital firms, accelerators and legal experts. The revision addressed key dispute-prone clauses, including investor redemption rights, securities price adjustment mechanisms, mandatory IPO provisions and third-party joint liability.

The amended Venture Investment Act will be promulgated Sept. 29 and take effect March 30 next year after a six-month preparation period. The ministry plans to refine subordinate regulations specifying the types and criteria of unfair investment contracts before the law takes effect.

"We will continue to strengthen the institutional foundation so that a fair venture investment contract culture can take root," said Noh Yong-seok, first vice minister of SMEs and Startups.