How to Form an Individual Investment Association
A step-by-step guide to forming an Individual Investment Association, including requirements, registration with the Ministry of SMEs and Startups, and required documentation.
How to Form an Individual Investment Association
To form an individual investment association yourself, you must follow the procedures prescribed by the Venture Investment Promotion Act. This article guides you through the entire process of forming an association step by step. Understanding this process is helpful not only for prospective GPs interested in forming an association, but also for investors looking to participate as LPs, as it helps them choose a better-run association.
Step 1: Verify Formation Requirements
The following requirements must be met before forming an individual investment association.
GPGeneral Partner / Limited Partner
GP (General Partner) manages the fund; LP (Limited Partner) provides capital as an investor. (General Partner) Qualifications
The GP is the core person responsible for operating the association. While the Venture Investment Promotion Act does not specify separate qualification restrictions for GPs, in practice it is common for a person with the following capabilities to serve as GP:
- Investment experience: At least 2 years of direct investment experience, or experience working at a venture capital firm or acceleratorAccelerator (AC)
Organizations providing investment, mentoring, education, and networking to early-stage startups, registered with MSS. - Network: Deal sourcing capabilities within the startup ecosystem
- Financial understanding: Company valuationBusiness Valuation
The process of determining the economic value of a business in monetary terms using methods like DCF and multiples. skills and ability to review contracts - Credit standing: Good credit with no issues in financial transactions
Legally, anyone without disqualifying factors (bankruptcy declaration, criminal conviction, etc.) can become a GP, but in practice, demonstrating credibility and capability is essential for recruiting LPs.
GP's minimum contribution: It is common practice for the GP to also directly contribute a portion of the total association contributions. The customary minimum is 1% or more, which demonstrates that the GP shares interests with the LPs.
Recruiting LPs (Limited Partners)
At least 1 LP in addition to the GP is required to form an association (minimum 2 members). When recruiting LPs, the following must be clearly communicated:
- Explanation of investment purpose and strategy
- Operating period and conditions
- Disclosure of expected returns and risks
- Information on income deduction benefits
LP recruitment must be done through private placement, not a public offering. Publicly soliciting investors from an unspecified large number of people may violate the Financial Investment Services and Capital Markets Act.
Determining the Contribution Size
The minimum contribution is 100M KRW; determine a realistically operable size. At a minimum of 10M KRW to 30M KRW per investment, diversifying across 5 to 10 companies requires at least 50M KRW to 300M KRW. Considering management fees and legal costs, the practical minimum size is approximately 200M to 300M KRW.
Step 2: Draft the Association Bylaws
The association bylaws are like the constitution of the association. They specify the rights and obligations of all members and the investment principles; in the event of a dispute, the bylaws serve as the standard.
Mandatory Items in the Association Bylaws
The following items must be included in the bylaws according to the Enforcement Decree of the Venture Investment Promotion Act.
Basic items - Name of the association - Location of the office - Name and address of the GP (managing partner) - Contribution amount and method of each member - Formation date and planned dissolution date (operating period)
Investment-related items - Investment scope (venture enterprise investment principles, investment sectors, investment stages, etc.) - Maximum investment cap per single company - Member rights including voting rights
Profit distribution-related items - Method and basis for profit distribution - Management Fee rate - Carried Interest rate and Hurdle Rate
Dissolution-related items - Grounds for dissolution of the association - Liquidation method - Method of distributing remaining assets
Standard Profit Distribution Structure
A typical profit distribution structure for an individual investment association is as follows:
- Management Fee: 1 to 2% per year (based on total association contributions)
- Performance Fee: 20% of the EXITExit
The process by which investors recover their investment through IPO, M&A, or secondary sale. proceeds exceeding the Hurdle Rate (Carried Interest 20%) - Hurdle Rate: 7 to 8% per year
For example, if a 500M KRW association realizes 1.5B KRW in profit after 10 years: - Total profit: 1.5B KRW - 500M KRW = 1B KRW - Amount meeting the 7% Hurdle Rate: approximately 484M KRW (100% attributed to LPs) - Excess profit: approximately 516M KRW - GP performance fee: 516M KRW × 20% = approximately 103.2M KRW - LP distribution: remaining 412.8M KRW
Step 3: Register with the Ministry of SMEs and Startups
Once the association bylaws are complete, apply for registration with the Ministry of SMEs and Startups.
Documents Required for Registration Application
- Individual investment association registration application form
- Association bylaws
- Identity verification documents for the GP and members
- Proof of contribution payment (proof of account opening for contribution account, etc.)
- GP's resume and proof of investment experience
Registration Agency and Submission Method
Registration applications are submitted to the Ministry of SMEs and Startups or the Regional Office of SMEs and Startups. Online submission may be available; for those in Seoul, it is processed at the Seoul Regional Office of SMEs and Startups.
Additionally, the Korea Business Angel Association (KBAN) provides support services for the registration process, making it convenient to seek assistance from the association when forming your first association.
Registration Time Required
If documents are complete, registration review and approval generally takes 2 to 4 weeks. Additional time may be required if documents need to be supplemented.
Upon completion of registration, an individual investment association registration certificate is issued by the Ministry of SMEs and Startups. This registration certificate is required before KBAN can issue investment confirmations, which LPs need to apply for income deductionsIncome Tax Deduction
Tax deduction system for venture enterprise investment: 100% for up to 30M KRW, 70% for 30-50M KRW, 30% for over 50M KRW..
Step 4: Open an Association Account and Receive Contributions
After registration is complete, open a dedicated account in the name of the association.
- Open a corporate or voluntary organization account in the name of the association
- Receive LP contributions into that account
- All subsequent investment execution and profit distribution is processed through this account
Step 5: Confirm Whether Financial Investment Business Registration Is Required
Individual investment associations themselves do not fall under "collective investment business" under the Financial Investment Services and Capital Markets Act, so separate registration with the Financial Supervisory Service is not required. However, caution is needed in the following cases:
- Recruiting LPs through a public offering: Publicly recruiting from 50 or more people may trigger application of the Financial Investment Services and Capital Markets Act
- GP entering into an investment advisory contract: Need to review whether registration as an investment advisory business is required
In practice, individual investment associations operated through private placement (based on a small circle of acquaintances) are generally operated without separate financial regulatory registration.
Major Costs of Formation
The following costs arise when forming an individual investment association:
| Cost Item | Estimated Amount | Notes |
|---|---|---|
| Legal fees (bylaw drafting, contract review) | 2M ~ 5M KRW | When using a law firm |
| Registration application fee | No separate fee | Public institution registration |
| Association account opening | Free ~ small amount | Varies by bank |
| KBAN membership registration | Annual membership fee | Based on GP |
| Association management software | Tens of thousands of KRW/month | Optional |
A realistic expectation for initial formation costs, including legal fees, is approximately 5M to 10M KRW.
Practical Tips: Considerations When Forming Your First Association
Invite an experienced co-GP: When forming an association for the first time, having an experienced angel investor or VC professional join as co-GP increases credibility and deal sourcing capabilities.
Join KBAN and leverage the network: Joining the Korea Business Angel Association provides access to regular training, introductions to outstanding startups, and networking opportunities. It is advisable to first understand the ecosystem through association activities before forming an association.
Start small: Starting the first association at the 200M to 300M KRW scale, building operational experience, and then scaling up in the next association is realistic.
Set a clear investment theme: Clearly defining an investment theme that matches the GP's expertise and network makes deal sourcing easier and allows you to present a compelling strategy to LPs. (For example: B2B SaaS focus, biohealth focus, etc.)
Forming an individual investment association involves somewhat complex procedures, but it is an important investment channel in Korea's venture ecosystem. An association formed through the proper procedures provides both investor protection and tax benefits.