Key Provisions of the Venture Investment Promotion Act
A detailed explanation of the purpose and key provisions of the Venture Investment Promotion Act, enacted in 2020, its differences from previous laws, and recent amendment trends.
Key Provisions of the Venture Investment Promotion Act
Legislative Background
The Venture Investment Promotion Act (hereinafter the "Venture Investment Act") was enacted on August 12, 2020 and entered into force on February 12, 2021. The Act consolidates and systematizes venture investment-related provisions that had been scattered throughout the former Act on Support for Small and Medium Enterprise Startups (Startup Support Act), creating a separate and independent piece of legislation.
Reasons for Enactment
Problems with the Previous Framework: 1. The Startup Support Act mixed venture investment provisions with startup support, making systematic operation difficult 2. Inconsistent regulations governing diverse investment vehicles such as individual investment associations and startup investment associations 3. Need to establish an investment environment aligned with global standards 4. Need to clarify relationships with various investment vehicles such as institutional private equity funds (PEFs)
Purpose of the Act (Article 1): To promote investment in startups and venture enterprises and establish a support system, thereby contributing to startup activation and venture enterprise growth, and ultimately to the balanced development of the national economy.
Structure of the Act
The Venture Investment Act consists of 7 chapters, 93 articles, and supplementary provisions.
| Chapter | Content |
|---|---|
| Chapter 1 | General Provisions (purpose, definitions, basic plan) |
| Chapter 2 | Individual Investment Associations |
| Chapter 3 | Startup Investment Companies and Startup Investment Associations |
| Chapter 4 | Korea Venture Investment Association and Korea Venture Investment Corporation |
| Chapter 5 | Investor Protection |
| Chapter 6 | Supplementary Provisions |
| Chapter 7 | Penalty Provisions |
Key Provisions by System
1. Individual Investment Associations
Definition (Article 2): An investment association formed by individuals for the purpose of investing in venture enterprises, etc., consisting of one general partner (managing member) and limited liability members.
Registration Requirements (Articles 38–44): - Capital contribution: KRW 100 million or more - Members: 49 or fewer (including the general partner) - General partner: Must meet requirements for establishing an individual investment association (KBAN angel investors, etc.) - Registration authority: Minister of SMEs and Startups
Investment Obligations (Article 41): - Within 3 years of formation, invest at least 50% of the contributed capital in mandatory investment targets - Mandatory investment targets: SMEs within 7 years of establishment, venture enterprises, companies that have received investment from startup accelerators (창업기획자), etc.
Linked Tax Benefits:
- Income deductionIncome 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. for contributing members (STTCL Article 16): 100% for up to KRW 30 million, 70% for KRW 30–50 million, 30% above
Precautions: - General partner's self-contribution limit: 50% or less of the total raised amount (conflict of interest prevention) - Reporting obligation: Quarterly report to the Ministry of SMEs and Startups on capital contribution status and investment status
2. Startup Investment Companies (Chapter 3)
Definition: A corporation specializing in investment in venture enterprises, etc., registered with the Ministry of SMEs and Startups. Commonly referred to as a "venture capital" (VC) firm.
Registration Requirements (Article 18): - Paid-in capital: KRW 2 billion or more - Specialists: 2 or more investment review professionals (meeting specified experience requirements) - Office: Maintains a principal office in Korea - Major shareholder requirements: Transparent governance structure
Formation of Startup Investment Associations (Articles 20–30):
Startup investment companies conduct their investment activities through startup investment associations.
| Item | Content |
|---|---|
| Formation size | KRW 1 billion or more |
| Manager | Startup investment company (GPGeneral Partner / Limited Partner GP (General Partner) manages the fund; LP (Limited Partner) provides capital as an investor.) |
| Duration | Up to 10 years (extendable) |
| Mandatory investment ratio | At least 40% of the raised amount to be invested in venture enterprises, etc. |
| Reporting obligation | Quarterly operation status report to Korea Venture Investment Corporation (KVICKorea Venture Investment Corp. (KVIC) Government fund-of-funds operator. A key capital source for the venture investment ecosystem.) |
Operational Restrictions on Startup Investment Companies: - Prohibited from managing funds other than those raised from associations (restriction on proprietary investment) - Board approval required for transactions with related parties - Restrictions on investment limits in affiliated companies
3. Korea Venture Investment Association and Korea Venture Investment Corporation (KVIC)
Korea Venture Investment Corporation (KVIC) (Chapter 4):
KVIC is a quasi-governmental organization established under the Venture Investment Act that manages the Korea Fund of FundsFund of Funds (FoF)
Government fund-of-funds operated by KVIC. Invests in individual VC funds as a parent fund. (KFoF).
Key Functions (Articles 68–75): 1. Operation of the Korea Fund of Funds (Korea Venture Investment Association): Re-invests government capital contributions into private VC funds 2. Sub-fund review and selection: Selects private VC managers through public offerings 3. Operation monitoring: Periodic review of sub-fund operations 4. Statistics and research: Compilation and publication of venture investment statistics 5. Education and consulting: Capacity-building support for early-stage VC managers
Sources of Capital for the Korea Venture Investment Association: - Ministry of SMEs and Startups budget - Ministry of Culture, Sports and Tourism budget - Ministry of Agriculture, Food and Rural Affairs budget - Other government ministry and public institution budgets
4. Investor Protection System (Chapter 5)
One of the most important newly established systems under the Venture Investment Act.
Key Protective Provisions:
Prohibition on Unfair Provisions (Articles 78–82): - Prohibition on contractual terms that are unilaterally unfavorable to investors - In particular, startup investment companies are prohibited from improperly transferring losses to LPs (contributing investors)
Information Disclosure Obligation (Articles 83–87): - Startup investment companies: Quarterly disclosure of operational status - Individual investment associations: Report on formation and investment status - Provision of false information is subject to criminal punishment
Dispute Resolution (Articles 88–90): - Venture Investment Dispute Mediation Committee operates within the Ministry of SMEs and Startups - Mediation request → processed within 60 days
Differences from the Previous Act (Startup Support Act)
Changes in Legal Framework
| Category | Former Startup Support Act | Venture Investment Act |
|---|---|---|
| Nature of act | Integrated startup support act | Independent investment-specific act |
| Individual investment associations | Scattered provisions | Systematic consolidation |
| Startup investment companies | Basic provisions | Strengthened detailed requirements |
| Investor protection | Inadequate | Explicit provisions |
| Unfair clauses | No provisions | Expressly prohibited |
| Statistics management | Non-systematic | KVIC integrated management |
Key New Provisions
① Clarification of Legal Status of Startup Accelerators (창업기획자) The legal status of accelerators, which had been ambiguous under the previous law, is clearly defined in the Venture Investment Act.
Startup accelerator registration requirements: - Paid-in capital: KRW 100 million or more - Specialized personnel: 2 or more - Track record in startup planning and early-stage investment
Investment methods for startup accelerators: - Acquisition of common shares or convertible bonds - Ability to form individual investment associations - Eligible to apply as TIPS lead organizations
② Provisions on Investment-Ineligible Persons Standards for restricting investment eligibility are explicitly codified.
③ Strengthened Penalties for Fraudulent Investment Activities Strengthened criminal penalty provisions for providing false information and illegal misappropriation of funds (maximum 5 years imprisonment or fine of up to KRW 50 million).
Provisions on Startup Accelerators
The Venture Investment Act recognizes startup accelerators as independent investment actors.
Registration Procedure: 1. File registration application with the Ministry of SMEs and Startups 2. Verify paid-in capital and specialized personnel requirements 3. Issuance of registration certificate (renewed every 2 years)
Rights of Startup Accelerators: - Formation and management of individual investment associations - Application as TIPS lead organizations - Preferred eligibility for government support programs
Obligations of Startup Accelerators: - Quarterly investment status reporting - Reporting on portfolio company support activities - Compliance with conflict of interest prevention requirements
Recent Amendment Trends (2022–2025)
2022 Amendments
- Relaxed startup accelerator registration requirements: Paid-in capital threshold reduced from KRW 300 million to KRW 100 million
- Expanded individual investment association investment targets: Extended to companies within 10 years of establishment (previously 7 years)
- Permitted investment in overseas companies: Investment in foreign companies permitted on condition of domestic technology transfer
2023 Amendments
- Clarification of secondary investment: Legality of secondary investment through acquisition of existing investor stakes explicitly stated
- Clarification of digital platform startup inclusion: Digital platform companies explicitly included as startup investment association investment targets
- ESG investment incentives: Investments in carbon-neutral and social enterprises given preferential treatment in calculating mandatory investment ratios
2024–2025 Amendment Direction
- AI startup investment promotion: Discussions on introducing provisions for priority KFoF contribution to AI-specialized funds
- Global venture investment platform: Discussions on mandatory English-language disclosure to activate foreign LP participation
- Activation of unlisted share trading market: Discussions on introducing a dedicated secondary fund system
- Strengthened investor eligibility requirements: Discussions on introducing financial literacy assessments for individual investors
Sanctions for Violations
Grounds for Cancellation of Startup Investment Company Registration: - Registration obtained with false documentation - Registration requirements no longer met - Serious violation of operational regulations
Administrative Fines: - Violation of reporting/disclosure obligations: Up to KRW 10 million - Minor violations of operational regulations: Up to KRW 5 million
Criminal Penalties: - Fraudulent investment activities: Up to 5 years imprisonment or fine up to KRW 50 million - Operating an unregistered startup investment company: Up to 3 years imprisonment or fine up to KRW 30 million
Conclusion
The Venture Investment Promotion Act is an important piece of legislation that completes the legal infrastructure of Korea's venture investment ecosystem. It systematically regulates the entire venture investment process, from individual investment associations and startup investment companies to the Korea Fund of Funds and startup accelerators.
Both founders and investors who understand the key provisions of this Act will be better positioned to protect their rights in investment agreements and to make timely use of various support programs. In particular, since the Act has been continuously amended since its entry into force in 2021 to reflect market realities, it is necessary to periodically check the latest amendments.