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Ministry of Strategy and Finance of the Republic o : Measures to Develop A Venture-Startup Funding Ecosystem

05/15/2013 | 08:43pm US/Eastern

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Measures to Develop A Venture-Startup Funding Ecosystem
Policy Coordination Bureau > Industrial Policy Division
2013-05-15 044-215-4532

Measures to Develop a Venture-Startup Funding Ecosystem

The Park Geun-hye administration has released an outline for their master plan to transform the Korean economy into a creative economy. The government, at the May 15 Ministerial Meeting on the Economy, announced 'Measures to Develop a Venture-Startup Funding Ecosystem.' These measures are the first to be made public of the government's soon to be announced 'Plan for a Creative Economy,' and will form the base for successfully implementing other related policies.

The aim of these measures is to create a barrier-less, free-flowing virtuous cycle of enterprise creation, growth, investment withdrawal, and reinvestment, and transform the domestic venture ecosystem into one that resembles the US' Silicon Valley.

Background

Over the last 15 years, the government has promoted the creation of a vibrant startup atmosphere in Korea, but there have always been problems with the circulation of investment capital. Reinvestment conditions were not prepared for entrepreneurs who had founded successful startup businesses to invest in new startup businesses, and incentives were insufficient to induce the investment of liquid capital in startups. Therefore, the investment conditions for fledgling startups have been inadequate. Outside of being listed on the KOSDAQ exchange, there is no way to actually withdraw one's venture capital, and even the KOSDAQ has been a weak market for investment withdrawal. Finally, it has been very difficult for entrepreneurs to make a comeback after their businesses have failed.

The government has prepared new measures to contribute to creating new markets and new jobs and prioritize developing a virtuous circle that supports the commercialization of creative assets, and make the creative economy a reality.

The Measures

The government will lay the groundwork for mentoring and reinvestment in the next generation of startups by those who have managed successful startups. The startup financing structure will be changed from a loan-based structure to an investment-based structure in order to support the high-risk, high-reward nature of venture/startup businesses. Customized investment and withdrawal systems are being developed according to the business' stage of growth through the foundation of a new capital market, the KONEX market, and the invigoration of high-tech M&As and angel investments. There will be an expansion of the infrastructure underlying the venture ecosystem to improve the 'try again' environment, prevent intellectual property theft, promote the inflow of talented human resources, and diversify the startup platform.

1. Creating a Path for the Free Flow of Venture Investment Capital to the next Stage of Business

[1] Changing Financing Methods from Loan-Based to Investment-based

Offering Incentives to those who Reinvest Funds Withdrawn from Startup Businesses

(1) Tax payments on investment income may be deferred if withdrawn capital is reinvested.

In the case that an investor reinvests capital in tech startups, which had been liquidated following the sale of stock that accompanies the transferring of ownership of a company, the capital gains tax on that capital will be postponed until the stock is sold. In the case that unlisted stocks in tech-heavy startups or SMEs are exchanged, the capital gains tax will also be postponed until the exchanged stocks are sold.

(2) Angel investors will be offered the best tax benefits in the world.

The government has agreed to increase tax deductions for capital withdrawn from 1stgeneration ventures if it is reinvested as angel capital. The tax deduction for investments of up to 50 million won will be increased from 30 percent to 50 percent, and should the investment exceed 50 million won, the excess amount only will still receive a 30 percent deduction. The deduction limit on annual earnings will be raised from 40 percent to 50 percent. Tax deductions that used to be only receivable for investments in high-risk ventures will now be expanded to companies that are 3 years old or younger and pass a technological evaluation.*

*The government will prescribe angel investment evaluation indicators as part of the Venture Law, in the 2ndhalf of 2013.

(3) 1stgeneration's venture investment will be supported by the government.

In the event that 1stgeneration ventures become angel investors and invest in a startup, the government provides 50 percent of the investment through the angel matching fund. However, it has been pointed out that this may be insufficient to draw in large professional investments.

Therefore, in the case that successful venture entrepreneurs create funds in order to invest in youth startups, they will be given first priority to make investments through the government's Fund of Funds. The government has decided to create a 'junior enrichment fund' in the range of 100 billion won this year.

*The creation of the 'Kakao Youth Startup Fund' (worth 30 billion won) is a good example.

Additional incentives will be offered to professional angel investors that continue to strongly invest in startups. The government will match angel investments of up to 2 hundred million won with an equal sum in R&D support, and this kind of investment will be entitled to government venture business support.

Uniting Individuals to Make Startup Investments

The government has decided to introduce a crowd funding system during this year in order to offer an 'online funding platform' that will allow regular people, who do not have large sums of available capital, to make small investments in startups that they support.

Providing Financial Support when Private Support is not Available

(1) A 500 billion won 'Future Creation Fund' will be created.

200 billion won will be used for investments in fledgling startups and 300 billion won will be used for M&As. The government will carry a greater risk burden with regards to fledgling startups and existing funds, which is expected to promote private investment in fledgling businesses.

(2) The government will newly introduce the 'Future Entrepreneur Guarantee,' a full guarantee of up to 500 million won, which will be made eligible to startups that undergo a preliminary evaluation before being founded.

[2] Widening Venture Capital's Worst Bottleneck: Mid-way Withdrawals

In order to promote capital reinvestment by 1stgeneration startups, the government will greatly expand the ways to withdraw capital before going public by invigorating M&As, and plans to adopt policies to improve the positive capital withdrawal function of the IPO market.

Giving Equal Preference to R&D and Technology Acquisitions through M&As

The government will introduce the concept of 'Technology Innovation-type M&As' in order to promote M&As that are driven by technology acquisitions, and tax benefits will be offered.

*Technology Innovation-type M&A: a merger or buyout of high tech startups or SMEs whose R&D investment is over 5 percent of annual revenues, purchased at a value that is 150 percent or higher than the assessed value based on tax law.

(1) The corporate tax will be reduced on the purchases of enterprises.

The government will introduce a 10 percent corporate tax deduction for technology acquired through M&As.

(2) The gift tax burden on stockholders of sold businesses will be lifted.

Don't Fear Expansions in Scale: Greatly Easing M&A Burdens

In order for large corporations to be able to actively buy out technical SMEs, subsidiary designation will be postponed for 3 years in the case of buyouts of startups or SMEs that invest 5 percent or more in R&D. Moreover, in the case that SMEs exceed the size limit to still be designated as an SME, those enterprises will be able to retain their status as SMEs for a period of 3 years.

Policies for Growth: Supplying 2.5 Trillion Won in New Capital

(1) The 2 trillion won Growth Ladder Fund (600 billion won in public sector funds and 1.4 trillion in private sector funds) will be created.

New and previously used evaluation models and corporate information from the Industrial Bank of Korea will be utilized to invest in stocks, mezzanine capital, asset-backed securities and loan arrangements. The government plans to focus its support on capital that is required at the growth and withdrawal business stages. This includes support for intellectual property rights protection, M&As, IPOs, and comebacks.

(2) 300 billion won in guarantees customized will be set up for convergence industries.

The government will do away with one-off guarantees, and will instead supply customized guarantees to SMEs in the fields of convergence technology and industry.

(3) 100 billion won in new M&A guarantees will be introduced.

The government has decided to introduce guarantees on M&A capital that has been borrowed from financial institutions in order to resolve financing difficulties that may arise in SME M&As.

KOSDAQ, More than a Second-Flight League: Strengthening Independence, Professionalism

The number of businesses listed on the KOSDAQ has greatly decreased (from 171 in 2001 to just 21 in 2012) due to conservative management centered on protecting investors. The government will conduct an extensive review of the KOSDAQ market as it has been pointed out that the financing window for innovative enterprises is too small. The KOSDAQ Market Committee will be separated from the exchange board of directors in order to strengthen organizational and functional independence. The listing evaluation committee will be composed mainly of technology professionals in order to boost consistency and professionalism of the listing evaluation, and improvements will be made, such as easing listing requirements and minimizing qualitative evaluation items. The government will prepare KOSDAQ governance, personnel restructuring, and listing and management system reform measures by the middle of June.

Opening the KONEX market in July to Boost the Growth of Innovative Startups

Listing requirements will be minimized and the number of items a company must make public will be greatly reduced. In the event that a KONEX listed company merges or acquires a non-listed company, some regulations applicable to the listed company will be eliminated. Investments in KONEX listed companies will not be subjected to the startup investment fund limit (normally only 20 percent or less of the fund may be invested in a listed company). Moreover, the system of taxation applicable to investments in KOSDAQ businesses will also be applicable to investments in KONEX listed companies.* Venture capital invested in new stocks of companies that have been listed for 2 years or less on KONEX will be given preferential tax treatment along with new stock investments in unlisted startups.**

*The stock market transaction tax (0.3 percent) will be applied, small stockholders will be exempt from transfer taxes, and large shareholders (4 percent or 1 billion won) will pay the SME capital gains tax rate.

**profits from transfers, dividend income, and securities transactions will all be tax-free.

[3] Fostering Junior Startups, Working Together with Overseas Koreans

The door will be opened for the venture capital of Koreans working overseas to be treated as equal to domestic venture capital and will able to receive investments from the Fund of Funds, and in the case of top-tier venture capital, from countries, such as the US, that are invested in domestic startups, the Fund of Funds will actively collaborate. Korean angel investors living overseas who invest in domestic startups will be treated as equal to domestic angel investors and will receive support from the Angel Matching Fund. More overseas centers will be founded to actively induce Koreans living overseas to mentor and invest in domestic startups.

2. Building Infrastructure to Promote Venture Capital Funding

Commercializing Ideas: Programs for Startup Business Support at the Incubation Stage

The government will establish a joint startup platform in July to help those with ideas but without the resources or experience necessary to commercialize them. New ideas can be collected and reviewed through this platform, and then market research will be carried out and business models will be designed. Enterprises participating in the joint startup platform program will manufacture the products and conducting marketing duties.

In June, a joint program combining well-performing business incubators, venture capital and the government will be launched to provide support for high-tech startups. The government will utilize its R&D budget of up to 500 million won.

Attracting High-Tech Human Resources to Venture Startup Businesses

Employees of companies that have been acquired will be entitled to receive stock options in the companies they have merged with in the case that more than 30 percent of their companies' shares are acquired. This will promote the retention of highly skilled employees at the acquiring companies. Capital gains taxes on the sale of stock options can be paid for in a three year installment plan.

The government will adopt new evaluation indices, such as the 'startup business cooperation' index to evaluate government-sponsored research institutions and promote the joint establishment of research and business bodies.

The 'Entrepreneur Visa' will be introduced by the revisions in the regulations related to investor visas to facilitate the starting of businesses by technically-skilled foreigners. As of now, visas are only granted for venture startups.

Paying Reasonable Prices for Technology: Enhancing Intellectual Property Protection

The government will strengthen intellectual property protection by increasing the number of public safes to keep intellectual properties, such as design drawings, tapes, CDs and other memory storage devices, from 7000 units in 2013 to 19,000 in 2017. In addition, support for filing overseas patent applications in the wake of acquiring a domestic patent will be increased from 3.6 billion won in 2013 to 8.0 billion won in 2017.

The Intellectual Property Protection Fund, which is aimed at protecting technologies owned by SMEs, will be increased from 100 billion won to 200 billion won. SME protection includes 'buying patents and leasing them back'. Technology utilization without approval will be treated strictly with indictment by the public prosecutor, and charges will be made more severe. Cases of technology utilization without approval by the employing high-skill work force will be thoroughly investigated by the Fair Trade Commission.

Developing the M&A Market: Strengthening the M&A Information Network

The government will include accounting firms and foreign consulting firms in the national M&A information network, while adopting an official certification for M&A brokers and utilizing the M&A matching fund to promote M&As.

Rising from Failure: Offering Opportunities to Recover

100 billion won in recovery support funds will be made available in 2017, up from 40 billion in 2013, and an additional 100 billion won will be utilized from the Growth Ladder Fund for those struggling to get back on their feet. The government angel matching fund will provide special support for those trying to recover by providing 2 folds of the amount funded by angel funds.

Expected Outcomes

With an increase in the funding for venture and startup businesses from 6.3 trillion won to 10.6 trillion won* over the next five years, revenue and employment increases of 1.7 percentage points and 0.8 percentage points, respectively, are projected in venture industries. Angel investors are projected to increase from 2,608 in 2012 to 12,000 in 2017, and total venture capital is projected to reach 2 trillion won in 2017, up from 1.2 trillion won in 2012. A 1.6 trillion won tax revenue increase is expected during the next five years, despite angel investment and M&A related tax incentives.

*Investment in businesses at the fledgling/startup stage is projected to increase by 740 billion won from 2.4 trillion won to 3.2 trillion won mainly through angel investment. Investment in companies at the middle/growth stage is projected to increase by 1.8 trillion won from 3.9 trillion won to 5.7 trillion won mainly through venture capital investment. A total of 4.4 trillion won is expected to be withdrawn or reinvested through M&As and the KONEX market, of which 1.7 trillion won is projected to be invested again in businesses at the startup or growth stages.

Please refer to the attached PDF.



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