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Focus Shifting from Lending to Investment for Financing Start-up Companies
Financing Ecosystem Improvement Plan
Focus Shifting from Lending to Investment for Financing Start-up Companies
  • By matthew
  • November 30, 2013, 06:14
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The government held an economic ministerial meeting on May 15 and announced the Venture and Start-up Financing Ecosystem Improvement Plan. The plan focuses on dealing with chronic bottleneck situations regarding the financing structure of venture and start-up firms, angel investment and reinvestment, investment recovery, and related issues.

In detail, the financing structure is being altered from loan-centered to investment-oriented, while growth phase-specific investment and investment recovery systems are put into place by means of the promotion of angel investment, technology and innovation-centered M&As, and the new stock exchange named KONEX, or Korea New Exchange. In addition, stages are being set for further reinvestment and mentoring by successful first-generation venture entrepreneurs, and auxiliary infrastructure is beefed up through the diversification of start-up platforms, personnel training, tech leak prevention, and other opportunities for fresh starts.

Han Jung-hwa (the second from right), Administrator of the Small and Medium Business Administration, is briefing on “Venture and Start-up Financing Ecosystem Improvement Plan” at the “Economy-related Ministerial Meeting” on May 15 this year.​In particular, the plan came up with more than enough incentives so that the funds recovered by first-generation venture firms can be re-invested in other venture and start-up firms. When a venture company is sold and a re-investment is made in another venture firm within a certain period of time, the 10% capital gains tax is postponed until resale. This provision is applied to venture firms, those companies within seven years of the cancellation of the designation as a venture firm, tax-exemptangel investments subject to the establishment of start-up investment companies, investment in start-up establishment investment, and venture investment associations.

Likewise, the taxation is postponed in a case when non-listed stocks are exchanged for strategic alliance. The deferment is effective until the shareholders of the selling company (the small or mid-sized venture enterprise whose ratio of R&D investment to sales is at least 5%) dispose of the exchanged shares.

The tax exemption on the angel investment of recovered funds is also expanded. For example, the tax deduction rate increases from 30% to 50% for investments of up to 50 million won (US$47,243) and maintained at the current rate of 30% for the amount exceeding it. The deduction limit in the total annual income is raised from 40% to 50% as well. The revised rate is equal to that of Japan, and just 10 percentage points lower than those of the United States and Singapore.

The income exemption is applied to not only venture firms but also three yearold or younger companies that passed the technology evaluation. Also, exceptional clauses have been set concerning the special deduction limit on angel investment so that the income tax deduction can be more effective.

When a fund is raised by a successful venture company for investment in another younger venture firm, the investment priority is given with a fund of funds in the framework of the Junior Promotion Fund, whose target amount is 100 billion won (US$94 million) for this year. One example of it is the Kakao Young Start-up Fund, which was raised in April this year at an amount of 30 billion won (US$28 million).

Moreover, additional incentives are prepared so that large amounts of money can be invested continuously by leading angel investors. R&D matching support is provided for them at the annual limit of 200 million won (US$189,000), and their investments are planned to be included in the type of investment into venture capital and venture firms.

A new crowd funding system has been introduced in an attempt to provide an online funding platform on which even the general public with little capital can investin the start-up companies of their choice. The 500 billion won (US$472 million) Future Creation Fund has been raised, and 200 billion won (US$189 million) of it is utilized for the benefit of companies in their early stages.The other is spent on those in their growth stages and for M&A purposes. Another new system brought in at this time is the special guarantee for founders-to-be, in which a 100% guarantee is granted for up to 500 million won (US$472,434) through preliminary evaluations before the corporate foundation.

The new plan’s purpose is to smooth the circulation of investment funds in the ecosystem and make the government’s efforts more effective in fostering the venture ecosystem. “When uncertainties linger on with regard to corporate establishment and investment recovery, the creative asset formation and the convergence-based concept of the creative economy become harder and harder to reach,” said a government official, adding, “With the new plan, we will create a virtuous cycle in the venture financing ecosystem by helping creative assets become new business models, thereby contributing to job creation and the realization of the creative economy.”