In the plenary session held on December 1, 2016, the National Assembly passed the proposed amendment to the Financial Investment Services and Capital Markets Act (the “Amended Capital Markets Act”) to permanently introduce the corporate financial stability PEF system and to introduce a new system of start-up/venture PEF. The Amended Capital Markets Act was passed by the plenary session on December 1, 2016 only in a week since it was submitted to the competitive National Policy Committee on November 24, 2016 as an alternative to the amendment to the Capital Markets Act (with regard to the corporate financial stability PEF) proposed by Member of the National Assembly, CHAE I-Bae and others and the government-proposed amendment (with regard to the start-up/venture PEF). Given the current political situation, this prompt bill processing shows that passing the amendment to the Capital Markets Act was so urgent for the corporate restructuring and economic revitalization. 

The details of the Amended Capital Markets Act stipulating the permanently or newly introduced systems of corporate financial stability PEF and start-up/venture PEF are as follows: 


1. Corporate Financial Stability PEF

The provision concerning the corporate financial stability PEF of the Amended Capital Markets Act is incorporated to re-define the existing provision concerning the corporate financial stability PEF (Article 249-22 of the old Capital Markets Act) in the same way. What matters here, however, is that the applicable provision is to be enforced immediately as of the date of promulgation in consideration of the urgent necessity of corporate restructuring (Article 1 of Addenda to the Amended Capital Markets Act). 

Meanwhile, it is also remarkable that the Amended Capital Markets Act does not provide for a sunset clause (see Article 2 of Addenda to the old Capital Markets Act) with regard to the corporate financial stability PEF. This means that now the companies may always use the corporate financial stability PEF, which was temporarily introduced for a 3-year effective term according to the required corporate restructuring utilizing private capital after the global financial crisis. 

As the provision regarding the corporate financial stability PEF under the old Capital Markets Act ceased to exist under the sunset clause on November 13, 2016, the relevant industry went through a big chaos. In particular, the old Capital Markets Act banned even additional investment in the corporate financial stability PEF already established as well as new establishment of corporate financial stability PEF since the time of sunset of the applicable clause (Article 2(3) of Addenda to the old Capital Markets Act), thereby totally stopping the activities of corporate financial stability PEF. In response, the supervisory authorities’ quick fix put out the fire by announcing its authoritative interpretation to allow the additional investment in the corporate financial stability PEF but still banning of new creation of the corporate financial stability PEF was marring the efforts of supervisory authorities.

The prompt response of the National Assembly is expected to be a big help in smoothly pushing forward the corporate restructuring-related tasks that have been building up.


2. Start-up/Venture PEF

Another remarkable point in the Amended Capital Markets Act is the introduction of start-up/venture PEF. The investors who provide the start-ups/ventures with capital have been mainly so-called ‘venture funds’ such as small and medium business start-up investment funds, Korea Venture Fund, new technology venture capital funds, etc. but there are few cases where PEFs make investments in the start-ups/ventures. This is probably based on the following circumstance: PEFs enjoy no tax benefits whereas the venture funds are granted many tax benefits such as deduction on the investor’s income in the phase of investment and exemption from capital gain tax/security transaction tax upon transfer of shares in the phase of transfer under the Restriction of Special Taxation Act.

To resolve this problem, the Korean government submitted the proposed amendment to the Capital Markets Act to introduce the start-up/venture PEF and the proposed amendment to the Restriction of Special Taxation Act to grant the start-up/venture PEF tax benefits in the level applicable to the venture funds. On December 2, 2016, the plenary session of the National Assembly passed the proposed amendment to the Restriction of Special Taxation Act as above, following the amendment to the Capital Markets Act.

The major provisions of the Amended Capital Markets Act regarding the start-up/venture PEF are as follows:

A.   Exception of Start-up/Venture PEF  

The Amended Capital Markets Act prescribes that the special cases concerning the start-up/venture PEF do not apply to the PEF whose general partner is a small small and medium business start-up investment company (Proviso to Article 249-23(1) of the Amended Capital Markets Act). The review report of the National Assembly states the reason for such exception as follows: “a small and medium business start-up investment company is prohibited from borrowing/guaranteeing when it as a general partner operates a start-up investment fund; if a tax benefit is granted to the start-up/venture PEF, the small and medium business start-up investment company is likely to circumvent/avoid regulations by participating in the start-up/venture PEF in lieu of the start-up investment fund” (See the Review Report, p. 7).

However, since PEF’s borrowing/guaranteeing is extremely limited and it is possible for PEF to borrow/guarantee smoothly if it uses an investment company, there are few cases where PEF actually borrows/guarantees. It is doubtful whether such an exception was positively necessary.  

B.   Start-up/Venture PEF’s Property Management  

The start-up/venture PEF is allowed to make investments only to the following targets: business starters as defined in the Support for Small and Medium Enterprise Establishment Act; venture companies under the Act on Special Measures for the Promotion of Venture Businesses; small and medium enterprises for technology innovation and small and medium enterprises for management innovation under the Act on the Promotion of Technology Innovation of Small And Medium Enterprises; new technology enterprises (limited to small and medium enterprises) under the Korea Technology Finance Corporation Act; specialized manufacturers of components/materials under the Act on Special Measures for the Promotion of Specialized Manufacturers of Components and Materials, Etc. (hereinafter collectively the “Start-up/Venture, etc.”) (Main Text of Article 249-23(1) of the Amended Capital Markets Act). Especially, since the new technology enterprise includes “enterprises which engage in the new technology business with not more than one thousand regular employees and with a total asset amount of not more than KRW 100 billion” (Article 2, Subparagraph 1 of the Korea Technology Finance Corporation Act and Article 3(2) of its Enforcement Decree), the investment targets of start-up/venture PEF can be said to be fairly broad.

Meanwhile, the start-up/venture PEF may invest in “securities” issued by the Start-up/Venture, etc. (Article 249-23(2) of the Amended Capital Markets Act). Since the start-up/venture PEF, unlike the general PEFs, needs not to make investments in the form of participating in management of the invested company1, the mezzanine investment or investment in general privately-placed debentures, all of which are not related to management participation, is understood to be available. This merit would greatly enhance the flexibility in managing the property of start-up/venture PEF.