Korean business lobby group urges deregulation in CVC financing

[Photo by Lee Seung-hwan]

The Federation of Korean Industries (FKI), a business lobby group in South Korea, on Tuesday called on the financial authority to ease regulations on corporate venture capital (CVC) financing by general holding companies to boost the strained startup investment market.

According to the Ministry of SMEs and Startups, the total amount of new venture and startup investments reached 815 billion won ($685.5 million) in the first quarter, down 60.3 percent from 2.2 billion won a year ago. The amount of annual venture investment last year was 6.76 trillion won, down 11.9 percent from 2021.

The FKI suggested easing regulations on CVC financing as a solution to the latest investment crunch in the venture market.

Under the current fair trade act, external funding for funds created by CVCs is limited to 40 percent. The investment of CVC funds in overseas ventures also cannot exceed 20 percent of the total fund value.

According to the FKI, fundraising was canceled due to such regulations in some cases.

A CVC affiliated with a holding company in Korea considered raising and co-managing a fund with an outside investor based on 50:50 ownership, but the plan failed due to the regulations.

The FKI also compared Korea’s stringent CVC regulations with those of other major countries, citing the example of a fund raised by venture capital Legend Capital Co., a subsidiary of China’s Legend Holdings Corp. It was mostly funded by external organizations, the federation said.

Korea’s current CVC funding regulations also go against the authorities’ recent moves for deregulation of the financial sector, according to the FKI.

The Financial Services Commission recently amended a law to allow two companies in different categories to jointly manage a venture fund in an effort to promote investment in the slowing venture industry.

“The recent decision to allow holding companies to own CVCs is to be welcomed, but placing restrictions on the establishment and operation of CVCs may hinder the effectiveness of the system,” said Chu Kwang-ho, head of the economic industry division at the FKI.

Chu also added that regulations on CVCs should be minimized to encourage corporate investment and promote the revitalization of the venture ecosystem to secure new growth engines and move toward win-win innovation between large corporations and venture companies.