As major countries clearly distinguish between investment and loan on an institutional level, they are operating various mechanisms to ensure that personal liability arising in the loan process does not expand excessively. This is drawing attention as a policy direction to boost startups and support entrepreneurs' second chances.
Korea SMEs & Startups Institute (KOSI) released a report, "Liability structures in overseas venture finance," on the 14th that compares and analyzes the liability structures of venture finance and corporate finance in the United Kingdom, Japan and the United States, and presents each country's institutional features and policy implications.
According to the report, investment and loan differ not only in simple funding methods but also in the principal bearing losses and the structure of liability attribution. In investment, the principle of limited liability applies, under which investors bear losses only up to the amount they contributed. In contrast, a loan requires the borrowing corporations to repay principal and interest, and the structure can combine additional liabilities such as collateral or the representative's personal guarantee.
By country, differences emerged in how personal liability is managed. The United Kingdom has put in place protections for personal assets by limiting in advance the scope of personal guarantees through government-backed loan programs and by prohibiting the use of a representative's residential dwellings as collateral.
Japan, through the "Guidelines on management guarantees" and the "Management guarantee reform program," is systematizing financial institutions' criteria for demanding guarantees and pursuing policies that gradually reduce reliance on representatives' personal guarantees.
The United States utilizes personal guarantees within a certain scope while operating a post-adjustment framework that supports corporate rehabilitation and founders' restarts through bankruptcy and corporate restructuring systems.
The report said that while all of these countries clearly distinguish investment from loan institutionally, the ways of managing personal liability in the loan process are differentiated according to each country's financial and legal systems. It explained that the United Kingdom limits the scope of personal liability in advance, Japan gradually eases reliance on personal guarantees, and the United States adopts a post-adjustment approach through bankruptcy and restructuring.
In the investment field, the principle of investor liability appears to be more clearly established. The model investment contracts of the National Venture Capital Association (NVCA) in the United States and the British Private Equity & Venture Capital Association (BVCA) stipulate investor rights, governance and revenue distribution methods, and maintain the principle of limited liability whereby investment losses are, in principle, borne by investors.
Han Sun-young, associate research fellow at Korea SMEs & Startups Institute (KOSI), said, "As in the cases of the United Kingdom, Japan and the United States, establishing systems that clearly distinguish the liability structures of investment and loan, and that also manage personal liability within an appropriate scope, will help activate startups and foster the growth of innovative corporations."