A claim has been raised that regulations on corporate venture capital (CVC) should be revised to back large-scale investments in advanced industries such as artificial intelligence (AI) and semiconductors.
The current Fair Trade Act and Venture Investment Act frameworks excessively block holding company CVCs from raising outside capital and investing overseas, acting as a "bottleneck" that obstructs the flow of funds into advanced industries, critics said.
Yoon & Yang LLC and The Federation of Korean Industries held a seminar on the 3rd titled "CVC system improvement plan" and discussed issues related to CVC regulations. At the seminar, there was focused discussion on the need to ease the limits on the ratio of external fund contributions (40%) and the cap on overseas investment (20%) to 50% and 30%, respectively.
Under the current Fair Trade Act, a CVC established by a general holding company can receive outside capital only up to 40% of the fund's total committed amount. Also, the share of overseas investment among the investments executed by a CVC fund cannot exceed 20%. Although the legislative intent was to channel retained earnings accumulated within holding companies into venture investment, on the ground the rules function as regulations that block joint fund formation and other efforts during actual operations.
Attorney Kim Chiyoul of Yoon & Yang LLC said, "We put in place limits on outside capital to ensure money reserved in holding company structures would flow out, but now those limits are actually hampering fund formation," adding, "Even when a CVC wants to create a joint fund with overseas investors at a 50-50 ratio, the outside contribution rule forces the holding company to shoulder at least 60%, weakening its negotiating power."
Kim said, "In fact, a holding company's CVC pushed a joint fund with a leading Chinese corporations almost to the finish line, but the deal fell through because it could not get past the outside contribution cap," adding, "Contrary to the system's intent, we are seeing side effects that block partnerships with global capital."
Criticism also emerged that the cap on the overseas investment ratio (20%) is designed on the premise of "crowding out domestic investment," which does not match reality.
Nam Kyung-mo, director of industrial policy at the Ministry of Trade, Industry and Energy, said, "Because CVCs are not structured with a fixed total investment amount, an increase in overseas investment does not mean domestic investment will decrease," adding, "If there are opportunities to generate revenue overseas, they will invest overseas, and there is separate investment demand for domestic consumption and exports in Korea, so it is hard to see the two areas as a one-to-one 'trade-off' relationship."
The government also appears to agree on the need for a certain level of deregulation. Kang Shin-cheon, head of the venture investment division at the Ministry of SMEs and Startups (MSS), said, "A bill to amend the Fair Trade Act to allow the outside contribution ratio up to 50% per fund is pending in the National Assembly," adding, "Although discussions with the Fair Trade Commission are not easy, we are continuing to coordinate views." He added, "We also agree with expanding the overseas investment cap to 30%."
There were also opinions that the rule restricting CVC investment targets needs to be revised. The Fair Trade Act and the Venture Investment Act bar CVCs from investing not only in their own affiliates but also in companies belonging to disclosure-subject business groups and cross-shareholding-restricted business groups. This effectively blocks the supply of funds to affiliates of large business groups, but given that advanced industries require large amounts of capital, some argue that exceptions are needed.
Kim said, "In AI and semiconductors, where investment is desperately needed, the investment amount per individual project reaches astronomical levels," adding, "In these advanced industry areas, I think it is necessary to allow limited investment in large corporations within a certain scope so that CVC funds can flow there."
Former Vice Minister of the Ministry of Trade, Industry and Energy Park Jin-kyu also said, "Among the actors participating in national strategic industries, there are small and midsize and mid-tier companies, but in reality it is a structure in which large companies inevitably have to participate," adding, "The system must support large companies so they can play a role." He said, "If investment in the domestic market does not occur naturally, incentives must be designed clearly," adding, "I hope the discussion on improving the CVC system will go beyond simple deregulation and evolve into designing a system that can change the investment flow itself."