[Editorial] Block Unfair Venture Investment Practices, but Ensure Legitimate Exit Pathways

There is now a regulatory check on contract practices in which some venture capital (VC) firms and other investors have excessively shifted burdens onto startups. The amended Venture Investment Act, which will take effect in March next year, will restrict actions such as prematurely retrieving their investments on grounds of underperformance, or excessively resetting conversion prices (known as "refixing," a mechanism to lower conversion prices if the stock price falls to compensate investors for potential losses) in cases where initial public offerings (IPOs) are delayed, thereby leading to significant dilution of founders' shares. Unfair clauses in contracts will be rendered void, and operating companies that violate these rules may face administrative penalties. Specific standards related to these restrictions will be refined in subordinate legislation before the law comes into force. This represents a positive change, as it establishes the principle that risks and returns should be shared equally between investors and founders.

Thanks to this amendment, startups are expected to be relieved of the pressure of meeting short-term performance goals and strict IPO timelines, allowing them to focus more on technology development and market expansion. This is especially significant in industries such as artificial intelligence (AI), biotechnology, and robotics, where it takes considerable time before meaningful outcomes are achieved. The reforms are also expected to help restore the principle that investors and founders share the risk of failure, while expanding opportunities for second chances.

However, proper risk management by investors must not be hampered. If a founder conceals important information or uses investment funds for unintended purposes, the law must ensure that investors still have channels to respond. The key challenge will be to clearly distinguish between unfair pressure and normal risk management. If the criteria are ambiguous, it could actually discourage investment contracts. The adoption of standard contract templates should also be actively encouraged by linking them to, for instance, the evaluation of fund-of-funds managers, so that their use is not left merely as a recommendation.

Fundamentally, the exit market itself needs to be expanded. In Korea, venture investment exits are concentrated in IPOs and over-the-counter (OTC) sales, while mergers and acquisitions (M&A) accounted for only 2.3% last year. The fewer exit opportunities available, the more investors try to minimize risk through contract conditions. The focus should not only be on blocking toxic clauses, but also on increasing legitimate exit routes by scaling up secondary markets and M&A activity. The government's planned secondary fund of 2 trillion won also needs to be accelerated. Blocking unfair exits while facilitating legitimate ones is essential in creating a virtuous cycle where both founders and investors can grow together.

This content was produced with the assistance of AI translation services.