SOUTH KOREA Law and Practice Contributed by: Ohryung Lee, Joceline Park, Maria Chang and Hakrae Cho, Bae, Kim & Lee LLC
ners, and articles of association for the manage - ment of the fund. Lastly, a venture capital fund established as a corporation must have in place the articles of incorporation that regulate matters relating to management of the fund. 2.2 Fund Economics Fees payable to fund initiators/managers/princi - pals ( “Fund Principals” ) are usually divided into (i) management or operating fees, and (ii) car - ried interest. Carried interest is determined on a case-by-case basis, and as a general matter, it is customary for approximately 20% of the excess profit to be paid as carried interest if the internal rate of return (IRR) exceeds a certain threshold, normally 7–8%. The following key terms pertaining to the rela - tionship between Fund Principals and investors are included in the standardised form of the investment partnership agreement published by the Korea Venture Capital Association, which form is widely used in practice: • investors’ right to make inquiries and receive responses from Fund Principals; • investors’ right to receive periodic financial reports from Fund Principals; • Fund Principals’ obligation to keep fund assets under a trustee’s custody and control; and • designation of “key persons” who may be replaced only through consultation with (or with consent from) the investors. 2.3 Fund Regulation Domestic venture capital funds are regulated under the Venture Investment Promotion Act (VIPA), which was enacted and came into effect in 2020. VIPA brings together regulations on venture-related investments that used to be dis- persed across several pre-existing pieces of leg -
islation, including the Act on Special Measures for the Promotion of Venture Businesses and the Support for Small and Medium Enterprise Estab - lishment Act. Compared to previous regulations, VIPA partially relaxes regulations on investment in venture companies in order to promote such investments by private investors. In addition, to cultivate an environment favourable to ven - ture capital investment that conforms to global standards, VIPA allows for the execution of a simple agreement for future equity (SAFE) with a venture company. Such agreements, though widely used in venture capital investment in the United States, were not previously recognised under Korean law. In addition, the issuance of convertible notes by venture companies has also been permitted. 2.4 Particularities In Korea, investment of government funds in venture companies and start-ups, through the formation of a fund of funds, and with the aim of fostering the growth of venture companies and start-ups, is active. A fund of funds is a parent fund that invests in one or more funds formed by private venture capitalists aiming to invest in SMEs and start-ups. A fund of funds is formed with government funds sourced from the Minis - try of SMEs and Start-Ups, the Korea SMEs and Start-Ups Agency, the Ministry of Culture, Sports and Tourism, the Korean Intellectual Property Office and other government departments and agencies. A fund of funds invests in other funds established using venture capital, and the latter invests in venture companies/start-ups. In most cases, the main investment by a particular fund of funds will be restricted to a particular sector.
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