VC regulations in Taiwan

As a direct result of this change, the "Regulations Governing Venture Capital Investment Enterprises" was also eliminated and replaced on May 23, 2001 with the Regulations "Scope and Guidelines for Venture Capital Investment Enterprises" which governs the formation and operation of venture funds. Under the new regulations, applications for the establishment of new venture funds became the jurisdiction of Department of Commerce under the Ministry of Economic Affairs (MOEA). A prospective venture fund with business scope described in Article 3 of the new regulations with capital commitments from banks, insurance companies, securities firms, financial holding companies, or pension funds needs to take the additional step of applying for a recommendation from the Industrial Development Bureau (IDB) under MOEA. Said banks, insurance companies, and securities firms can only invest in the venture fund if the recommendation is granted by the government. Venture funds that wish to apply to the NT$ 100 billion venture capital fund investment project of the Development Fund under Executive Yuan for capitals need to submit an application to the Trust Department of the International Commercial Bank of China (ICBC) and wait for the approval of the Investment Review Committee of the Development Fund. Applicants approved by the Committee can then officially set up a venture fund and commence investment activities in accordance with the Development Fund’s guidelines and regulations. The investment scope set by the Development Fund, which previously limited investee funds to investing in the manufacturing industry, has now been relaxed to include the service industry.

Since 2005, responsibility for overseeing and governing the venture capital industry officially shifted from the Ministry of Finance (MOF) to MOEA. The government hopes that this move will breathe new life into the industry. On March 31, 2006, MOEA completed a draft amendment of “Scope and Guidelines for Venture Capital Investment Enterprises” to relax

restrictions on venture capital fund sources, allowable investment targets, and usage of idle capital. The Council for Economic Planning and Development (CEPD) is also assessing the feasibility of venture capital funds incorporating in the form of limited partnerships. The resulting draft bill will be evaluated by the Executive Yuan, and if passed, will greatly benefit domestic venture funds during the fundraising process, and bring domestic venture fund regulations into line with those of other nations with developed venture capital industries.

Government policies and the industrial environment are the main factors that affect the development of the domestic venture capital industry in Taiwan. Current laws and regulations affecting the industry are summed up below:

The Revised “Scope and Guidelines for Venture Capital Investment Enterprises” has Allowed Venture Funds to Develop in Multiple Directions

In 2005, jurisdiction over venture capital investment enterprises (funds) shifted from the Ministry of Finance (MOF) to the Ministry of Economic Affairs (MOEA). Following a number of negotiation sessions between Taiwan Venture Capital Association (tvca) and the MOEA, the Executive Yuan formally announced a draft revision to the “Scope and Guidelines for Venture Capital Investment Enterprises” (Scope) on March 31, 2006. The main revised points are as follows:

1. Jurisdiction over venture capital investment enterprises (funds) shifts from MOF to MOEA, while the appointed office overseeing venture capital-related matters shifts from the Development Fund under Executive Yuan to the Industrial Development Bureau (IDB) under MOEA.

2. Prospective venture funds with capital commitments from banks, insurance companies, securities firms, financial holding companies, or pension funds now need to apply for a recommendation from IDB (previously from TVCA).

3. Restrictions governing the scope of venture capital investments are eliminated. In the future, venture funds won’t face restrictions on industries of investment targets.

4. Restrictions on the usage of idle capital are eliminated, while regulations governing venture funds’ investments in public companies are relaxed.

While prospective venture funds with capital commitments from financial institutions or pension funds now need to apply for a recommendation from IDB, it remains unclear which office is responsible for various other aspects of fund formation until IDB makes final decisions about the guiding process and enforcement rules. Before that the prospective venture funds can seek assistance from either IDB or tvca. In addition, the elimination of investment restrictions on venture funds and the relaxation of venture funds’ idle capital usage as set forth in the revised “Scope and Guidelines for Venture Capital Investment Enterprises”

allows and encourages domestic venture funds to develop in the direction of private equity placement.

B. Draft Amendments to the “Financial Holding Company Act” will Impact Venture Funds’

Fundraising Activities

The promulgation of the Financial Holding Company Law in 2001 allowed financial holding companies to invest in venture funds. Over the past five years, domestic financial holding companies have invested over NT$11 billion in venture funds. Over the past three years, financial holding companies have become the main source of capital for venture funds.

However, in 2005, the Financial Supervisory Commission pushed forth draft amendments to

the “Financial Holding Company Act.” A number of scholars and analysts feel that “venture capital” has no relation to the finance industry, and therefore “venture capital investment enterprises” should be listed in Article 37 of the Act under industries that financial holding companies cannot invest in, rather than in Article 36 under industries financial holding companies can invest in. If this amendment is passed, securities firms held by financial holding companies will begin to decrease their investments in venture funds, which would deal a heavy blow to the venture capital industry since it is already facing a capital shortage.

The venture capital industry hopes to stage negotiation sessions with the government, and amend laws in ways that would benefit, rather than harm, the future of the industry.

C. Revisions to Regulations Governing Directors’ and Supervisors’ Deposited Shares will Aid Venture Funds in Exiting Their Investments

As an investment specialist, a venture fund assume a seat on its portfolio company’s Board of Directors or as the company’s supervisor in order to provide the company with management and operation guidance until it is ready to go public. The role it plays is different from that of general company management. After the portfolio company goes public, venture funds can exit their investment by selling their shares in the company when the timing is right. With the proceeds from the sale, the fund can then invest in another early-stage company. According to the securities depository regulations, once a venture fund attains a seat on its investee company’s Board of Directors, a certain percentage of its shares in the company becomes non-transferable for a period of four years, while a smaller percentage of the shares may never be transferred or sold. These shares are deposited with the Taiwan Depository and Clearing Corporation (TDCC, formerly the Taiwan Securities Central Depository Company), where they will remain for the restricted period. In general, venture funds have a fixed life of around seven years. In many cases, at the time when the funds are closed, it is unable to regain

custody of the deposited shares from TDCC. In other words, the current legal structure is an exit obstacle for venture funds.

The Taiwan Venture Capital Association (tvca) has on multiple occasions related these difficulties to the government, and its efforts were rewarded on May 3, 2006 when

“Directions Relating to Article 3, Paragraph 1, Subparagraph 4 of the GreTai Securities Market Criteria Governing Review of Securities Traded on Over-the-Counter Markets” was amended. The major revisions to the regulation are as follows:

1. Before the regulation was amended, the directors and supervisors and major shareholders of a company could begin to reclaim 20% of their deposited shares two years after the company becomes listed on Over-The-Counter Securities Market (OTC), and 20% more in each successive six-month period. Under the amended regulation, the directors and supervisors and major shareholders of a company can reclaim all of their deposited shares after the company has been listed on the OTC Market for two years as long as the company does not violate any of its listing terms and maintains a pre-tax profit margin of 3%.

2. Because the objectives of legal-setting 1) the minimum percentage of shares that directors and supervisors of a company must hold and 2) the mandatory depositing of shares differ, and also because these two regulations have different target groups and of calculation bases, the revision eliminated the minimum percentage of shares that directors and supervisors must hold.

3. Although restrictions governing deposited shares after a company lists on the OTC market have been relaxed, the regulations governing deposited shares prior to listing on the OTC Market have become more stringent. According to the revised regulation, any shares that are additionally issued to directors, supervisors, and main shareholders for any reason, including

Corporation (TDCC) for the period starting on the day that the application for listing is first filed and ending on the day that the company officially lists on the OTC market. The shares cannot be pledged or transferred during this period.

In summary, revisions to the regulations governing the deposited shares of companies’

directors and supervisors will benefit those companies’ management with outstanding performance and fulfillment of loyal duties. The length of time that shares owned by directors and supervisors of companies must remain in deposit has been halved from four years to two.

The minimum percentage of shares that directors and shareholders must hold has also been eliminated. In other words, venture funds will face an easier time divesting of their long-term securities assets, which is extremely helpful when a fund closes. Generally speaking, the revised regulations will be very beneficial for venture funds in exiting investments and overall performance. (TVCA, 2006)