Yes – but care should be taken as to when to strike.
1 – But first, what is a VC fund in Vietnamese context?
By definition, ‘innovative investment fund’ (i.e. – VC fund) means a fund which is established from investments made by private investors to invest in innovative startups.
Under the new rule,[1] a VC fund’s key characteristics include:
- Portfolios must be non-public ‘innovative’ small and medium enterprises (iSME);[2]
- Fund membership must not exceed 30;
- A fund must not hold more than 50% charter capital (or ‘paid-up equity’) of an iSME;
- Business activities of a fund are restrictive to (i) deposit of money at banks and (ii) investment in iSME by way of incorporation of new entity or M&A. No cross-investment among VC funds are permitted; and
- The VC fund does not have a legal entity status.
2- What’s more?
The licensing process, on its face, looks pretty simple and straightforward. The fund management company (FMC) needs only to send a notice of formation of fund to in-charge State body. This means no heavily-regulated procedures applicable to funds operating under Vietnamese law on securities are involved.
In terms of organization, three types of funds are offered, which are (i) investors’ general meeting (IGM) and FMC, which essentially resembles the GPs in other jurisdictions; (ii) IGM, the fund manager or fund representative board, FMC and (ii) IGM, the fund manager and fund representative board, FMC. Fund’s investors can set up an FMC or simply hire an existing one.
A fund operates in accordance with its charter (articles of association), which is greatly similar to the popular ‘limited partnership agreement’. A fund’s accounting system must be separate from that of the FMC.
Funds’ income generated from investment in iSMEs is entitled to tax incentives.
3 – Any special note?
Well, when it boils down to investment platform, please note that, in addition to the aforesaid ‘fund’ (partnership) form, investors may choose a ‘corporate’ vehicle (an LLC or a shareholding company) for their investment. This corporate vehicle must however register ‘innovative investment activities‘ as one of its business lines. In other words, the investors may join a fund like a partner, or simply hold shares in a corporate entity as a normal shareholder.[3]
Regrettably, a VC fund cannot offer loans (including widely used convertible notes) to the targets because the Government is concerned about VC funds’ doing the bank jobs. Arguably, neither can the corporate vehicle. In addition, investors have to use their ‘pocket’ money (i.e. – no loans) to fund their investment. Such ‘pocket money’ restriction however appears not to apply to investment via a corporate vehicle.
4 – What else should be taken into account?
Despite the initial joys, many unanswered questions may leave investment via VC fund route ‘a bridge a little bit far’ – at least for this very moment. Below are the key ones:
- In case of foreign investment, is the current typical licensing process under Vietnamese law on investment still applied?[4]
- Is a foreign-invested VC fund still subject to market-access restrictions under relevant treaties that Vietnam has signed (e.g. – WTO’s commitments, etc.) when investing in each local target?
- What are the business activities of ‘innovative’ nature based on which a VC fund and an FMC is permitted to invest and register respectively with the licensing authority?
- What are specific guidance on separate accounting system of a VC fund?
- If there exists a partnership agreement, will it enforceability prevail the charter in case of inconsistencies if so agreed by the partners?
- What are specific tax incentives for a VC fund?
5- The take-away?
Unfortunately, one should not expect the Government to actively address such questions. Rather, the Government may provide explanations on a case by case basis if directly asked by the fund incorporators during the licensing process. Such explanations would set a good precedent for similar investments to come. It may however take months to have all these issues cleared.
Making the precedent or just repeating it, the choice is yours.
NOTE: Further discussions on VC fund operations in Vietnam’s context will be held in the next post.
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[1] On 11 March 2018, the Government of Vietnam issued Decree 38 which among others paves the way to VC-style investment in startups. This new set of regulations where the author had the honor to have worked closely with the drafting team at the outset is designed to help venture capitalists (literally, ‘innovative investment funds‘ under Decree 38) to avoid the tortuous route under securities laws of Vietnam.
[2] SMEs are defined as those having (i) not more than 200 contractual employees and (ii) owner’s equity of less than VND100 billion (around US$4.4 mil) or revenue of the preceeding year of less than VND300 billion (US$13.2 mil).
[3] In practice, before the issuance of Decree 38, many local investors choose a corporate vehicle to carry out their financial investment in startups. Operations of these de-factoentities, which often mark themselves as ‘holding companies’, will be discussed in a separate post.
[4] Typically, a foreign investor (other than who invest in stock markets) must apply for an investment registration certificate or an M&A approval depending on whether they choose greenfield investment or acquisition respectively.
