Flexible investment methods, convertible note foreign exchange transaction reporting cases

Law firm Veat successfully performed foreign exchange transaction reporting related to convertible note (Convertible Note, “conditional equity conversion contract”) investment for a domestic investment combination (hereinafter "client").

Law firm Veat’s foreign exchange reporting center thoroughly reviewed whether the transaction could satisfy existing foreign direct investment regulations, specifically when the client was additionally acquiring a convertible bond for an overseas entity that the client had already partially acquired shares in.

Furthermore, foreign direct investment requirements are one of the frequently occurring complex regulations in international transactions. Since legal issues can arise if investment structures and reporting procedures are not properly understood and prepared, Law firm Veat’s foreign exchange reporting center clearly identified the required reporting types and reporting institutions, and proceeded with securities acquisition reporting accordingly.

During this advisory process, Law firm Veat’s foreign exchange reporting center paid attention to whether it constituted foreign direct investment if a previous investment existed, and assisted the client in preparing the necessary documents in advance based on the necessary reporting content.

What is a Convertible Note (Conditional Equity Conversion Contract)?

On December 12, 2023, an amendment to the Venture Investment Promotion Act (hereinafter “Venture Investment Act”), which explicitly stipulated convertible notes as a method of venture investment, came into effect. This amendment formally defines investment methods previously known as Convertible Notes as conditional equity conversion contracts, providing a clearer legal basis for venture investment.

Convertible notes are gaining popularity among many venture investors due to their advantages of providing a fast and efficient investment method. Firstly, convertible notes offer the flexibility to postpone the timing of valuation. In contrast to typical equity investments where valuation is essential at the time of investment, convertible notes allow it to be postponed. This allows for faster investment for both investors and companies, and can reduce the time and cost involved in valuation.

Secondly, as an advantage, convertible notes are classified as debt, so they do not dilute equity and have a smaller impact on artificially inflating company valuation. This is particularly advantageous for early-stage startups, as equity investments can be associated with additional tax issues due to the increase in company valuation.

Finally, convertible notes can flexibly adjust the company valuation instead of evaluating it at a fixed price. This is very advantageous as it leaves open the possibility that the investor's conversion terms may change according to the company's future growth. Specifically, they have the characteristic of being converted into equity at an appropriate time depending on the company's growth rate or external investment situation, providing better opportunities for both investors and companies.

Thanks to these advantages, convertible notes are increasingly becoming a preferred investment method for many venture investors. However, it is very important to confirm that the process is carried out in a simple manner, but complies with the requirements stipulated by law and that the contractual conditions are appropriately set. In particular, if there are issues related to foreign exchange transaction reporting, a proper reporting procedure must be accompanied, and we recommend that you receive advice from experienced legal professionals to proceed safely and accurately.

Law firm Veat provides swift and accurate legal advice to clients based on its deep legal knowledge and abundant practical experience regarding convertible notes (conditional equity conversion contracts) and foreign exchange transaction reporting.

Law firm Veat operates a regular legal subscription service to provide clients with professional support as a legal partner, so that they can minimize legal risks and lead successful businesses.

If you need legal advice regarding various foreign exchange reporting issues, including convertible issues, please contact Law firm Veat.

Thank you.

Law firm Veat