How to become a companion for startup success as an individual investor

Recently, there has been increasing interest in early-stage startups and venture businesses, leading to an increase in businesses forming accelerators and personal investment syndicates, or attracting investments through them. Within this trend, personal investment syndicates are gaining attention. In this post, we will thoroughly examine the concept and investment methods of personal investment syndicates with a Veat investment attorney.

Q. What is a personal investment syndicate?

A personal investment syndicate is a syndicate formed for the main purpose of venture investment and the distribution of its performance, and means a syndicate registered in accordance with Article 2, Paragraph 12 of the "Venture Investment Promotion Act" (hereinafter referred to as the "Venture Investment Act") (Article 2, Paragraph 8 of the Act).

A personal investment syndicate is established when registered with the Ministry of SMEs and Startups, and must meet certain requirements for registration. The total investment amount must be 100 million won or more, the amount per investment unit must be 1 million won or more, and the number of members is limited to 49. In addition, the duration of the syndicate must be a minimum of 5 years. (Article 12, Paragraphs 1 and 2 of the Venture Investment Act, and Article 6, Paragraph 2 of the Enforcement Decree).

Q. Are there any advantages to individual investors forming a personal investment syndicate?

Yes, since personal investment syndicates were introduced with the purpose of promoting investment in early-stage founders and venture businesses, various tax benefits are provided to syndicate members who invest in a personal investment syndicate.

For example, when a personal investment syndicate invests in a venture business, individual syndicate members who have invested in the personal investment syndicate may deduct 100% of up to 30 million won from their total income, 70% of the amount exceeding 30 million won up to 50 million won, and 30% of the amount exceeding 50 million won (Article 53 of the Tax Evasion Restriction Act), and may also receive tax exemptions when transferring their shares later (same law, Article 54), and corporate syndicate members may deduct the amount equivalent to 5% of the shares or investment units acquired through the personal investment syndicate from corporate tax (same law, Article 28, Paragraph 2). These tax benefits are one of the main advantages of personal investment syndicates.

Q. So, who and how can a personal investment syndicate invest?

Since a personal investment syndicate is a syndicate formed for the main purpose of 'venture investment,' there are limitations on the investment targets.

First, for three years after registration, a personal investment syndicate must use more than 50% of the total investment amount for investment in founding companies (companies within 7 years from the commencement of business) and venture businesses (small and medium-sized enterprises that have received confirmation from a venture business confirmation agency as a venture investment type/research and development type/innovation growth type/pre-venture type), and if a business planner is a business execution member, the personal investment syndicate must use more than 50% of the total investment amount for investment in early-stage companies (companies within 3 years from the commencement of business) (Article 13, Paragraphs 1 and 2 of the Venture Investment Act).

There are also limitations on the investment methods for personal investment syndicates, which must be by way of acquisition of newly issued shares or investment units (except for newly issued shares for listing on the stock market), newly issued unsecured convertible bonds (CB), unsecured warrants and bonds (BW), unsecured exchange bonds (EB), or conditional equity purchase agreements (SAFE), as stipulated in the Venture Investment Act (Article 13, Paragraph 4 of the Venture Investment Act, Article 7 of the Enforcement Regulations).

When the required investment ratio is met, investments can generally be made freely within the scope excluding the required investment ratio. It is possible to invest in the desired manner, such as acquiring existing shares or acquiring shares of listed companies on the stock exchange or KOSDAQ market. However, there may be investment methods restricted by the Venture Investment Act or related laws, such as limiting investment to 10% of the investment amount when investing in companies listed on the stock exchange or KOSDAQ market, so it is important to carefully check the possibility of investment through a professional’s review beforehand.

Personal investment syndicates are an attractive investment method for capitalizing on the high growth potential of early-stage founders and venture businesses, but they also carry risks, so we recommend obtaining sufficient legal review from Veat investment attorneys.

If you need legal advice on personal investment syndicates and the Venture Investment Act, please feel free to contact Veat.

Thank you.
Veat Law Offices