SAFE investments foreign currency transaction reporting review to reporting agency, please check the precautions.

Law firm Veat received a request from a domestic investment firm A (hereinafter referred to as "the client") regarding the SAFE investment in an overseas corporation, and proceeded with foreign exchange transaction reporting (securities acquisition reporting).

The "Foreign Exchange Transactions Act" requires a proper foreign exchange transaction reporting procedure for investments in overseas corporations and the acquisition of shares. Especially SAFE investments have the potential to be converted into shares in the future, so it is necessary to thoroughly review the contract terms at the initial investment stage and proceed with foreign exchange transaction reporting based on this. Law firm Veat thoroughly analyzed the draft investment contract and provided a one-stop service, from reviewing the necessity of foreign exchange transaction reporting to handling the reporting itself.

What is a SAFE investment?

SAFE (Simple Agreement for Future Equity) investment is a revolutionary investment method that attracts attention in the startup ecosystem. It is an investment method where investors provide funds and have the right to convert them into shares in the future, based on trust between early-stage companies and investors. It is mainly used when it is difficult to evaluate the corporate value of early-stage startups.

SAFE contracts have the advantage of not having to go through a complicated corporate valuation process, and the contract terms are relatively simple, allowing capital to be raised quickly without complex procedures. Moreover, the funds raised through SAFE investments are free from interest or repayment obligations, which is a great help to startups in maintaining liquidity in the early stages. However, legal review and thorough reporting procedures are essential for SAFE investment processes.

If a SAFE investment is made in an overseas corporation, an obligation to report capital movement arises pursuant to the Foreign Exchange Transactions Act, and domestic regulations must be strictly adhered to in all processes, including overseas remittances, fund movements, and share conversions. Especially, foreign exchange transactions and securities acquisition reporting are important legal requirements, and failure to omit or improperly handle them may result in sanctions from the Financial Supervisory Service, so advice from a legal expert is essential. In addition, it is necessary to strictly comply with the laws of the investment target country as well as domestic laws to accurately proceed with the reporting procedures to eliminate legal uncertainty and secure legal protection for both investors and startups.
 

Key considerations for the foreign exchange transaction reporting process following a SAFE investment

* Investment amount and subsequent investment conditions

It is important to clearly define the conditions for subsequent investments along with the investment amount. In a SAFE contract, investors agree in advance on the timing and conditions for conversion into shares, so this information must be clearly stated in the reporting process.

* Pre-investment company value cap and discount rate

SAFE contracts generally include a pre-investment company value (Cap) and a discount rate (Discount Rate). These values serve as the criteria for determining the share price at the time the investor acquires shares, so they must be mandatory in foreign exchange transaction reporting.

* Liquidation and dissolution events

The amount and method of payment to the investor in the event that the investment target corporation is liquidated or dissolved were also reviewed. SAFE contracts are designed to protect investors in such situations, so the relevant information should be detailed in the application form.

* Subsequent Reporting

If the conditions for conversion into shares are met pursuant to the SAFE investment contract, this will be considered as new securities acquisition, and additional reporting procedures will be required. In particular, if Equity Financing or Valuation Cap conditions are met and shares are converted, securities acquisition reporting is mandatory in addition to foreign exchange transaction reporting. In this process, it is necessary to thoroughly review the relevant information from the beginning of the contract and prepare the application form to prevent risks that may arise later.

SAFE contracts may seem simple at the early stage, but in reality, it is very important to clearly understand the meaning of the detailed provisions and subsequent procedures. It is essential to be aware of the legal obligations that may arise after the contract is concluded and to prepare for them.

Law firm Veat has thoroughly reviewed key conditions such as investment amount, subsequent investment conditions, company value cap, and discount rate in relation to SAFE contract conclusion, and systematically managed legal requirements such as foreign exchange transaction reporting and securities acquisition reporting based on this. In particular, it has prepared in advance for additional reporting procedures that may arise when converting into shares pursuant to the SAFE contract to minimize legal risks and establish a stable legal foundation in the investment process.

Furthermore, it has swiftly supported a smooth SAFE investment process that both investors and investees are satisfied with by systematically proceeding with all processes from drafting the contract to managing the reporting procedures.

Law firm Veat is a startup and investment specialized law firm that provides rapid and accurate legal services throughout the entire process, from complex SAFE investment contracts to foreign exchange transaction reporting and securities acquisition reporting. It has demonstrated expertise in complex investment structures such as M&A, venture capital, and blockchain investments, particularly being ranked 7th in the Bloomberg league table of legal advisors in M&A in the 4th quarter of 2024, and is committed to helping our clients succeed.

If you need legal advice on SAFE investments, foreign exchange transaction reporting, or securities acquisition reporting, please feel free to contact the Foreign Exchange Reporting Center of Law firm Veat.

Thank you.

Law firm Veat