South Korea to Block Indirect Investment by Corporate Venture Capital

South Korea is moving to close loopholes that allowed corporate venture capital (CVC) firms to make indirect, illicit investments. The Fair Trade Commission announced on Tuesday that it will revise the Fair Trade Act to prevent CVCs affiliated with general holding companies from channeling funds through external investment vehicles into companies owned by the group's chairman. Currently, the law permits general holding companies to own CVCs to boost venture investment. However, it prohibits CVCs from investing in affiliates of their own business group, companies owned by the chairman or their relatives, or foreign companies if such investments exceed 20% of total assets. Despite these restrictions, CVCs found ways around the rules. They could establish private master funds or directly invest in external funds, which then invested in affiliated companies or those owned by the chairman. The Fair Trade Commission has now classified such indirect investment activities as circumvention of the law. The proposed amendments to the enforcement decree of the Fair Trade Act will be open for public comment until September 1.

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The method by which corporate venture capital (CVC) affiliated with general holding companies makes illicit investments through external funds into companies invested in by the chairman will be blocked at the source.