South Korea restricts unfair venture capital contracts
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South Korea’s Ministry of Small and Medium Business Startups passed an amendment to the Act on Promotion of Venture Investment.
The change will prevent investors from unfairly lowering stock prices or demanding early returns based on weak justifications. The new law, passed by the State Council on September 22, addresses practices where investors penalized companies for failed initial public offerings (IPOs) or declining performance. The amendment establishes legal grounds to invalidate unfair investment contracts made by venture capital firms.
Specifically, it targets agreements allowing early retrieval of funds due to changed performance metrics or those lacking reasonable grace periods. The practice of “refixing”, adjusting the price of convertible bonds or stocks after an IPO failure, will also be limited, as overly strict conditions can diminish the equity value of founders and existing shareholders. The government will also increase transparency in venture capital firms by prohibiting major shareholders from exerting undue influence through improper exchanges of money or favors.
The Ministry has been reviewing unreasonable contract clauses through the Venture Investment Contract Culture Development Forum and revised the standard investment contract in June to reflect those findings. The revised law will take effect on March 30, 2027, after its promulgation on September 29.
