30 October, 2017
The operation of small and medium-sized enterprises, including start-ups, has been codified in a specific law. On 12 June 2017, the National Assembly adopted the Law on Supporting Small and Medium-Sized Enterprises, which takes effect on 1 January 2018 (SME Law). This law also facilitates investment in SMEs by venture capital funds, and other investors.
Small and medium-sized enterprises (SMEs)
SMEs means micro enterprises, small enterprises and medium-sized enterprises with an annual average number of employees participating in social insurance not exceeding 200 and which satisfies one of the following criteria:
(a) Total capital does not exceed VND100 billion1; or
(b) Total turnover of the immediately preceding year does not exceed VND300 billion.2
The term "innovative start-up SMEs" refers to SMEs established to realize concepts based on the exploitation of intellectual property, technology, and new business models, and which have the ability to grow rapidly (Start-ups).
It is unclear, however, as to whether the "total capital" (that is used to determine whether an enterprise qualifies as an SME) refers to the registered charter capital or the total investment capital. Local companies which operate according to the Enterprise Registration Certificate will only have registered charter capital. Foreign owned companies which operate according to the Investment Registration Certificate and Enterprise Registration Certificate will have both registered charter capital and total investment capital. It is expected that the Government will provide a more detailed definition of SMEs.
Support for innovative Start-up SMEs
Start-ups which have operated for five years or less from the date of the first Enterprise Registration Certificate, and have not made any public offer in the case of joint stock companies, shall be eligible for receiving support from the Government in terms of:
(a) Technology application and transfer, use of equipment at a technical facility, participation in an incubator and common working area, and guidance on testing and completing new products, new services and business models;
(b) Training, including in-depth practical training on product construction and development, on attracting investment, advice on intellectual property
rights, conducting procedures regarding standards and technical specifications, measurement and quality;
(c) Information and communications, trade promotion, connection to innovative start-up networks, and attracting investment from innovative start-up investment funds;
(d) Commercialization of the results of scientific research and technological development, and of exploitation and development of intellectual property; and
(e) Interest rate subsidies shall be provided by credit institutions for loans borrowed by Start-ups.
Investment by Venture Capital Funds
The SME Law recognizes different capital sources supporting SMEs, which include, without limitation, legitimate capital sources from both domestic and foreign organizations and individuals.
In particular, investors in Start-ups include innovative start-up investment funds (i.e., venture capital funds), domestic and foreign organizations and individuals that will conduct business activities by way of capital contribution for the establishment or purchase of shareholding or capital contribution in such Start-ups.
The SME Law contemplates that the source of capital investment in a venture capital fund is contributed by private investors subject to the following conditions:
(a) The venture capital fund accounts for 50% or less of the charter capital of the Start-up; and
(b) The private investors must have adequate financial standing and shall be liable for their capital contributions.
In the absence of further clarification, it appears that this law imposes an ownership cap on investments made by venture capital funds into Start-ups. With regards to the requirement for private investors to have financial capacity, it is anticipated that private investors may have to provide evidence of their financial capacity to the authorities as part of the licensing procedures.
Additionally, investors in Start-ups, including venture capital funds, are entitled to tax incentives for income arising from investments in Start-ups.
The drafters included a roadmap for state-owned funds to divest their capital in Start-ups. Within five years from the capital contribution in the Start-up, the State shall transfer its shareholding or capital contribution to private investors in accordance with the regulations on management and use of state-owned investment capital. We understand that the Government encourages private sector investment in Start-ups and will provide further guidance regarding the divestment of state-owned capital in Start-ups.
1 Approximately USD 4,400,000.
2 Approximately USD 13,000,000.
For further information, please contact:
Thanh Son Dang, Partner, Baker McKenzie
thanhson.dang@bakermckenzie.com
