ASTANA – Kazakh President Nursultan Nazarbayev signed a law on venture financing July 9 providing a number of innovations that should stimulate the private venture capital market.
The law was developed by the National Agency for Technological Development (NATD) and the Ministry for Investments and Development, reported Kazinform with reference to the NATD press service.
The government expects the new laws will foster the growth of innovation-active enterprises and venture capital market investors, create new jobs and increase entrepreneurial activity.
In the long term, the innovations will ensure scientific and technological progress, GDP growth and the country’s competitiveness, said Minister for Investments and Development Zhenis Kassymbek.
The law introduces a clear definition of venture financing and specifies the features of its legal status. This will allow Kazakh investors to structure their transactions in domestic jurisdiction, thus avoiding the outflow of investment and innovations abroad.
Approaches to assessing the effectiveness of state support for innovative projects financed by venture funds have been changed, taking into consideration the high risks associated with venture investments. In particular, the results of the entire portfolio of venture fund projects co-financed by the state will be considered during state audit and financial control, offering private investors the opportunity to more confidently invest in risky projects at an early stage.
The law also allows carrying out joint venture financing activities without forming a legal entity. In addition, other information and communication technology institutions can become involved in venture financing. For instance, Zerde, the national info-communication company, can create a venture fund to finance IT enterprises.
Importantly, the law introduces new corporate law contractual instruments in order to regulate the relationship between the parties involved in venture financing. The amendments include elements of English law. The following contractual instruments are used for venture financing, but were not fully regulated by civil legislation before the law was adopted.
The shareholder agreement allows establishing a balance of interests between shareholders, as well as avoiding conflicts of interests between persons on whom the effectiveness of such legal entity depends, such as managers, company directors and creditors. The agreement regulates a wide range of issues such as managing society and circulating shares.
The contract is the agreement to implement the rights of those involved in the partnership. It is designed to consolidate agreed-upon “rules of the game” between partners, including the conditions for entering and exiting the business, as well as reducing the risks of corporate conflicts. The impossibility of changing the terms of the contract without the consent of its participants allows effectively protecting the rights of minority shareholders without violating the balance of interests of other participants.
The agreement also introduces a stock option contract, where one party can undertake to fulfil its obligations on the demands of the other party.
Another important innovation is the possibility of venture fund participants to require other participants on a convertible loan to contribute to the charter capital of the partnership.
The law also allows including contract provisions on representations and warranties. In these cases, representation is a statement of fact, based on the counterparty of the person who made the certification and entered into the transaction. It will allow the counterparty to spend less time rechecking the relevant circumstances within the legal expertise, receiving a guarantee for damages and saving transaction costs. The warranty is a statement that determines the essential terms of the contract, such as the price and term for retaining the force of some restrictions. Their violation gives the investor the right to demand terminating the contract and compensation for losses.