Venture capital financing in Thailand
VC, Venture Capital (ธุรกิจร่วมลงทุน), as defined by the Thai Venture Capital Association, is long-term risk capital which invests as alongside entrepreneurs, typically in business with high growth potential. In the following, we describe how a start-up successfully gets a VC financing in Thailand and the legal and tax considerations on the VC provider’s side.
VC firms, CVCs, banks, and the Thai government compete on Thailand’s start-up industry
Angels, accelerators, incubators, kickstarter and crowdfunding: There are more than fifty traditional venture capital and private equity firms in Thailand, whose primary goal is to maximize the financial return on the investment, including
- 500 Startups, JDFI Asia, Scapita Partners, Sinar Mas Digital Ventures, Sumitomo Corporation Equity Asia Limited, CyberAgent Ventures, True Group/True Incube, Galaxy Ventures Co., Ltd, DeNA, Tigerlabs, Asia Pacific Capital, East Ventures, Digital Media Partners, Recruit Strategic Partners, IMJ Investment Partners, Fenox Venture Capital, Invent, Singtel innov8, Crystal Horse Investments, JL Capital, Sinar Mas Indonesia, NTT DoCoMo Ventures, Jungle Ventures, Ardent Capital, Recruit Holdings, M&S Partners, Red Dot Ventures, Inspire Ventures, Transcosmos, iTech Capital.
The Siam Commercial Bank (SCB) is setting up its first venture capital fund, with a target size of up to US$ 50 million and expects to launch the fund in the first quarter of 2016 – which is nearly over.
In addition, Corporate Venture Capital (CVC) gains more significance as well. Under a CVC scheme, big market players like Google, Facebook or Microsoft invest in external startups to complement strategically to the business of the company. However, CVCs are (increasingly) investing in deals that generate social and/or environmental impact.
Very soon the Thai government intends to establish THB 3 billion venture capital fund, supported by the government’s Vayupak Fund and Krung Thai Bank. As the Finance Ministry announced, “the fund will be sprayed into high-potential startups who require seed funding.” This step will be accompanied by a National Start Up Committee.
However, the governmental VC fund is just one more player on the VC market and Thailand’s potential goes far beyond governmental sponsored start-ups. The market is still open for private VC firms and the following explanations just mention some rough legal and tax considerations.
The start-up in Thailand – fit for venture capital?
Given the plethora of investment opportunities, the success rate for a start-up to get financed by VC does not exceed 2%. The right approach is critical for the success. Lack of legal maturity: Experience shows that most start-ups are not fit for VC financing. Legal aspects are neglected, the tax structure is inefficient and the accounting is a mess. Since there is typically no second chance in this industry, the first approach has to impress. This means the difference between pursuing or abandoning a venture.
As a consequence, the start-up has to make its homework before it is ready for the investor’s roundtable:
- Cheap corporate structures have to be repaired.
- A corporate governance system has to be implemented.
- The licenses have to be properly prepared.
- The foreigner restrictions under Thai laws have to be carefully implemented.
- Any type and scope of corruption has to be strictly avoided.
- The tax structure has to be clear and stringent.
- The financial plan has to be in place.
From the banker’s point of view, the investment attractiveness depends on (i) a convincing business model, (ii) medium-term growth potential and scalability (big and bold), (iii) qualifications of project developer and workforce, (iv) a high exit potential, but also (v) by a legal advisor who is familiar with the individual phases and a proactive deal-flow practice.
Legal consideration for the corporate structuring of a VC business for Thai target companies
The legal framework for doing venture capital (VC) business in Thailand includes a broad scope of laws and regulations:
- Foreign Business Act (1999) (FBA)
- Securities and Exchange Act (1992) (SEC Act) regarding license requirements for securities business
- Announcement of the Ministry of Finance as of September 17, 2001 (SEC Announcement) regarding VC business as securities business under the SEC Act
- Ministerial Regulation as of January 10, 2002 (SEC Regulation)
- Royal Decree No. 396 as of January 26, 2002 regarding tax benefits
- Ministerial Regulation No 235 of the Revenue Code as of March 1, 2002
- Ministerial Regulation on Securities Business Licensing (2008) regarding liberalized licensing regime commencing January 1, 2012
- Notification of the Capital Market Supervisory Board, No. ThorJor. 12/2554 (CMSB Notification)
It is a worthwhile consideration to set-up the VC entity offshore. Jurisdictions as BVI or Hong Kong provide handsome advantages of a tax-free and unregulated jurisdiction. However, limitations for offshore VC investments under Thai legislation have to be strictly observed. In practice, it is a good compromise to cherry picking by mixing onshore and offshore elements. Doing this, the status of agents and representatives of an offshore VC firm in Thailand should be carefully examined.
When setting up an onshore VC firm in Thailand, this might be in the legal form of a PLC or Co. Ltd. In both cases, minimum capital requirements apply and there is a need for a registration with the Securities Exchange Commission.
The shareholders’ structure is typically influenced by foreign ownership restrictions under the Foreign Business Act, restrictions on foreign land ownership and the identity and purpose of local partners. A shareholders agreement and additional legal and compliance requirements are typically required.
In Thailand, VC businesses need securities business licenses. The laws and regulations offer one of four license package deals:
- Type A: Full Service License
- Type B: Boutique Debt Services License
- Type C: Boutique Asset Management Services License
- Type D: Boutique Limited Business Development Unit Services License
Additional licenses are required for investment advisory businesses, securities lending businesses, and VC management companies. Apart from SEC regulations, a careful structuring is advisable to fulfill the legal requirements to avoid the classification as a securities business and to operate VC business without a license and without legal restrictions. In the case of an offshore VC business, the license implications for onshore business in Thailand have to be fulfilled.
Tax aspects of the structuring of the VC business in Thailand
Tax efficient structure has to distinguish between
- Offshore structuring in onshore VC companies
- Tax implications in the home countries of the investors
- Tax planning for the overall life cycle of the VC investment
With respect to tax incentives, the requirements under Royal Decree No 396 and other legal or factual requirements have to be observed. Tax benefits may include (i) dividends and capital gains from target companies, (ii) dividends and capital gains from VC company, and (iii) other tax benefits. Tax benefits, as well as non-tax benefits, are offered by the BOI Board of Investment.
Procedural requirements for the VC business under the laws of Thailand
Thailand’s financial markets are heavily regulated and it is essential to observe and consider protocols and procedural requirements to be compliant in the mine field of Thai laws and regulations. External procedures are especially
- Legal requirements for the general market presence
- Legal requirements for the contact with target companies in Thailand
- Requirement specifications and liability aspects
Important documents, issues and milestones include joint venture and investment agreements, the financial closing, the portfolio management, monitoring and risk management, the reporting requirements and a comprehensive corporate governance.
A prudent investor will always take special diligence for the preparation for and management of the exit. Eventually, 90% of startups bite the dust, and 51% of all businesses die off within a period of five years.