Government policies and the industrial environment significantly impact how the venture capital industry develops and performs. Current laws and regulations affecting the industry are summed up below:

A. The Revised "Scope and Guidelines for Venture Capital Investment Enterprises" Has Allowed Venture Funds to Develop in Multiple Directions

In 2005, the Ministry of Economic Affairs (MOEA) took over jurisdiction of venture capital investment enterprises (funds) from the Ministry of Finance (MOF). Following a number of mediation sessions between the Taiwan Venture Capital Association (tvca) and MOEA, the Executive Yuan formally announced a draft revision to the "Scope and Guidelines for Venture Capital Investment Enterprises" (Scope) on March 31, 2006. The main revised points are as follows:

While prospective venture funds with capital commitments from financial institutions or pension funds now need to apply for a recommendation from the IDB, it is unclear which office is responsible for other aspects of fund formation, and will remain so until the IDB finalizes its guidelines and enforcement rules. (In the past, prospective venture funds could seek assistance from either the IDB or the tvca.) In addition, the elimination of investment restrictions and the easing of restrictions governing venture funds' idle capital usage as set forth in the revised "Scope and Guidelines for Venture Capital Investment Enterprises" allows and encourages domestic venture funds to move in the direction of private equity placement.

B. Draft Amendments to the "Financial Holding Company Act" will Impact Fundraising

The promulgation of the "Financial Holding Company Act" (FHCA) in 2001 allowed financial holding companies to invest in venture funds. Over the past five years, domestic financial holding companies have invested over NT$11 billion in venture funds. In the past three years, financial holding companies have become the main source of capital for venture funds. However, due to an increasing feeling among scholars and analysts that "venture capital" is unrelated to the finance industry, the Financial Supervisory Commission pushed forth draft amendments to the FHCA in 2005. If passed, "venture capital investment enterprises" would be removed from Article 36 of the Act, which lists the industries that financial holding companies can invest in, and added to Article 37 of the Act, which lists the industries that financial holding companies are restricted from investing in. Furthermore, securities firms held by financial holding companies will have to divest their interest in venture funds, which would deal a heavy blow to the capital-strapped venture capital industry. Representatives from venture funds hope to negotiate with the government on this issue, and push forth amendments that would benefit, rather than harm, the future of the industry.

C. Revisions to Regulations Governing Deposited Shares Held by Directors and Supervisors of Venture Funds Will Aid Exits

As investment specialists, representatives from venture funds typically assume a seat on their portfolio company Board of Directors or Supervisors to provide the company with management and operation guidance until it is ready to go public. The role venture funds play is different from that of general company management. After the portfolio company goes public, venture funds can exit their investment by selling their shares in the company at a suitable time. With the proceeds from the sale, funds can then invest in another early-stage company. According to securities depository regulations, once a venture fund attains a seat on its investee company Board of Directors, a certain percentage of its shares in the company becomes non-transferable for a period of four years, while a smaller percentage of the shares may never be transferred or sold. These shares are deposited with the Taiwan Depository and Clearing Corporation (TDCC, formerly the Taiwan Securities Central Depository Company), where they will remain for the restricted period. In general, venture funds have a fixed life of around seven years. In many cases, funds are unable to regain custody of deposited shares from the TDCC at closing time. In other words, the current legal structure is an exit obstacle for venture funds.

The (tvca) has on multiple occasions related these difficulties to the government, and its efforts were rewarded on May 3, 2006 when "Directions Relating to Article 3, Paragraph 1, Subparagraph 4 of the GreTai Securities Market Criteria Governing Review of Securities Traded on Over-the-Counter Markets" was amended. The major revisions to the regulation are as follows:

In summary, the length of time that shares held by directors and supervisors of companies must remain in deposit has been halved from four years to two. The minimum percentage of shares that directors and shareholders must hold has also been eliminated. Venture funds will therefore face an easier time divesting of their long-term securities assets, which is crucial at a fund's closing time. Generally speaking, the revised regulations will be highly beneficial for venture funds in exiting investments and overall performance.