BAKU, Azerbaijan, July 7. The legal framework for venture capital funds will be formed in Azerbaijan, Trend's correspondent reports from the event.
This is reflected in the draft law on amendments to the Labor Code, Civil Code, the law "On currency regulation", "On banks", "On investment funds," and "On the securities market", which was discussed at today's session of the parliament.
During the discussions, it was noted that the general goal of the project is to ensure the recognition of modern legal and financial instruments for financing innovation activities, as well as those widely used in international practice, in national legislation.
The draft primarily forms the legal framework for venture capital funds. It's intended to add the concepts of venture capital fund, professional investor, accredited investor, free-reporting venture capital fund, and licensed venture capital fund to the law "On investment funds". This creates different legal models for venture funds to operate in a light registration regime or in a licensed regime.
Furthermore, it's proposed to add provisions to the Civil Code on convertible instruments, convertible notes, and future participation agreements (SAFEs). These mechanisms allow an investor to immediately provide funds to a startup, and those funds can be converted into shares or stocks at a future financing stage or upon the occurrence of a liquidity event.
The draft also includes norms on the institution of corporate contracts and special rights of investors. The legal basis for mechanisms such as tag-along rights, drag-along rights, first refusal rights, priority in liquidation, provisions against the impairment of shares or stocks, protected issues, conversion rights, and different voting rights is determined.
Moreover, the draft comprises provisions on employee stock ownership plans (ESOPs). Under this mechanism, startups and technology companies will not only provide employees and board members with a salary, but will also be able to provide them with the opportunity to acquire shares or stocks in the company in the future. This is an important tool for attracting and retaining highly qualified specialists, in particular. In other words, the employee has a direct interest in the company's success, since the value of the shares or stocks he or she can acquire may increase as the company grows.
At the same time, the draft adds provisions to the laws "On currency regulation" and "On banks" that regulate the specifics of currency and banking transactions for digital travelers, innovation projects, venture capital funds, accredited investors, and digital services. These changes serve to reduce the existing administrative difficulties for innovation and digital economy entities in the field of foreign payments, investments, repatriation of income, and access to banking services.
The forecast draft adoption outcomes include:
- strengthening the financial sustainability of the innovation and startup ecosystem and boosting local startups' access to initial investments through flexible financing instruments such as venture capital funds, angel investor activity, convertible debt agreements, and future participation agreements;
- creating more favorable conditions for attracting foreign capital, intellectual potential, and highly qualified specialists to the country by simplifying banking, currency, and repatriation operations of digital travelers and non-resident investors;
- enabling local technology companies to attract, motivate, and retain talented personnel through the introduction of employee share and stock ownership plans (ESOP);
- ensuring protection of investors' rights and the improvement of corporate governance as a result of the recognition of mechanisms for protection against corporate contracts, joint sales, forced sales, and dilution of shares in the event of liquidation;
- faster integration of local digital businesses into global markets through the simplification of payments for digital services, software licenses, and cloud services.
In general, as a result of the draft adoption, it's expected that the innovation and venture environment of Azerbaijan will adapt to international practice, the volume of private investments attracted to the innovation ecosystem will increase, new venture funds will be established, the legal and financial foundations of the digital economy will be strengthened, and the country's attractiveness as a regional innovation and investment center will increase.
The draft law was put to a vote after discussions and passed in the first reading.
Meanwhile, venture capital (VC) funds are pooled investment vehicles that finance early-stage startups and emerging companies with high growth potential. In exchange for capital, these funds acquire equity stakes, taking on substantial risk in the hope of generating outsized returns when the companies eventually exit through an IPO or acquisition.
