BAKU, Azerbaijan, September 1. New investment instruments are being created for venture funds in Azerbaijan, Head of Corporate Law Department of the Innovation and Digital Development Agency (IDDA), Turkan Hajiyeva, said during her speech on the topic "Development of the digital and innovation ecosystem in Azerbaijan: new legislative opportunities" organized within the framework of the educational session "Digital skills for the media", Trend's correspondent reports from the event.
According to her, the legal basis for new financial instruments such as SAFE (Simple Agreement for Future Equity) and convertible securities has been formed for investing in startups in Azerbaijan.
"After attracting funds from professional investors, these funds can be invested in startups through SAFE and convertible securities," Hajiyeva noted.
According to her, the SAFE mechanism facilitates investment, especially in startups, which are at an early stage and whose shares or stakes haven't yet been formed.
"SAFE is a deal concluded in relation to property rights that will be acquired in the future. The startup may not have shares or stakes that it can give to the investor today. In such a case, how can the investor secure his rights in return for the funds he has invested? For this purpose, the legal basis of SAFE agreements was formed within the framework of the amendments to the Civil Code," the official pointed out.
Hajiyeva emphasized that this mechanism envisages granting the investor appropriate rights in the event that certain conditions occur between the investor and the startup in the future.
"When a certain conversion event occurs in the future, for example, when the startup reaches a certain stage of development or the commercialization of the product is ensured, the shares and other property rights that the investor will acquire in the future are secured in advance on the basis of a contract. This creates a legal basis for protecting the rights and interests of the investor in the event that the startup is successful and grows," she said.
The head of the department noted that the previous legislation didn't have sufficiently clear mechanisms for regulating such relations.
"The main purpose of these legislative changes is to clarify the investor. The investor should know what rights he has in return for the funds he has invested and at what level and by what legal mechanisms these rights are protected," Hajiyeva stressed.
According to her, within the framework of the new approach, a number of new legal institutions have also been formed regarding the corporate agreement, special transactions regulating relations between investors and shareholders, and emission rights.
"Instead of creating special economic zones, we have directly integrated the legal institutions necessary for this area into civil legislation. The corporate agreement, special agreements regulating relations between investors and shareholders, emission rights, and other mechanisms have been formed within this framework," she added.
Hajiyeva also highlighted that venture funds can operate under two different regimes.
"We have identified two approaches: free reporting venture activities and licensed venture activities. There is no license requirement for free reporting venture funds. They can start operating by applying in a simplified manner," the head of the department said.
She noted that a venture capital fund can also operate as a licensed fund by applying to the Central Bank if it wishes. In this case, the fund is subject to reporting, identification and other prudential requirements.
"Free-reporting funds do not mean completely unregulated funds. It is just that all the heavy prudential and identification requirements applied to licensed funds aren't applied to them to the same extent. These funds are required to engage an external auditor once a year and submit the audit results to the relevant body," Hajiyeva underscored.
The department chief further said that the list of documents required for the activities of free-reporting venture funds has also been simplified.
"The main documents, such as the fund's constituent documents, investment and risk policy, are submitted. The main goal here is to ensure informing investors about the potential risks by the fund manager, as a financial intermediary," she noted.
According to Hajiyeva, innovative projects are considered high-risk investment instruments, and therefore, it's especially important for investors to be informed about the risks in advance.
"Innovative projects are risky projects in any case. In such investments, a significant part of the funds may result in an unsuccessful investment. Therefore, it's important to disclose the risk policy and inform investors," she added.
