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.
