RVC Discusses Amendments to Venture Investment Regulation Mechanisms


On February 4, at the initiative of RVC, a meeting of the committee under the ASI Working Group was held as part of the execution of an order of the President of the Russian Federation, dedicated to the analysis of law enforcement practice in the field of venture investments and the consolidation of proposals from market participants to change the regulatory framework that determine permissible cases and the amount of non-return of venture investments.

The meeting was attended by experts from RVC, Rusnano, the Skolkovo Foundation, and representatives of the investment community. The meeting was organized by a committee created by the Working Group, which is engaged in the implementation of Order of the President of the Russian Federation No. PR-2199 of September 18, 2019. Under this document, the Government of the Russian Federation, together with the ASI, the Audit Chamber of the Russian Federation, the General Prosecutor's Office of the Russian Federation and development institutions, must, by June 1, 2020, propose amendments to the regulatory framework governing permissible cases and the amount of non-return of venture capital investments involving state capital in technological projects. The chairperson of the committee is Alexei Basov, Deputy General Director and Investment Director of RVC.

Opening the meeting, Alexey Basov noted that the committee’s participants were faced with a large-scale task — to offer the state a set of tools that would change the nature of venture capital market regulation, create a balanced control system that would take into account the interests of all industry representatives.

“Our task is to analyse and give a qualified assessment of the public investment system in the broadest sense. By practice, modern legislation created in this area is workable, but law enforcement practice needs to be adjusted. The key to solving this problem is recognition by the state, along with other participants in the business turnover, of the right to risk. At the same time, it is necessary to give a clear definition of what 'bona fide actions' of market participants means, in which cases these actions must be recognized as unqualified, and in which they are deemed to be malicious. As a result, we must present the most comprehensive methodology with a wide range of assessment tools, which will allow supervisors to differentiate the responsibilities of all market participants.”

According to Irina Monina, Director of Legal Affairs of RVC, the existing mechanisms currently used for state support of venture activities need to be adjusted. There is no law-based definition of venture investment activity that takes into account its increased risk, which is compensated by the excess profitability of individual projects, while the others are unprofitable. Also, the state today is not ready to take entrepreneurial risks upon entering the venture market, along with private players. At the same time, the very concept of “Entrepreneurial Risk” should be clearly described in the legislation to avoid multiple interpretations.

“Venture capital investments are a particular risk zone. It often happens that the company did not succeed due to objective reasons, and not because management made some mistakes. We call it “Entrepreneurial Risk”, and we need to clearly state what its criterion is. And when the state wants to have access to income from investments in advanced technologies on an equal footing with private investors, it must fully share the entrepreneurial risk with private investors.”

As another factor hindering the development of the venture capital market, Irina Monina cited the lack of a unified methodology for assessing the effectiveness of venture projects with the participation of state capital.

“It is also important to look at the role of each player in the venture capital market. An investor, a management company, and a portfolio company have different roles, tasks, and meanings of money management. It is necessary to include in the methodology for evaluating their work a section that would include a body of tools developed based on international best practices.”

The director for the development and planning department of the Skolkovo Foundation Sergey Izrailit, as a measure to improve the regulatory framework, proposed to clarify the budget code, according to which budget money spent on venture projects should be considered as incentive funds. In this case, the purpose of the funds will be changed, which will remove additional risks from investors and entrepreneurs.

“We need a separate measure in the Budget Code that would say that investments in venture projects are obviously of a stimulating technological nature. My idea is to give out venture capital investments from the budget under a single flag. We create a tool called venture, technological, or innovative financing. Then we talk about the fact that the entire life cycle, from direct seeding and educational programs for start-ups to pre-IPOs and sales to a strategist, is available to the market.”

In so doing, to exclude abuses on the part of dishonest managers, Sergei Izrailit proposed introducing a “hygienic minimum” — a set of measures that every manager must observe.

“I support the need to fight against intruders. There should be a “hygiene minimum”, which every manager of such a portfolio must do. If he did so, then there are no criminal claims against him.”

The Deputy General Director for Strategy of Rusnano JSC Alexey Kachay proposed to supplement the system of measures with the ability of market participants to defend their rights in the arbitration court.

“I believe that it is important for us to offer the government a wide package of proposals. The venture capital industry has some peculiarity; therefore, people who understand our specifics should protect the interests of the community. There is a form of arbitration; let's add it here.”

Summing up the meeting, Alexey Basov instructed the Committee members to work out in detail and send their proposals by February 10, 2020.

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