Wed, Jan 19, 2000 - Page 8 News List

Venture capital must be regulated

By Chiu Chen-Miao

The China Times reported last Thursday that a number of legislators have established venture capital firms and then pressured state-owned banks to invest as much as NT$10 billion in the firms. Legislators' blatant misuse of their powers to secure lucrative investments from bankers is enough to make one's blood boil, but equally worrying is the lack of relevant laws.

What is a venture capital fund? It refers to a private fund set up to invest in new high-tech start- ups. The funds involve a great deal of risk, however, due to the nature of their investments.

High-tech firms have developed rapidly over the past decade and are now competing neck and neck with traditional firms. Some people have therefore expanded the definition of venture capital investments to include investments in any unlisted start-up company regardless of their tech level.

Investment in these traditional firms should be called "direct investment" or "investment in unlisted companies," in order to emphasize that the investment is not conducted indirectly through the stock market.

The role of venture capital firms is to make efficient use of idle private capital to develop small enterprises. Venture capital funds can be likened to an "accelerator," in that their role is to select promising firms, rapidly develop them, get them market-listed, and then search for new firms to develop.

The funds are an effective method of bringing together venture capital, high technology, and human capital and result in the creation of many highly competitive tech firms.

Most venture capital companies invest in unlisted, high-tech companies with large growth potential. Moreover, the goal of venture capital funds' investments is not to retain stock in the companies or collect stock dividends, but instead to realize large gains by first infusing large amounts of capital and expertise to induce rapid growth in the companies, and then selling their stake in the firms.

It seems the legislators in question hope to make high-risk investments through venture capital funds using both official and unofficial channels. The official channels refer to investments in the OTC's "second board" due to open in June, which will allow investment in high-tech firms based on traditional investment and management practices. This would serve as to "accelerate" the growth of high-tech firms in Taiwan.

The unofficial method refers to venture capital firms that dangle a small amount of capital in front of legislators, who then help the firms by pressuring banks, and finally the public at large to invest in the firms. The high risk of the investments, however, could in effect mortgage society and government against the investments.

Capital could be invested preferentially into legislator-controlled, unlisted companies, and if any problems emerge, the firms could be dumped onto their major shareholders: the state-owned banks, government and society. It could be the start of another monster the likes of the Hungyuan Investment Company (鴻源投資公司) (a front company that absconded with billions of NT dollars from thousands of private investors in the late 1980s).

OTC's "second board" has yet to be established, meaning there is still a legal gray area regarding venture capital firms. Further, risk hedging mechanisms have yet to be set up, and laws and regulations have still not been passed.

This story has been viewed 3176 times.

Comments will be moderated. Keep comments relevant to the article. Remarks containing abusive and obscene language, personal attacks of any kind or promotion will be removed and the user banned. Final decision will be at the discretion of the Taipei Times.

TOP top