In a four-part series, this article looks at the history of Iran’s venture capitals, its legal framework and related issues. The following is the third part of this series.


Venture Capitals in Iran’s Legal System – Part 1

Venture Capitals in Iran’s Legal System – Part 2

This Article has been written for TechRasa for educational purposes. Using this Article partly or wholly is allowed by referring to TechRasa website.

Article number 100 of the third Development Plan created the first generation of venture capitals Iran. This Development Plan was a temporary Act expired in 2005. After this Act, there were no favorable rules for the establishment of a venture capital.

The second generation of venture capitals came into existence in 2015 by an amendment adopted by the Parliament which added an article to the Knowledge-Based Companies’ Act. This added article is the same as the article number 100 of the Third Development Plan. These two generations have some differences.

The First Generation vs. The Second Generation

The differences between the first generation and the second generation are in two areas: 1- The resources. 2- The scope of activities.

1- The first generation could use budget allocation in the annual national budget. In the second generation, the resources are more market-based. The Fund’s resources have been determined in article number 6 of the Regulation:

  • Article number 6- financial resources for Funds are:
    • Governmental grant or governmental participation.
    • Investments and grants and facilities from banks and financial institutions. 
    • Investments and aids from individuals and legal entities, governmental and non-governmental companies, public and private institutions, municipalities and their affiliate and subsidiary companies.
    • Investments and aids from scientific, technological, and research centers, universities, R&D units, guilds, and individual researchers.
    • Profits that the Fund earns from investments and interests from deposits in banks and financial institutions.
    • Funds deposited to executive organizations.
    • Innovation Fund’s resources in the form of facility and partnership.
    • Absorbable resources through Stock Market instruments.

2- As I mentioned earlier, the first generation of venture capitals had a clear definition of their activities which was stated in article number 7 of their Regulation. The second generation doesn’t have this article; the Regulation for these Funds doesn’t specify their activities. Also, in the first generation, each Fund had a specialty. In the second generation there is no mention of the specialist Funds which means a Fund can work in more than one field of research and innovation programs.

In order to reach a practical conclusion I will summarize the important points.

The Summary 

  • The first generation of venture capitals in the startup market was created in 2000. 
  • The first generation came into existence by a temporary Act. Since the duration for this Act expired, it is not possible to establish such venture capitals now.
  • This generation benefited from vast financial aids from the government. They even have a special budget allocation in the national annual Budget Act.
  • Besides their special budget, they can also use financial supports from related governmental organizations.
  • The second generation doesn’t have an allocated annual budget, however the government and the executive organizations can provide financial aids and facilities for them. 
    • Executive organizations are those that are related to the executive branch including governmental companies and non-governmental public institutions. By this definition, the “government” means the other two branches of governance.
  • The second generation has more freedom of action. Their Act and Regulation doesn’t determine the scope of activities which means they can finance any type of startups they find profitable. Besides this statement, there is still an important argument in their freedom of action, which I will explain in the next part.
  • Legalities and Illegalities:
    • The Act that created the first generation didn’t put any limitation on the scope of activities. i.e. they were not bound to serve “Technology Companies” or as it was called later the Knowledge-Based Companies. The Regulation for the Implementation of the Act took the liberty to change the scope of the original Act.
    • The second generation came into existence via an amendment adopted by the Parliament which added an article to the Knowledge-Based Companies’ Act. This type of legislation means that the second generation VCs are relevant to the Knowledge-Based Companies. Again, the Regulation took the liberty to change the scope of the original Act.
    • The sequence of Acts was to create a pattern like this:
      • First, encourage venture capitals to take action in the whole startup ecosystem;
      • Second, provide extra support for “Technology Companies”.
    • The sequence of Regulations created an upside-down pattern merely because of illegal changes in the original Acts. 
    • In the sequence of Acts, the Innovation Fund also makes sense. Using this Fund, you can aim that sector of the market that needs extra attention while the rest of the market is under control by the first generation of venture capitals. Due to illegal changes that happened in the Regulations, this Fund overlapped with the first generation of venture capitals.

To Be Continued.

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