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 last part of this series.

The first generation of venture capitals in Iran came into existence by a temporary Act. Since the duration of this Act has expired, it is not possible to establish such venture capitals now. This generation benefited from vast financial aids from the government and they even have a special budget allocation in the national annual Budget Act.

Read:

Venture Capitals in Iran’s Legal System – Part 1

Venture Capitals in Iran’s Legal System – Part 2

Venture Capitals in Iran’s Legal System – Part 3

The second generation doesn’t have an annual budget but the government and the executive organizations can provide financial aids and facilities for them. 

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.

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The Second Generation of Venture Capitals and the Startup Market

• The origin of the second generation is in an Act adopted on April 21, 2015, by the Parliament called: “The Act for the Removal of Obstacles for Competitive Production and the Improvement of the Financial System”. 
• Article number 44 of this Act added an article to the Act of “Commercialization of Inventions and Innovations and Supporting Knowledge-Based Companies”. This article has been added to article number 5 of this Act which is about the “Innovation Fund”.
• Here is the argument:
  • The Parliament adopted an Act for the improvement of competitive production and financial system;
  • Article number 44 of this Act, added a text to article number 5 of the Act of “Commercialization of Inventions and Innovations and Supporting Knowledge-Based Companies”;
  • Article number 5 is about funding for Knowledge-Based Companies through “Innovation Fund”;
  • Any Act might amend or terminate previous Acts. This Act has 60 articles and has amended a lot of the other financial regulations without mentioning their title. However four Acts have been mentioned explicitly: Tax Act, Labor Code, Mining Act, and Knowledge-Based Companies Act;
  • If these venture capitals are not related to Knowledge-Based Companies, there is absolutely no need to amend another Act in order to create these venture capitals. Furthermore, this amendment is exactly for the article which is about “The Innovation Fund”.  
  • This argument leads us to this conclusion that the second generation of venture capitals can only serve Knowledge-Based Companies.
• Despite this logical argument, there is a contrary argument:
  • The article that created the second generation of venture capitals is word by word a repetition of article number 100 of the third Development Plan;
  • This article also explicitly refers to the article number 100 of the Third Development Plan. According to this article: “The government is allowed to participate in the establishment of non-governmental Funds as expressed in article number 100 of the third Development Plan”.
  • There was no such thing as a Knowledge-Based Company at that time;
  • Also there was no limitation on the scope of activities for the first generation. The limitations were a set of illegal interferences by  the Board of Ministers; Because: 
    • The original article didn’t put any limitation on venture capital’s activities;
    • A Regulation cannot exceed from the original Act.
  • In the article number 5 of the “Knowledge-Based Companies” Act, the “Innovation Fund” is in charge of financing for Knowledge-Based Companies. The resources for this Fund are the same as the resources for the first generation of venture capitals. It doesn’t make any sense to create another institution for the same purpose with the same resources. 
  • And finally, there is no mention to Knowledge-Based Companies in the added article and the Regulation. 
  • The newborn second generation of venture capitals have more freedom of action and can serve any startup in the Iranian market.
• While we are on this topic it’s worth to mention the role of nationality in the establishment of venture capitals. The question is: Can non-Iranians establish a venture capital in Iran?
  • In the case of a private venture capital without using the options that I explained, the answer is Yes.
  • In the case of venture capitals that want to use these favorable regulations, the answer is generally positive;
    • The right to establish a company is not an exclusive right for  Iranians.
    • There is no mention to nationality requirements in related regulations.
    • Also there is no mention of nationality in the sample statute for venture capitals.
    • The only possible restriction is about the Stock Market;
      • As I explained in the resources for these funds, one of the resources was: Absorbable resources through the Stock Market instruments.
      • Using these instruments needs the ability to enter into the Stock Market. There are some requirements for CEOs in the institutions that want to work in the stock market. Although the Iranian nationality is not one of these requirements, it is possible to be taken into account. Also there is a restriction on the percentage of shareholding in the Stock Market. See (http://legalknowhowir.com/investment-stock-market-part-one/ )
      • So if the venture capital doesn’t want to use the Stock Market instruments, and even if it does, the non-national is not a CEO, there is no limitation for non-nationals to establish a venture capital and benefit from the above-mentioned provisions. Also the limitation on shareholding in the Stock Market is about those companies that sell their shares in this market so if the company doesn’t sell its shares in the Stock Market, there is no limitation on the number of shares that a non-national can own.

Guidelines for Venture Capital’s Contracts and Structure

In the Regulation for the first generation of venture capitals, there were some guidelines for the scope of activities and a few mentions to the conditions of their contracts.

In the Regulation for the second generation, there is no mention of contracts. Logically, this generation can actually follow the market rules. In this section, I will take a look at the sample statute for these venture capitals including their structure and contracts.

• Structure
  • According to article number 6 of this sample statute, the Fund consists of these organs:
    • General Meeting
    • Board of Directors; three to five members
    • CEO
    • Inspector/s
    • The government will have a permanent member on the Board of Directors if the government has at least 20% of the Fund’s shares.
    • Major decisions are on the General Meeting. Routine activities are on the Board of Directors. 
• Contracts
  • According to article number 5 of the sample statute, the Fund’s activities are:
    • To provide Financial services and facilities for individuals and legal entities to perform research, technological, and innovative programs and commercialization of outcomes in the form of; 
      • Subsidies;
      • Short-term and long-term facilities;
      • Payment of debts for other facilities on behalf of the debtor (the receiver of Fund’s facility);
      • Issuing warranties.   
    • To absorb or lead the financial resources from the government, banks, financial institutions, and other Funds;
    • Risk investment of venture capitalism in research and technology programs;
    • To participate and invest in the creation, development, leadership, and empowerment of research and technology companies and Knowledge-Based Companies;
    • To guaranty the obligations and installments for research and technology programs in order to expedite and facilitate the program;
      • To this end, the Fund has to take due diligence such as bail or mortgage in order to avoid interruption in the whole financial system of the Fund.
    • To cooperate with domestic and foreign institutions;
    • To join professional societies related to the Fund’s goals;
    • To get and grant brokerage and agency for financial resources of individuals and legal entities;
    • To provide evaluation and feasibility services for business plans and research and technology programs;
    • To provide supervising services for research and technology programs;
    • To participate in regulating and prioritizing venture capitals ecosystem and synergistic improvement of the whole supportive instruments in the research.