South Korea is poised to employ a Silicon Valley-style venture capital instrument starting from July, to let startups raise funds with fewer strings attached.

The Ministry of SMEs and Startups promulgated on Tuesday a separate set of laws that center on venture investment schemes here, which have been recognized under two different laws: the Act on Special Measures for the Promotion of Venture Business and the Support for Small and Medium Enterprise Establishment Act.

The new rule gives legal grounds to a fundraising scheme called Simple Agreement for Future Equity. Since being introduced by US startup accelerator Y Combinator, SAFE has risen in popularity across the Silicon Valley venture capital community and given birth to other varieties, including Keep It Simple Security by 500 Startups.

SAFE refers to a single document-based contract that gives a venture investor the right to receive equity, with the purchased cost paid in the name of seed funding before equity is actually issued. Venture investors would not immediately set a valuation of the startup and instead wait until the following round of funding, when new equity is issued.

The investment involves no expiration or maturity date.

This differentiates itself from popular options in Korea for venture investors, mostly mezzanine instruments, all of which leave startups exposed to increased debt risk.

The new law also removes legal uncertainty for accelerators to create and manage their own venture funds.

The Korean venture capital community welcomed the move.

The law will allow accelerators to become more truthful to their role in the startup ecosystem here, Lee Eun-se, managing director at Techstars Korea, told The Korea Herald.

“Many startup accelerators here have rather focused on setting a valuation of a portfolio company and improving that until the next funding round, instead of literally ‘accelerating’ the growth of a startup,” Lee said, adding that removing legal uncertainties in terms of issuing, or investing in, convertible bonds in Korea will give more leeway to the accelerators.

First mentioned immediately after the Startup Ministry came into being in 2017, the rules became the first to be enacted by the ministry. More details on the law are set to be announced by July.

On the flip side, venture investors here remain cautious as the new rule works under a “positive system,” a principle that bars anything not clearly allowed by law.

Some argue this might hamper accelerators from thinking outside the box and allowing varieties like KISS of 500 Startups.

“The one-size-fits-all SAFE contracts might not work in Korea,” Ryu Jung-hee, chief executive of technology-focused accelerator FuturePlay, told The Korea Herald. “In Silicon Valley, there is no government intervention in an investment contract between investors and startups.”

“I doubt that variations can be accepted if they diverge from the standards given by the government,” said Cho Sung-min, a partner at law firm Bae, Kim & Lee. “SAFE did not come to life in the United States because there was a law that supports it, but because Y Combinator wanted the standard.”

By Son Ji-hyoung (consnow@heraldcorp.com)