Structural Challenges in Foreign Venture Capital Investment
Foreign investors generally do not prioritize direct investment in Vietnamese startups. Instead, they require startups to undergo corporate restructuring to establish a parent company in a foreign jurisdiction, such as Singapore, before receiving investment. This process unfolds as follows:
- Establishing an Offshore Parent Company: At certain stages, the shareholders of a Vietnamese startup must set up a foreign entity to access investment capital. Legal challenges may arise during this process. For instance, in Singapore, it is mandatory to have at least one Singaporean director on the board when registering a company. Vietnamese startups often rely on accounting service firms to appoint a nominee director, who typically holds no equity in the company.
- Acquisition of the Vietnamese Entity: Once the offshore company is established, it proceeds to acquire full ownership of the Vietnamese entity, effectively becoming its parent company. This restructuring allows the offshore company to receive investment and channel funds back to Vietnam. However, to legally transfer these funds, the offshore entity must register its investment in Vietnam in compliance with local investment regulations. Notably, the primary purpose of setting up the foreign entity is not to expand business operations abroad but to facilitate the investment process through venture capital funds.
Challenges Arising from Corporate Restructuring
The requirement to restructure corporate ownership poses several difficulties for Vietnamese startups:
- Increased Costs: The process incurs additional expenses, including consultancy fees, incorporation costs, and ongoing maintenance of a foreign legal entity.
- Legal and Regulatory Uncertainty: Startups may encounter challenges related to investment management, fund transfers, and other compliance requirements, creating legal ambiguities. As a result, Vietnamese startups and their founders often operate in an unfamiliar legal environment, putting them at a disadvantage.
Prevalence of This Practice in Emerging Markets
Despite these obstacles, most Vietnamese startups still comply with investors’ restructuring requirements, given that a majority of their funding comes from foreign sources. This practice is not unique to Vietnam but is commonly observed across emerging markets, including Indonesia, Malaysia, the Philippines, and China.
Addressing these challenges requires ongoing improvements in Vietnam’s legal and investment frameworks to create a more conducive environment for direct foreign investment in startups. By streamlining regulations and enhancing investor confidence, Vietnam can strengthen its position as a competitive startup hub in the region.
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