World Law Group member firms recently collaborated on a Global Venture Capital Guide that covers more than 30 jurisdictions on investment approval processes, typical investment sectors and investment structures on Venture Capital deals (and more!).
The guide does not claim to be comprehensive, and laws in this area are quickly evolving. In particular, it does not replace professional and detailed legal advice, as facts and circumstances vary on a case-by-case basis and country-specific regulations may change.
This chapter covers Chile. View the full guide.
Urenda Rencoret Orrego y Dörr
1) In your jurisdiction, which sectors do venture capital funds typically invest in?
In Chile, venture capital funds, in general, invest in high potential technology or science-based enterprises with capacity to increase their operations and become regional or global companies.
2) Do venture capital funds require any approvals before investing in your jurisdiction?
It depends on the number of contributors to the fund, and whether or not they make a public offering of securities. Those funds that have less than 50 contributors and do not make public offerings of securities do not require any approvals before investing in Chile. Private investment funds shall be governed exclusively by the provisions contained in their internal regulations and by the rules of Chapter V of Law No. 20,712 (Ley sobre Administración de Fondos de Terceros y Carteras Individuales). These funds may be administered by General Funds Administrators (“AGF”) or by closed corporations registered in the Special Registry of Reporting Entities (“REEI”) kept by the Financial Market Commission ("CMF").
On the other hand, venture capital funds that have more than 50 contributors must be managed, on behalf and at the risk of the contributors or participants, through a “special” corporation supervised by the CMF, and whose exclusive purpose is the administration of third-party resources. Such special corporation must be incorporated in accordance with the provisions of Law No. 20,712 and its Regulations (Supreme Decree No. 129) and must include in its name the expression "General Fund Administrator". Additionally, this type of capital fund must permanently maintain equity of not less than the equivalent of UF 10,000 (USD 372,730 approx.) and have at least 50 participants. Also, in this type of capital fund, the AGF must constitute a guarantee for the benefit of each fund to ensure the administrator’s compliance with their obligations. In the event that the guarantee is not constituted or does not remain permanently in force, the administrator and its directors will be jointly and severally liable for the damages that this failure may cause to the participants of the fund.
3) Are there any legal limitations to an offshore venture capital fund acquiring control or influencing the business, operations, or governance of an investee entity?
As a general rule, in Chile there are no limitations to an offshore venture capital fund to acquire control or influence the business of an investee entity. Article 56 of Law No. 20,712 states: "(…) the investment of the fund's resources must be made in all types of instruments (...) unless this is prohibited." Based on the foregoing, funds may acquire shares and/or rights in all kinds of companies, no matter if such investment may eventually give them control over such companies or the possibility to influence their administration.
As general limitations, among others, we can mention the following: (i) Article 57 of Law No. 20,712 states that funds (including private investment funds) "may not invest directly in real estate, mining property, water rights, industrial or intellectual property rights and vehicles of any kind; nor may they directly carry out activities (...) involving the direct development of a commercial, professional, industrial or construction activity by the fund and in general any activity carried out directly by the fund other than investment and its complementary activities"; and (ii) Article 58 of Law No. 20,712, states that funds may not invest in quotas of funds managed by their own AGF or by an AGF of their business group, or in shares issued by AGFs, nor in instruments, contracts or assets, issued, guaranteed or owned by persons related to the AGF. Likewise, Article 22 of Law No. 20,712 establishes the general rule which prohibits the acquisition or disposal of assets on behalf of the fund
to persons related to the AGF or to funds managed by it or by related companies. In the case of private investment funds, they may not carry out transactions or operations with other funds regulated by Law No. 20,712, unless they are managed by unrelated companies.
4) Would an investor be required to undertake an antitrust analysis prior to investment? When would such a requirement be triggered?
Pursuant to the general rules, the parties of a concentration transaction —as such term is defined in Article 47 of the Chilean Competition Law— that has effects in Chile shall notify the same to the National Economic Prosecutor (FNE), prior to its materialization (i.e., there is a no-close obligation), if the following conditions are met: (i) the sum of the sales in Chile of the economic agents that intend to concentrate reached, during the calendar year prior to the notification, an amount equal to or higher than the threshold fixed by the FNE, which as of September of 2020 is of UF 2,500,000 (USD 93,182,468 approx.); and (ii) at least two of the economic agents that intend to concentrate have individually generated sales in Chile, during the calendar year prior to the notification, for an amount equal to or higher than the threshold fixed by the FNE, which as of September of 2020 is UF 450,000 (USD 16,772,844 approx.).
Sales shall be calculated by adding: (i) in the case of a merger or any type of association to form a separate entity, the sales in Chile of the economic agents involved in the transaction and those of their respective business groups; (ii) in the case of the acquisition of rights that give the acquirer decisive influence on the acquired entity’s management, the sales in Chile of the acquirer and of its business group and those of the acquired entity; and (iii) in the case of the acquisition of control over the assets of another agent, the sales in Chile of the acquirer and of its business group and those generated by the acquired assets.
Sales shall not include taxes, sales between agents of the same business group, sales not generated from the normal business activity of the agents and other exclusions that may be determined by the FNE.
In the case of investment funds, in addition to a fund’s fees, sales shall be calculated by adding the sales of the fund’s portfolio companies where the relevant AGF or administrator has, directly or indirectly, (i) the majority of the votes in the shareholders' or owners’ meetings and the right to appoint the majority of the directors or administrators; or (ii) the possibility of exercising decisive influence, pursuant to article 99 of the Chilean Securities Law. Also, as explained above, depending on the type of concentration, the sales of the business group of the AGF or administrator shall also be added (including the sales of other investment funds administered by said AGF or administrator).
In addition, please note that in certain circumstances the Chilean Competition Act forbids interlocking directorates with respect to competing entities and also includes a post-closing reporting obligation regarding the acquisition of an interest in competing companies.
5) What are the preferred structures for investment in venture capital deals? What are the primary drivers for each of these structures?
In Chile, the venture capital industry is not regulated as such, so investors can opt for the various corporate structures contemplated by our law. Notwithstanding the foregoing, they are usually incorporated as join-stock companies, since they allow greater flexibility from the point of view of the management and administration of the company and their capital is represented by shares that can be transferred without need to modify the company's bylaws.
Venture capital operations are carried out in successive investment rounds involving investments between 10% and 30% of the company's capital in each of the rounds. The financing rounds usually give the investors a minority participation in the ownership through the issuance of new shares of the company being financed.
Venture capital funds establish protection measures that aim to enhance the investor's position when facing liquidity events, and provide certain guarantees regarding the corporate governance of the company and access to information. The purpose of these measures is to provide sufficient guarantees to the investor. As companies advance in their investment rounds and, consequently, the size of the investments involved increases, the protection measures become more intense.
6) Is there any restriction on rights available to venture capital investors in public companies?
No, the only limitations are those indicated in answer number 3 above.
7) What protections are generally available to venture capital investors in your jurisdiction?
In Chile there is no further regulation of the venture capital market, so the parties are quite free to agree on the terms of the investment and the way in which the financing will be carried out. Notwithstanding the above, the fact that the funds are under CMF's supervision provides protection to the investors. This security is also present in private investment funds, since, if they are managed by closed companies, they must be registered in the REEI maintained by the CMF and will be subject to the reporting obligations established by the CMF.
8) Is warranty and indemnity insurance common in your jurisdiction? Are there any legal or practical challenges associated with obtaining such insurance?
In Chile, warranty and indemnity insurance is not common.
9) What are common exit mechanisms adopted in venture capital transactions, and what, if any, are the risks or challenges associated with such exits?
Exits, meaning at least the disposal of the venture capital investors’ participation in the company, usually occur in three ways: (i) sale of the company’s shares outside the stock exchange to another investor; (ii) re-purchase of the investors' shares by the founders or company; or (iii) winding up of the company. Depending on the amount of the investment, this matter is generally regulated in a Shareholders’ or Partners’ Agreement.
10) Do investors typically opt for a public market exit via an IPO? Are there any specific public market challenges that need to be addressed?
IPOs are not common in Chile for the venture capital market.
Urenda Rencoret Orrego y Dörr
Sergio Orrego Flory
Felipe Rencoret Portales
Nicholas Mocarquer Grout
María Isidora Zañartu Ramírez
Want to Learn More?
The objective of this publication is to serve as a Q&A-style multi-jurisdictional guide to venture capital law in countries where WLG member firms have offices. The guide intends to provide a high level overview of the venture capital market, including key sectors, preferred investment structures, regulatory approval requirements, limitations on acquisition of control in portfolio companies, restrictions on investment, investor protection, and exits; and hopes to provide readers the benefit of the shared global knowledge and local insights among the WLG member firms.