Venture capital investment in Argentina: market and regulatory overview

A Q&A guide to venture capital law in Argentina.

The Q&A gives a high level overview of the venture capital market; tax incentives; fund structures; fund formation and regulation; investor protection; founder and employee incentivisation and exits.

To compare answers across multiple jurisdictions, visit the Venture Capital Country Q&A tool.

This Q&A is part of the PLC multi-jurisdictional guide to venture capital. For a full list of jurisdictional Q&As visit www.practicallaw.com/venturecapital-mjg.

Contents

Market overview

1. What are the main characteristics of the venture capital market in your jurisdiction?

Venture capital (VC) and private equity

The VC market in Argentina remains not yet fully developed. Seed capital is typically provided by angel investors, generally relatives or acquaintances of the entrepreneurs. While the PE market sees the involvement of more international firms, the VC market is largely invested in by local players, including relatives or acquaintances of entrepreneurs. Accordingly, the VC market has not yet fully developed international practices.

The lack of a legal framework addressing specific VC needs or creating appropriate incentives constitutes an important barrier for a full development of the VC market.

Sources of funding

As mentioned above, seed capital is generally provided by angel investors, generally relatives or acquaintances of the entrepreneurs. However, some funds or business incubators aim to help entrepreneurs in the first stages of a project, and other VC funds in the process of being created and raising funds. Most of the VC funds active in Argentina are located outside Argentina. Foreign funds that provide financing in Argentina include Pymar, Monashees Capital, Kaszek and Aurus. The government (national, provincial and municipal) has not yet created any stable fund or programme to solve funding gaps.

Types of company

VC in Argentina has primarily focused its attention on industries such as technology, software, e-commerce and biotechnology.

Market trends

The local entrepreneurial community remains very active in creating business opportunities. However, lately, deal volumes reduced due to the slowdown in the Argentine economy and the uncertainty over Government economic policy over the next few years. The nationalisation of the oil and gas company YPF by the government created concern for the possibility of future nationalisations in sectors such as utilities, oil and gas, mining and infrastructure. However, the Argentine economy still benefits from high commodity prices, GDP growth, and an educated workforce.

Currently, VC is most relevant in technology, software, e-commerce and biotechnology companies.

 
2. Are there any recent or proposed regulatory changes affecting the venture capital industry?

The income tax exemption for capital gains is likely to be repealed soon (see Question 3).

 
3. What tax incentive or other schemes exist to encourage investment in venture capital companies? At whom are the schemes directed? What conditions must be met?

There are no specific tax incentive schemes for venture capital funds. Local companies are subject to a 35% income tax. Dividends distributed by local companies and trusts are not subject to withholding tax in Argentina, unless such dividends exceed the previously taxed accumulated income at the company's level. Sale of shares by individuals (regardless of country of residence) and non-residents are exempt from income tax. However, the income tax exemption for capital gains is likely to be abrogated by a proposed bill that has been drafted by the tax administration, but not yet submitted to the Argentine Congress.

At whom directed

The exemption of dividends is directed at all investors, local and foreign, individuals and legal entities. The exemption of capital gains is directed mainly at foreign investors or Argentine individuals.

Conditions

Investors must not be resident in a listed tax haven.

 

Funding sources

4. From what sources do venture capital funds typically receive funding?

Venture capital funds are mainly foreign funds. Accordingly, they raise funds outside Argentina in accordance with the market practices of their countries of origin.

The few local VC funds typically raise funds from relatives or acquaintances of the fund organisers. There are certain non-governmental organisations acting locally that help in linking foreign VC funds with local entrepreneurs. Only rarely do VC funds raise funds from local financial institutions or other local players. However, there are several local efforts aimed at developing venture capital in Argentina and it is likely to continue to grow steadily.

 

Fund structuring

5. Can the structure of the venture capital fund affect how investments are made?

Following international practices, VC firms are usually structured as limited partnerships. General partners serve as the managers of the VC fund and as investment advisors (to the investee companies). In Argentina, given the lack of specific regulation applicable to VC firms, there is no particular structure that can be used to achieve additional tax efficiencies.

 
6. Do venture capital funds typically invest with other funds?

Venture capital funds do not typically invest with other funds (and this has been seen only in a very few limited cases).

 
7. What legal structure(s) are most commonly used as vehicles for venture capital funds in your jurisdiction?

While in certain cases VC funds use local vehicles (such as corporations or limited liability companies), the most common structure is a foreign limited partnership. Such a partnership is typically created offshore as a special purpose vehicle corporations in jurisdictions that have double taxation treaties with Argentina through which the investment is made into Argentina.

Foreign companies in all jurisdictions are currently exempt from capital gains tax on the sale of shares.

Investment vehicles are often in Spain, Chile, Austria or, to a lesser degree, Switzerland, because the tax treaties with these countries granted an exemption from personal assets tax, an annual tax on equity held by individuals and foreign entities. However, these treaties were terminated in the first half of 2012.

It is likely that future special purpose vehicle structures will be similar but this will depend more heavily on the relevant foreign domestic legislation.

For local investors, a simple holding company structure is used, since dividends are exempt from income tax. Capital gains, however, are exempt only if the seller is an individual (this exemption is likely to be repealed soon (see Question 3)).

Other than as described above, customary international practices are followed.

 

Investment objectives

8. What are the most common investment objectives of venture capital funds?

As privately-held companies (including investments made by venture capital firms) are subject to limited reporting obligations, the average life of funds and rates of return is largely unknown.

 

Fund regulation and licensing

9. Do a venture capital fund's promoter, manager and principals require licences?

A venture capital fund's promoter, manager and principals do not require licences.

 
10. Are venture capital funds regulated as investment companies or otherwise and, if so, what are the consequences? Are there any exemptions?

There is no specific investment company regulation in Argentina. If a venture capital fund wants to raise funds in Argentina through an offering directed to the public at large it must register with the Argentine Securities Commission (Comisión Nacional de Valores) (CNV) as a registered issuer, either as a corporation (sociedad anónima) or as a financial trust (fideicomiso financiero). However, there are no existing private equity funds created locally using these structures. There are some local conglomerates or holding companies organised as listed corporations that resemble a private equity fund. However, no specific private equity fund formed locally has so far offered securities to the public at large in Argentina.

 
11. How is the relationship between investor and fund governed? What protections do investors in the fund typically seek?

As funds are usually organised outside Argentina and local laws do not specifically regulate venture capital in Argentina, the relationship is typically subject to foreign laws and contractual agreements, which contain customary protections and other standard clauses.

 

Interests in investee companies

12. What form of interest do venture capital funds take in an investee company?

VC funds generally take equity (due to conditions and requirements under existing foreign exchange regulations). In turn, this allows a higher degree of control at the investee company level. Where debt is taken, VC funds have a priority over equity holders in bankruptcy or liquidation scenarios.

 

Valuing and investigating investee companies

13. How do venture capital funds value an investee company?

There are no specific valuation methods or mechanisms in Argentina. Standard practices are followed.

 
14. What investigations do venture capital funds carry out on potential investee companies?

Typically, VC funds carry out extensive legal, tax, business, accounting and financial due diligence on potential investee companies and management teams. Independent research at local governmental and non-governmental organisations, registries and agencies is also usual (and advisable).

 

Legal documentation

15. What are the principal legal documents used in a venture capital transaction?

The main transaction documents are:

  • Subscription agreement (as a result of which the VC firm acquires initial stake in the investee company through a capital injection).

  • Shareholders' agreement.

  • Bye-laws of the investee company (reflecting terms and conditions contained in the subscription agreement and the shareholders' agreement, to the extent permissible under local laws).

  • Investors' rights agreement. This may not be required or may be merged in one of the previous documents. If it is executed separately, the agreement will contain registration rights, rights in future fundraising rounds, lock-up provisions, informational rights and other customary covenants.

 

Protection of the fund as investor

Contractual protections

16. What form of contractual protection does an investor receive on its investment in a company?

The subscription agreement typically contains broad representations, warranties and indemnities. VC firms seek protection through the shareholders' agreement, imposing:

  • Market standard corporate governance provisions.

  • Veto rights or special majorities.

  • Restrictions on transfer of shares.

  • Anti-dilution provisions.

  • Dividend policies.

  • Rights of preferred shares.

  • Exits and remedies on default.

In addition, VC firms will also request the right to participate in future financing rounds.

Forms of equity interest

17. What form of equity interest does a fund commonly take (for example, preferred or ordinary shares)?

Typically, a venture capital fund takes equity interests in the portfolio company. Those interests are generally common shares (acciones ordinarias) but can be preferred shares (acciones preferidas) or quotas (cuotas) in a limited liability company (sociedad de responsabilidad limitada). Debt is less commonly used, although some transactions see the use of mezzanine and convertible debt. While interest under a debt has the advantage of being tax deductible, current foreign exchange regulations from the Argentine Central Bank impose several conditions and requirements on financing by local companies. Loans to local companies must be reported to the Argentine Central Bank, and are subject to certain minimum repayment terms. In addition, in certain circumstances 30% of the loan proceeds must be held in a mandatory non-interest bearing deposit for a term of one year.

However, in a bankruptcy proceeding, debt holders have preference over equity holders. There are no legal restrictions on the transfer of shares, except in regulated industries such as banks, insurance companies and utilities, where the approval of the regulatory authority is necessary to transfer control or a relevant number of shares.

Preferred shares

18. What rights does a fund have in its capacity as a holder of preferred shares?

As a holder of preferred shares, a fund may have priority on the collection of dividends and proceeds on liquidation of the company.

Management control

19. What rights are commonly used to give a fund a level of management control over the activities of an investee company?

Control can be achieved through protections included both in a shareholders' agreement and the bye-laws of the investee company (to the extent permissible). Management control over the activities of the investee company is usually achieved through a set of measures, including:

  • Board representation.

  • Veto rights at the board and shareholders level.

  • Appointment of auditors and/or corporate counsel.

  • Appointment of key personnel.

  • Reporting duties.

Share transfer restrictions

20. What restrictions on the transfer of shares by shareholders are commonly contained in the investment documentation?

Transfers of shares are typically subject to rights of first refusal or rights of first offer. Share retention provisions are also customary and enforceable under local laws if limited in time. Limited share retention provisions (where sale is limited to certain persons or entities) are valid and are not subject to time limitation requirements. Transfers of shares cannot be prohibited (an absolute restriction) under local laws.

 
21. What protections do the investors, as minority shareholders, have in relation to an exit by way of sale of the company?

Minority shareholders are typically protected through tag-along and drag-along rights.

Pre-emption rights

22. Do investors typically require pre-emption rights in relation to any further issues of shares by an investee company?

Investors typically require pre-emption rights. This right is specifically provided for under local corporate laws (although it may be waived by investors).

Consents

23. What consents are required to approve the investment documentation?

No specific consents or approval are required other than those generally applicable in certain industries and sectors (such as banking and insurance) and competition (anti-trust) clearance.

 

Costs

24. Who covers the costs of the venture capital funds?

The parties are free to agree on who covers the costs of the venture capital funds. Typically, VC investors assume the costs of the due diligence and advisors. VC investors may negotiate annual fees payable as from a later stage to get reimbursement of initial costs.

 

Founder and employee incentivisation

25. In what ways are founders and employees incentivised? What are the resulting tax considerations?

Incentives

The most usual incentive is the grant of options to acquire shares in the investee company. In some cases, special bonus payments are also used.

Tax

Dividends and capital gains from the transfer of shares are exempt from income tax. The grant of shares is subject to tax for the recipient on the difference between market price and purchase price. The grant of options is tax-free until vesting, when they become taxable.

Bonus payments are subject to income tax in the same way as salaries.

 
26. What protections do the investors typically seek to ensure the long-term commitment of the founders to the venture?

Investors typically seek to ensure the long-term commitment of the founders to the venture through share options and share retention agreements.

 

Exit strategies

27. What forms of exit are typically used to realise a venture capital fund's investment in an unsuccessful company? What are the relative advantages and disadvantages of each?

A VC fund may either sell its shares (including through auction), sell company assets (which will require agreement with the other partners) or liquidate the company and receive the proceeds after payments to creditors, if any (which requires consent from the other partners).

 
28. What forms of exit are typically used to realise a venture capital fund's investment in a successful company? What are the relative advantages and disadvantages of each?

Typically, exits are carried out through trade sales. IPOs are less common due to the underdevelopment of the Argentine capital market (and as a result of the 2008 nationalisation of pension funds). Argentina's stock exchange is relatively small and most trades are made on debt instruments.

 
29. How can this exit strategy be built into the investment?

Exits through IPOs are limited in Argentina. Therefore, negotiation of registration rights is available but of limited practical use (unless the IPO is to be carried out outside Argentina). Other exit strategies (in particular trade sales) may be included in the shareholders' agreement through drag-along rights or options.

 

Contributor details

Diego Serrano Redonnet

PAGBAM Abogados

T +54 11 4114 3026
F +54 11 4114 3001
E dsr@pagbam.com.ar
W www.pagbam.com.ar

Qualified. Argentina, 1990; New York, 1997

Areas of practice. Corporate finance; private equity and venture capital; M&A; capital markets; lending and project finance.

Fernando Zoppi

PAGBAM Abogados

T +54 11 4114 3053
F +54 11 4114 3001
E fz@pagbam.com.ar
W www.pagbam.com.ar

Qualified. Argentina, 1999

Areas of practice. Private equity and venture capital; M&A; lending and project finance.

Maximiliano Batista

PAGBAM Abogados

T +54 11 4114 3054
F +54 11 4114 3001
E mab@pagbam.com.ar
W www.pagbam.com.ar

Qualified. Argentina, 1995; New York, 2001; Spain, 2004

Areas of practice. Taxation.


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