¹ Andrew Loo, ‘What is Venture capital?’ (Corporate Finance Institution, 28 Apr 2023) <https://corporatefinanceinstitute.com/resources/capital-markets/what-is-venture-capital/> accessed 2 May 2023.

² Gilson, Ronald J, ‘Engineering a Venture Capital Market: Lessons from the American Experience’ (2003) 55 Stanford Law Review 1067, 1067–1068Google Scholar.

³ George W Fenn et al, ‘The Economics of Private Equity Market’ (Board of Governors of the Federal Reserve System, Dec 1995) <https://www.federalreserve.gov/pubs/staffstudies/1990-99/ss168.pdf> accessed 2 May 2023. In 1959, the Small Business Investment Companies (SBICs) were established with the incentives of government loans and tax benefits. This form is promoted under the Small Business Administration (SBA); moreover, the US also created the Small Business Innovation Research (SBIR) Program to advocate the development of tech firms by providing a capital-intensive risk to the innovators long before the products become financially viable.

⁴ Gilson (n 2) 1094–1096.

⁵ The Treasury and the Department of Industry, Innovation, Science, Research and Tertiary Education, ‘Review of Venture Capital and Entrepreneurial Skills’ (2012) <http://ict-industry-reports.com.au/wp-content/uploads/sites/4/2013/09/2012-Venture-Capital-and-Entrepreneurial-Skills-DIISRTE-Dec-2012.pdf> accessed 2 May 2023.

⁶ Zenichi Shishido, ‘Why Japanese entrepreneurs don't give up control to venture capitalists’ (SSRN Electronic Journal, 30 Mar 2009) <https://dx.doi.org/10.2139/ssrn.1370519> accessed 2 May 2023.

⁷ Haitian, Lu, Yi, Tan & Gongmeng, Chen, ‘Venture Capital and the Law in China’ (2007) 37 Hong Kong Law Journal 229Google Scholar.

⁸ Lin, Lin, ‘Venture Capital in Singapore: The Way Forward’ (2019) 5 Journal of Business Law 363–387Google Scholar.

⁹ An example of this shortfall can be viewed from China. See Caihe, Hu, ‘Three Generations of Mainstream VCs Direct the Venture Capital Investment in China’ (New Fortune, Jul 2004) 155–161Google Scholar. China Hi-Tech Venture Capital Corporation (‘CHVCC’), the first joint-stock venture capital firm in VC's China Investment, was set up. The fund can be set up in the form of Venture Capital Funds (VCF). As a result, the CHVCC still barely hit their standard because the investment usually fell to the sector of real estate and listed securities instead of high-tech and high-growth companies. A few foreign venture capitalists gave China some trial investment; however, most of them still perceived the Chinese market as immature.

¹⁰ For more detailed and up-to-date information, please visit: The World Bank, ‘Foreign direct investment, net inflows (% of GDP) – Cambodia’ <https://data.worldbank.org/indicator/BX.KLT.DINV.WD.GD.ZS?locations=KH> accessed 4 Jul 2023.

¹¹ Siphana Sok, ‘Role of Law and Legal Institutions in Cambodia Economic Development: Opportunities to Skip the Learning Curve’ (PhD thesis, Bond University School of Law 2009) 85–86.

¹² Constitution Law 1993, art 1.

¹³ ibid, art 56

¹⁴ Law on Investment (amended 2003). This law stipulates the investment procedure, investment guarantees, investment incentives, and land ownership restriction. Then, the new Investment Law was promulgated, replacing both the 1994 Investment Law and its amendment in 2003, in order to provide more rigid approval framework and incentives for specific sectors; however, since its effect cannot be clearly assessed yet due to its short period of implementation, this article will analyse only the effect of the 1993 Investment Law and the amendment in 2003.

¹⁵ Articles 13 & 14 of the LoI provides the exemption, in whole or in part, of customs duties and taxes such as the tax on profit for the investor.

¹⁶ Sangeetha Amarthalingam, ‘Is Covid-19 testing Cambodia's financing model?’ (Phnom Penh Post, 22 Jul 2021) <https://www.phnompenhpost.com/special-reports/covid-19-testing-cambodias-financing-model> accessed 2 Aug 2021. Due to Covid-19, the FDI dropped off 23.6%. This fall somehow is unsurprising because Cambodia has heavily relied on investment in global value chain industries which get hard hit. The concentrated reliance on China and the graduation from the Least Developed Country (LDC) status impose a big threat to the future of the FDI. This requires the nation to evolve and structure its financing model to be self-sustained rather than reliance on external sources.

¹⁷ Worldometer, ‘Cambodia Population (live)’ <https://www.worldometers.info/world-population/cambodia-population/> accessed 10 Sep 2022.

¹⁸ Datareportal, ‘Digital 2022: Cambodia’ (Feb 2022) <https://datareportal.com/reports/digital-2022-cambodia> accessed 4 Jul 2023.

¹⁹ Bora Kem et al, ‘Startup Kingdom: Cambodia's Vibrant Tech Startup Ecosystem in 2018’ (Mekong Strategic Partner and Raintree Development, 1 Jan 2019) 11 <https://static1.squarespace.com/static/56a87acd05f8e263f7b16c7f/t/5c8a98caec212db15379299d/1552586969710/Cambodian_Tech_Startup_Report_Final_150319.pdf> accessed 1 Jun 2023.

²⁰ Cellcard, ‘Cellcard first to launch real 5G trials in Cambodia, with speeds reaching 1.6Gbps’ (30 Nov 2020) <https://www.cellcard.com.kh/en/media-center/news/post/cellcard-first-launch-real-5g-trials-cambodia-speeds-reaching-1-6gbps/> accessed 2 May 2023.

²¹ Sopheara Ek & Paul Vandenberg, ‘Cambodia's Ecosystem for Technology Startups’ (Asian Development Bank, Jun 2022) 38 <https://www.adb.org/sites/default/files/publication/804931/cambodia-ecosystem-technology-startups.pdf> accessed 2 May 2023.

²² ibid.

²³ See Bocken, NMP, ‘Sustainable venture capital – catalyst for sustainable start-up success?’ (2015) 108 Journal of Cleaner Production 647–658CrossRefGoogle Scholar. This article proves that sustainable venture capitalists help to prove the success of the business format. In its Table 3, it assesses the key success factors that VC can contribute. They are the innovation in business model (for instance, novel partnerships and value propositions), collaboration (across small and large companies and industry), and strong business case.

²⁴ ibid; Quynh Nguyen, ‘Cambodian VC Firm Scouts for Late-Stage Deals to Grow Profitability’ (Nikkei Asia, 3 Mar 2021) <https://asia.nikkei.com/Spotlight/DealStreetAsia/Cambodian-VC-firm-scouts-for-late-stage-deals-to-grow-profitability> accessed 2 May 2023. Until 2021, only 30 tech startups are disclosed with institutional capital investment. There is a belief that early-stage firms still lack understanding of what ‘investment readiness’ means and what conditions are demanded to close the deal with institutional, corporate or even angel investment.

²⁵ ibid.

²⁶ Kem et al (n 19).

²⁷ For the list of organisations, see Ek & Vandenberg (n 21) 16.

²⁸ This registered status is based on the online search in the database of the Ministry of Commerce. See Ministry of Commerce, ‘Business Registration’ <businessregistration.moc.gov.kh> accessed 2 May 2023.

²⁹ Law on Commercial Enterprise 2005; Amendment on Law on Commercial Regulations and the Commercial Register 2022.

³⁰ Fenn et al (n 3) 11–12.

³¹ Bintang, Sanusi, ‘Venture Capital: An American Concept and Its Problems of Implementation in Developing Countries (2015) 12 Indonesian Journal of International Law 186CrossRefGoogle Scholar.

³² Ronald J Gilson, ‘Engineering a Venture Capital Market: Lessons from the American Experience’ (Stanford Law School John M Olin Program in Law and Economics, Working Paper no 248, 2002) 6–7.

³³ Nishizawa, Akio, ‘Evolution of Japanese-style venture capital and its limitation: Why non-linear VC model emerged in Japan’ (2009) 4 International Journal of Entrepreneurship and Innovation Management 9Google Scholar.

³⁴ Decision on the Reform of Science and Technology System (promulgated 1 Jan 1985) introduced a new form of Venture Capital Funds (VCF) in China. However, the result is not satisfied due to the traditional investment mindset. In 2006, China adopted the new form of Limited Partnership in its Partnership Law (2006 Revision). Currently, venture capital funds are organised as offshore funds or onshore funds. The offshore funds are generally established in a tax heaven jurisdiction such as the Cayman Islands. It can be in the form of a limited partnership or corporation. The funds were invested in Chinese companies through a variable interest entity (VIE) structure. The offshore fund can in principle invest and exit tax-free, however still subject to the tax regulation of the investor's jurisdiction. In contrast, the onshore VC fund is established within China and is subject to Chinese regulation.

³⁵ ibid.

³⁶ LCE 2005, art 64.

³⁷ LCE 2005, art 72 (‘Liability of Limited Partner’).

³⁸ ibid, art 75 (‘Liability of General Partner’). The general partner has the rights and obligations in managing the partnership without inference from the limited partner.

³⁹ ibid, art 74 (Power, rights, obligations of a general partner); ibid, art 79 (Management-Limited Partners). Although limited partners cannot make decisions in the management, they can examine the reports and progress of the partnership and may give advisory opinions.

⁴⁰ ibid, art 79 (Management – Limited Partner); Lin, Lin, Venture Capital Law in China (Cambridge University Press 2021)CrossRefGoogle Scholar. Interestingly, in China's Partnership Enterprise Law, there is no such extension of obligation in case the limited partner involves in the decision. This lacking point creates many issues because the limited partner in China usually used the pressure on the VC to listen to their decision. Sometimes, all the investment decisions must go through a vote to make investment decisions.

⁴¹ ibid. The Cambodian LCE does not specify clearly what activities can be included as management involvement. This will be the court's discretion. However, the Delaware Code §17-303 (2017) stipulates in detail what activities should be included as management involvement such as to be an independent contractor; to act as surety, guarantor or endorser for a limited partnership or a general partner; to call, request, or participate in a meeting of the partners; etc. For more detail, please see (Title) 6 Delaware Code §17-303 (2017).

⁴² Milhaupt, Curtis J, ‘The Market for Innovation in the United States and Japan: Venture Capital and the Comparative Corporate Governance Debate’ (1997) 91 Northwestern University Law Review 865Google Scholar. In 1998, the ‘limited partnership fund’ was established under the Japanese-type Limited Partnership Act to realise the advantages of flow-through tax treatment and limited liability. However, the tax treatment was criticised as not serving its full purpose because the Ministry of Finance imposed a withholding tax on the fund with ten or more limited partners.

⁴³ The Arbitration Council, ‘Prakas’ <https://www.arbitrationcouncil.org/resources/laws-regulations/prakas/> accessed 11 Jul 2021. ‘Prakas’ are issued by the Ministry in charge. It is a secondary source of regulations but is considered to be the primary source for decision-making's purpose.

⁴⁴ Prakas No 346/20 MEF on Capital Gain Tax, art 6.

⁴⁵ The gain here is subject to the deduction of expense first. In a way, it is similar to profit.

⁴⁶ Prakas No 346/20 MEF on Capital Gain Tax, art 10.

⁴⁷ ibid, art 18; GDT Notification No 4577 on the Second Postponement of the implementation of the Capital Gain Tax (22 Mar 2022).

⁴⁸ For more detail, see Prakas MEF on Tax on Profit 2003.

⁴⁹ Notification No 36 from the Council of Ministers 2021.

⁵⁰ Whichever higher between Annual Turnover and Asset is used.

⁵¹ Sub-decree No 24 on Tax incentive for small and medium enterprises in the prioritised sector, art 5.

⁵² ibid, art 6; Clint O'Connell (DFDL), ‘Cambodia Tax Update: SME Tax Incentives Announced’ (Asia Law Network, 2 Nov 2018) <https://learn.asialawnetwork.com/2018/11/02/cambodia-tax-update-sme-tax-incentives-announced/> accessed 1 Jun 2023.

⁵³ ibid.

⁵⁴ ibid.

⁵⁵ Trust Law 2018, art 9.

⁵⁶ Prakas No 003 on Mechanism in management, organisation and acts of the trust 2022, cl 4.

⁵⁷ Sub-decree No 114 on Registration of Trust 2019, art 7.

⁵⁸ ibid, art 11.

⁵⁹ Prakas No 003 on Mechanism in management, organisation and acts of the trust 2022, cl 12.

⁶⁰ Trust Law 2018, art 22.

⁶¹ Matthieu de Gaudemar, ‘Startups discuss local challenges’ (The Phnom Penh Post, 25 Apr 2017) <https://www.phnompenhpost.com/business/startups-discuss-local-challenges> accessed 25 Oct 2022.

⁶² Armour, John, ‘Personal Insolvency Law and Venture Capital’ (2004) 5 European Business Organization Law Review 87, 109CrossRefGoogle Scholar.

⁶³ ibid. The finding of this article indicates a negative correlation between severity of personal insolvency law and levels of venture capital investment.

⁶⁴ Insolvency Law 2007, art 3.

⁶⁵ Regarding some professional occupation which requires the practitioner to obtain the license, such regulatory mechanism can be found in the relevant Sub-decree or Prakas instead.

⁶⁶ Code of Civil Procedure 2006, art 382.

⁶⁷ Code of Civil Procedure 2006, art 380. The Property exempt from attachment includes clothing, bedding, furniture, tools, net, fishing equipment, book, fire-fighting equipment, etc. See also Insolvency Law 2007, art 20.

⁶⁸ The United States is the father of venture capital. In the US, by 2000, venture capital enhanced the US GDP by USD 1.1 trillion and created new jobs for 12.5 million workers. This result is not coincident. Instead, it is a vision strategically built by the US government and legislators from the 19th century to promote technological and financial advancement.

⁶⁹ Okrah, James, Nepp, Alexander & Agbozo, Ebenezer, ‘Exploring the factors of startup success and growth’ (2018) 9 The Business and Management Review 229Google Scholar. The regulation can revolutionise the entrepreneur culture of a country by fostering a climate in which entrepreneurship is viewed as a means to create value for the economy and attract investment opportunities. See also Colwell, Ken & Narayanan, VK, ‘Foresight in economic development policy: Shaping the institutional context for entrepreneurial innovation’ (2010) 42 Futures 295CrossRefGoogle Scholar.

⁷⁰ Tykvová, Tereza, ‘Legal framework quality and success of (different types of) venture capital investments’ (2018) 87 Journal of Banking & Finance 333CrossRefGoogle Scholar. Tykvova used the data of 8,270 companies from 41 countries to explore the relationship between the success of venture capital investment and legal frameworks in the investment countries. Her finding is that legal framework quality is linked to the success of such investments, but this effect varies with the deal types. She also finds that International VCs usually exit the startup abroad mostly due to the weak legal framework of the investment nation.

⁷¹ Lin, Venture Capital Law in China (n 40). There are many frauds and scandals that emerged in China from 2011 due to a lack of regulatory oversight in the VC sector. These issues involve illegal fundraising, abused power from the limited partner in the investment decision, unqualified investors with a low-risk tolerance, and so forth.

⁷² Gilson (n 2).

⁷³ ibid.

⁷⁴ ‘A look at the history of implementing the Civil Code on its 10^th anniversary’ (The Phnom Penh Post, 23 Feb 2022) <https://www.phnompenhpost.com/supplements/look-history-implementing-civil-code-its-10th-anniversary> accessed 9 Oct 2022.

⁷⁵ See Smart Axiata ‘Home’ <https://sadif.com.kh/> accessed 4 Jul 2023. Smart Axiata Digital Innovation Fund (SADIF) is a 5-million-dollar VC fund established to promote the digital ecosystem in Cambodia. The fund is created by the Smart Axiata, and then co-invested by Forte Insurance and Mekong Strategic Partners.

⁷⁶ See Occtane fund <www.ooctane.com>. OOCTANE is a 55-million-dollar VC fund aiming to invest in technology-enabled businesses founded in Cambodia or by Cambodians. The fund is chaired by Oknha Sear Rithy, Chairman of the Worldbridge Group. This link was cited when the author was a student at Keio University in 2021; however, it is no longer accessible on 4 July 2023. Some information is available at <https://dev.worldbridge.com.kh/portfolio/ooctane/>. However, there is no public news updated on the status of this fund.

⁷⁷ Bintang (n 31) 187.

⁷⁸ Banking deposit is fixed and more certain. The upward potential of real estate investing is still promising despite the pullback in the last few years. Also, there is no platform for ordinary people and those traditional companies to invest money in VC yet.

⁷⁹ Fenn et al (n 3). The form of this company is promoted under the American Small Business Administration (SBA).

⁸⁰ Chart from Preqin & First Republic Bank, ‘Preqin and First republic update: US Venture Capital in 2019’ (2019).

⁸¹ ibid 10.

⁸² The ‘prudent man’ rule restricts the fund investor from investing in the high-risk portfolio. Since the nature of a VC fund is to invest in the high-risk startup to generate an unexpectedly high return, this rule hinders the choice of the fund manager. Removing this rule allows VC to have a bigger pool of companies to do fishing.

⁸³ ibid.

⁸⁴ Mikito Ishida, ‘Venture capital investment in Japan: market and regulatory overview’ (2020) <https://content.next.westlaw.com/6-504-1281?__lrTS=20201014143156245> accessed 27 Dec 2020.

⁸⁵ ibid

⁸⁶ ibid.

⁸⁷ ibid.

⁸⁸ ibid.

⁸⁹ Lin, Venture Capital Law in China (n 40) 68–70 (see Table 2.4: Percentage of capital raised by LPs in China's VC and PE market (by investable amount) (2011–2017)).

⁹⁰ ibid 66. The accredited investor is an institution or individual with a certain amount of wealth and investment experience. For details, please see Measures for the Suitability Management of Securities and Futures Investors 2016, China Securities Regulatory Commission, No 130 (effective 1 Jul 2017) (People's Republic of China), arts 8 and 1.

⁹¹ Matthew Rendall et al, ‘Pensions Schemes are now implemented in Cambodia’ (Sok Siphana & Associates, 2021) <soksiphana.com/resources/alerts/pensions-schemes-are-now-implemented-in-cambodia> accessed 2 May 2023. In the first five-year, 4% of the gross monthly salary will be contributed to the scheme. Half of the four percent is from the employer and the other half is from the employee. This rate will increase every five years.

⁹² Prakas No 170 on Commencement Date of Payment of Contribution of Social Security Scheme on Pension under Compulsory Contribution and Voluntary Contribution 2022, cl 2.

⁹³ In December 2018, the trust law was approved to be implemented in Cambodia. This law stipulates a trust could be established in four types such as commercial trust, public trust, social trust, and individual trust. This commercial trust will bring a new form of saving which is a pension fund to this kingdom.

⁹⁴ In this context, the trustee is referred to the manager of the pension fund itself.

⁹⁵ In the future, should the VC intend to fundraise from public, the regulations pertaining to collective investment scheme will apply. See Prakas No 003 on Granting license and Management of Collective Investment Scheme 2018.

⁹⁶ See Smart Axiata (n 75).

⁹⁷ Ooctane fund (n 76).

⁹⁸ Mikito Ishida. ‘Venture Capital Investment in Japan: Market and Regulatory Overview Market Overview’ (Thomson Reuters, 1 May 2020) <https://uk.practicallaw.thomsonreuters.com/6-504-1281?transitionType=Default&amp;contextData=(sc.Default)&amp;firstPage=true> accessed 2 May 2023.

⁹⁹ ibid.

¹⁰⁰ For detailed information, see Small and Medium Enterprise Agency, ‘Guidance on the angel tax system (investment before March 31, 2020)’ <https://www.chusho.meti.go.jp/keiei/chiiki/angel/index.html> accessed 30 Jun 2021.

¹⁰¹ ‘Japanese Government May Offer Companies 25% Tax Break on Investment in Startups’ (The Japan Times, 7 Dec 2019) <https://www.japantimes.co.jp/news/2019/12/07/national/politics-diplomacy/japan-might-offer-companies-25-tax-break-investment-startups/> accessed 2 May 2023.

¹⁰² See Yuri I Misaki, Joe Bryer & Emiko Tanaka, ‘A Guide to Japan's Amazing Tax Exemption Scheme for Investment by Individuals’ (Tsunagu Local, 7 Apr 2021) <https://www.tsunagulocal.com/en/72530/> accessed 2 May 2023.

¹⁰³ Offset return here refers to the consolidated return of multiple investments. For example, Mr X buys Stocks A and B, which gains 50,000 JPY and losses 20,000 JPY respectively. Therefore, the offset return for Mr X is 30,000 JPY.

¹⁰⁴ In case of aggregation of profit and loss, the loss invested amount can be deducted from the capital gain of the winning investment.

¹⁰⁵ In case of deduction of carryover of loss, all the losses (net loss) can be carried over for 3 years.

¹⁰⁶ This relationship will also pave the way for the future acquisition of the startup, which is one way of the exit as well.

¹⁰⁷ See also Law on Foreign Exchange 1997.

¹⁰⁸ Law on Investment 1993 (amended 2003), art 11.

¹⁰⁹ To reduce the compliance cumbersome, the Japanese government by reducing the tax filing for the non-permanent establishment (non-PE) investors who hold less than 25% of the partnership interest in the fund.

¹¹⁰ See Schwartz, Larry W, ‘Venture abroad: Developing Countries Need Venture Capital Strategies’ (1994) 73 Foreign Affairs 14CrossRefGoogle Scholar.

¹¹¹ ibid.

¹¹² Tun Yong Yap, ‘500 Startups launches Angkor 500 to accelerate the development of Cambodian startups’ (e27, 23 Nov 2020) <https://e27.co/500-startups-launches-angkor-500-to-accelerate-the-development-of-cambodian-startups-20201123/> accessed 1 Jun 2023. This is a two-year partnership that aimed to gather founders from across the kingdom to create startups and host boot camps to strengthen the readiness of local startups for engagement with international markets and investors.

¹¹³ Brian Badzmierowski, ‘ANGKOR 500 Opens up Applications for Startup Acceleration Programme’ (Khmer Times, 9 Jun 2021) <https://www.khmertimeskh.com/50870838/angkor-500-opens-up-applications-for-startup-acceleration-programme/> accessed 1 Jun 2023.

¹¹⁴ This table is inspired by the Report from the Organisation for Economic, Co-operation and Development and the presentation by Trisha Mani, VC Fund associate at UBERIS fund, at ‘Private Equity Venture and Capital Webinar: Outlook of the Agribusiness Sector in Cambodia’. The components listed in each criterion are not absolute components but are usually subjected to changes based on the needs of the investors and the interpretation of individual.

¹¹⁵ Kem et al (n 19).

¹¹⁶ ‘Cambodian VC Firm Scouts for Late-Stage Deals to Grow Profitability’ (Nikkei Asia, 3 Mar 2021) <https://asia.nikkei.com/Spotlight/DealStreetAsia/Cambodian-VC-firm-scouts-for-late-stage-deals-to-grow-profitability> accessed 1 Jun 2023.

¹¹⁷ This can be because different VCs or individuals define the term ‘investment readiness’ differently.

¹¹⁸ Organisation for Economic, Co-operation and Development (OECD), ‘Facilitating Access to Finance: Discussion Paper on Investment Readiness Programmes’ (OECD) <https://www.oecd.org/global-relations/45324336.pdf> accessed 1 Jun 2023.

¹¹⁹ The negative attitude can be due to the reluctance in surrendering ownership and control of the startup.

¹²⁰ ibid.

¹²¹ ibid.

¹²² ibid.

¹²³ This does not include the ‘investor's investment parameter’ because the previous section has discussed heavily the investor side how to increase the variety of VC. This section focuses only on the startup condition and their bottleneck in relation to the VC investor.

¹²⁴ This regulatory framework is inspired by the ‘Cloning Silicon Valley Policy’ adopted by Japan in the late 1990s. This policy centers on university-industry technology transfer and facilitates university spin-off ventures with the driver of cutting-edge research innovation developed in universities. To support this initiative, the technology licensing organisation system was established. For more details, see Akio Nishizawa, ‘University startup ventures and clustering strategy in Japan’ (2007). Currently, there is an absent connection between the universities and the real industry. This is not full use of human resources because universities are the place that bred new breakthrough innovation and this innovation should be realised to be the real business to help society. Moreover, this innovation might be the way for Cambodia to increase the pie of the economy by selling the products or services to other nations and improving the balance of trade. However, to continue the sustainable growth of this university innovation, the enforcement of intellectual property is also a key factor to strengthen too.

¹²⁵ Currently, there are only approximately 50,000 people in the STEM industry. Due to the lack of human resources in technical skills, it is more suitable for the government to eradicate the tradition of using non-compete clauses in employment contracts because it blocks the free movement of labour from one startup to another. In recent years, there are many academic studies advocating the elimination of the non-compete clause to boost the flow of innovation. However, it is noteworthy that Japanese VCs usually include the non-compete clause in the investment contract to ensure the founder's commitment to the startups. See McCahery, Joseph, Renneboog, Luc & Armour, John, ‘Law, Innovation, and Finance’, in McCahery, Joseph & Renneboog, Luc (eds), Venture Capital Contracting and the Valuation of High-Technology Firms (Oxford University Press 2003) 151Google Scholar. This study quotes the study by Jeng and Wells (Leslie A Jeng & Philippe C Wells, ‘The determinants of venture capital fundraising: evidence across countries’ (2000) 6 Journal of Corporate Finance 241), which shows the labor market rigidities were negatively correlated with venture capital investment. It also adds that the labor movement creates the benefit of information transfer which might open new discoveries to be exploited.

¹²⁶ Many startups in Cambodia have claimed the company registration to be their bottleneck in accessing legal recognition due to the high cost and complicated process of registering. Some are also afraid that this registration will create more burden rather than benefit toward their businesses. Therefore, most of them decide not to register instead at the early stage. However, this non-registration coupled with lack of solid financial report is the key bottleneck for the VC to access their performance. Without the registration, it shows a lack of seriousness that the team has toward the business. Without a formal financial statement, there is no assurance whether the number is true and correct or not.

¹²⁷ See Facebook, ‘BMC Cambodia Startup Accelerator & Competition’<https://www.facebook.com/BMCCambodia2017/> accessed 1 Jun 2023; SmartStart Young Innovator Program, <https://smartstart.com.kh/yip> accessed 1 Jun 2023; Reverse Innovation, ‘Frequently Asked Questions’ <https://ri.techostartup.center/faq> accessed 1 Jun 2023.

¹²⁸ Kem et al (n 18).

¹²⁹ ibid.

¹³⁰ Coyle, John F & Green, Joseph M ‘Contractual Innovation in Venture Capital’ (2014) 66 Hastings Law Journal 133, 159Google Scholar.

¹³¹ ibid.

¹³² ibid 161.

¹³³ Investopedia, ‘What is Series A Financing? Process, Definition, and Example’ <https://www.investopedia.com/terms/s/seriesa.asp#:~:text=Series%20A%20financing%20refers%20to,after%20seed%20and%20angel%20investors.> accessed 3 Jul 2023. Series A financing is an investment stage upon the seed stage and angel investor. Usually, it is privately held by the startup after having some progress on showing the traction of its business model and demonstrate its growth potential to earn revenue.

¹³⁴ A Reid Monroe-Sheridan, ‘Promoting Legal Innovation in Japanese Startup Financing’ (2019) 10 George Mason Journal of International Commercial Law 26, 26.

¹³⁵ ibid.

¹³⁶ ibid.

¹³⁷ ibid.

¹³⁸ ibid.

¹³⁹ Yukihito Machida, ‘Shinkabuyoyakukentsukishasai no katsuyo nitsuite no ikkosatsu (jo) [Observations Regarding the Use of Corporate Bonds Paired with Stock Warrants (Part 1 of 2)]’ (15 Jul 2017) 2139 Shoji Homu 20, 21−22; Monroe-Sheridan (n 135) 41.

¹⁴⁰ Venture Enterprise Center, ‘VEC Yearbook 2016’, I-30; Nobuki Takeuchi & Shuya Ogawa, ‘Shoki Raundo ni Okeru Shikin Chotatsu no Jitsumu to Kadai [Issues and Practice Relating to Initial Fundraising Rounds]’ (15 Dec 2015) 2087 Shoji Homu 37, 43. The classified stock can be structured to serve as convertible equity.

¹⁴¹ Takeuchi & Ogawa (n 141) 42.

¹⁴² Machida (n 140) 23.

¹⁴³ See Opinion on Pilot Program of Preferred Shares by the State Council (State Council (2013) No 46), effected 30 Nov 2013, Central People's Government (2013) <www.gov.cn/zwgk/2013-11/30/content_2539046.htm> accessed 30 Jun 2023; Bratton, William W, ‘Venture Capital on the Downside: Preferred Stock and Corporate Control’ (2002) 100 Michigan Law Review 891CrossRefGoogle Scholar.

¹⁴⁴ Liquidation preference creates a distribution waterfall that allows investors to have a fixed return prior to payments to common shareholders in the event of sale or liquidation.

¹⁴⁵ Lin, Venture Capital Law in China (n 40) 149; Milhaupt, Curtis J, ‘The Market for Innovation in the United States and Japan: Venture Capital and the Comparative Corporate Governance Debate’ (1997) 91 Northwestern University Law Review 887Google Scholar.

¹⁴⁶ Isozaki (n 85) 261.

¹⁴⁷ Interim measure for the Administration for the Startup Investment Enterprise (2006), art 22 <http://www.asianlii.org/cn/legis/cen/laws/iamftsie766/> accessed 1 Jun 2023.

¹⁴⁸ ibid, art 15.

¹⁴⁹ PRC Company Law 2005, art 143.

¹⁵⁰ SAFE stands for Simple Agreement for Future Equity.

¹⁵¹ For example, Chapter 7 of Prakas No 89 on Management of Real Estate Business 2016 (Cambodia) has clarified in detail what are the minimum clauses to include in the Sale-Purchase Agreement (SPA) of land or house, and also embed other conditions regarding the contract between the parties as well.

¹⁵² Morrison & Foerster LLP (Rafael Hernandez Mayor et al), ‘Impediments to Risk Capital in Argentina, Chile, Elsavador And Mexico’ (Multilateral Investment Fund, Jan 2001) 10 <https://publications.iadb.org/en/publication/12021/impediments-risk-capital-argentina-brazil-chile-el-salvador-and-mexico> accessed 1 Jun 2023.

¹⁵³ Bernard S Black & Ronald J Gilson, ‘Venture capital and the structure of capital markets: banks versus stock markets’ (1998) 47 Journal of Financial Economics 243, 261; Marco Da Rin, Giovanna Nicodano & Alessandro Sembenelli, ‘Public policy and the creation of active venture capital markets’ (2006) 90 Journal of Public Economics 1699; Lin Lin, ‘Venture Capital Exits and the Structure of Stock Markets in China’ (2017) 12 Asian Journal of Comparative Law 1, 5−6; Bonini, Stefano & Alkan, Senem, ‘The political and legal determinants of venture capital investments around the world’ (2012) 29 Small Business Economic 997Google Scholar. This study explores the data from 16 countries globally.

¹⁵⁴ Black & Gilson (n 154) 257.

¹⁵⁵ Lin, ‘Venture Capital Exits’ (n 154) 5−6.

¹⁵⁶ Schwienbacher, Armin, ‘Innovation and Venture Capital Exits’ (2008) 118 The Economic Journal 1888CrossRefGoogle Scholar. There are empirical studies that show that only innovative and profitable ventures have a high likelihood to go public.

¹⁵⁷ Cambodia Securities Exchange, ‘Home’ <http://csx.com.kh/> accessed 1 Jun 2023.

¹⁵⁸ For more detail, see Chhut Bunthoeun, ‘Cambodia's young stock exchange looking good’ (Khmer Times, 17 Jan 2020) < https://www.khmertimeskh.com/680997/cambodias-young-stock-exchange-looking-good/ > accessed 1 Jun 2023.

¹⁵⁹ Listing Requirements and Procedures of Cambodia Stock Exchange, art 8: The requirements of Main Board are: (1) Shareholder's equity shall be at least USD 7,500,000, (2) Net Profit shall be at least USD 500,000 per annum and the aggregate of net profit at least USD 750,000 for the latest 2 financial years prior to filing an application, (3) At least 200 shareholders with less than 1-percent voting rights.

¹⁶⁰ ibid. The other board, the growth board, has somehow a bit lower requirement: (1) Shareholder's equity shall be at least 500,000 USD, (2) Positive net profit for the latest financial year, Positive operating cash flow and gross margin of at least 10%, (3) At least 100 shareholders with less than 1-percent voting rights.

¹⁶¹ Its requirement is similar to the growth board of CSX which requires an existence period, a threshold on profit earning and the number of shareholders, which becomes the bottleneck for startups in China to go public.

¹⁶² Lin, ‘Venture Capital Exits’ (n 154) 20.

¹⁶³ ibid: ‘ChiNext’ is a portmanteau of the phrase ‘China Next’ and is also known as the Growth Enterprise Board or chuangyeban.

¹⁶⁴ The company is required to have a share capital of only RMB 30 million post-IPO and must have profit for the last two consecutive years, which its net profits in the period must increase continuously and exceed RMB 10 million.

¹⁶⁵ See Zuo Yonggang, ‘Five Year's ChiNext: VC/PE is the Biggest Winner [chuangyeban wunian, VC/PE cheng zuida yingfia]’ (Securities Daily [zhengquan ribao], 23 Oct 2014) <http://finance.people.com.cn/stock/n/2014/I23/c67815-2589I7o6.html>. This link is no longer accessible as of 3 July 2023.

¹⁶⁶ Lin, ‘Venture Capital Exits’ (n 154) 21.

¹⁶⁷ ibid 23.

¹⁶⁸ This is a more relaxed requirement as the other boards require the existence period to be at least three years.

¹⁶⁹ See Quanguo Zhongxiaoqiye Gufen Zhuanrang Xitong Youxianzerengongsi Guanli Zanxing Banfa [Interim Measures for the Administration of National Equities Exchange and Quotations Co Ltd] (promulgated by the China Securities Regulatory Commission, 31 Jan 2013).

¹⁷⁰ Jia Hongyu, ‘Is the New Third Board a Blue Ocean or Refuse Dump? [xinsanban shi ‘lanhai’ haishi ‘lajichang’?]’ (China Broadcast Net [zhongguo guangbo wang], 28 Jul 2015) <http://finance.china.com.cn/stock/xsb/sc/hoi5o728/3256287.shtml.>. This link is no longer accessible on 3 July 2023.

¹⁷¹ Wang Yinping, ‘New Third Board - A New Opportunity for China's Capital Market [xinsanban, dangdai zhongguo ziben shichang de baofu jihui]’ (Huaxia Business [Huaxia Licai], 12 Jun 2015).

¹⁷² Japan Exchange Group, ‘Overview of IPO’ <https://www.jpx.co.jp/english/equities/listing-on-tse/new/basic/index.html> accessed 1 Jun 2023. The growth potential of the companies is assessed by the lead underwriters based on its business model or business environment.

¹⁷³ Japan Exchange Group, ‘Criteria for Listing’ <https://www.jpx.co.jp/english/equities/listing/criteria/listing/index.html> accessed 1 Jun 2023.

¹⁷⁴ Mikito Ishida, ‘Venture Capital Investment in Japan: Market and Regulatory Overview Market Overview’ (Thomson Reuters Practical Law, 1 May 2020) <https://uk.practicallaw.thomsonreuters.com/6-504-1281?transitionType=Default&contextData=(sc.Default)&firstPage=true> accessed 1 Jun 2023.

¹⁷⁵ An earlier lesson can be learned through the global financial crisis in 2008. One mistake of mortgage-backed security can destroy the whole economy. Despite being a wealthy nation, this crisis still hurt the US economy badly.

¹⁷⁶ More exit routes will be discussed in upcoming sections.

¹⁷⁷ Rachel Layne, ‘IPO or M&A? How Venture Capital Shapes a Startup's Future’ (HBS Working Knowledge of Harvard Business School, 27 Apr 2021) <https://hbswk.hbs.edu/item/ipo-or-ma-how-venture-capital-shapes-a-startups-future> accessed 1 Jun 2023. This article also mentioned that when asking the investors whether they prefer IPO or M&A; one investor simply replied that the best outcome is ‘money’.

¹⁷⁸ Lin, ‘Venture Capital Exits’ (n 154). US VCs prefer M&A as an exit because of the booming merger business in contrast to the volatility of the capital markets. Moreover, the VC-backed companies start to receive a better offer from potential acquirers such as financial firms and strategic rivals.

¹⁷⁹ ibid. The lower percentage of M&A incidences are due to (1) higher return from the IPO listing and the government effort to promote the capital market; (2) prolonged approval timeline resulting in negative possibilities such as employee brain drain and variations in acquisition price; (3) stringent control over debt financing. For example, in CBRC, there is a 60% limit to percentage of the loan-to-acquisition price ratio. However, after March 2014, the State Council promulgated a new Opinion – Opinion 92 – to reduce the scope of examined projects. Above that, the mandatory 75% loan-to-deposit ratio was abolished as well. These revisions of the regulatory framework are believed to promote a more friendly environment for M&A.

¹⁸⁰ James Riney, ‘7 Things Investors & Founders Need to Know about the Japan Startup Ecosystem’ (500 Insights, 2016) <https://500.co/blog/japan-startup-ecosystem-founders-investors/> accessed 1 Dec 2020 (Note that this link is no longer accessible on 3 Jul 2023); Ken Sakakibara, ‘Startup Japan: Buyouts overtake IPOs as preferred exit’ (Nikkei Asia, 21 Jun 2018) <https://asia.nikkei.com/Business/Business-trends/Startup-Japan-Buyouts-overtake-IPOs-as-preferred-exit> accessed 1 Jun 2023.

¹⁸¹ See Lin, Venture Capital Law in China (n 40).

¹⁸² ibid.

¹⁸³ Kem et al (n 19) 26.

¹⁸⁴ ibid.

¹⁸⁵ Rajah & Tan Asia. ‘Merger control guide – always up-to-date’ <https://www.mergerfilers.com/guide.aspx?expertjuris=Cambodia#guidebook> accessed 1 Jun 2023. As mentioned above once, some of the M&A activity are regulated under the Company Law and sectoral laws. After a 15-year delay, the antitrust law was enacted and entered into force in October 2021. We do not expect the Merger control law to take the same amount of time; however, it is still too early for us to predict if or when it may come into force. As of today, there is no news yet relating to the draft of such law.

¹⁸⁶ Gordon Phillips & Alexei Zhdanov, ‘Venture capital investments and merger and acquisition activity around the world’ (National Bureau Of Economic Research Working Paper No 24082, Nov 2017) <https://www.nber.org/papers/w24082> accessed 1 Jun 2023.

¹⁸⁷ ibid.

¹⁸⁸ ibid.

¹⁸⁹ Gary Dushnitsky & D Daniel Sokol, ‘Competition Laws Could Be A Death Knell For Startup Mergers And Acquisitions’ (The Hill, 22 Jul 2021) <https://thehill.com/opinion/white-house/564321-competition-laws-could-be-a-death-knell-for-startup-mergers-and?rl=1> accessed 1 Jun 2023.

¹⁹⁰ ibid.

¹⁹¹ Law on Competition 2021, art 3(3).

¹⁹² Federal Trade Commission, ‘Premerger notification and the merger review process’ <https://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/mergers/premerger-notification-merger-review> accessed 1 Jun 2023; Japan Fair Trade Commission, ‘ICN merger notification and procedures template’ <https://www.jftc.go.jp/en/policy_enforcement/mergers/ICNmerger.html> accessed 1 Jun 2023.

¹⁹³ J Nicholas Happe, ‘What start-ups should know about minority investor rights’ (Lexology, 30 Jan 2018) <https://www.lexology.com/library/detail.aspx?g=45938014-a6be-4311-8fb7-55e56477da72> accessed 1 Jun 2023.

¹⁹⁴ LCE 2005, art 145. The Company's Article of Incorporation may put more than one class of shares with different rights, privilege, restrictions and conditions. This may allow the startups to set up two classes of share where one class has greater voting rights than the other; and VC should be provided with a class that has greater voting rights power. Currently, many tech giants use this strategy to maintain the control for the founders, eg, Facebook, Dropbox, GoPro, etc.

¹⁹⁵ Tag-along and drag-along rights allow the minority shareholder like VC to join in and sell the share with the majority shareholders during the trade sale or acquisition.

¹⁹⁶ Alison Bird et al, ‘Top ten minority investor protections’ (Turinas & Bird LLC, 12 Jan 2016) <https://turinasbird.com/2016/01/12/corporate-law/minority-investor-protections> accessed 1 Jun 2023.

¹⁹⁷ See LCE 2005, art 93. Currently, regarding share transfers, the current regulation requires the parties to discuss during the formation of the corporation and then the agreement will be listed in the company's Article of Incorporation. However, during this period, VC may already or may not yet be a party to the negotiations; but the VC's interest is also on the line. Hence, if the VC insists, the Article of Incorporation might need to be revised. This will create a cumbersome process for all parties, causing more transactional costs to be incurred.

¹⁹⁸ Law on Financial Management 2013 (Cambodia), art 40. See also ‘New amendments on stamp Duty provisions in Cambodia: Legal tax & investment expertise’ (DFDL, 22 Jan 2013) <https://www.dfdl.com/insights/legal-and-tax-updates/new-amendments-on-stamp-duty-provisions-in/> accessed 1 Jun 2023.

¹⁹⁹ Startup Decisions, ‘The Mergers and Acquisitions (M&A) Scheme’ <https://www.startupdecisions.com.sg/singapore/incentives/mergers-and-acquisition-scheme-singapore/> accessed 1 Jun 2023. The scheme is applicable to the M&A execution between 1 April 2010 and 31 March 2015. Then, the application is extended until 31 March 2020.

²⁰⁰ IRAS e-Tax Guide, Income Tax and Stamp Duty: Mergers and Acquisitions Scheme (7th edn, Inland Revenue Authority of Singapore 2023).

²⁰¹ Gale, William G & Samwick, Andrew A, ‘Effects of income tax changes on economic growth’, in Auerbach, Alan J & Smetters, Kent (eds), The Economics of Tax Policy (Oxford University Press 2017) 13–39Google Scholar. Gale and Samwick found that the tax cuts as a stand-alone policy without expenditure cut will generally lead to an increase in the budget deficit. This increase in the budget deficit will reduce national savings and raise the interest rate, which will negatively affect investment. Some taxpayers might use the saving from tax cuts on economically inefficient things such as modern cars, big houses, and fancy clothes. As the budget deficit grows, future generations will pay for it when the public debt comes due.

²⁰² Shishido, Zenichi, ‘Does Law Matter to Financial Capitalism?’ (2014) 37 Fordham International Law Journal 1121Google Scholar.

²⁰³ Venture Enterprise Center, VEC Yearbook 2017: Annual Report on Japanese Startup Businesses (2018) 1–19.

²⁰⁴ Cumming, Douglas J & MacIntosh, Jeffrey G, ‘Venture capital exits in Canada and the United States’ (2003) 53 The University of Toronto Law Journal 101CrossRefGoogle Scholar.