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.
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.
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.
The income tax exemption for capital gains is likely to be repealed soon (see Question 3).
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.
Investors must not be resident in a listed tax haven.
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.
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.
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.
Fund regulation and licensing
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.
Interests in investee companies
Valuing and investigating investee companies
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).
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
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.
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
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.
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:
Veto rights at the board and shareholders level.
Appointment of auditors and/or corporate counsel.
Appointment of key personnel.
Share transfer restrictions
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.
Founder and employee incentivisation
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.
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.
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.
Diego Serrano Redonnet
Qualified. Argentina, 1990; New York, 1997
Areas of practice. Corporate finance; private equity and venture capital; M&A; capital markets; lending and project finance.
Qualified. Argentina, 1999
Areas of practice. Private equity and venture capital; M&A; lending and project finance.
Qualified. Argentina, 1995; New York, 2001; Spain, 2004
Areas of practice. Taxation.