Over the past years, Cyprus has become an attractive destination and a global hub for venture capital investments. This insight will delve into the legal aspects surrounding venture capital in Cyprus and how our team can assist with venture capital investments.
What is venture capital?
Venture capital constitutes a form of private equity financing, for early stage businesses and startup companies that are thought to have potential for growth, and which require investment in order to achieve such growth. It is considered as the best mechanism to raise capital in early stages, given that such businesses and startup companies may not be able to easily access loans from banking institutions or capital markets.
How does venture capital work?
Investors, investment banks and other funding institutions such as specialised venture capital funds provide capital to investee companies either by way of equity (i.e. in exchange for shares) or by way of debt, and they usually require having board representation in the investee company. Additionally, once a company receives venture capital investment by an institutional investor as referred to above, such an investor can also offer their expertise and guidance for the development of the business, using its experience in the specific field.
Venture capital is a competitive market and as such companies that have a comprehensive business plan, clear business model and / or a competitive characteristic, distinguishing them from other companies in the industry, are more likely to be perceived as having more potential for growth and thus are more likely to attract investors.
Why choose Cyprus?
Cyprus benefits from a stable legal system and from all EU law instruments. The legal system is based on the English common law system and legal reforms have been implemented recently which include the adoption of new CP Rules (similar to the English ones) and a 3-tier court system, with a specialist commercial court (expected to commence operations within 2025) to hear high-value commercial claims exclusively. Additionally, Cyprus' regulatory framework as well as its established financial infrastructure, offer an innovative and investment friendly environment.
Along with the foregoing, Cyprus' favourable tax regime, and its strategic geographic location between three continents, providing a convenient time zone to carry on business between Europe, Middle East and Africa, enables Cyprus to provide easy access to global markets.
Legal and Regulatory Framework Overview
Venture capital investments in Cyprus fall mainly under the scope of the Companies Law Cap. 113, investment laws (to the extent relevant businesses are regulated) as well as tax laws. In general, the responsible bodies for overseeing venture capital investments are the Central Bank of Cyprus, the Registrar of Companies and the Cyprus Securities and Exchange Commission, depending on the nature of the business being invested into.
Due Diligence and Negotiation Procedure
From the investor's point of view, thorough due diligence of a target company is pivotal in deciding whether or not to proceed with a venture capital investment and how to identify and manage any potential risks which may exist. In in our experience, it is common for early stage companies not to maintain adequate records and struggle to demonstrate full compliance with relevant rules and regulations. Our team specializes in assisting and supporting both (a) investors to perform in depth due diligence on the target company's history, including, but not limited to, verifying compliance with applicable laws and regulations, reviewing contracts and intellectual property rights, as well as ownership of real estate, and highlighting any potential risks that the investor may face; and (b) target companies by guiding them through the entire due diligence process and managing the potential investors' due diligence requests.
The negotiation and preparation of legal documents process is also a critical aspect of venture capital investments. Our team regularly assists clients with drafting and/or negotiating relevant agreements such as term sheets, subscription and shareholder's agreements, articles of association, share purchase agreements and any other relevant documents while ensuring protection of the client's interest (whether an investor or an investee company) and at the same time securing compliance with applicable laws and regulations and navigating regulatory requirements throughout the process.
A jurisdiction of choice
Cyprus remains at the forefront of investing developments, catering a secure and well-established investment hub while offering opportunities for both investors and startup companies.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
