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A new legal framework to boost local startups

Argentina is one of the most innovative tech hubs of Latin America and hometown to several of the pan-regional “unicorns”. However, it lacked until now an adequate legal framework to fund startups through venture capital, crowdfunding platforms or seed capital. The absence of clear rules and incentives reduced substantially the financing opportunities for local startups, which largely depended on making the right pitch to friends and family or the willing few.

In order to boost local financing of new projects on March 29 the Argentine Congress approved a long awaited law (the “Entrepreneurship Law”), which is set to change the whole startup environment, technology-related or otherwise.

The law generously defines an eligible startup project as any activity to be undertaken in Argentina by a newly created entity or by one not older than seven years. Any individual or entity (governmental, private or mixed) shall have the right to fund a startup, either through a startup capital institution (“ICE”, following its Spanish name of institución de capital emprendedor) or directly, although the direct funding option is only available to individuals. ICEs will be created to fund projects with their own or third party-raised capital.
The investors in the startups will have the right to deduct up to 75% of their relevant investments from their annual income tax, up to 10% of the net taxable income; provided that any undeducted excess may be rolled over the subsequent five fiscal years. This is a very interesting incentive, likely to encourage funding by otherwise uninterested investors.

The Entrepenership Law also creates a 30-year government-sponsored fund (the “Startup Fund”) which purpose shall be to lend, grant or invest capital to ICEs or startups and favors particularly the capital supply to incubators and accelerators. The Startup Fund will also be allowed to grant seed capital to eligible projects.

The new legal framework also provides the rules for the creation of crowdfunding platform managers, which shall be supervised by the CNV (which is the local equivalent to the SEC). Entrepreneurs will submit their projects to these managers, who in turn will select those that eligible to be offered to the public. Crowdfunding investments will be made online either through equity, convertible loans or interests in a trust. The system is designed to encourage a secondary market where the investors will be able to trade their investments.

The Entrepreneurship Law also creates a “Seed Fund” which purpose is to educate and finance those entrepreneurs willing to startup a project or boost an existing one in its initial stage. The project selection will be made through incubators and the financing may take the form of grants, “soft” loans or any other funding mechanisms. Priority will be given following criteria of innovation potential, value or employment generation potential, geographic and productive diversity.

The Entrepreneurship Law also creates the Simplified Share company, which is a new company type, the most flexible of the ones available in our legal system. It will be available for set up online and operative within 24 hours. The positive thing is that company will not only be available to small entrepreneurs but also to larger companies who may opt in to have the benefits of a much modern legal regime.

All these changes are a very good answer to a long existing deficiency in Argentina: clear rules for startup creation and funding. While the success of these changes will depend largely on the details and implementing regulations (which are expected to be issued in May 2017), this is a major step ahead in giving entrepreneurs a dynamic framework in which to develop their ideas.

This article was first published in the Corporate Finance/M&A Newsletter of the International Law Office – www.internationallawoffice.com.

Diego S. Krischcautzky

Partner

C.V.

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