Abstract

The venture capital industry in the U.S.is the most advanced in the world, in the recent years, the amount of venture capital investment is over 100 billion per year.The prosperity of venture capital industry in the U.S.is due to not only American's economic prosperity, endless innovation of science and technology, heavy venturing tradition, but the maturity and perfect of legal system as well.This treatise describes the development of American's venture capital industry and constitution of its legal system at first, then it demonstrates the federal and state legislation of venture capital.Afterwards, this book expounds the legal system of venture capital operation, which includes the subject legal system, angel investment contract, contract between venture capital providers and venture capitalists, contract between venture capitalists and entrepreneurs, control and governance of business, exit legal system, etc.At last, it describes the history and status quo of venture capital in China, points out the problems, and based on the success experiences of the U.S., put forward the countermeasures.

Chapter 1 demonstrates the history of the U.S.venture capital industry and constitution of its legal system.It analyses the conception, subject and function of venture capital, describes the development history, which divided into four stages, of the U.S.venture capital industry from the macroscopic view.Based on this description, it concludes that the supporting policy of government and legislation are very important to venture capital industry.Chapter 1 details the venture capital operating process from the microscopic view: venture investors provide capital to venture capital firms, through their venture capitalists, the firms provide capital and value-added service to venturing business, when the business matures, venture capital will exit by means of initial public offering（IPO）, sales, or repurchase, at last, the firms will distribute capital gains to investors according to ex ante determined rate.In the cycle of venture capital，the rights and obligations are determined by contracts.At the end of this chapter, it expounds the constitution of the legal system of the U.S.venture capital.

Chapter 2 demonstrates the U.S.federal legislation of venture capital.The main legislators are government and the congress.This chapter emphasizes on 1958 Small Business Investment Companies Act, 2003 New Market Venture Capital Program,2001 Uniform Limited Partnership Act,2003 Employment and Economic Growth Coordination Tax Relief Act, analyses the backgrounds, aims, contents of each act or regulation.The contents of federal legislation are government financial supports and credit guarantees, building of perfect system of organizations, tax relief, direct subsidies, etc.

Chapter 3 demonstrates the state legislation of venture capital.According to the U.S.constitution, all powers that not authorized to federal or not prohibited from state belong to state.Most states of the U.S.have legislation of venture capital, the forms of which are different, the contents of which are systematic. Combined with federal legislation, they constitute a perfect legislation system of the U.S.venture capital.Many states take part in venture capital industry directly by legislation, the reasons are promoting small business development, developing high-tech industry, diversifying the labour forces, filling gap of private venture capital, etc.There are Massachusetts type and Michigan type.This chapter analyses and demonstrates Arkansas and California legislation, as they respectively represent the primitive and advanced state.

Chapter 4 expounds the subject legal system of venture capital.There are two types of venture capital subjects: main subject and supplementary subject, the former consists of venture investors, venture capital firms and venture capitalists, venturing businesses and entrepreneurs, the latter includes investment banks, accountant firms, lawyer firms, information consulting services, asset assessing firms, etc.Venturing investors includes single investors and institution investors, which consists of pension funds, insurance companies, enterprises, etc.The rights and obligations of investors are determined by contracts, related laws and regulations.Venture capital firms and venture capitalists are the key subjects, the main role of which is: raising capital from investors, providing capital and value-added services to venturing businesses, supervision of venturing businesses.The forms of venture capital firms are corporation, partnership, limited liability company, etc.Entrepreneurs and venturing businesses are subjects that absorb capital and services, the capital gains origin from them eventually. Forms of venturing business are very important, different form has different advantages and disadvantages in respect of attracting capital.

Chapter 5 demonstrates contracts between angel investors and entrepreneurs.Angel investors are different from common venture investors, because they are both investors and venture capitalists simultaneously.The amount of potential angel investors in the U.S.is as large as 1.5—2.5 million.They give impetus to the development of small businesses and play an important role in the growth of the U.S.high-tech industry.Angel investors are different from venture capitalists in investment experiences, motivations, decision procedure, investment volume and risk controlling methods.Angel investment contracts are negotiated between angel investors and entrepreneurs.Compared with ordinary venture capital investment contracts, they are simple and informal.

Chapter 6 discusses the legal issues of capital raising and formation of venture capital firms, the main item of which is the contract between venture investors and venture capitalists.The chief value of venture capital firms is that they can lower investment costs, improve investment efficiency, control investment risk, reach scale economy.The main forms of venture capital firms are limited partnership, corporation and limited liability company.In the U.S., most venture capital firms take the limited partnership, because it has advantageous tax treatment, good incentive mechanism, and because reputation plays a very essential role in venture capital industry.Limited partnership contract is the main legal document that defines the rights and obligations of venture investors and venture capitalists.This chapter emphasizes on the incentive clauses, covenants clauses, and their decisive factors, analyses the role of venture capitalists'reputation in restricting their own opportunism behaviours.According to the contract, venture capitalists have a wide scope of freedom and rights, and have good chances to behave opportunistically, in fact, they seldom do this, because the reputation mechanism takes effects.

Chapter 7 expounds the contract between venture capitalists and entrepreneurs.In the field of venture capital, information asymmetry is omnipresent.Information asymmetry includes ex ante and ex post, the former may lead to adverse selection, the latter may lead to moral hazard.Using principal-agent theory, the author demonstrates how the two parties, venture capitalists and entrepreneurs, under the situation of information asymmetry, make use of investment contract to define each other's rights and obligations to deal with adverse selection and moral hazard.The investment contract always consists of investment amount, investment time, financial tools selection, guarantee, control and governance of venturing business, exit of venture capital, etc.This chapter demonstrates selectively three topics of contract, that is, guarantee clauses, selection of financial tools, investment staging, and concludes that these clauses effectively solve the adverse selection and moral hazard problem.

Chapter 8 demonstrates the control and governance of venturing business. When the venture capitalists have invested part or all of venture capital into the venturing business, their relationship with the entrepreneurs is both of common interest and of conflict.The control and governance of venturing business is related to not only success or failure of the business, but also the realization of the two parties'interests.This chapter analyses the control and governance of venturing business based on the incomplete contract theory.The distribution of board of directors membership and voting rights of general meeting of shareholders are the two main methods of control and governance.The transference of downwards business control rights is particularly discussed in details in this chapter, because under this kind of situation, the conflict between two parties is especially severe, and their interests need be protected vehemently.

Chapter 9 discusses the legal issues of venture capital exit.Exit is very important for venture capital, because it is indispensable for continuous supply of venture capitalists'capital and value-added services, and it is the basis for assessing the achievements and competence of venture capitalists.The main forms of venture capital exit are initial public offering（IPO）, sale, repurchase by venturing business, liquidation, etc.Based on empirical analysis of venture capital exit in the U.S., the author concludes that the failure probability of venture capital is high, the rate of return by IPO is the highest, IPO is related positively to NASDAQ.This chapter emphasizes on the NASDAQ operating mechanism, offering regulation and offering procedure.

Chapter 10 expounds the perfect of Chinese legal system of venture capital. At first it describes the history of Chinese venture capital from the macroscopic views and demonstrates the legislation and policies of China.Then, it discusses the operating procedure of Chinese venture capital compared with that of the U. S.from the microscopic views.The author holds that there are so many differences in project selection, project supervision, value-added services and exit forms between China and the U.S.The main problems of Chinese venture capital industry are as the following: the subject and capital resources are single, the forms of venture capital firms are single and scale small, the supply of capital can't meet the need, the operating and exit mechanism is imperfect, etc.The success experiences of the U.S.venture capital legal system are that it secures the capital resources, investment efficiency, subject diversity, and unblocked exit.At last, this chapter puts forwards the countermeasures to perfect venture capital legal system of China.

In whole, this treatise consists of four parts: Chapter 1 describes the history and legal system of the U.S.venture capital industry, Chapter 2 and 3 demonstrate the U.S.legislation of venture capital, chapter 4 to 9 expound the legal system of venture capital operation in the U.S., Chapter 10 describes the history of venture capital industry and puts forwards the countermeasures to perfect legal system of venture capital in China.Each part is undependable to and reliable upon each other, and they constitute a perfect theory system.

Key words: venture capital legal system federal legislation state legislation venturing business