Research On The Legal Issues Concerning The Application Of Preferred Stocks In Venture Capital

Venture capital originated in the 1920 s and 1930 s.It once became popular in Western developed countries.The application of preferred stock investment and financing tools has actively and effectively promoted the development of venture capital,making the venture capital mechanism in developed countries gradually develop and improve.China's venture capital industry began in the 1980 s.It has greatly stimulated the development of China's high-tech industry and economy after a long period of nearly 10 years.However,China's current legislation lacks comprehensive and detailed laws and regulations on preferred stocks.Although preferred stocks are widely used in commercial banks to supplement capital in market practice,there is still room for improvement and improvement in the area of venture capital investment.In the development of capital markets,preferred stocks have adapted to the real needs of venture capital.On the one hand,the preferred stocks are beneficial to ease the two-way moral hazard and adapt to the balance of investment and financing rights.On the other hand,it is beneficial to broaden the financing channels of enterprises and promote the development of multi-level capital markets.The application of preferred stocks in venture capital has both enriched and developed the equity equality principle and also complied with the principle of autonomy of the shareholders and companies in the contract law and company law.Whether it is for the capital market,companies or investors,the value and function of the preferred stock system in venture capital can't be underestimated.However,China's legal provisions on preferred stocks are still not perfect,which adds instability to the application of preferred stocks in venture capital.The current legal problems in the application of preferred shares in venture capital in China include: First,the lack of preferred shares at the legal level,there is no express provisions in the company law,and the legal hierarchy of the Measures for the Administration of Pilots of Preferred Shares is too low.Second,the restrictive provisions on the issuance of preferred stocks are more stringent,which affects the market liquidity of preferred stocks and the special issue of disclosure of rights in preferred stock transactions.Third,there is not enough flexibility in the contents of the rights of preferred shares,the exit mechanism isn't perfect,and the right protection mechanism for shareholders of preferred shares needs to be improved.By comparing venture capital investment model contracts widely used in U.S.venture investment practice,the author found it's generally agreed in the venture capital contract that shares held by investors should be designated as preferred shares,and that preferred shares can be given conversion rights and back.There are a series of specific rights such as redemption,joint sale,compulsory sale,voting rights for election of directors,and anti-dilution rights.According to the design of the preferred stock system,investors can convert preferred stocks when the target company's business conditions deteriorate,and achieve exit or control over the target company.Regarding the transplantation of applicable preferential shares in risk investment in common law,using the lessons learned from foreign legislation and practice,the author puts forward the following suggestions: First,supplement the related provisions of the company law and incorporate the preferential share system into the legal regulation.Second,we will improve the issuance provisions for preferred stocks in the Procedure for Piloting Preferred Stock Pilots,increase the flexibility of designing clauses for preferred shareholders,and standardize the development of preferred stocks.Third,improve the rights protection mechanism for preferred shareholders in the exit channels such as redemption of preferred shares,preference shares,and share reversal of preferred shares.This article is divided into five parts:The first part sorts out the legislative overview of our country's preferred sharessystem,and on this basis,points out that the development of preferential shares system lacks basic legal guarantees and corresponding supporting measures,explains the necessity of close integration of venture capital and preferred stock,but here are legal issues that apply to stocks.The second part compares the different legislative models of domestic and foreign preference shares and summarizes the inadequacies of China's preferred shares.It imposes strict requirements on the issuance of China's preferred shares,limits the functions of preferred shares,and requires special A detailed analysis was conducted on issues such as the disclosure of interest and the protection of rights in the process of withdrawal.The third part starts with the US Venture Capital Model Contract and introduces the legislative provisions of the preferred stock system in the US venture capital,its own flexibility and adaptability to the venture capital industry,as well as its important implications and lessons for China.The fourth part puts forward suggestions for the improvement of the preferred stock system in China's venture capital,including the improvement of China's preferred stock related legislation,the relaxation of restrictive conditions for the issuance of preferred stocks,the content of supplementing the rights of preferred shareholders,and the construction of preferred stocks rights protection mechanisms and other aspects.The fifth part is the conclusion of the article,summing up the viewpoint of the paper: The development of the preferential shares system is of great significance to the establishment of a multi-level capital market in China,and is in line with the interests of all market players.China should learn from the legislative experience of America,and improve the preferred shares.The legal system regulates the development of preferred stocks.