Proposed Venture capital act 2026 sets Rs. 100 million fine for unlicensed operations

Pakistan is considering a new regulatory framework for the venture capital industry under the proposed Venture Capital Act, 2026, which aims to bring venture capital funds, fund managers and startup investments under a formal legal and supervisory structure.

ISLAMABAD: Pakistan is considering a new regulatory framework for the venture capital industry under the proposed Venture Capital Act, 2026, which aims to bring venture capital funds, fund managers and startup investments under a formal legal and supervisory structure.

The draft legislation proposes strict penalties for entities conducting venture capital activities without the required approval. Under the proposed framework, unauthorized operations could attract a fine of up to Rs. 100 million, imprisonment for up to three years, or both.

The draft law is currently being discussed with the Board of Investment (BOI) and other relevant stakeholders. Since the legislation is still at the consultation stage, its provisions could be revised before being formally enacted.

Draft law defines eligible startups

One of the key features of the proposed legislation is the introduction of a formal definition of a startup.

Under the draft, a startup would generally be a company that has been operating for no more than 10 years and has not reported annual turnover exceeding Rs. 500 million in any financial year since incorporation.

The company would also need to demonstrate characteristics such as innovation, development of new products, processes or services, or a scalable business model capable of generating significant employment or wealth.

Companies created by splitting up or reconstructing an existing business would not be eligible for startup status under the proposed framework.

Venture capital investment scope

The draft legislation would permit registered venture capital funds to invest primarily in startups and unlisted early-stage or high-growth businesses.

Eligible investments could include companies developing technology, products, processes and services with substantial growth potential.

Venture capital funds would also be permitted to make follow-on investments in companies already included in their portfolios for up to 10 years from the date of the initial investment.

The framework would additionally allow funds to invest in units of other registered venture capital funds, subject to disclosure and regulatory requirements.

Two-tier regulatory structure proposed

The proposed law would establish a two-level regulatory system.

Under this structure, venture capital fund management companies would require a license, while individual venture capital funds would have to obtain separate registration.

Public limited companies, private limited companies and limited liability partnerships would be eligible to apply for a fund management license if they meet the prescribed requirements.

A venture capital fund management company would be required to maintain minimum equity or capital of Rs. 15 million.

Applications would have to include information about promoters, directors, majority shareholders, the chief executive officer and compliance officer. At least one director or designated partner would also need relevant experience in venture capital.

License and registration fees

The proposed application fee for a venture capital fund management license is Rs. 200,000.

The Securities and Exchange Commission of Pakistan (SECP) would be required to decide a complete application within 45 working days.

Fund registration would also carry a proposed fee of Rs. 200,000, while voluntary cancellation of registration would cost Rs. 100,000.

Annual monitoring charges would vary according to the size of a fund. The draft proposes fees ranging from Rs. 100,000 or 0.02% of net assets for funds with assets up to Rs. 1 billion to Rs. 500,000 for funds with assets exceeding Rs. 5 billion.

Existing private fund management companies already involved in private equity or venture capital activities could potentially be deemed licensed, subject to confirmation and compliance with the proposed framework. Such companies would, however, be required to keep their existing activities separate from their newly regulated venture capital operations.

Responsibilities of fund managers

Licensed management companies would be authorized to establish, launch, manage and administer venture capital funds. They could also manage investments and provide related advisory services.

The draft would impose several fiduciary and operational responsibilities on managers, including acting in the best interests of investors and following the investment objectives stated in the fund’s documents.

Managers would also be required to:

– Keep fund assets separate from their own assets.

– Maintain accurate books and accounts.

– Establish appropriate risk-management systems.

– Monitor fund performance.

– Identify and manage conflicts of interest.

– Provide required information to investors and regulators.

– Seek subscriptions only from eligible investors.

– Raise investments through a placement memorandum.

Separate registration for each fund

Each venture capital fund would have to be separately registered through its management company.

The registration application would provide information about the fund’s legal structure, proposed size, investment objectives, target sectors, expected life, placement memorandum and investor commitments.

It would also have to explain how the interests of unit holders would be protected.

For Shariah-compliant venture capital funds, the proposed framework would require additional information covering the Shariah structure, relevant opinion and investment-screening criteria.

Once registered, a fund would operate separately from its management company and could only be offered to eligible investors through a placement memorandum.

Investors would face eligibility requirements

The proposed framework would also establish eligibility criteria for individual investors.

A Pakistani or foreign individual investor would generally be required to have annual income of at least Rs. 5 million and net assets of at least Rs. 15 million, excluding the value of their personal residence.

Investors would also need to acknowledge that they understand the risks associated with venture capital investments.

Institutional investors eligible under the framework could include financial institutions, companies, insurance companies, securities brokers, collective investment schemes, voluntary pension funds, foreign companies and other entities approved by the SECP.

Investors to have a say in major changes

The proposed law seeks to give investors greater oversight over significant changes to a venture capital fund.

Fund managers would have to notify investors and the SECP at least seven days before material changes involving investment strategy, key management, fund life or legal structure.

Changes to a placement memorandum would require approval from holders representing at least 51% of the fund’s units by value.

A fund’s offering document would also be required to disclose important information, including its investment strategy, management team, fund size, expected life, exit arrangements, capital calls, distribution policy, fees, borrowing arrangements and conflict-of-interest policies.

Risk disclosures, portfolio and performance reporting policies, valuation procedures and the frequency of unit pricing would also have to be disclosed.

SECP given extensive supervisory powers

The proposed legislation would give the SECP broad powers to obtain information from venture capital funds, management companies, promoters, directors and senior executives.

The regulator could take action where it identifies suspected violations or requires information for regulatory purposes.

The SECP could also suspend or cancel licenses and registrations in cases involving fraud, financial misconduct, misleading investors or other serious breaches.

However, managers would generally be given an opportunity to present their case before regulatory action is taken.

Voluntary cancellation of a fund would require approval from at least 75% of unit holders by value, while the SECP could impose conditions considered necessary to protect investors or the wider public interest.

Penalties for regulatory violations

The draft proposes fines of up to Rs. 50 million for a range of regulatory violations.

These could include breaches of the proposed law or regulatory directions, failure to provide required information, submission of false or misleading disclosures, misuse or misappropriation of fund assets, failure to disclose material conflicts of interest and significant violations of investment restrictions.

In addition to financial penalties, the SECP could order recovery of profits obtained or losses avoided through violations and could seek reimbursement of investigation-related costs.

Up to three years in prison for unlicensed operations

The strongest punishment under the proposed framework would apply to entities carrying out venture capital business without the required license or registration.

Such unauthorized activity could result in a fine of up to Rs. 100 million, imprisonment for up to three years, or both.

Existing businesses engaged in activities covered by the proposed legislation without the necessary approval would receive a 12-month transition period after the law comes into force to obtain the required authorization.

Entities failing to regularize their operations within that period would be prohibited from accepting new investments and would be required to wind up their activities within 30 days after the transition period expires.

Audits, reporting and investor protection

The proposed framework would require venture capital funds and managers to maintain audited financial statements and submit detailed reports.

Reporting requirements would cover portfolio composition, asset valuations, expenses, expense ratios, benefits received by managers and overall fund performance.

The SECP would also have the authority to order special audits where necessary and issue directions aimed at protecting investors, preventing material harm or addressing systemic risks.

Funds and management companies would additionally be required to comply with applicable anti-money laundering (AML), counter-terrorism financing (CFT) and know-your-customer (KYC) requirements.

No guarantee of investment performance

The draft makes clear that registration or approval by the SECP would not amount to an endorsement of a fund manager’s capabilities or guarantee the investment performance of a venture capital fund.

The proposed framework would also allow the SECP and federal government to introduce additional regulations and rules as required.

Such regulations would have to be published for public comments for at least 14 days, while the SECP would be empowered to amend schedules attached to the proposed Act through notification.

The Venture Capital Act, 2026 remains a draft proposal and is currently undergoing consultation with the BOI and other stakeholders. Its final provisions may therefore change before the legislation is submitted for formal approval.