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Startups

Investors choking startups with purse strings: Japan watchdog

Share-purchase rights abused most, Fair Trade Commission says

In a survey of more than 1,400 startups, the Japan Fair Trade commission found many complaints that large investors sought special favors, such as free access to intellectual property.

TOKYO -- The Japan Fair Trade Commission, the country's competition regulator, says big Japanese companies often make unreasonable demands of the startups they invest in, including free access to intellectual property, possibly violating antitrust laws.

In November 2019, the Japan Fair Trade Commission launched a fact-finding survey to investigate whether investors such as large companies and venture capitalists impose unreasonable conditions on startups in return for cash. It sent out questionnaires to more than 1,400 startups, and interviewed investors and experts, to draw up a forthcoming report.

Startups' frequent lack of capital gives investors a lot of influence. Japanese venture capitalists provided 526 billion yen ($5 billion) to new companies in 2019, about three times as much as five years earlier.

A survey by the Japan Fair Trade Commission found many cases where large companies and venture capitalists make unreasonable demands of those they invest in. In particular, the commission is concerned about investor demands they be allowed to purchase large chunks of targeted startups.

In Japan, large companies and venture capitalists invest in such young companies, which often find themselves in financial straits as they try to grow.

The commission says such investors often use their financial leverage to make unreasonable demands of unicorns, as unlisted startups estimated to be worth $1 billion or more are called.

One startup surveyed complained that an investor threatened to exercise its right to purchase shares in the company if they did not offer its intellectual property free of charge.

The exercise of share-purchase rights must meet certain conditions, such as a contract violation, but the commission found cases where large companies tried to coerce startups into meeting onerous conditions even when there was no violation.

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