Venture Capital, often referred to as "VC," involves a group of individuals with expertise and experience in technology, finance, marketing, or industry-specific knowledge utilizing their professional capabilities to assist investors in selecting and investing in promising enterprises with high-risk, high-growth potential. VC aims for future high returns^[1].

The reason why VC teams need to be familiar with various fields such as technology, finance, marketing, or industry-specific knowledge is that, unlike ordinary shareholders who merely provide funding, VC continues to provide various "value-added services" after injecting funds into promising enterprises. These services include assisting invested companies in finding talents, financing, going public or listing, mergers, or acquisitions. Moreover, VC may also actively participate in the management of invested companies, guiding them in all aspects to nurture their growth. The growth of many high-tech companies is closely related to the support provided by VC.

However, under the pursuit of high returns, the risks faced by VC are not only whether the returns meet expectations but also whether it has inattentively stepped on the red line of insider trading.

In the insider trading case deriving from the tender offer of Taiwan Green Point Enterprises Co. Ltd (“Green Point”) by Jabil Circuit Inc. (“Jabil,” see Taiwan High Court Criminal Judgement No. 102-Jin-Shang-Zhong-Geng-Yi-Zi-7), the Group A, as a VC , not only injected funds to became a shareholder of Green Point, but also served as a legal person director of Green Point at the time. The general manager of the Group A was designated to perform director’s duties on behalf of the Group A. Even though the general manager of the Group A ceased to perform such duties thereafter, as  it had been less than six months since the resignation, the court still considered the general manager of the Group A as an insider under Article 157-1, Paragraph 1, Subparagraphs 1 and 4 of the Securities and Exchange Act. The court  opined that the general manager, along with other members from the Group A, has violated the principle of information equality by trading Green Point’s stocks held by the Group A after Green Point had signed and returned a non-binding Letter of Intent with the Jabil’s U.S. parent company. The court sentenced the above individuals for the crime of insider trading with imprisonment respectively of 4, 8, and 9 years.

After the aforementioned judgment was issued, it sparked significant backlash in the industry. Four prominent entrepreneurs in the industry have publicly expressed grievances to the Group A. They particularly questioned the lack of clarity in the timing of when the insider trading is deemed constituted in Taiwan and requested for a unified standard for the industry to follow. They also questioned that the signing the "non-binding" Letter of Intent is merely an expression of willingness to negotiate between the companies. The court, however, considered such timing as the point at which all transition should be prohibited. Such timing is too premature and the court’s opinion is inconsistent with M&A practices in the industry, which may discourage companies from exploring investment intentions with each other in the future.

For the crime of insider trading, the determination of when a material information shall be deemed as " precise" or "existing" after which insiders should refrain from trading related stocks often varies with different rulings by courts in the first, second, or third instances. The industry questions the clarity of the "red line" for insider trading, finding it easy to violate. However, this article believes that establishing a unified standard for the "red line" of insider trading, either in law or in practice, may be challenging. The reasons are as follows:

1. The theoretical basis for the punishment of insider trading lies in prohibiting traders from exploiting the advantage of "material information" to engage in arbitrage transactions. The determination of when the material information should be deemed as "precise" and "existing" is contingent upon various factors such as the content, nature, development, and surrounding circumstances of such information.^[2] Different assessments may be made for individual cases based on the intrinsic characteristics of the information involved. This may also explain why the general manager of the Group A did not persuade the judge with the Supreme Court judgment previously recognizing that the risks of M&A prior to "due diligence" could not be accurately assessed, and thus trading preceding such due diligence would not constitute violations of the law.^[3]
2. On the other hand, establishing more rigid standards, such as explicitly stipulating that the information become precise only after due diligence, may inadvertently provide relevant individuals with opportunities to simply defer certain procedural benchmarks, thereby allowing for greater leeway in conducting insider trading.^[4] Such scenario would run counter to the legislative purpose behind the regulation of insider trading.

The original working model of VCs inherently includes investment and different degrees of operational involvement. In terms of operational involvement, VCs are considered insiders of the company. Therefore, they need to be more cautious when engaging in stock trading. Particularly, the court's determination of the timing at which trading should be prohibited may vary depending on the trader's identity. Taking M&A as an example, if the trader is the chairman of the company holding the vast majority of shares and his/her personal intentions could decisively impact the success of the transaction, the timing for prohibiting such trader from trading may be earlier compared to other internal managers.

As for whether VC should be afforded more freedom for "entrepreneurial investment" in the securities trading market rather than easily being punished with serious crimes, so as to promote economic development, is a matter  that needs legislative intervention to be finally solved.

(The article is originally in Chinese which can be found here.)