Foreign investors often seek to use Convertible Notes (CNs) or Simple Agreements for Future Equity (SAFEs) when investing in Korean startups. However, unlike in the U.S. or other jurisdictions, these instruments are not yet common in Korea and raise unique legal and regulatory questions, particularly during FDI (Foreign Direct Investment) filings.
CNs vs. CBs under Korean Law
While CNs may resemble Convertible Bonds (CBs), the two are distinct. CBs are statutory securities under the Korean Commercial Act, requiring strict issuance procedures, registration, and corporate filings. By contrast, CNs are not recognized as securities in Korea, and thus lack automatic convertibility. Instead, conversion into shares requires the standard procedures for new share issuance, including board resolutions and registration.
This distinction means that provisions such as “automatic conversion” commonly found in U.S. CN agreements may be unenforceable in Korea. The Korean Supreme Court has held that conversion rights outside statutory procedures could be invalid, emphasizing the need for formal resolutions and filings at each conversion event.
SAFE and Conditional Equity Contracts
Korea introduced similar—but not identical—structures under the Venture Investment Act:
Conditional Equity Acquisition Agreements (2020): modeled after SAFEs, without maturity or interest.
Conditional Equity Conversion Agreements (2023): allowing maturity and interest, with conversion into CBs rather than shares.
Despite these developments, U.S.-style CNs with both maturity and interest or SAFEs do not fall neatly under these categories.
FDI and Practical Treatment
In practice, CNs are typically reported to banks as “loan agreements with equity conversion rights” rather than CB issuances. Each case is reviewed individually, based on terms such as maturity, interest, and repayment. SAFE-like structures are also recognized but remain relatively unfamiliar in the Korean regulatory environment.
Practical Implications for Investors
Foreign investors should note three key differences when structuring CN/SAFE investments in Korea:
No statutory security status – CNs and SAFEs should not be recognized as CBs under Korean law.
No automatic conversion – every conversion requires corporate resolutions and filings.
Regulatory uncertainty – banks and regulators may classify CNs differently depending on contract terms.
Given these complexities, foreign investors are strongly advised to seek local legal counsel to ensure that CNs or SAFEs are properly structured, enforceable, and compliant with Korean law.
Hence, we strongly advise investors to exercise caution when adopting CNs or SAFEs in Korea and to seek professional guidance tailored to their specific transaction.
Architect Legal Advisory is well experienced to assist with structuring, compliance, and FDI filings in CN/SAFE investment. Please feel free to contact us for further advice.
Jeonghwan JK Kim
Partner | Korean Attorney-at-Law
Foreign investors often seek to use Convertible Notes (CNs) or Simple Agreements for Future Equity (SAFEs) when investing in Korean startups. However, unlike in the U.S. or other jurisdictions, these instruments are not yet common in Korea and raise unique legal and regulatory questions, particularly during FDI (Foreign Direct Investment) filings.
CNs vs. CBs under Korean Law
While CNs may resemble Convertible Bonds (CBs), the two are distinct. CBs are statutory securities under the Korean Commercial Act, requiring strict issuance procedures, registration, and corporate filings. By contrast, CNs are not recognized as securities in Korea, and thus lack automatic convertibility. Instead, conversion into shares requires the standard procedures for new share issuance, including board resolutions and registration.
This distinction means that provisions such as “automatic conversion” commonly found in U.S. CN agreements may be unenforceable in Korea. The Korean Supreme Court has held that conversion rights outside statutory procedures could be invalid, emphasizing the need for formal resolutions and filings at each conversion event.
SAFE and Conditional Equity Contracts
Korea introduced similar—but not identical—structures under the Venture Investment Act:
Conditional Equity Acquisition Agreements (2020): modeled after SAFEs, without maturity or interest.
Conditional Equity Conversion Agreements (2023): allowing maturity and interest, with conversion into CBs rather than shares.
Despite these developments, U.S.-style CNs with both maturity and interest or SAFEs do not fall neatly under these categories.
FDI and Practical Treatment
In practice, CNs are typically reported to banks as “loan agreements with equity conversion rights” rather than CB issuances. Each case is reviewed individually, based on terms such as maturity, interest, and repayment. SAFE-like structures are also recognized but remain relatively unfamiliar in the Korean regulatory environment.
Practical Implications for Investors
Foreign investors should note three key differences when structuring CN/SAFE investments in Korea:
No statutory security status – CNs and SAFEs should not be recognized as CBs under Korean law.
No automatic conversion – every conversion requires corporate resolutions and filings.
Regulatory uncertainty – banks and regulators may classify CNs differently depending on contract terms.
Given these complexities, foreign investors are strongly advised to seek local legal counsel to ensure that CNs or SAFEs are properly structured, enforceable, and compliant with Korean law.
Hence, we strongly advise investors to exercise caution when adopting CNs or SAFEs in Korea and to seek professional guidance tailored to their specific transaction.
Architect Legal Advisory is well experienced to assist with structuring, compliance, and FDI filings in CN/SAFE investment. Please feel free to contact us for further advice.
Jeonghwan JK Kim
Partner | Korean Attorney-at-Law