Pakistan is considering a new law that could bring very strict penalties for companies and businesses working in the venture capital sector without the required licence or registration. Under the proposed Venture Capital Act, 2026, any business carrying out venture capital activities without legal approval could face a fine of up to Rs. 100 million. Those responsible could also face imprisonment for up to three years, or both punishments.
The proposed law is still in draft form and has not yet become law. It is currently being discussed with the Board of Investment and other relevant stakeholders. Its main purpose is to create a clear and modern legal system for venture capital funds, fund managers and investment in startups and other growing businesses.
The new framework could bring major changes to Pakistan’s startup and investment sector. If approved, it would set clear rules about who can manage venture capital funds, how such funds should operate, who can invest, and what kind of information must be shared with investors.
A Major Step for Pakistan’s Startup Investment Sector
Venture capital plays an important role in helping startups and new businesses grow. Startups often need money to develop their products, hire workers, enter new markets and expand their operations. Banks may not always be willing to provide loans to businesses that are new or still growing. This is where venture capital can become useful.
Under the proposed law, venture capital would mainly focus on investing in startups and unlisted businesses that are in their early stage or have strong growth potential. The businesses could be working on new technology, products, services or processes.
The government wants to create a proper system for these investments instead of allowing the sector to operate without clear rules. The proposed framework is expected to improve trust between investors, startups and fund managers.
At the same time, the government wants to make sure that people and companies managing other people’s investment money follow proper rules and remain accountable for their actions.
What Businesses Could Be Considered Startups?
The proposed Venture Capital Act, 2026 also gives a formal definition of a startup. According to the draft, a startup would generally be a company that has been operating for no more than 10 years.
The company must also meet certain financial conditions. It should not have recorded annual turnover above Rs. 500 million in any financial year since it was established.
However, being new and having lower turnover would not be enough on their own. The company would also need to show that it is involved in innovation, the development of a product, service or process, or has a business model that can grow quickly.
The proposed law also looks at the ability of a startup to create jobs and wealth. This means companies with strong growth potential could qualify even if they are still in the early stages of development.
Companies created simply by dividing, rebuilding or restructuring an existing company would not automatically qualify as new startups under the proposed rules.
Separate Rules for Fund Managers and Venture Capital Funds
The proposed law suggests a two-part system for regulating the venture capital industry.
Companies that manage venture capital investments would need to obtain a licence. Individual venture capital funds would also need separate registration.
This means a business would not be allowed to freely start managing venture capital activities without first meeting the required legal conditions.
Public limited companies, private limited companies and limited liability partnerships could apply for a licence, provided they meet the rules set by the regulator.
A venture capital fund management company would need at least Rs. 15 million in equity or capital. The application would also include information about important people connected with the company.
This would include details about promoters, directors, major shareholders, the chief executive officer and the compliance officer.
At least one director or designated partner would also need to have relevant experience in venture capital.
The aim is to ensure that people managing investment funds have the required knowledge and experience to handle investor money.
Licence Application Fee Set at Rs. 200,000
Under the draft framework, the application fee for a venture capital management licence would be Rs. 200,000.
Once a complete application is submitted, the Securities and Exchange Commission of Pakistan would be required to make a decision within 45 working days.
This could help provide a clearer timeline for businesses planning to enter the sector.
Some existing private fund management companies that are already involved in private equity or venture capital activities may also be covered under the new framework.
Such companies could be treated as licensed, subject to confirmation under the proposed rules. However, they may need to separate their existing activities from their venture capital operations.
This would help create a clearer structure and make it easier for the regulator and investors to understand how each part of the business is operating.
Duties of Licensed Fund Managers
Businesses that receive a licence would be allowed to establish, launch, manage and administer venture capital funds.
They could also manage investments and provide related advisory services.
However, the proposed law would place several responsibilities on fund managers.
They would be required to act in the interests of investors and follow the investment goals mentioned for each fund. They would also have to keep fund assets separate from their own company assets.
Proper financial records would have to be maintained.
Fund managers would also need systems to manage risks and monitor the performance of investments.
Another important responsibility would be managing conflicts of interest. If a situation arises where the interests of the fund manager and investors are different, the manager would have to follow the required rules and provide proper information.
Managers would only be allowed to seek investment from eligible investors. The investment offer would also need to follow the rules set out in the placement memorandum.
Every Venture Capital Fund Would Need Registration
The proposed law would require every venture capital fund to be separately registered through its management company.
The registration application would contain important information about the fund.
This could include its legal structure, target fund size, investment plans, preferred sectors and expected life.
Details about the placement memorandum and investor commitments would also have to be provided.
The application would also need to explain how the interests of unit holders or investors would be protected.
Funds that claim to follow Shariah principles would have additional requirements. They would need to provide information about their Shariah structure, relevant opinion and the criteria used to screen investments.
A registered fund would operate separately from its management company.
It could only be offered to eligible investors through a proper placement memorandum.
The proposed rules would also allow a registered fund to invest in another registered venture capital fund, but important details about the underlying funds and extra fees would have to be shared.
Investors Would Have a Role in Important Decisions
The proposed law gives investors a role in certain major decisions involving the fund.
Fund managers would have to inform investors and the SECP at least seven days before making major changes in areas such as investment strategy, important management positions, the life of the fund or its legal structure.
Changes to the placement memorandum would require approval from at least 51 percent of unit holders based on the value of their holdings.
This could provide investors with greater involvement in decisions that may affect their money.
The proposed rules also set conditions for individual investors.
Pakistani and foreign individual investors would generally need an annual income of at least Rs. 5 million.
They would also need net assets worth at least Rs. 15 million, excluding the value of their personal residence.
In addition, they would have to confirm that they understand the risks connected with venture capital investment.
Which Institutions Could Invest?
The draft law would also allow several types of institutional investors to participate in venture capital funds.
These could include financial institutions, companies, insurance businesses, securities brokers and collective investment schemes.
Voluntary pension funds, foreign companies and other entities approved by the SECP could also qualify.
The purpose of these requirements is to ensure that venture capital funds mainly deal with investors who have the financial strength and understanding needed for such high-risk investments.
Unlike some traditional investments, startup investments can carry greater risks.
A startup may grow quickly and become highly successful, but it may also fail.
For this reason, the proposed law places importance on investors understanding the possible risks before putting their money into a venture capital fund.
Important Information Would Have to Be Shared
The placement memorandum would play an important role under the new system.
It would be required to provide investors with important information before they make an investment decision.
The document could include information about the fund’s legal structure, investment manager and investment team.
It would also explain the investment goals of the fund, its target sectors and its expected size.
Other important details would include the life of the fund and how investors may exit their investment.
The placement memorandum would also provide information about capital calls, drawdowns and the policy for distributing income.
Management fees and other charges would have to be disclosed.
The fund’s borrowing policy and rules for handling conflicts of interest would also need to be shared.
Investors would also receive information about possible risks, performance reporting and the fund’s investment portfolio.
The method used to value investments and decide the price of fund units would also have to be explained.
For Shariah-compliant funds, the relevant Shariah structure would also be disclosed.
The document would also explain how assets would be distributed when a fund reaches the end of its life or is cancelled.
SECP Would Receive Strong Regulatory Powers
The proposed law would give the SECP broad powers to collect information from venture capital funds and fund management companies.
The regulator could ask for information from promoters, directors and senior executives when required for regulatory purposes.
It could also take action if it suspects that the law has been violated.
In serious cases involving fraud, financial misconduct or misleading investors, the SECP could suspend or cancel a licence or registration.
Action could also be taken where an active fund has not been properly managed for two financial years, subject to the conditions mentioned in the proposed law.
However, fund managers would generally be given an opportunity to explain their position before such action is taken.
The draft also includes rules for the voluntary cancellation of a fund.
A voluntary cancellation would require approval from at least 75 percent of unit holders based on the value of their holdings.
The SECP could also impose certain conditions to protect investors or the wider public interest.
Other Violations Could Bring Fines of up to Rs. 50 Million
Apart from the much larger penalty for operating without a licence, the draft law also proposes serious fines for other violations.
Fines of up to Rs. 50 million could be imposed for breaches of the proposed law or directions issued by the regulator.
The same penalty could apply in cases where required information is not provided.
Providing false or misleading information could also result in serious action.
Misuse or misappropriation of assets, hiding major conflicts of interest and breaking important investment restrictions could also lead to penalties.
The SECP may also have the power to order the return of profits gained through violations or recover losses that were avoided because of illegal actions.
The cost of an investigation could also be recovered from those responsible.
These provisions are meant to increase accountability in the venture capital sector and protect investors from financial misconduct.
Unlicensed Businesses Could Face Rs. 100 Million Fine
One of the strongest parts of the proposed law relates to businesses that carry out venture capital activities without the required licence or registration.
Such a business could face a fine of up to Rs. 100 million.
Those responsible could also face imprisonment for up to three years.
Both punishments could be imposed depending on the nature of the case.
This makes the proposed law very strict for businesses that continue to operate outside the legal system.
Existing businesses involved in activities covered by the new law would be given a transition period.
They would have 12 months after the law comes into force to obtain the required licence or registration.
Businesses that fail to receive approval within this period would not be allowed to accept new investments.
They would also have to wind down their activities within 30 days after the transition period ends.
Financial Reporting and Investor Protection
The proposed framework would require funds to prepare audited financial statements.
They would also need to provide detailed reports about their investments.
These reports could include information about the composition and value of the investment portfolio.
Funds would also need to report their expenses and expense ratios.
Information about benefits received and the overall performance of the fund would also be included.
The SECP could order special audits where necessary.
It could also issue directions to protect investors or prevent serious financial damage.
Fund managers and venture capital funds would also need to follow applicable rules related to anti-money laundering, countering the financing of terrorism and customer identification.
These requirements are commonly known as AML, CFT and KYC rules.
Annual Fees and Other Charges
The proposed framework also sets out different fees for fund managers and venture capital funds.
The licence fee for a fund management company would be Rs. 200,000.
The registration fee for a venture capital fund would also be Rs. 200,000.
A fee of Rs. 100,000 would be charged for voluntary cancellation.
Annual monitoring fees would depend on the size of a fund’s assets.
For smaller funds, the annual fee could be Rs. 100,000 or 0.02 percent of net assets for funds with assets up to Rs. 1 billion.
The fee could rise to Rs. 500,000 for funds with assets above Rs. 5 billion.
The proposed law also clearly states that SECP registration or approval would not mean that the regulator guarantees the skills of a fund manager or the future performance of a fund.
In simple words, registration would mean that the fund is legally allowed to operate, but investors would still need to make their own decisions and understand the risks.
Draft Law Still Under Consultation
It is important to remember that the Venture Capital Act, 2026 is still a proposed law.
It is currently going through consultation with the Board of Investment and other stakeholders.
Further changes may be made before the final version is approved.
The proposed framework could help Pakistan build a more organised and transparent venture capital market.
It may also make it easier for startups and growing businesses to connect with serious investors.
At the same time, the law aims to protect investors by setting strict rules for fund managers and taking strong action against unlicensed businesses.
If approved, the proposed law could bring a major change to how venture capital activities are regulated in Pakistan.
The possibility of a Rs. 100 million fine and up to three years in prison shows that the government wants to discourage businesses from operating without proper legal approval.
For startups, investors and fund managers, the proposed framework could create new opportunities while also increasing the need for transparency, compliance and responsible financial management.
The final shape of the law will depend on the consultation process and any changes made before approval. However, if the proposed rules are introduced, businesses operating in Pakistan’s venture capital sector may need to carefully review their activities and make sure they have the required licence or registration before the transition period ends.
The draft law represents an effort to bring greater order, investor protection and accountability to Pakistan’s growing startup investment sector. With clear rules, stronger reporting and strict penalties for illegal operations, the government hopes to create a safer environment for venture capital investment and long-term business growth.
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