Pakistan’s proposed Venture Capital Act, 2026 could impose a fine of up to Rs. 100 million and imprisonment of up to three years for carrying out venture capital business without the required license or registration, while setting out a formal definition of startups based on factors including a Rs. 500 million annual turnover threshold.
The draft legislation aims to establish a legal framework for venture capital investment and fund management in Pakistan, with the stated objective of encouraging investment in startups and emerging businesses through locally domiciled venture capital funds.
The bill allows eligible venture capital investments to include startups, as well as unlisted early-stage and high-growth companies or businesses involved in technology and the development of new products, processes or services.
Who Will Qualify as a Startup?
Under the proposed law, a startup company would generally be one that has existed for no more than 10 years and has not recorded turnover exceeding Rs. 500 million in any financial year since incorporation.
It would also need to be working on the innovation, development or improvement of products, processes or services, or operate a scalable business model with strong potential for employment generation or wealth creation.
Companies created through the splitting up or reconstruction of an existing company would not qualify as startups under the proposed definition.
The bill also allows the Securities and Exchange Commission of Pakistan (SECP) to specify other periods, turnover amounts or classes of companies through the mechanisms provided in the legislation.
Rs. 100 Million Fine for Unlicensed VC Business
Section 3 of the proposed law states that no person may carry on or purport to carry on venture capital business without a license from the SECP.
A person operating without the required license or registration could face a fine of up to Rs. 100 million, imprisonment for up to three years, or both.
The penalty applies to unlicensed or unregistered venture capital activity rather than to companies merely because they qualify as startups.
The bill defines venture capital business as establishing, managing and operating one or more venture capital funds by a venture capital fund management company.
Businesses already conducting activities that fall within the proposed definition but lack the required authorization would have 12 months after the law comes into force to apply for a license and fund registration. Those that fail to comply would be barred from accepting new investments and required to wind down within 30 days after the transition period.
Two-Tier Regulatory Structure
The proposed framework would require venture capital fund management companies to obtain licenses, while individual venture capital funds would need separate registration.
Eligible applicants for a fund management license would include public or private limited companies and limited liability partnerships meeting the prescribed requirements.
The minimum equity or capital requirement for a venture capital fund management company is proposed at Rs. 15 million.
The application fee for a management company license would be Rs. 200,000, while registration of a venture capital fund would also cost Rs. 200,000. The SECP would have 45 working days to decide a complete license application.
Existing private fund management companies conducting private equity and venture capital activities could be deemed licensed under the proposed framework, subject to confirmation by the SECP and segregation of their activities.
Who Can Invest in VC Funds?
The draft would restrict subscriptions in venture capital funds to eligible investors.
An individual Pakistani or foreign investor would generally need 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 have to declare that they understand the risks associated with venture capital investment.
Institutional investors could include financial institutions, companies, insurers, securities brokers, collective investment schemes, voluntary pension funds, foreign companies and other entities approved by the SECP.
Each venture capital fund would have to operate as a separate legal entity from its management company and be offered through a placement memorandum.
SECP Gets Broad Regulatory Powers
The SECP would be empowered to obtain information and documents from venture capital fund management companies, funds, promoters, directors, key executives and other officers where necessary for regulatory purposes or where it has reasonable grounds to believe a breach has occurred.
The regulator could suspend or cancel licenses or registrations in cases involving fraud, financial misconduct or investor deception, as well as specified cases of prolonged inactivity.
The draft also proposes a separate penalty of up to Rs. 50 million for violations such as failing to comply with the law or SECP directions, providing false or misleading information, misappropriating fund assets, failing to disclose material conflicts of interest or materially breaching investment restrictions.
In addition to penalties, the SECP could order the reimbursement of profits gained or losses avoided and recover reasonable investigation-related costs.
Reporting and Compliance
Venture capital funds and their management companies would have to prepare audited financial statements and provide information on portfolio composition and valuations, expenses, management fees, other charges, benefits received and fund performance.
The framework would also require compliance with applicable anti-money laundering, counter-financing of terrorism and know-your-customer requirements.
The proposed annual monitoring fee would range from Rs. 100,000 or 0.02 percent of net assets for funds with assets of up to Rs. 1 billion to Rs. 500,000 for funds with assets above Rs. 5 billion.
The bill states that an SECP license or fund registration would not amount to an endorsement of the manager’s competence or the fund’s investment performance.
The Venture Capital Act, 2026 remains a proposed law and could be amended during consultation and the legislative process before becoming law.
