Research Of Preferred Stock Mechanism In Venture Capital

In America, venture capital plays a significant role in improving GNP,providing employment and propelling industrial upgrading, etc. The success ofventure capital cannot be achieved without the support of preferred share system.According to statistics,95%venture capital in America applies the preferred sharesystem, thus, it is of great significance for studying the preferred share withinventure capital, especially for the American preferred share system.The preferred share is relative to common share, which is superior to commonshare in terms of dividend and liquidation, while that is inferior to common share invoting power. The preferred share and venture capital can be closely combinedbecause of the flexibility that lies within preferred share, which meets therequirement of pioneering enterprises on risk, adaptability and efficiency. It mainlymanifests in promoting pioneering enterprises’ financing and realizing their dynamicgovernance.In2014, the China Securities Regulatory Commission issued the "Regulationsfor Preferred share Pilot", explicitly stipulating the preferred share system. Theissuing of the "Regulations" has made certain progress, but yet it is still imperfect. Interms of legal hierarchy, it belongs to department regulation; From the perspective ofthe legislative mode, the "Regulations" has simultaneously the characteristics of thestatutory pattern of the continental legal system and the authorization pattern of theAnglo-American legal system; From the perspective of the content, the"Regulations" has nine chapters and70articles in total, including the concept andtypes of preferred share, preferred share holder’s right, the issuing and trading ofpreferred share and so on, but without a clear distinction between the peremptorynorm and the arbitrary norm. In practice, due to the imperfection of preferred sharesystem in China, there are only a few cases using preferred shares as a financing tool,so the gap in venture capital industry between China and America is very large.America is the base camp for venture capital. Its venture capital has obtained an achievement that attracts worldwide attention, behind which the achievement cannotbe realized without the support of its perfect system of preferred share. The preferredshare of America has taken the legislative modes of authorization pattern, whichmeans to authorize the articles of association to make provisions for the issuablespecies of preferred share, the content of the right contained by the preferred shareand so on under the condition of respecting autonomy. Compared with the statutorylegislative modes of the continental legal system, the American preferred sharesystem has greater flexibility. The abundant practices of venture capital in the US ledto an intellectual contract text, namely The Model Legal Documents for Venturecapital enacted by The National venture capital Association. It serves as the model ofgreat significance to the venture capital business in the US or even other countries inthe world. Most participants in venture capital business including lawyers draft legaltexts based on The Model Legal Documents. Therefore, a research on the clauses ofpreferred share of The Model Legal Documents is helpful for improving thedeficiency resulted from the lack of provisions of preferred share right in thepreferred share system in China.The legislative modes of the continental legal system and Anglo-American legalsystem each have its merits. On the basis of its own legal system, China shouldabsorb the advantages from them. Legal mode should be adopted in peremptorynorms, while authorization mode should be adopted in random norms. The flexibilityof the preferred share system in China should be increased as much as possible inorder to promote the development of venture capital business and other fields.