shareholders.<sup>63</sup> This new vehicle would also be subject to fewer reporting requirements than public companies. Even though _sapis_ would be permitted to list on the market, they would have a three year “grace period” until they are required to make full disclosure of their accounts. Because of the risks involved and the limited disclosure, investment in this new vehicle would be restricted either to institutional investors, or to private investors who have signed a waiver acknowledging that they understand the risks of the investment. Pension funds, however, which previously have been limited to investing in bonds, would be permitted to invest in the new vehicle. This new vehicle is expected to increase venture capital investment by creating an exit mechanism, build liquidity through increased pension fund investment, encourage listings, and protect minority shareholder rights.<sup>64</sup> _2. Private Equity._ Another potential source of capital for issuers in emerging markets is private equity, or venture capital investment funds. However, private equity should not be considered as an antidote to regulated markets. Arguments that private equity would take off if “stifling” regulation were eliminated are specious. Indeed, “[i]f developing a strong public stock market is hard, developing a strong venture capital industry is harder still.”<sup>65</sup> Development of a private equity industry is a bit of a chicken and egg problem. On the one hand, venture capitalists are unlikely to supply funding to a firm without an established reputation; on the other, it is difficult for a firm to gain much of a reputation without funding. Regulation is necessary to bridge the gap between the venture capitalist seeking a profitable investment with limited risk, and the issuer seeking the private equity funding. Without at least limited regulation, the venture capitalist is likely to feel that he is taking on more risk than he is willing to bargain for – literally. In addition to the risk of the venture itself, he may be assuming the risks inherent in a weak regulatory system with limited property rights, disclosure and judicial enforcement and limited avenues for redress and exit. Indeed, private equity investments in small and hightech firms are more likely in countries with stronger guarantees against contract repudiation and shareholder rights.<sup>66</sup> In countries where legal enforcement is poor, investors are likely to seek majority control of the firms they invest in to counteract their apparent inability to enforce contractual rights.<sup>67</sup> In addition to limited regulation that will promote private equity investment by closing the gap between risk and potential reward, ensuring that there is an exit mechanism is a key element in creating a venture capital industry. Private equity investments typically do not pay dividends; rather, returns are derived from capital gains obtained upon exit. While a private sale to another company can be an

> 63 For example, only ten percent of the voting shares would be necessary to call a shareholders meeting or to name a director.

> 64 Financial Times, April 12, 2005

> 65 Black 2000

> 66Cumming and Fleming 2003

> 67 In contrast, private equity transactions in countries with greater contractual protections and better legal enforcement are more likely to be structured as convertible preferred stock than ordinary shares or debt. Lerner and Schoar 2004

28