Seoul to regulate profit-sharing fractional investment products as securities

2022.04.29 12:45:24 | 2022.04.29 12:46:00

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South Korea specified guidelines for fractional investment products that trade rights to claim profit without owning underlying asset after it counted in Music Cow’s music copyrights trading service as legitimate investment tool subject to scrutiny.

The Financial Services Commission (FSC) on Thursday released a detailed guideline on new securities businesses, including fractional investment to define investment products that will be regulated as regular securities.

Under the guideline, fractional claim to profits generated from under asset will be classified as securities, making them subject to public disclosure and other capital market regulatory rules.

The guideline is a follow-up measure after the regulator earlier this month announced that fractional investment products would be handled as securities.

Under the latest guideline, Musicow Inc.’s operation of music copyrights trading platform Music Cow, where investors can buy and sell a portion of music copyrights and claim copyright fees in accordance with the ownership size, will be regulated like securities.

But if the profitability of such investment product does not depend on investing ability of the business operator, such as real estate broker that arranges a sale of an apartment to multiple owners for monthly rent earnings, is not classified as securities.

Brokers for fractional investing in general offer services in varying types of securities, from bond and equity to hybrid.

Of them, fractional investment in bond that allows investors to collect initial investment after a set period time and in equity that distributes profits depending on performance will be likely be treated as regular securities. Also, fractional investment in hybrids such as a product whose profit generation depends on the change in value of underlying asset, will also be subject to securities regulations.

However, the FSC will also take sandbox approach to allow firms testing innovative fractional investment products.

Those fractional investment products applying for the regulatory sandbox will be closely examined for the ability to protect investors. For example, a fractional investment service provider must separate investors’ deposit from its own assets to protect investors against possible bankruptcy. Such firms also have to prepare plans for compensating investors when losses occur.

Fractional investment service providers are reacting fast to FSC’s guideline announcement by looking into their offerings from the legal aspect.

Proptech firms, like BBRIC that offers technology-based solution for investment in a portion of real estate property, are welcoming the change. They already are under the securities regulations under the existing law.

By Cha Chang-hee, Lee Han-na, Jung Seok-hwan and Cho Jeehyun

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