Private Equity Fund Minimum Investment Raised from 100 Million to 300 Million Won

Revision of the Private Placement Act Approved at Cabinet Meeting
Subscription to High-Risk DLS Becomes More Stringent

[Asia Economy Reporter Park Jihwan] The minimum investment amount for private equity funds by general investors will be raised from 100 million KRW to 300 million KRW. A new measure will also be implemented to classify derivative-linked securities with a maximum potential loss exceeding 20% of the principal as high-difficulty financial products, significantly strengthening the subscription procedures.

The Financial Services Commission announced on the 2nd that the "Amendment to the Enforcement Decree of the Capital Markets Act," which includes these details, was approved at the Cabinet meeting.

According to the amendment, general investors will now have to invest at least 300 million KRW (or 500 million KRW for funds with leverage over 200%) when investing in professional private equity funds (hedge funds). Since private equity funds carry a high risk of loss, investors must have assets and income levels sufficient to bear potential losses.

Following major incidents involving Lime Fund and Optimus Fund, there have been increasing voices criticizing the financial authorities for indiscriminate deregulation. Previously, in 2015, the Financial Services Commission lowered the minimum investment amount for professional private equity funds from 500 million KRW to 100 million KRW. This significant reduction in investor requirements led to indiscriminate sales of private equity funds even to general investors without investment experience, increasing the risk of damage.

The amendment also includes provisions to classify derivative-linked securities, derivatives, and funds with a maximum principal loss exceeding 20% as "high-difficulty financial products." Discretionary investment trusts and money trusts with a loss risk exceeding 20% of the principal and complex management methods are defined as "high-difficulty discretionary investment contracts" and "high-difficulty money trust contracts," respectively. For high-difficulty financial investment products, regardless of age or investment suitability, the sales process must be recorded, and a cooling-off period of at least two days is granted to allow investors to reconsider and withdraw their subscription. The recording and cooling-off system, currently applied only to derivative-linked products for elderly and unsuitable investors, will be expanded to all financial products. The current age criterion for elderly investors, set at 70 years or older, will be lowered to 65 years.

In the case of OEM (Original Equipment Manufacturer) funds, where asset management companies operate funds under orders or instructions from sales companies, sanctions were previously imposed only on the asset managers. Now, grounds for sanctions against sales companies have also been established. Sales companies are prohibited from interfering in fund management through orders, instructions, or requests, and violations will result in institutional and employee sanctions as well as fines of up to 50 million KRW.

The amendment also stipulates that the identity of funds will be determined based on the similarity of their underlying and managed assets and profit and loss structures. This aims to prevent the practice of circumventing public offering regulations by splitting public funds, which have more than 50 investors, into smaller private funds for sale.

Some parts of the amendment, such as the increase in the minimum investment amount for private equity funds, will take effect immediately upon promulgation. Strengthened regulations on the sale of high-difficulty financial products will be enforced three months after promulgation.

This content was produced with the assistance of AI translation services.