"Report All Securities"…Financial Services Commission Establishes Guidelines for Fractional Investment

[Asia Economy Reporter Ji Yeon-jin] With the recognition of Musicow's copyright royalty participation claim rights as securities, other fractional investments such as artworks and real estate will also be subject to financial authorities' regulations after determining whether they qualify as securities.

The Financial Services Commission announced on the 28th that it has established the 'Guidelines on New Securities Businesses Including Fractional Investments,' requiring businesses offering fractional investment products to pre-assess whether their products qualify as 'securities' under the Capital Markets Act, and if so, to comply with related regulations.

The guidelines mainly consist of criteria for determining the securities nature of fractional investment products and considerations for businesses related to fractional investment products that qualify as securities.

Under the Capital Markets Act, securities are defined as "financial investment products for which investors do not bear any additional payment obligations under any name beyond the money paid at the time of acquisition." The FSC stated that it will comprehensively consider all relevant factors to determine securities status on a case-by-case basis, judging based on the substantive content of the rights represented regardless of method, form, or technology. This means that fractional investment products issued on paper, recorded in deposit accounts, electronically registered in electronic registration accounts, or tokenized on distributed ledgers can all be considered securities.

The FSC provided examples of securities, including ▲ cases where the invested capital can be repaid after a certain period ▲ cases where profits and losses from business operations are distributed ▲ cases where investment returns are distributed based on the appreciation of fractional investment targets through investments in tangible assets or financial products ▲ cases where repayment amounts vary according to the price fluctuations of underlying assets ▲ cases where subscription or acquisition of newly issued securities is possible ▲ cases where contractual rights or equity relationships in other securities exist ▲ and cases where the investor's returns are significantly influenced by the business operator's expertise or activities.

An FSC official stated, "We will actively interpret and apply regulations against attempts to deliberately circumvent existing rules, considering the regulatory intent of the Capital Markets Act and the potential for fraud against general investors," adding, "Before determining securities status, businesses should separately review, inquire, and confirm whether their activities require licensing or registration under the Capital Markets Act and the applicability of other laws outside the Capital Markets Act depending on the business type."

For example, if management (acquisition, disposal, etc.) is conducted without routine operational instructions and results are distributed, registration as a collective investment business is required, and if the business involves soliciting, subscribing, or accepting subscriptions for securities issued by others, it is considered an investment brokerage business, and operating or opening a market for securities trading requires approval from the exchange.

Businesses issuing and distributing fractional investment securities must comply with all relevant laws including the Capital Markets Act, such as submitting securities registration statements, prohibitions on unauthorized business activities, bans on unlicensed market openings, and prohibitions on unfair trading, and violations will be subject to sanctions.

However, under the Special Act on Financial Innovation Support, effective since 2019, if designated as a financial regulatory sandbox, some Capital Markets Act regulations may be exempted. The financial regulatory sandbox is a system that grants exceptional and temporary regulatory exemptions for financial services recognized as particularly innovative.

The FSC plans to strictly review innovation, necessity of designation, investor protection, and market order when fractional investment securities apply for the financial regulatory sandbox. An FSC official said, "Simply lacking the conditions or capabilities to comply with securities-related regulations does not meet the innovation criteria," emphasizing, "If commercialization is possible by utilizing sandboxes operated by the competent authorities of tangible assets or rights, or if the purpose is to evade regulations under the laws governing those assets or rights, designation as a financial regulatory sandbox will not be granted."

Even if fractional investment securities receive special exemptions, essential investor protection systems must be established. Standards and procedures for explanatory materials and advertisements must be prepared to prevent investors from misunderstanding important matters for investment decisions, terms and contracts must be provided, investors' deposits must be separately deposited or entrusted with external financial institutions, and returns to investors must be ensured even in the event of insolvency.

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