Individual Investors to Freely Trade 'Unlisted Venture Investment Funds' on KOSDAQ

Amendments to the Capital Markets Act, Financial Investment Business Regulations, and Exchange Regulations

Financial Services Commission Approves Business Development Company (BDC) Rules

Investment Allocation: 60% to Companies, 10% to Safe A

Business Development Companies (BDCs), which are public funds that allow individual investors to freely buy and sell investments in unlisted venture companies much like Exchange Traded Funds (ETFs), will be formally introduced. On March 5, the Financial Services Commission announced that, following the Cabinet's approval of the amended Enforcement Decree of the Capital Markets Act, it has also approved and authorized amendments to the Financial Investment Business Regulations and Exchange Regulations.

BDC Investment Requirements

The investment allocation for BDCs is as follows: 60% of total assets must be invested in main target companies, 10% in safe assets such as government or public bonds, and the remaining 30% can be managed autonomously in accordance with public fund operation regulations.

Main target companies include unlisted ventures and innovative companies, venture capital funds that have completed investments, and companies listed on KONEX or KOSDAQ. Investments in venture capital funds and KOSDAQ-listed companies with a market capitalization of 200 billion won or less are permitted to encourage the activation of exits and reinvestments in the venture investment market. To prevent over-concentration in specific sectors, no more than 30% of the minimum 60% investment requirement can be allocated to each area.

Investments can be made by purchasing equity-linked bonds or through monetary lending. For monetary lending, an internal control system capable of assessing feasibility must be established, and the investment amount in the main target companies through this method is capped at 40% of total investments in these companies.

Investments exceeding 10% of total assets in a single main target company via the same method are not allowed, nor can BDCs invest in more than 50% of the total shares of such a company. In addition, regulatory arbitrage through indirect investments in venture capital funds is prohibited, and BDCs cannot invest more than 50% of their assets in venture funds managed by the same operator through indirect means.

Requirements for BDC Formation

The minimum maturity for BDCs is five years, and the minimum amount to be raised is 30 billion won. Asset management companies are required to retain a seed investment for the longer of five years or half of the maturity period (up to a maximum of ten years). Furthermore, for amounts up to 60 billion won, a 5% seed investment is required, and for amounts exceeding 60 billion won, a 1% seed investment is required. For example, when establishing a BDC of 100 billion won, the asset manager must contribute 3 billion won (5% of 60 billion won) and 400 million won (1% of 40 billion won), totaling 3.4 billion won in their own funds.

A BDC investment review committee must also be established. Investments in target companies must be preceded by an assessment of growth potential and credit risk by external professional institutions. The fair value of fund assets must be assessed quarterly, and external evaluations must be conducted semiannually.

Listing must take place on the KOSDAQ market within 90 days of establishment (or within three years if the BDC is established solely with investments from professional investors). Disclosure obligations apply to acquisitions or disposals of assets exceeding 5% of BDC assets, as well as to major management events in companies where more than 5% of assets are invested.

Unlisted companies that receive BDC investment receive additional points in technology evaluations for special technology listings. This measure is intended to create a virtuous cycle in which BDCs distribute profits to investors when the invested companies grow after listing.

The grace period for operational regulations is one year, which is longer than the three months granted to general public funds. This is because BDCs primarily invest in illiquid unlisted stocks, making it difficult to comply with regulatory ratios due to price fluctuations, splits, or mergers.

In cases where investments made to meet minimum investment ratios would harm investor interests, the investment review committee may grant a one-year regulatory exemption. If rising prices of unlisted shares cause investment in a single company to exceed 10% of total assets and disposing of these shares would harm investor interests, the exemption can be extended for up to two years.

BDC Authorization Criteria

The 42 asset management companies that are authorized to operate public funds in all fields, including securities and real estate, are considered as already authorized to operate BDCs. Special provisions are recognized for venture capital companies (VCs) and new technology business finance companies.

Securities firm app, stock trading scene. Photo by Hyunmin Kim kimhyun81@

In addition, to receive BDC authorization, requirements include a minimum equity capital of 4 billion won, at least four professional personnel specializing in securities management, and at least one professional each in risk management, internal control, and IT. At least three years of experience in managing venture or new technology funds is required, and up to two individuals who have completed training by the Korea Financial Investment Association may be counted as professional securities management personnel. For VCs and new technology business finance companies, at least six years of business history and an average of 300 billion won or more in assets under management are also required.

The Financial Services Commission plans to complete exchange system upgrades between March 17 and next month, and will proceed with BDC launches and listings through reviews by the Financial Supervisory Service for operators wishing to manage BDCs, as well as listing reviews by the exchange. BDCs sold before listing can be purchased through bank and securities company sales channels, while listed BDCs can be traded like stocks at securities companies.

Meanwhile, with this amendment, the operational autonomy of private indirect funds will be expanded. General private funds will be allowed to invest up to 100% (previously 50%) of their collective investment securities and will be permitted to invest together in the same special purpose company (SPC) as institutional private funds. If a violation of operational regulations is discovered due to valuation changes, regulatory enforcement will be deferred until maturity of the fund.

Funds investing more than 50% in equity-linked bonds will be exempt from seed investment obligations. In cases where branches or corporations are converted between entities with the same ultimate parent company, the substantive business remains unchanged, so these will be included in the scope of simplified authorization reviews.

An official from the Financial Services Commission stated, "This BDC introduction focuses on balancing two policy goals: promoting the supply of venture capital and protecting general investors," adding, "We will continue to monitor the stabilization of the BDC system and will review additional improvements to the system if necessary."

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