The Securities and Futures Commission Recognizes 'Musicow' Copyright Investment as Securities... Sanctions Temporarily Deferred

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[Asia Economy Reporter Lee Jung-yoon] Financial authorities have determined that the business model of 'Musicow,' the largest music copyright investment platform in South Korea, corresponds to investment contract securities.

On the 20th, the Securities and Futures Commission (SFC) under the Financial Services Commission held a regular meeting and judged that the music copyright royalty participation claims (claims) issued by Musicow fall under investment contract securities under the Capital Markets Act. The SFC made this decision based on industry and expert consultations conducted from February to March, and a review by the Legal Interpretation Deliberation Committee in March.

The SFC viewed the claims as contractual rights indicating that a specific investor invests money or other assets in a joint business between the investor and others, and primarily receives profits or losses based on the results of the joint business performed mainly by others, thus having the purpose of gaining profits or avoiding losses, which qualifies them as investment securities. Furthermore, all ten members of the Legal Interpretation Deliberation Committee agreed that the claims correspond to investment contract securities.

As a result of this measure, Musicow, which raised and sold securities without submitting securities registration statements or small-scale public offering disclosure documents, may be subject to sanctions such as restrictions on securities issuance and imposition of fines and penalties for violating disclosure regulations under the Capital Markets Act, following an investigation by the Financial Supervisory Service.

However, considering that this is the first application case of investment contract securities and there was low awareness of illegality, that over the past five years there has been an expectation of business continuity among approximately 170,000 investors, and that there is potential to contribute to the expansion of the cultural content base and revitalization of related industries, the sanction procedures under the Capital Markets Act will be temporarily withheld on the condition that investor protection measures appropriate to the business content are established.

Musicow must change its current business structure within six months from the date of the SFC resolution to strengthen investor protection and report the results to the Financial Supervisory Service.

Musicow has operated a platform that sells claims divided into 'shares' representing rights to receive revenue generated from the copyright property rights or neighboring rights of specific sound sources to investors, allowing them to trade these claims. The number of members, which was 40,000 in 2019, increased to 910,000 last year, and the actual number of investors is estimated to be 170,000. Since the end of last year, numerous complaints regarding investor damages due to potential violations of the Capital Markets Act and legal instability of the business structure during Musicow’s operations have been filed with the Financial Supervisory Service.

A Financial Services Commission official stated, "Regarding Musicow, we plan to continuously supervise the fulfillment of imposed conditions and the progress of business restructuring during the suspension of sanction procedures. Also, during the business restructuring period, the secondary market for already issued claims will continue to operate as before to protect existing investor rights."

He added, "Recently, business activities issuing and distributing related products under the name of so-called fractional investment have been increasing in various fields such as music and art. We plan to soon prepare and announce guidelines related to new types of securities businesses such as fractional investment to enhance predictability regarding legal interpretations by informing the market of the applicability of capital market laws and to provide stronger protection for investors."

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