Research Report
A Study on Regulations for Promotion of Fractional Investment
I. Background and Purpose of Research
▶Recently, collective investment or fractional investment that several investors jointly invest in the form of split shares, focusing on expensive artworks, real estate, and other music copyrights, has been activated.
○ Unlike funds and online investment-linked finance (P2P) under existing financial laws, investment activities that link various assets or rights and sell them to the multitude are prevalent.
-Many of these fractional investment companies are exposed to weakness in investor protection because of existing financial-related laws’ limit.
○ Financial supervisory authorities are supplementing the institutional deficiencies of fractional investment by judging(making guideline of) the nature of securities in fractional investment and by allowing innovative financial service for institutional incorporation of the fractional investment business, but still exposing normative limitations.
- In the long run, it is necessary to revise laws related to fractional investment, considering non-biding guidelines and the continuous limitations ofinnovative financial services with expiration date.
▶ In particular, fractional investment is showing signs of rapid development and spread, such as liquidity by taking advantage of the offering and distribution of rights (token) to an unspecified number of unspecified people through linkage with security token, one of the recent spreading virtual assets.
○ However, in the offering and distribution of securities tokens, most issuers of security token also serve as exchanges, and investors' investment deposits and investment assets are not separated from investors, showing a very vulnerable aspect of investor protection.
Ⅱ. Contents
▶ Nature of securities in bond claims around fractional investment
○ Regarding the transaction structure of the fractional investment, it can be classified into 1) ownership acquisition type, 2) bond claim acquisition type, and 3) beneficiary type, and 2) bond claim acquisition type and the 'securability' of the relevant right are questioned
- According to the Howey test in the U.S. and the 'investment contract securities' standard in Korea's Capital Markets Act, there is a high possibility that securities will be recognized in the form of ownership equity acquisition or bond claim acquisition among fractional investment types
- Since fractional investment has various aspects depending on its business model and investment method, it is necessary to determine whether there is a nature of securities under the Capital Markets Act on the premise of the three-dimensional nature and integration of ‘investment contract’.
▶ Legal Issues and Improvement Direction of Security Token Offering (STO) under the Capital Markets Act
○ (Restriction on Issuance of Beneficiary Certificates of Non-Money Property Trusts) The current Capital Markets Act only allows issuance of beneficiary certificates based on monetary property trusts, so fractional investment businesses, such as copyrights, real estate, and art, are limitedly serviced through innovative financial services.
- (Allow non-monetary trusts to issue beneficiary certificates) It is possible to issue beneficiary certificates of non-monetary assets in accordance with the recently announced trust business innovation plan, which will systematize and activate asset liquidity through diversification and professional management of related assets.
○ (The issue of distribution method of security tokens) Most issuers of fractional investment securities, except for partial investment in security tokens, are both running exchanges, so there are many conflicts of interest such as investment trading, investment brokerage license, and prefernetial proprietary trading.
-(Resolution of Problems by Using Alternative Trading System (ATS)) In the short term, the current method of issuing and distributing on the premise of resolving conflicts of interest is prepared, but in the mid-to long-term, a plan to utilize the existing Capital Markets Act system (Korea Exchange or Alternative Exchange).
▶ Legal Issues and Improvement Direction of Security Token Offering (STO) under the Electronic Securities Act
○ (Restriction on electronic registration of security tokens) Under the current Electronic Securities Act, 'investment contract securities' or 'non-stock shares' are not included in the types of stocks that can be electronically registered, so it cannot take advantage of the Electronic Securities Act, such as disclosure of securities-related rights and determination of legal rights.
- (Need to consider allowing electronic registration of security tokens) In order to utilize the advantages of electronic registration under the Electronic Securities Act and secure transparent information related to distribution, it is necessary to consider allowing electronic registration of security tokens.
○ (Whether or not to allow electronic registration of security tokens) Even if electronic registration of security tokens is allowed, there is no legal basis for the distributed book system, which is a technical characteristic of security tokens under the Electronic Securities Act
-Considering the cases of overseas legislation (Germany) or demonstration application (USA), it is judged that there will be no legal issue if the distributed book technology method is designed according to the electronic securities law on the premise of the multi-layered account structure.
▶ Development of measures to protect investors
○(Lack of evidence for transparent information provision related to fragment investment) In most fragment investment-related securities, there is a lot of gap between the actual rights structure of the securities and investors' perceptions, so transparent and objective information provision by business operators is necessary, but it is insufficient.
-(Transparent information provision plan) In the case of a fractional investment public offering, it is necessary to apply securities declaration regulations with asset liquidity plan at the level of collective investment securities declaration and to provide transparent information related to fractional investment.
○(Lack of bankruptcy insulation for fractional investors) Most of the current fractional investment businesses are managed by investors' investment deposits and rights (assets) under the name of fractional investment companies, which is expected to cause investor damage investors when fractional investment companies go bankrupt.
-(Grounds for Insulation of Bankruptcy of fractonal Investment Companies) It is necessary to consider the legal basis for deposit and trust of investment deposits and investment assets (rights) in financial institutions related to Insulation of fractonal Investment Companies in Capital Markets Act.
○ (Insufficient management system for investment target assets (rights)) In the case of current fractional investment business, the original value may disappear or fall due to violation of the manager's duty of care for investment assets (rights) and other force majeure reasons, and the continuous management system such as valuation of the investment assets (rights) is insufficient.
- (Consideration of establishing management standards for assets (rights) subject to fractional investment) In order to protect investors, such as preserving the value of investors' investment assets (rights), it is necessary to prepare the basis for insurance for the investment (rights) and to prepare the minimum necessary standards for fractional investment by applying some guidelines on the handling of trust business.
Ⅲ. Expected Effects
▶ It is expected that the presentation of problems in the current legal framework and improvement directions related to the rapid growth of he fractional investment business and the protection of investors can be used as basic data for the relevant fractional investment supervisory practice and industrial development.
○ Recently, the government is pushing for a revision of the provisions of
the Capital Markets Act and the Trust Act to institutionalize fractional investment, which is expected to improve significantly in the future, but needs to promote policies from a balanced perspective of investor protection and development of fractional investment business.