South Korea's FSC Issues Guidelines for Fractional Investing Services

South Korea's FSC (Financial Services Commission) has issued new guidelines on the operation of "fractional investing services" offered by domestic companies.

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The guideline is aimed at establishing clarity on the expectations for fractional investment, as business operators are not subject to adequate regulations in the "gray area" and investors are not able to protect themselves as the fractional investments represent intangible assets, the FSC said.

According to local reports, the guideline comes as fractional investing services that have been springing up in various fields, including music, art, real estate and many other types of assets.

A week earlier, the FSC categorised Korea's first copyright trading platform Musicow as a tool for securities trading, a decision that will put the firm under regulatory monitoring. Launched in 2016, Musicow allows investors to trade the right to claim profits generated from music copyrights on its platform in a way similar to securities trading.

In the new guideline, the FSC said that anyone trying to issue or distribute fractional investment products should strictly comply with the FSCMA (Financial Investment Services and Capital Markets Act) and other relevant regulations, or face a penalty. However, provisional regulatory exemptions can be provided through the FSC's sandbox programme to "innovative" businesses that adopt sufficient measures to protect investors.

The FSC will determine whether fractional investment products qualify as "securities" on a case-by-case basis, taking into account factors such as investor rights structures, contractual terms, and details about the investment methods used.

The guideline specifies that business entities have to comply with disclosure requirements by filing a security registration report when they plan to issue a fractional investment product that is classified as a security. They may also be required to obtain the FSC's authorisation, approval or registration, depending on their business practice.

Businesses offering fractional investment products are required to segregate deposits from investors at a third-party financial institution, insulate investors' rights from bankruptcy risks, and document a conflict resolution process and damage compensation system.