FSC Unveils Guideline on ‘Fractional Investment’ to Enhance Investor Protection

This photo, provided by Music Cow Inc., shows an image of its music copyright trading app.

SEOUL, April 28 (Korea Bizwire) — South Korea’s financial regulator on Thursday unveiled a guideline on the operation of “fractional investment,” vowing to step up monitoring of the fast-growing industry.

The Financial Services Commission (FSC) also said it will determine whether fractional investment has the nature of “securities” by “comprehensively” taking into consideration terms of contracts and details on investment methods of each case.

The guideline came about a week after the FSC categorized Musicow Inc., the country’s first copyright trading platform, as a tool for securities trading, a decision that will put the tech startup 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.

Despite such similarities and a fast-growing user base, especially among those in their 20s and 30s, the company has not been under regulatory scrutiny like other financial services firms, raising worries that investors could not be sufficiently protected if it goes under.

The decision on Musicow was based on the judgment that the trading on its platform is not about buying ownership of copyrights but trading the right to claim profits from the assets.

The Musicow case marked the first of its kind and is expected to have a far-reaching impact on the fractional investing services that have been springing up in various fields, including music, art, real estate and many other types of assets.

The FSC said that anyone trying to issue or circulate fractional investment products should strictly comply with the Capital Markets Act and other relevant regulations or face a penalty.

It, however, left room for flexibility in enforcing regulations, saying exemptions could be possible if that business proves to be “innovative” and takes sufficient measures to protect investors.

An FSC official said it was necessary for the regulator to put forth the guideline for clarity on growing worries that the industry for fractional investment is generating a “gray area,” where investors are not able to protect themselves by owning tangible assets and business operators are not subject to regulations linked to the trading of securities.

(Yonhap)