Final Decision on Musicow Sanctions Exemption... Closure of Hanwoo and Art Piece Fractional Investment Distribution

Decision to Postpone Sanctions on 5 Hanwoo and Art Piece Fractional Investment Platforms
"High Risk of Investor Losses in Fractional Investment Distribution"
Demand for Business Structure Reorganization Including Closure of Distribution Market

[Asia Economy Reporter Ji Yeon-jin] The Securities and Futures Commission under the Financial Services Commission announced on the 29th that it has finalized the exemption from sanctions for Musicow, which conducts fractional investment in copyright participation claims. In addition, five other fractional investment platforms, including the Korean beef fractional investment platform Bankau, were judged to be investment contract securities, and sanctions were deferred on the condition of business structure reorganization, such as closing the distribution market for six months.

Earlier, on April 20, the Securities and Futures Commission judged Musicow's music copyright participation claims as investment securities contracts and deferred the sanction procedures on the condition of business reorganization. Although the copyright claims fall under the definition of "securities" stipulated in the Capital Markets Act, considering comprehensively that there was no investor damage, investors had expectations for the continuation of the business, and there is potential to contribute to the cultural content industry, they required the establishment of investor protection measures.

Accordingly, Musicow submitted a business reorganization plan on May 19, was designated as an innovative financial service on September 7, and reported the implementation results of the business reorganization plan on the 19th of last month. According to the Financial Supervisory Service's inspection, Musicow has confirmed that it has fulfilled all the business reorganization conditions imposed by the Securities and Futures Commission.

Starting next month, Musicow will accept investor account opening applications for trust beneficiary certificates trading, and if all additional conditions imposed at the time of innovative financial service designation are met, new issuances based on the new business structure are expected to take place.

The Securities and Futures Commission also judged that Stockkeeper's Korean beef fractional investment meets the requirements of investment contract securities under the Capital Markets Act, as it combines the shared ownership interest (ownership) of calves with a service contract that fully performs breeding, sale, and profit and loss distribution.

Investment contract securities refer to securities that represent contractual rights where a specific investor invests money or other assets in a joint business with others (including other investors) and primarily receives profits or losses based on the results of the joint business performed mainly by others, with the purpose of gaining profits or avoiding losses.

Furthermore, fractional investments in artworks by Tessa, Seoul Auction Blue, Together Art, and Yeolmae Company were also interpreted as meeting the requirements of investment contract securities.

These five companies were instructed to reorganize their business structures within six months from today to strengthen investor protection and report the results to the Financial Supervisory Service, in exchange for deferring sanction procedures.

The Securities and Futures Commission required that the business structure reorganization include the establishment of key investor protection measures to ensure that fractional investment investors' assets (such as deposits) are protected and that investors' joint ownership rights under civil law regarding Korean beef and artworks can be safely exercised.

In particular, the Securities and Futures Commission did not grant the five companies special exceptions allowing them to engage in both issuance and distribution, and required full compliance with the regulations under the Capital Markets Act. According to the Capital Markets Act, except for authorized exchanges and businesses designated as innovative financial services that have received related regulatory exceptions, operating a securities distribution market is not permitted.

Accordingly, companies that operated distribution markets must prepare existing investor protection measures and close the distribution markets. A Financial Services Commission official explained, "Unlike fractional investments in real estate or music copyright claims, fractional investments in Korean beef and artworks cannot assess intrinsic value or market price through continuous cash flows during the investment period, and there is a significant problem of information asymmetry in determining fractional prices in the distribution market, so investor damage cannot be ruled out. Also, there are frequent cases where the market capitalization of the fractional distribution market and auction prices differ significantly," adding, "Considering that the investment period is short and a separate auction market exists, the distribution market is not necessarily essential for investor protection."