[Fractional Investment Rising] ② Included as Financial Investment Products... Expected to Be Tradable on the Exchange

Musicow and Kasa Fractional Investment Products Recognized as 'Securities'
Immediate Trading Not Possible... Regulatory Sandbox to Be Applied Soon

Editor's NoteFractional investment is regaining attention. This is because regulations related to fractional investment are expected to be gradually eased. Last year, financial authorities recognized fractional investment as a type of financial investment product called 'securities.' This provided a legal basis for conducting business legitimately. Additionally, the possibility of trading on the Korea Exchange like stocks is opening up. Fractional investment, where multiple people invest in tangible assets and hold divided shares, has gained great popularity in recent years due to the ability to invest in high-priced assets with small capital. Expectations are also rising that the related industry could grow as token securities issuance (STO) using blockchain technology has been proposed to be registered as electronic securities. However, many still do not understand the concepts properly, often confusing fractional investment with STO. We examined the background of incorporating fractional investment and token securities into the regulatory framework, why the securities industry is entering the fractional investment business, and the concerns in the market.

Musicow homepage (Photo by Musicow)

"Invest in music copyrights."

In 2018, a new investment product emerged. It was a product that bought and sold rights to income generated from music copyrights (copyright participation claims). By purchasing copyright participation claims divided into single shares, investors received monthly copyright royalty income like dividends. If the price of the purchased music copyright participation claim rose, investors could sell it like stocks to gain capital gains. Intangible assets were divided and sold as if they were financial investment products. This was the emergence of 'fractional investment.' Previously, there was a similar system called 'securities-type crowdfunding.' However, the difference was that securities were not directly issued, and the system only mediated between businesses and investors.

"Fractional investment products are securities"…Recognized as financial investment products

Controversy arose over fractional investment. Is this product an intangible asset? Or a financial investment product? Financial investment products can only be sold by financial investment business operators authorized by financial authorities. However, Musicow, which sold music copyright participation claims, was registered as a telecommunication sales business. Also, when selling financial investment products (securities), the issuer (subscription) and the entity handling distribution (trading) must be different. Musicow did not comply with this. On the Musicow platform, music copyright participation claims were issued and traded among investors. Although the product sold was an intangible asset, its nature was no different from a financial investment product.

Meanwhile, last year, financial authorities judged Musicow's 'music copyright participation claims' as financial investment products. Under the Capital Markets Act, financial investment products are broadly divided into 'securities' and 'derivatives.' The Financial Services Commission classified them as 'securities.' This was because Musicow collected investment funds from multiple investors and distributed income according to copyright claims. The purpose was the same as stock investment, and the trading method was similar.

According to the Capital Markets Act revised in 2009, securities are further classified into △debt securities (bonds) △equity securities (stocks) △beneficiary certificates (funds) △investment contract securities △derivative-linked securities (ELS, DLS, etc.) △depositary receipts, totaling six categories. The Financial Services Commission defined fractional investments like music copyright participation claims as 'investment contract securities.'

'Investment contract securities' refer to contractual rights to jointly invest in a specific business and receive the business's profits and losses. Unlike stocks or funds, they have no secondary market for trading and do not allow early redemption before maturity. Investment contract securities differ in nature from bonds, stocks, funds, derivative-linked securities, and depositary receipts, so they existed only in law until now. When drafting the amendment, the law explicitly included 'investment contract securities' anticipating new types of securities not previously existing, and fractional investment falls into this category.

The Financial Services Commission's designation of Musicow's copyright participation claims as 'securities' is significant. It means the government officially recognized fractional investment, which existed outside the law, as a financial investment product. Accordingly, to operate a fractional investment business, one must comply with the Capital Markets Act from product design to sales, including submitting securities registration statements.

Securities issuance format is 'blockchain'…Capital Markets Act amendment proposed

Although fractional investment was defined as 'securities,' legal application issues remained. Some fractional investment companies like Musicow and Casa issued ownership certificates to investors using blockchain technology, unlike traditional securities. Securities issued using blockchain technology are called token securities (STO). Because they are difficult to forge or tamper with, many in the fractional investment industry use blockchain technology when issuing securities.

However, under current law, securities issued using blockchain are not recognized. Securities are classified into physical securities and electronic securities depending on the issuance method. In the past, securities information was printed on paper, but now listed stocks and bonds are issued only through electronic registration.

Another problem is that 'investment contract securities' are non-transferable products. Securities subscribed cannot be traded between individuals on the Korea Exchange (secondary market) like stocks. It is only possible to raise funds through investment (issuance and subscription) to purchase assets such as artworks or real estate, and then sell the assets when their value rises to share profits among investors. This means that Musicow's issued music copyright participation claims cannot be sold to other individuals on the platform.

The Financial Services Commission incorporated fractional investment into the regulatory framework through a two-track approach. First, it proposed amendments to the 'Electronic Securities Act and Capital Markets Act' through the National Assembly. This established a legal basis for electronic registration of securities issued using blockchain technology. Alongside this, through a regulatory sandbox, it plans to allow 'investment contract securities' to be traded on the exchange. This would enable fractional investment products approved with 'investment contract securities registration statements' to be listed on the Korea Exchange and traded like stocks.

The securities industry is highly interested because fractional investment issuance work is similar to initial public offerings (IPO). In particular, many cases involve securities firms participating as partners in the business. From the perspective of investor protection, an institution supporting accounts responsible for investment fund deposits is necessary, and securities firms can support dedicated account systems for issuers.