[Fragmented Investment Rising]③Examining Korea's First Fragmented Investment Securities Registration Statement

TogetherArt Plans to Purchase Artwork 'Stay Song 61' with Public Funds
Importance of 'Bankruptcy Isolation' to Protect Investors... Investment Funds Raised via Securities Firm Accounts
Securities Firms Handle Asset Discovery, Valuation, and Investor Recruitment Preferred by Investors

Editor's NoteFractional investment is regaining attention. This is because regulations related to fractional investment are expected to be gradually lifted. Last year, financial authorities recognized fractional investment as a type of financial investment product called 'securities.' Accordingly, a legal basis for conducting business was established. Additionally, the possibility of trading on the Korea Exchange like stocks is opening up. Fractional investment, where multiple people invest in physical 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. This article examines 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 market's concerns.

On August 11, the Financial Supervisory Service (FSS) received the first domestic fractional investment (investment contract securities) securities registration statement. If the fractional investment securities registration statement is approved, it will be possible to subscribe to high-priced art investments like stocks, and upon maturity, investors can receive profits corresponding to the increase in the artwork's price. The industry is paying close attention to whether the first fractional investment securities registration statement will be approved. The most important consideration by financial authorities when incorporating fractional investment into the regulatory framework was 'investor protection measures.' The fractional investment securities registration statement must specifically include mechanisms to safely protect investment funds in case the fractional investment company goes bankrupt. If the first registration statement is approved, it is expected to become the standard for art fractional investment securities registration statements.

Complete Revision of Securities Registration Statement Format... How Was the Bankruptcy Isolation Plan Presented?

The first fractional investment securities registration statement was submitted by the art brokerage company TogetherArt and NH Investment & Securities. According to the securities registration statement submitted to the FSS, this product raises investment funds through a public offering of investment contract securities. The funds are used to purchase a work titled 'Stay Song 61' by American artist Stanley Whitney. TogetherArt stores the purchased artwork with a professional gallery or auction company and, after a certain period, disposes of it to generate profits, which are then distributed to investors as liquidation proceeds.

The most important content in the securities registration statement is 'bankruptcy isolation.' Bankruptcy isolation means that even if the fractional investment company goes bankrupt or enters rehabilitation procedures, the assets acquired with investors' funds must be protected so that bankruptcy or rehabilitation effects do not apply to them. This is the biggest difference from stock investments. Stock investments carry unlimited liability, so if the company goes bankrupt, investors also suffer losses. However, fractional investment is not an investment in the company itself, so a bankruptcy isolation plan must be established.

TogetherArt first entrusted the raised funds to a trust company to separate them from the business operator's credit risk. NH Investment & Securities acts as the trustee. TogetherArt starts subscription on its platform and collects investment funds into an NH Investment & Securities account. Most fractional investment platforms have adopted phone banking services, which are non-face-to-face accounts, when restructuring their business models. Phone banking services use virtual accounts. TogetherArt chose NH Investment & Securities as the trustee to use a real-name account structure.

An industry insider said, "There was an evaluation that a real-name account, which allows maximum control over fund inflows and outflows so that the issuer cannot arbitrarily withdraw money, is the safest." He added, "I understand that other platforms are also reviewing linking securities company accounts while preparing fractional investment securities registration statements."

As a second measure, the purchased artwork was set to be co-owned by all investors. Even if TogetherArt goes bankrupt, the investors' shared ownership shares will not be affected.

Finally, in preparation for the possibility that TogetherArt cannot continue its business, a consignment contract for liquidation work was made with a third party. Additionally, a more creditworthy auction company was designated as a joint business partner to ensure the business for investors can continue.

Fractional Investment Trust Business Similar to Subscription Work... "Advantageous to Secure Underlying Assets First"

There is a reason why not only NH Investment & Securities but most securities companies are actively entering the fractional investment business. Fractional investment operators must establish an account-supporting institution (trustee) that can accept investment payments. This structure is similar to an initial public offering (IPO), where a listed company issues stocks, and securities companies support the listing process and collect investment funds through subscription accounts. This is why fractional investment companies and securities firms are forming alliances and strategies to enter the business.

The success or failure of fractional investment depends on the 'underlying asset,' which also influenced the market. Another securities company official said, "There are many fractional investment targets, but it is important to develop products that can exit (recover investment funds) within 1 to 2 years." He added, "It is like finding a company that will hit big after listing." Simply put, it is advantageous to identify profitable investment assets (underlying assets) first. Discovering assets preferred by the market, assessing their value, and recruiting investors is one of the securities company's core tasks.

NH Investment & Securities stated that it plans to dispose of the artwork within 10 years, but it is expected to do so earlier. To build positive investment experiences in fractional investment, it is necessary to realize profits in a short period. Therefore, the assets targeted for fractional investment are expected to be narrowed down to artworks, real estate, Korean beef (Hanwoo), racehorses, luxury goods, etc. These are assets that satisfy conditions such as steady value appreciation and active circulation (trading).

However, the revenue securities companies earn from the fractional investment trust business is expected to be minimal. In the case of IPOs, securities companies support everything from underwriting stocks, public offering, subscription, to listing. Fractional investment is somewhat different. The scale of fractional investment targets is smaller than listed companies, and currently, they cannot be traded in the secondary market. Securities companies will only receive fees related to account support services. Fees are expected to be less than 3%. Since TogetherArt plans to raise 790 million KRW, NH Investment & Securities' fee income is expected to be at most around 20 million KRW.

Nevertheless, there are reasons securities companies are entering the fractional investment business. A financial investment industry official explained, "By opening accounts targeting the 20s and 30s generation interested in fractional investment, they can attract potential customers. Also, if the fractional investment company succeeds in business and goes public, various corporate finance services can be provided."