[Exclusive] Financial Services Commission to Review Fragmented Investment On-Exchange Market Sandbox Around October

[Fractional Investment Rises] ① Fractional Investment Platform Products Tradable on Stock Exchanges
"Approval for OTC Market Requires Caution Until Legal Amendments"

Financial authorities will begin reviewing regulatory exemptions (sandbox) for establishing an on-exchange market for fractional investment by October at the latest. Considering the review period, fractional investment (investment contract securities) products are expected to be traded on the Korea Exchange early next year. Over-the-counter markets where fractional investment platforms like Musicow trade will be permitted after legal amendments. However, platforms such as Musicow that previously received regulatory exemptions are currently operating services temporarily. Once the on-exchange market for fractional investment is allowed, businesses of fractional investment companies collaborating with securities firms are expected to gain momentum.

According to the Financial Services Commission, an Innovation Financial Service review subcommittee will be held around autumn to allow trading of 'fractional investment products issued as investment contract securities and non-monetary trust beneficiary certificates' on the on-exchange market. Innovation Financial Services is a system that grants regulatory exemptions to businesses recognized as differentiated from existing financial services.

Fractional investment refers to multiple people investing in real assets such as artworks, real estate, aviation, and Korean beef, dividing ownership shares. Last year, financial authorities defined fractional investment as a financial investment product (security), requiring related companies to comply with the Capital Markets Act. This means submitting securities registration statements to the Financial Supervisory Service and preparing investor protection measures.

Financial investment products are broadly divided into securities and derivatives. Both carry the risk of principal loss, but derivatives differ in that additional losses exceeding the principal can occur. Securities are further categorized into bonds (debt securities), stocks (equity securities), funds (beneficiary certificates), equity-linked securities (ELS) (derivative-linked securities), depositary receipts, and investment contract securities. Financial authorities have classified fractional investment as 'investment contract securities.'

Under current law, investment contract securities have no basis for circulation. Fractional investment products can be issued (public offering and subscription) like stocks, but cannot be circulated (traded) on the Korea Exchange or proprietary platforms through listing procedures. This is why Musicow, recognized as investment contract securities, changed music copyright participation claims to trust beneficiary certificates and applied for regulatory exemptions. Submitting a securities registration statement as investment contract securities does not provide a basis for circulation, so individuals cannot trade music copyright participation claims on proprietary platforms. Therefore, investment contract securities must also receive regulatory exemptions to be traded on the market like stocks.

The Korea Exchange will be responsible for the circulation of fractional investment. In May, the Korea Exchange held a board meeting and approved the agenda on 'Pilot establishment plan for investment contract securities and non-monetary trust beneficiary certificates market and application for the Financial Services Commission's Innovation Financial Service.' After finalizing details, it plans to apply for Innovation Financial Service with the FSC by October.

Once the Innovation Financial Service application is submitted, it must be processed within 30 days. If supplementation is needed, the period can be extended up to 120 days. Considering that establishing a digital securities market is a national agenda, regulatory exemptions are expected to be finalized by the end of October.

Ahead of the regulatory exemption review, the fractional investment and securities industries are expected to accelerate related businesses. Since financial authorities classified fractional investment as financial investment products (securities) last year, related services are being reorganized. Like stock issuance, submitting securities registration statements, disclosures, and obtaining approval from authorities for operations and investor protection measures are required.

Tessa, a platform for fractional ownership trading of artworks, has completed account linkage with Kiwoom Securities. Daishin Securities acquired the real estate fractional investment platform Kasa and launched a dedicated product account. Major securities firms such as Korea Investment & Securities, Mirae Asset Securities, Shinhan Investment Corp., KB Securities, and Hana Securities are preparing to collaborate on token securities (STO) businesses using blockchain technology for fractional investment.

The first fractional investment product approved by financial authorities is expected to be launched next month. Once the on-exchange market is established, products issued by fractional investment platforms will be listed like stocks and individuals will be able to trade them on the Korea Exchange.

However, establishing an over-the-counter market is unlikely before legal amendments. A financial authority official said, "Anyone can issue securities, but distribution operations cannot be licensed to just anyone," adding, "Just as Samsung Electronics cannot both issue stocks and operate an exchange, over-the-counter markets require innovation and necessity that surpass competitive fairness."