Announcement of ‘Guideline on New Financial Instruments Including Fractional Investment’ (Updated 2022.05.) 

[Executive Summary]  

◼ On February 20th, Securities and Futures Commission (SFC) under Financial Services Commission (FSC) concluded that ‘the right to participate in a share of a copyright’ that Musicow Inc. issued falls under the category of investment contract securities under Financial Investment Services and Capital Markets Act (Financial Investment Act). Following the decision, FSC announced on April 28th, a guideline on new financial instruments including fractional investment. Through this guideline, the concept of fractional investment instrument has been defined relatively clearly, and the evaluation criteria as securities for fractional investment instrument was presented.  

A. Outline  

From the regular session held on February 20th, SFS under FSC concluded that ‘the right to participate in a share of a copyright’ which Musicow, Inc. has issued, falls under the category of investment contract securities under Financial Investment Act.  

Musicow, Inc. has been selling so-called ‘fractional investment’ instruments, which are individual fragments of ‘the right to participate in a share of a copyright’, a right to claim profit from a music copyright. ‘Fractional investment’ is a way for multiple investors to make a joint investment on a costly asset by dividing it into shares. Recently, fractional investments are being made not only on music, but also on art pieces, high-priced imported cars, and luxury watches.  

As a result of FSC’s conclusion that Musicow’s ‘the right to participate in a share of a copyright’ falls under the category of investment contract securities under Financial Investment Act, Musicow is now subject to the regulations of Financial Investment Act. Consequently, Musicow can now be subject to sanctions such as restrictions on issuing securities or being charged with a fine, if it fails to follow the protocols of public disclosure under Financial Investment Act.  

Also, on April 29th, FSC has announced a guideline on new financial instruments including fractional investment in light of its conclusion on fractional investment being categorized as securities. Key contents of the guideline are as follows.  

B. Determining Whether Fractional Investment Instrument is a Security  

If the right that an investor investing on a fractional investment instrument earns falls under the category of one of six classifications of the securities listed in Financial Investment Act, 1) debt securities, 2) equity securities, 3) beneficiary certificates, 4) investment contract securities, 5) derivatives-linked securities, 6) depositary receipts, it can be regulated by the Act. FSC has confirmed that the actual substance is what determines whether the right of an investor is categorized as securities, not the method of how the right is expressed or whether certain technologies have been implemented. In addition, FSC also stated that deciding whether a right is a security or not has to be analyzed comprehensively and individually by considering how the object of fractional investment is being managed, and the method of charging expenses and distributing profits.  

If the fractional investment instrument being handled does fall under the category of securities, the business operator must comply with all the regulations imposed by Financial Services Act when issuing and distributing fractional investment instruments. 

With fractional investment instrument falling under the category of securities, it is highly likely for related agencies to make decisions on whether various tokens and NFTs should fall under the same category. Corporations operating businesses related to such virtual assets must keep an eye on the regulations trends.