Digital markets, funding and payment services
Under Korean laws, businesses related to financial investment products such as collective investment businesses are fundamentally regulated by the Financial Investment Services and Capital Markets Act (FSCMA), with regulations differing for each specific type of business.i Crowdfunding
The FSCMA regulates securities-type crowdfunding, and in order to conduct securities-type crowd funding, registration needs to be made as an 'online small-sized investment broker' with the FSC in accordance with the FSCMA.
Crowdfunding was introduced in 2016 for the financing of start-ups and venture businesses. There are, however, certain restrictions in the issuance of equity for crowdfunding under the FSCMA. Namely, a single company can raise funds up to 1.5 billion won per year through crowdfunding. To raise funds that exceed 1.5 billion won, conventional means of financing should be utilised. Moreover, under the FSCMA, the issuance of equity for crowdfunding is permitted for non-listed small- to mid-sized companies with less than seven years of business operations.
In April 2018, the Enforcement Decree of the FSCMA was amended to increase the limit for an ordinary investor to invest in crowdfunding from 5 million won to 10 million won per year with an issuer of equity. In addition, the amended Enforcement Decree of the FSCMA allowed social enterprises, which are companies certified by the Ministry of Employment and Labour that seek to improve financial, social and environmental well-being through commercial activities (e.g., providing employment opportunities to disadvantaged groups or making contributions to the local society) to raise funds through crowdfunding.ii Crowd-lending and P2P lending
There are currently no laws or licences that directly regulate regarding P2P, but there is a plan by the Korean authorities to push forward with P2P loan legislation in 2019. Currently, regulations are based on the Act on Registration of Credit Business and Protection of Finance Users (the Credit Business Act), which applies to general lending businesses, and the P2P Loan Guidelines announced by the FSC in February 2017. Thus, typically, in order to run a lending business, a credit business registration (licence) is necessary in accordance with the Credit Business Act. However, in the case of running a P2P lending business in accordance with the P2P Loan Guidelines, the supervising authority's position is that it shall not take issue with whether a P2P business or P2P lending investor owns a Credit Business Act licence.
P2P lending that is in accordance with the P2P Lending Guidelines takes place by a method wherein the investor and the borrower do not enter into a direct agreement. Because P2P broker businesses do not have Credit Business Act licences, a liaison financial business operator that has completed registration in accordance with the Credit Business Act enters into a lending agreement with the borrower, and the P2P broker business acts as an intermediary in this arrangement. The investor is not party to the lending agreement with the borrower, but obtains the right to acquire principal and interest that result from the loan bond against the borrower.
The main contents of the P2P Guidelines are as follows:
- investment limits:
- for an individual investor, 10 million won per one P2P business (5 million won for an equivalent borrower), provided that an additional 10 million won is permitted for credit loans;
- an individual investor who has satisfied income requirements:
- no credit limit for corporate investors and individual professional investors;
- regulation of advertisements and regulation of mandatory disclosure items; and
- regulation of business activities. The P2P lending business cannot participate in P2P lending as the investor, etc.
In the case of securities acquired through crowdfunding, it is obligatory to deposit at a securities depository or make a safety deposit, and for a period of six months, transfer cannot be made other than to professional investors and persons specified under certain laws (Article 117-10, Item 7 of the FSCMA).
For rights to acquire principal and interest obtained through P2P lending, in principle, transfer is possible depending on the method of bond transfer. However, there are cases where a P2P lending business restricts transfer through its terms and conditions.
If a right that is acquired through investment is deemed a security under the FSCMA owing to the possibility of transfer, risk of loss of principal, etc., the issuer of such bond and the broker business must obtain financial investment business licences in accordance with the FSMCA and will be strictly regulated with regards to issuance and distribution of securities. Therefore, caution needs to be exercised to prevent being deemed a security.iv Payment licence
In order to run a payment service, registration needs to be made as a payment gateway (PG) with the FSC.
Upon registering as a PG, obligations under the EFTA are applied, and the PG is subject to supervision and inspection by the FSS.