1. Introduction
In line with the increase in liquid funds around the world due to the corona pandemic, new investment products have been pouring in. Now, as the pandemic enters a lull, the bubble of overheated investment fever with interest rate hikes is dissipating, and the gemstones of commodities are being covered. The so-called ‘sculpture investment’ is gaining popularity, especially among young people, in that many people can enjoy a relatively small amount of investment in expensive assets that are difficult to access, such as buildings and artworks. However, since it is a relatively new type of product, it was placed in a blind spot in the system and there were concerns about damage to investors.
The financial authorities stepped in. The Securities and Futures Commission under the Financial Services Commission (hereinafter referred to as the “Financial Commission”) judged the securities properties of the right to claim participation in music copyright fees (hereinafter the “claim”) issued by Music Cow on April 20, 2022, and decided on measures against Music Cow Co., Ltd. did And on the 28th, about a week later, ‘Guidelines related to new securities business such as piece investment’ were announced. The FSC’s announcement is of great significance to both the fragmented investment platform and the investors, as the rise and fall of the business can vary depending on the regulation of the financial authorities.
Below, among the various types of sculpture investment, we look at the issue of securities, focusing on content such as music and art. As an individual theory, the contents of the announcement of the Financial Services Commission on April 20, focusing on Music Cow Co., Ltd., and furthermore, as a general theory that can be applied to the overall sculpture investment platform, the specific contents of the guideline dated on April 28 are reviewed. Prior to this, let’s briefly look at why the financial authorities have no choice but to intervene in the widely popular piece investment, that is, why ‘securitability’ is a problem.
2. Why is the ‘securitity’ of piece investing a problem?
Fragmented investment basically means that a business operator collects money from several investors to purchase high-priced assets, store, manage, and operate them, and divide the operating profits and return them to investors. There is a positive aspect in that it provides investment opportunities in a way that creates ‘mountainous mountains’ in expensive real estate or artworks that are difficult for individuals to access. This is also the reason why the MZ generation, who is entering investment for the first time with spare money, has drawn attention. However, asset securitization or tokenization similar to this method has been limitedly made under strict regulations in the past. Why?
The biggest reason is the peculiarity of securities trading, ‘information asymmetry’. Unlike goods whose value is visible, such as buildings and jewels, financial investment products such as securities are merely intangible rights or legal status that honor the flow of money. The value of these financial investment products is inevitably affected by various invisible factors, and information about them is often monopolized by the entity that created the product. The general investor lacks information about the numerous variables that can influence the value of a product. On the other hand, the piece investment platform pursues a simple web design for the convenience of the MZ generation, but in this process, the problem of information asymmetry may become more serious. Since content such as music, art, drama, and movies can be easily accessed by the public, it is easy for investors to mistakenly think that they know more about products than anyone else.
Furthermore, financial investment products including securities have the property that they can be the subject of ‘impulsive investment or speculation’. Investors are prone to the temptation of the moment when they can easily earn income just by throwing capital without labor, and the consequences can be far worse than buying tangible goods such as jewelry, automobiles, and real estate carelessly. This is because investment money can disappear like a mirage with nothing left in your hands.
The biggest purpose of the financial authorities’ intervention in piece investment is to protect investors from the properties of these securities. Furthermore, by specifying the scope of regulatory intervention to promote predictability, sound market development is also expected through stable business operation of operators. If a new investment product is judged to be a ‘securities’, it is subject to the Capital Market and Financial Investment Business Act (hereinafter the ‘Capital Market Act’). Strict issuance and disclosure regulations and unfair trade regulations are applied. Therefore, whether or not a piece investment business is ‘secretistic’ is the most basic issue in predicting whether investors can receive protection from the system and financial authorities and to what extent they will be subject to regulatory interference from the perspective of investors. .
3. Securities issue of sculpture investment as an example of ‘Music Cow’
go. Music Cow Co., Ltd.’s business structure and rights relationship
Contrary to the general perception that the investment products sold by Music Cow Co., Ltd. are ‘directly invested in copyright’, they are nothing more than a bond claim against Music Cow Co., Ltd. To understand this, it is necessary to examine the business structure and rights relationship of Music Cow Co., Ltd. and its subsidiary, Music Cow Asset Co., Ltd.
First, Music Cow Asset purchases the copyright from the creator of the music, trusts it to the Copyright Association, and acquires the right to beneficiary, the right to receive royalties from the association. Based on this beneficiary right, Music Cow Asset Co., Ltd. issues a claim called ‘right to participate in copyright fees’. This is a claimable right that Music Cow Asset Co., Ltd. can claim for the payment of copyright fees received from the Copyright Association, and Music Cow Asset Co., Ltd. grants it to Music Cow. Music Cow Asset Co., Ltd. receives a payment in exchange for granting the right to participate in copyright fees to Music Cow Co., Ltd. and uses it to purchase another copyright.
Music Cow Co., Ltd. quantitatively divides the ‘right to participate in copyright fees’ granted by Music Cow Asset Co., Ltd. into several pieces and issues a right called the right to claim participation in copyright fees (hereinafter, ‘claim’). This ‘right to claim’ is the right of an investor to claim against Music Cow Co., Ltd. for the payment of the copyright fee that Music Cow Co., Ltd. has received from Music Cow Asset. This bond claim, which the investor acquires through an auction, is a product traded within the Music Cow platform. Investors acquire ‘claims’ and receive distribution of copyright fees, or obtain profits by disposing of them on the platform.
me. Judgment by the Financial Services Commission: Corresponds to investment contract securities
On April 20, the FSC announced that Music Cow Co., Ltd. should be regulated under the same law, as ‘claims’ traded on the Music Cow platform correspond to ‘investment contract securities’ as stipulated by the ‘Capital Market Act’.
Investment contract securities indicate contractual rights in which a specific investor (1) invests money, etc. in a joint project between the investor and another person (including other investors), and (2) is attributable to the gains and losses resulting from the joint project mainly performed by others. (Article 4, Paragraph 6 of the same Act), ③ The purpose is to obtain profit (Article 3, Paragraph 1 of the same Act).
By substituting Music Cow’s ‘right to claim’ to the requirements for recognition of investment contract securities, ① Investors with the same ‘right to claim’ enjoy the same profit and loss from the price change of ‘claim’ and income from copyright fees, ② It can be seen that Music Cow Co., Ltd. and Music Cow Asset Co., Ltd. perform all tasks such as investment, operation, management, calculation of issuance value, settlement and distribution of copyright fees, and operation of the distribution market. The ‘claims’ owned by investors and the only distribution channel through which they can be traded are newly created by Music Cow and Music Cow Asset. This is because they cannot receive copyright fees without going through Music Cow. Furthermore, ③ Investors purchase ‘claims’ for the sole purpose of earning royalties or for profit from trading due to an increase in the price of ‘claims’, not for the purpose of listening to or processing specific songs. Music Cow Co., Ltd. also gave investors expectations for profits through extensive advertisements.
Following this logical structure, the FSC judged Music Cow’s ‘claim right’ to be an investment contract security. As a result, Music Cow Co., Ltd. did not submit a securities declaration (or small public offering documents) necessary to protect investors while soliciting and selling securities. Accordingly, the financial authorities are able to take sanctions in accordance with the ‘Capital Market Act’, such as the imposition of fines and fines for Music Cow Co., Ltd. However, a grace period of 6 months was granted. As the first case where ‘investment contract securities’ under the ‘Capital Market Act’ were applied, Music Cow Co., Ltd.’s illegality and intentionality were low, and close to 170,000 investors were already using the service, so the service was suspended due to sanctions by the financial authorities This decision was made in consideration of the fact that it could lead to damage to many investors. Accordingly, Music Cow Co., Ltd. meets the seven conditions suggested by the Financial Services Commission within six months.*(Mechanisms for establishing an investor protection system) must be complete.
*① Investor rights and property should be legally insulated from the risk of insolvency of the business operator and be protected stably, ② Investor deposits should be separately deposited in an account (including virtual account) in the name of an external financial institution investor, ③ Investor protection, disability response, Securing physical equipment and professional manpower necessary for information security, etc. ④ Prepare appropriate explanatory materials and advertisement standards for claim structure, etc., and issue terms and conditions, ⑤ In principle, it is impossible to operate both the claim issue market and the distribution market ( However, if the secondary market is absolutely necessary to protect investors, and a system for preventing conflicts of interest equivalent to separation and a market monitoring system, etc. are in place, exceptions are allowed) , ⑦ It is impossible to issue new claims and execute new advertisements until the Financial Supervisory Service confirms the completion of fulfillment of the above conditions and approves the Securities and Futures Commission possible)
all. implication
Sculpture investment in content may be mistaken for direct investment in intellectual property rights of tangible objects in which content is embodied. The FSC’s announcement is of primary significance in that it explained the core contents of the products sold by Music Cow and showed the process of extracting securities issues subject to the ‘Capital Market Act’.
The problem with Music Cow’s business structure is that the essence of ‘claims’ is only a claim against Music Cow, so if Music Cow goes bankrupt, it is difficult to fully guarantee the ‘right to claim’. Third-party monitoring of the company Investors are not disclosed about the financial status of Music Cow Co., Ltd. or the design structure and issuance (auction) price calculation of Music Cow Co., Ltd. It has been pointed out that this is not possible. The measures that the FSC has requested to be implemented as a condition of pending sanctions are expected to act as important clues in predicting the future regulatory direction of the financial authorities in that they aim to resolve these problems.
However, the aforementioned business structure problems are not limited to Music Cow. At the same time, the structure of the content piece investment platform is not all similar to Music Cow. Accordingly, on April 28, 2022, the FSC announced guidelines that can be more generally applied to the various types of sculpture investment industry. Let’s look at this by changing the terms.
4. ‘Guidelines for new securities business such as piece investment’ of the Financial Services Commission
go. Securities judgment
Securities, among financial investment products, are classified as debt, equity, income, derivative combination, and investment contract securities. In the ‘Guidelines related to new securities business such as piece investment’ dated April 28 (hereinafter the ‘guideline’), the FSC declared that judgment on securities properties is determined by looking at the actual contents, regardless of how business operators advertise and explain them. It means that the decision is made by combining all information such as the terms of use, management and operation method of fragmented investment objects, the collection of various nominal expenses such as fees and remuneration, the content of profit distribution, the content of advertisements, and other agreements.
The following items are listed in the guidelines as examples of cases where there is a high possibility that the securities properties of a piece investment product will be recognized. ① If the investment can be repaid after a certain period of time, ② If the profit and loss from business operation can be distributed, ③ If the investment income can be distributed according to the increase in the value of the piece investment target through investment in real assets and financial products, etc. In the case of the possibility of being able to, ④ In the case of receiving a recovery amount that varies according to the price change of the underlying asset, ⑤ In case of being able to subscribe or acquire newly issued securities, ⑥ In the case of having a contractual right or equity relationship in other securities, ⑦ When the professionalism or business activity of a business operator has a significant impact on the investor’s returns.
Furthermore, the guidelines emphasized that the scope of application of ‘investment contract securities’ among the types of securities can be widely recognized. As the ‘claim right’ of Music Cow, a piece of investment product that shares the profits from copyrights of music content, was identified as investment contract securities, there is a considerable possibility that additional products classified as two-contract securities will emerge. For better understanding, the FSC explained in detail the cases in which it is highly likely that investment contract securities will be recognized in the guidelines. This is a case in which the professionalism or business activity of a business operator plays an important role in the income earned by the investor. ③ This is a case where it is reasonably expected that the price of a piece investment product related to the business can rise through the efforts and capabilities of the business operator when recruiting investors.
On the other hand, if ownership, etc. can be directly divided or can be used, profited, or disposed of individually, it is considered that the probability of being classified as securities is relatively low. This is because even if it is a piece of investment product, the actual ownership can be divided and purchased and held, and if the profit is settled by selling it, it is only a simple real transaction, but is unlikely to be a security.
me. Business considerations related to piece investment securities
If the right to sell falls under a financial investment product as ‘securities’, a business operator who intends to issue and distribute it must comply with all of the ‘Capital Market Act’ and related laws. Specifically, the regulations include the submission of securities declarations, the prohibition of unauthorized business practices, the prohibition of unauthorized market opening, and the prohibition of fraudulent transactions. Violation of this may result in various sanctions, including criminal punishment, imposition of fines, and business suspension in accordance with relevant laws and regulations. This means that if a business that provides a piece of investment product rushes ahead with its business without checking whether the product falls under the ‘Capital Market Act’, the hard-earned platform and large-scale advertisements may become useless.
If the product to be issued falls under securities, it is necessary to comply with disclosure regulations such as submission of a securities declaration form at the time of issuance. If the service (business) to be provided falls under the financial investment business, an investment brokerage business or collective investment business license, or permission from an exchange is absolutely necessary. In the guidelines, the business operator can separately review, inquire, and confirm whether the behavior of a piece investment business operator is a business that requires authorization, permission, and registration under the Capital Market Act and the applicability of other laws other than the ‘Capital Market Act’ depending on the type of business. Nailed it as necessary.
However, the guidelines also mentioned the possibility that heavy regulations under the Capital Market Act may not be applied temporarily in exceptional cases where the innovativeness of the service is specially recognized, although it is difficult to issue and distribute it within the current legal system due to the nature of the piece investment securities. . It is a method to temporarily issue and distribute piece-investment securities after being designated as an innovative financial service by using the financial regulation sandbox system in accordance with the ‘Special Act on Financial Innovation Support’. For designation, it is necessary to demonstrate that it contributes to market development in terms of originality and innovation, as well as the seven investor protection measures that the FSC previously granted to Music Cow as a condition of suspension of sanctions, etc., in the business plan. .
all. implication
Sculpture investment in content such as music or art can be considered both ‘a model that directly holds a part of ownership’ and ‘a model that holds control over profits generated from assets’. Of these, the latter was considered by the FSC to be relatively more likely to fall under securities. In the case of a product in which claims for returns from assets are shared by multiple investors, the possibility of such a product as a security should be carefully considered.
If we look at the operating method of the currently operating content sculpture project, it can be seen that there is a mixture of parts that overlap with the example of a case in which the security characteristics of fragment investment products suggested by the guidelines are high and those that do not. . In order to determine whether the actual content fragmentation investment currently in operation is ‘securities’ or ‘separation of ownership’ outside the scope of regulation, it is not enough to check the guidelines presented as a general standard of action. The guideline itself indicates that ‘the actual application method may vary for each individual case and the possibility that this guideline can be modified and supplemented in the future’. It is a time when a detailed regulatory review by experts is essential for safe business operation.
5. Conclusion
At a time when the piece investment market expands on a large scale, the financial authorities’ intervention in piece investment primarily aims to protect investors. The Financial Services Commission’s decision on Music Cow on April 20th and the guidelines on the 28th can also be seen as suggesting a direction for investor protection in a broad framework. In the case of fragmentation investment operators, this successive announcement by the FSC can be used as an opportunity to promote predictability by specifying the scope of regulatory intervention. Some content piece investment platforms advertise that it is safe from securities issues as ‘split sales of ownership’. Whether the financial authorities will make the same judgment will only be known until the door is opened. It is worth noting that the only way to avoid unexpected sanctions is to develop a business model that has been scrutinized by legal experts.
Attorney Baek Se-hee (DKL Partners Law Firm)
