"Going Bankrupt While Waiting": Fractional Investment Security Tokens... When Will Subordinate Regulation Amendments Come? [Bitcoin Now]

Number and Value of Fractional Investment Issuances Declining
Real Estate Fractional Investment Firms End Services
Planned Announcement of Enforcement Decree Amendments Delayed from July

The fractional investment market, which has attracted attention as the initial stage of security token offerings (STO), is experiencing a decline. Observers note that market growth remains distant due to protracted discussions by financial authorities on the creation of subordinate regulations, as well as issues such as the lack of issuance grounds for certain types of securities.

Fractional Investment Market on the Decline

According to Kiwoom Securities Research Center on August 18, the number of fractional investment issuances rose rapidly from 3 cases in 2023 to 60 cases in 2024. However, the figure dropped to 50 last year and stands at just 14 so far this year. Issuance amounts also increased from 24.76 billion won in 2023 to 27.22 billion won, before falling to about half of that figure last year. This year, the issuance amount remains less than half of last year's figure. Fractional investment represents the early stage of security tokens, which face full-scale legalization next year. When fractional investments are issued using blockchain technology, they become security tokens.

By asset type, real estate fractional investments—which once dominated the segment in terms of scale—saw platform operators announce the end of services in the first half of this year. Kasa Korea discontinued its service on the 10th of this month after selling off all its underlying assets. Fundble also announced the discontinuation of its service in April and is in the process of liquidating its remaining assets. For art fractional investments, at least two public offerings were held every quarter for new projects, but in many cases, the amount subscribed was less than the target offering amount. The livestock-based fractional investments, with Hanwoo (Korean cattle) or pork, are being issued stably without leftover quantities, but their scale remains small.

Given the concentration on specific underlying assets, there is a growing opinion that expanding the asset scope is vital for market growth. Soobin Sim, a researcher at Kiwoom Securities, said, "Ultimately, the main concern in the early market will be whether the range of underlying assets can be broadened. The types of underlying assets used in the existing fractional investment market are quite limited, and new issuances are also slowing in some asset categories."

Delayed Subordinate Legislation... "Rising Interest in Underlying Asset Eligibility and Pooling"

The enactment of subordinate legislation to regulate this market is also delayed. Previously, the Financial Services Commission prepared to announce amendments to the enforcement decrees and guidelines related to security tokens, initially targeting July. However, there has reportedly been no communication yet with the National Assembly's Political Affairs Committee, which drafted the main legislation.

The aspects the industry is most interested in regarding the subordinate legislation include the eligibility requirements for underlying assets, disclosure standards for securities registration statements, best practices for fractional investment securities, and the scope permitted for pooling. Eligibility requirements define which assets can be issued as security tokens. The 2023 guidelines for underlying assets of trust beneficiary securities set standards such as the potential for objective value assessment, ease of liquidation, and the requirement for single asset bases. Since the subordinate legislation will adopt and adjust these criteria, the range of eligible underlying assets will be determined accordingly.

Pooling refers to the method of bundling assets of the same type for issuance. For assets such as patent rights—which are difficult to assess in individual units and have unstable returns—portfolio pooling would transform them into investable products, according to industry views. An industry source commented, "The allowable scope for pooling, currently prohibited, will determine the degree of flexibility available in product design."

"Legislative Approval Needed for Non-Monetary Trust Beneficiary Securities"

A bill regarding non-monetary trust beneficiary securities related to real estate rental income, music copyrights, or patent rights—sponsored by Assemblyman Kim Sanghoon of the People Power Party—remains pending in the National Assembly's Political Affairs Committee. Broadly, security tokens are divided into standard and non-standard securities. Standard securities are based on assets already standardized in the institutional financial sector, whereas non-standard securities are based on tangible or intangible assets that cannot easily be incorporated into existing securities formats.

Non-standard securities are further classified into non-monetary trust beneficiary securities and investment contract securities. Non-monetary trust beneficiary securities are issued as beneficiary securities, in which assets are entrusted to professional trust companies and the income generated from the trust is distributed to investors. Investment contract securities are based on contractual arrangements where investors pool funds in a certain joint venture, and profits and losses are shared, even without a trust company. The legislative framework for investment contract securities was completed within amendments to the Capital Markets Act and related laws.

For trust beneficiary securities, relevant companies currently issue beneficiary securities under the Asset-Backed Securitization (ABS) Act. The issue is that many of these companies are capital-strapped startups. The ABS regulatory framework requires assets to be purchased in advance, which must then go through a trust in order to issue securities. For instance, a startup must first acquire a building or asset worth around 10 billion won before issuing products. Additionally, the ABS Act requires issuers to directly retain about 5% of the total asset value—a burdensome "risk retention obligation."

Having to prefund asset purchases, alongside supplementary capital requirements, imposes a double burden for companies with limited capital. An industry source noted, "For capital-constrained startups, the requirement to pre-purchase assets is a significant challenge," adding, "This is why the fractional investment industry is calling for legal reforms to provide a formal basis for issuance, rather than having to navigate around the current ABS regulations."

This content was produced with the assistance of AI translation services.