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Newsletter | April 2017, Issue 1
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SECURITIES
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Korea’s Top Financial Regulator Expands the Scope of Investors Eligible to Invest in Offshore Funds
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On August 27, 2016, the Financial Services Commission (the “FSC”) issued an interpretive ruling on the scope of investors eligible to invest in a domestic privately placed fund established and managed by a domestic asset manager for making a specialized investment (the “Domestic Private Feeder Fund”) (the “Qualified Investors”). This interpretive ruling clarifies who can invest in such a Domestic Private Feeder Fund.
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The Domestic Private Feeder Fund, which receives investment funds from the Qualified Investors, can now invest in an offshore fund, which was previously open only to Qualified Professional Investors (as defined below) (the “Professional Offshore Fund”).
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Previously:
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Under the current regulation, the scope of the Qualified Investors is larger than that of investors eligible to invest in the Professional Offshore Fund (the “Qualified Professional Investors”). Given this difference in the investor scope between the Domestic Feeder Private Fund and the Professional Offshore Fund, the regulators were concerned about the possibility of investors unduly taking advantage of the difference to circumvent the investor eligibility restriction on the Professional Offshore Fund. To address this, the regulators used to take the view that the Domestic Private Feeder Fund and the Professional Offshore Fund should have the same scope of eligible investors.
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Currently:
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However, through the interpretive ruling, the FSC has articulated in a way different from its earlier view that the Domestic Private Feeder Fund and the Professional Offshore Fund can continue to have their different investor scopes.
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Specifically, according to the interpretive ruling, even if the Domestic Private Feeder Fund intends to invest in the Professional Offshore Fund, its Qualified Investors can be the same as those of other Domestic Private Feeder Funds, which do not invest in the Professional Offshore Fund. Based on the interpretive ruling, some Qualified Investors, such as general corporate entities should now be able to do so. Due to the regulatory uncertainty, these Qualified Investors could not invest in the Professional Offshore Fund indirectly through the Domestic Private Feeder Fund, because they were not Qualified Professional Investors.
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Separately, this interpretive ruling makes it clear that if an investor is not a Professional Qualified Investor, the investor still cannot utilize a trust instrument to invest in the Domestic Private Feeder Fund.
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Significance / Potential Impact:
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This change in the regulators’ stance is expected to: (i) increase the Qualified Investors’ investments in offshore funds; and (ii) promote the domestic market for setting up funds that invest in offshore funds. Additionally, regulators may hope to see a greater interest from offshore funds in entering the Korean market.
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