On November 2, 2018, 15 National Assembly members submitted a bill proposing to amend the Financial Investment Services and Capital Markets Act (“FSCMA”) to relax regulations on private equity funds (“PEFs”).

The proposed amendment will unify the current two-track regulatory framework for PEFs that apply different requirements to “specialized investment-type” PEFs (i.e., hedge funds) and “management participation-type” PEFs.  The proposal includes changes to relax the regulations on fund management and on “institutional investors PEFs,” and to increase the current investor number cap for PEFs.  

These changes reflect the demands within the industry to ease the PEF regulations in Korea to be more in line with global standards and to increase the competitiveness of domestic PEFs.

Key Proposed Changes:

1. Unified regulatory regime for PEFs 
  
The proposed amendment will eliminate the current requirement for management participation type PEFs to have more than a 10% stake for management participation, thereby unifying the current PEF regulation regime.  

Under the amended FSCMA, PEFs will no longer be classified as specialized investment-type PEFs and management participation-type PEFs.

The regulations on investment management by PEFs will be unified as below:

• The current requirement for specialized investment-type PEFs restricting exercise of voting rights for shares held by the PEF in excess of 10% will no longer apply. 

• The current requirements for management participation-type PEFs to do the following will no longer apply: (i) invest at least 50% of their capital in equity within two years from the capital contribution date; (ii) acquire at least 10% of shares; and (iii) hold acquired shares for at least six months.

• The current prohibition of loans for management participation type PEFs will no longer apply.

2. Introduction of institutional investment PEFs 

Instead of the previous two-track system, the proposed amendment introduces “institutional investor PEFs,” which funds exclusively from institutional investors, and will be subject to minimal regulation as compared to “general PEFs.”  

The specific scope of institutional investors will be defined later through the subordinate regulations.  Under the new regime, the management participation-type PEF will fall under the institutional investor PEF. 

Additionally, the examinations of institutional investor PEFs by the regulatory authorities will be conducted from the perspective of stabilizing the financial markets, rather than investor protection, and only when necessary.  

While it is unclear under the current regulation whether GPs are included in the scope of examination, the proposed amendment specifically includes GPs. 

3. Increase of investor number cap from 49 to 100 

The proposed amendment increases the number of investors permitted for PEFs from “49 persons or less” to “100 persons or less.” 

4. Transitional measures

Under the proposed amendment, existing specialized investment-type PEFs will be converted into general PEFs, and management participation-type PEFs will be converted into institutional investor PEFs.  

As such, existing management participation-type PEFs will be prohibited from receiving capital commitments from non-institutional investors from the enforcement date of the amendment.

Significance:

The unification of the two-track regime is expected to bring substantial changes to the PEF regulations in Korea.  Hence, it is recommended that you closely monitor the legislation status of the proposed amendment and the changes it may bring.