On January 9, 2020, Korea’s Financial Services Commission announced specific proposed amendments to the Enforcement Decree of the Financial Investment Services and Capital Markets Act (the “Capital Markets Act”) for the purpose of enhancing investor protection in relation to sale of financial investment instruments (the “Proposed Amendments”).
Under the current Capital Markets Act, the minimum investment amounts in a Professional Qualified Investors Private Fund (“PQIF”) required for an investor to qualify as a qualified investor are KRW 100 million in the case of a PQIF with a maximum borrowing limitation of up to 200% of the net assets of the PQIF, and KRW 300 million in the case of a PQIF with a maximum borrowing limitation of higher than 200%. The Proposed Amendments, if adopted and enacted, will increase the minimum investment amounts to KRW 300 million and KRW 500 million, respectively.
The Proposed Amendments are expected to have a considerable impact on the investment method and structure of future investments into real estate because (i) a real estate fund (“REF”) is widely used as an investment vehicle for the purpose of acquiring, operating and disposing real estate and (ii) most of the REFs are established in the form of PQIFs.
The legislative intent of the minimum investment amounts in PQIFs is to encourage and limit the investment opportunities in PQIFs to only the investors who are capable of taking risks associated with PQIFs, to the extent that such limitation does not significantly interfere with the investment opportunities of the investors. Some view the minimum investment amount of KRW 100 million as a threshold that is too low and insufficient to serve as an appropriate basis for determining whether or not investors have the capability to take on the risks associated with a PQIF. In fact, there were many cases where investors with insufficient capacity to take on the risks associated with investing in PQIFs used leverage or invested entire life savings or assets to meet the KRW 100 million threshold. It appears that the Proposed Amendments have also taken into account that investors’ opportunities to invest in PQIFs have expanded in recent years through public offering funds as a result of the introduction of “fund of fund” investment instruments.
Therefore, it appears that the Proposed Amendments will heighten the requirements to qualify as a qualified investors for PQIFs by encouraging and limiting the investment opportunities in PQIFs to only those investors with sufficient risk-taking capability to invest in a PQIF, which is deemed a high risk investment instrument.
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#PQIF #Capital Markets Act #Real Estate #2020 Issue 1 #Newsletter