Starting in May, individual investors in South Korea will be allowed to freely trade venture capital funds like traditional stocks or ETFs, expanding investment opportunities in the sector.
Beginning in May, the South Korean government will enable individual investors to invest in venture capital funds, allowing them to trade these funds as freely as they do with conventional stocks or exchange-traded funds (ETFs). This move aligns with the government's initiative to enhance productive finance and broaden pathways for individual investment in venture businesses. The Financial Services Commission (FSC) has announced the implementation of the corporate growth fund system, which aims to streamline capital flows to venture and early-stage innovative companies. The regulatory framework for this system follows last year's amendments to the Capital Markets Act that cleared legislative hurdles and allowed for the establishment of supporting regulations by the FSC.
Under the new corporate growth fund (BDC) system, at least 60% of the fund's assets must be invested in unlisted venture and innovative companies, as well as stocks or investments from companies listed on the KOSDAQ and KONEX markets. The primary goal is to provide risk capital to venture firms and expand investment opportunities for individuals, acknowledging the inherent uncertainties associated with long-term investment in such ventures. To mitigate risks, the FSC has instituted safety standards, requiring that more than 10% of the BDC's total assets be allocated to safe assets such as government bonds, cash, and savings accounts. Additionally, the investment size in any single entity cannot exceed 10% of the BDC's total assets, and individual company equity stakes should remain below 50%.
To prevent market shrinkage, a minimum fundraising target of 30 billion KRW has been set for the BDCs, with a fund maturity period of at least five years to accommodate investments in unlisted stocks. A critical factor for the success of the BDC initiative will be the ability to accurately select promising venture companies for investment, as misallocation of funds could result in losses and could further complicate the return of invested capital to existing investors. Addressing these concerns, the FSC has mandated that fund managers invest a portion of their own capital into the BDC as well, thereby ensuring alignment of interests and enhancing diligence in their investment decisions.
