Fragmented Investment and Investment Contract Securities—The Critical Analysis of the South Korean Regulatory Body’s Attempt to Correlate the Two

Abstract

In South Korea, the advent of fragmented investment has attracted many young adults who were looking for new investment opportunities with limited capitals. Musicow's business model has been the epitome of the new phenomenon, as it introduced an idea of royalty participation right and offered it to the public instead of copyright itself. However, some started to complain about the lack of or the insufficiency in investor protection. As a response, the Korean regulatory body labeled the royalty participation right as an investment contract security and ordered Musicow and other service providers of similar fragmented investment products to establish systems for bankruptcy remoteness and other means of investor protections. During the process, however, the regulatory body erred in labeling royalty participation right as an investment contract security as such a decision conflicted with the existing law. While restrictions on the issuance of investment contract security could be no more than the submission of registration statement and avoidance of unfair tradings, the demands to Musicow and other service providers were above such a limitation. In theory, it seems to be more fit to consider such products as derivatives-linked securities rather than investment contract securities. In addition, such an inconsistency could have been avoided if the regulatory body had i) waited for an appropriate amendment of the related law or ii) guided Musicow and other service providers in restructuring their products as entrusted beneficiary certificates.