The introduction of the business development company (BDC) system opens the way for individual investors to invest in unlisted companies, similar to how they contribute to venture capital funds. The government plans to list these BDCs on the stock market to facilitate investments.
With the introduction of new products, some in the securities industry express expectations, but there are calls to enhance investor protection measures and tax incentives to increase investment appeal.
According to the Financial Services Commission, a revision of the Capital Markets Act to introduce BDCs passed the National Assembly plenary session on the 27th of last month. The amendment is set to take effect in March next year, six months after the law is announced. A BDC is a public fund mandated to invest more than half of its total assets in growth-oriented venture and innovative corporations.
According to the amendment, BDCs are closed-end public funds, and investors cannot request redemption for five years. However, there is a plan to allow free trading like stocks or exchange-traded funds (ETFs) once they are listed on the exchange. The minimum fundraising amount is set at over 30 billion won.
The specific implementation plan stipulates that the venture investment ratio must be over 60%, allowing investments in unlisted companies, KOSDAQ-listed companies, venture investment associations, new technology investment associations, and shares of specialized startup venture capital funds. Asset management companies and venture capitals (VCs) will manage them.
Industry insiders believe that this will create opportunities for all market participants, including unlisted venture corporations, individual investors, and asset management companies. In particular, it is assessed that individual investors' access to unlisted companies, which have been mainly centered on institutions and professional investors, will significantly improve.
A Financial Services Commission official noted, "Until now, there has been no platform within the system where unlisted stocks could be traded, leading investors to use private sites to invest in lesser-known undervalued companies and often suffering losses. Going forward, more secure and proactive investments will be possible through licensed asset managers," he said.
However, since BDCs are structured to invest in high-risk unlisted companies, there are opinions that more investor protection measures need to be considered. While it is true that investors must be cautious themselves due to the nature of unlisted company investments, proper investment information must be provided and monitored as they are traded on the market.
Such concerns were raised multiple times during the introduction process of the actual bill. Due to the nature of venture corporations, it is difficult to evaluate their objective market value, and information disclosure is limited.
In response to these criticisms, the implementation plan stipulates that the operational subject must fulfill obligations such as making seed investments of more than 5% of the fund's assets directly, conducting quarterly fair value evaluations at least once a year, and mandating the disclosure of significant management matters.
Along with this, there are voices calling for incentives to increase individual participation, such as tax support and expanding dividends.
A venture industry insider said, "For BDCs to take root and become active in the market, aggressive tax support is needed, such as corporate tax reductions, individual investment income deductions at a certain rate, and capital gains and dividends tax benefits." Another securities company researcher noted, "Just as individuals receive a 10% income tax deduction or capital gains tax exemption when investing in the private market, similar tax benefits could be considered for BDCs."
There is also a need to introduce policy support to enhance the dividend appeal of BDCs. In the United States, where the BDC system has been established, corporations that distribute more than 90% of their income in dividends receive corporate tax exemption benefits, which is supported policy-wise to maintain a high dividend payout rate. This has led BDCs to position themselves as high-dividend investment products with dividend yields reaching 8% to 11%, thereby increasing incentives for individual investors.
An anonymous researcher stated, "Korean BDCs lack the mandatory high-dividend policies seen in the U.S., and tax incentives have yet to be confirmed, making them less attractive to individual investors. However, since U.S. BDCs mainly focus on loans, they can maintain a high dividend yield through regular interest revenue, while criticism argues that cash dividends are difficult for Korean BDCs due to their equity-holding nature."