As part of efforts to expand the supply of venture capital, the business development company (BDC) system will take effect on the 17th.
A BDC is a public fund that must diversify investments so that more than half of the fund's asset is allocated to high‑growth unlisted venture corporations and the like. Unlike existing innovation and venture investments that were limited to private funds centered on high‑net‑worth individuals and institutions, it is designed to allow retail investors to invest indirectly.
The Korea Exchange (KRX) will complete related system upgrades by April, and asset management companies preparing to launch BDCs plan to pursue the Financial Supervisory Service's review of securities registration statements and the exchange's listing review.
Retail investors can invest in BDCs sold before listing through the on‑ and offline channels of distributors such as banks and securities firms. BDCs listed on the KOSDAQ market can be traded like stocks through home trading systems (HTS) and mobile trading systems (MTS).
◇ Focus on stocks and CBs, etc.… maturity of at least 5 years
Under the revised enforcement decree, at least 60% of total asset must be invested in unlisted and innovative corporations, small and midsize corporations listed on KONEX and KOSDAQ, and venture partnerships. To prevent concentration in specific sectors, investments in KOSDAQ and venture partnerships are each reflected only up to 30% when calculating the minimum 60% investment ratio, and KOSDAQ investments are limited to listed companies with a market cap of 200 billion won or less.
The investment method must focus on purchasing stocks or equity‑linked bonds (CB, EB, BW), and monetary lending is allowed only within 40% of the total investment amount. For monetary lending, the rules require establishing an internal control system to manage credit risk.
Given the investment risks of key BDC asset, at least 10% of asset must be invested in safe assets such as government and public bonds, cash, and deposits and installment savings, while the remaining 30% can be managed at the manager's discretion within the existing public fund regulatory framework.
However, in consideration of the characteristics of unlisted assets, if the operating ratio is violated due to unavoidable reasons such as price fluctuations of target investment asset, splits or mergers, the application of the regulation will be deferred for a basic period of one year. This is longer than the basic three‑month deferral for general public funds.
If the investment deliberation committee determines there is a concern that investors' interests could be harmed, the minimum 60% investment ratio can also be deferred for one year. If the ratio temporarily increases due to price gains in invested unlisted shares, an exception is recognized for two years.
For investor protection, BDC funds must have a maturity of at least five years, and the minimum offering amount is set at 30 billion won. To ensure responsible management, managers must seed a certain amount depending on fund size (5% for 60 billion won or less, 1% of the amount exceeding 60 billion won), and hold it for at least five years or more than half of the fund's maturity (up to 10 years).
In addition, to enhance the reliability and transparency of valuations for venture corporations and the like, BDCs must assess the fair value of fund property on a quarterly basis and conduct external evaluations semiannually.
◇ BDC securities must be listed on the KOSDAQ market and disclosed
BDCs must list BDC securities on the KOSDAQ market within 90 days of the setup or establishment date. It has been about 20 years since a fund was listed on the KOSDAQ market.
Through exchange rules and the like, procedures for listing BDC securities on the KOSDAQ market and systems for listing management such as designation as issues under management and delisting have also been established.
If the acquisition, disposal, or change of assets exceeding 5% of BDC asset, including monetary lending, occurs, or if a major management matter arises at a principal portfolio corporation in which more than 5% of BDC asset has been invested, disclosure is mandatory. There are also penalties for inaccurate disclosures.
The exchange plans to grant additional points as an incentive when unlisted corporations receiving BDC investments undergo technology evaluations for future special listings. This is because if an unlisted corporation that received BDC investment lists directly on the KOSDAQ market, BDCs can create a virtuous cycle by distributing realized revenue to investors.
The 42 existing comprehensive management firms preparing products will be deemed approved on the effective date. For venture capital (VC) firms and new technology business finance companies seeking to enter, special provisions such as eased authorization requirements will apply.
An official at the Financial Services Commission said, "The BDC introduction plan focuses on balancing the two policy goals of revitalizing the supply of venture capital to venture and innovative corporations and protecting retail investors, taking into account concerns raised by the National Assembly and others."
The official added, "We will continue to monitor whether the BDC system takes root and will consider additional institutional improvements if necessary."