The Financial Services Commission introduced a revision proposal for the Enforcement Decree of the Financial Investment Services and Capital Markets Act (FSCMA) and supervisory regulations on financial investment business for establishing regulations on business development companies (BDCs) on December 3.
This revision proposal prescribes detailed provisions for establishing rules on BDCs under the revised FSCMA (promulgated on September 16, 2025 and scheduled to go into effect on March 17, 2026), while upgrading other regulations on publicly traded funds and financial investment business in general.
Key Revision Details
Rules regarding the operation of BDCs
BDCs will be required to invest 60 percent or more of their total assets in their main investment target, such as unlisted startups or venture businesses, venture investment associations, and KONEX-listed or KOSDAQ-listed businesses. To promote reinvestments after the recovery of initial investment in the venture investment market, BDCs will be permitted to invest in venture associations and KOSDAQ-listed companies. However, in order to prevent the potential of concentration toward certain sectors, only up to 30 percent of investments made in venture associations and KOSDAQ-listed companies each will be counted toward the calculation of the minimum investment requirement of 60 percent. The KOSDAQ-listed companies eligible for investment will be limited to those with a market capitalization of KRW200 billion or less (about 75 percent of KOSDAQ-listed companies).
Investment can take the form of either purchasing shares or lending money. Share purchases will be limited to stocks and equity-linked bonds (convertible bonds, exchangeable bonds, and bonds with warrants). The proportion of money lending to total investment on major investment targets should be limited to maximum 40 percent, and the establishment of internal control mechanisms is required to ensure the appropriateness of money lending and the assessment and management of credit risks.
BDCs will be required to invest 10 percent or more of total assets in safe assets, in the form of cash, savings, certificate of deposits (CDs), and money market funds (MMFs). In accordance with the current rules on publicly offered funds, BDCs will be able to invest up to 30 percent of total assets on a discretionary basis.
BDCs will not be permitted to invest more than 10 percent of total assets in a single entity with the same investment method. The proportion of shares purchased should not exceed 50 percent of the invested company’s total shares. BDCs will be prohibited from bypassing regulations through investing in the form of fund of funds.
Exemptions regarding the operation of BDCs
Normally, for publicly offered funds, a three-month grace period is granted when there is an unavoidable reason for noncompliance, such as a change in asset prices, a business restructuring involving a spin-off, merger, etc. For BDCs, which mostly involve investments in unlisted stocks with low liquidity, a grace period of one year will be granted.
In addition, although BDCs are required to satisfy the minimum investment rate of 60 percent of total assets on major investment targets in one year (the same rule in place for real estate investment funds), an additional grace period may be granted for one year if a decision is reached by an investment review committee for the purpose of protecting investors’ interest. In a similar vein, a grace period of two years may be granted when it is deemed necessary by the investment review committee following price increases in unlisted stocks pushing up the volume of investment in the same company in excess of 10 percent.
Investor protections
Considering that BDCs will be largely investing in unlisted stocks, BDCs will be required to have at least five years or more in maturity with a minimum subscription amount of KRW30 billion. To ensure responsibility in the management of funds, a seed funding of five percent for subscription amounts of up to KRW60 billion plus an additional one percent for subscription amounts in excess of KRW60 billion will be required. Moreover, BDCs will be subject to the lockup period of either five years or a half of the maturity period (maximum ten years).
To make sure that investment decisions are made in transparent and appropriate ways, BDCs will be required to have an investment review committee and begin to make investments after carrying out thorough evaluations on the main investment target’s growth potential and credit risk based on the result of relevant external reviews.
Publicly offered funds are normally subject to the assessment of fair market value at least once every year. For real estate investment funds, an external evaluation is also required once every year. However, to ensure credibility and transparency, BDCs will be subject to the assessment of fair market value on a quarterly basis and the external evaluation on a semi-annual basis.
Moreover, since ordinary investors will make investments in BDCs through stock market, BDCs will need to make appropriate disclosures when there is a change of five percent or more in the management of investment assets, when there are changes in material information with the invested company, or regarding the lending of money.
Licensing requirements for BDC management entities
Considering that BDCs will mostly invest in securities, such as stocks and equity-linked bonds, the licensing requirements for BDC management entities will be identical to those required for collective securities investment services. BDC management entities will be required to have at least KRW4 billion in equity capital, four securities management experts, and one professional staff each for risk management, internal management, and information technology (IT). Up to two professional staff members each with minimum three years of experience in the management of venture or new technology investment funds will be recognized as securities management experts.
Other regulatory improvements
The revised rule will grant more autonomy in the management of policy-based funds (publicly offered fund of funds), which largely invest in the private equity funds (PEFs) that have the government in a subordinated investment position, since they offer stronger safeguards for investors and considering the need for policy implementation. In this regard, the proportion of shares allowed to be invested in this type of PEFs will be expanded to 100 percent from the current level of 50 percent. The invested PEFs will also be permitted to invest in a special purpose company (SPC) jointly with an institution-only PEF. In addition, if there are violations of rules following unavoidable reasons including a change in the pricing of fund, a regulatory exemption will be granted for policy-based funds until their maturity.
Publicly offered funds are currently allowed to invest up to 100 percent in Korean government bonds (KTBs) and up to 30 percent in OECD government bonds. To enhance efficiency in fund management and improve convenience for investors, the revised rule will allow publicly offered funds to invest up to 100 percent in the government bonds issued by the countries that have an equivalent or higher level of credit ratings with Korea assessed by all three major global credit rating agencies.
Currently, publicly offered funds are subject to the seed funding requirement of KRW200 million in general, although an exemption of this rule is granted on certain types of funds (ETFs, index funds, MMFs, overseas funds of funds), which demonstrate low levels of correlation between the fund’s management capability and its performance. Under the revised rule, this exemption of seed funding requirement will also apply to the funds investing in equity-linked bonds (ELBs) and derivative-linked bonds (DLBs).
Currently, there exists a streamlined process for authorizing a simple change in organizational structure (e.g. from a branch to a subsidiary) for foreign financial investment businesses. However, there have been difficulties in applying this streamlined process for the conversion taking place between different corporate entities (e.g. a branch and a subsidiary of two different direct parent companies) even when both entities share the same ultimate parent company. In this regard, insofar as there are no changes in the core business function of the entities, the revised rule will allow the streamlined process for authorizing the conversion involving different corporate entities (e.g. a branch and a subsidiary of two different direct parent companies), so long as the ultimate parent company remains the same.
Further Plan
This revision proposal will enter a public comment period from December 4, 2025 to January 13, 2026 and go through a successive legislative review and approval process before going into effect on March 17, 2026.
* Please refer to the attached PDF for details.