SOUTH KOREA Law and Practice Contributed by: Dongwook Kang, Chris Kim, Seung-Wan Chae and Jongwoo Kim, Bae, Kim & Lee LLC
4.4 Rules Concerning Marketing of Alternative Funds
Eligible investors for an IPF are: • institutional investors, including financial institu - tions, mutual aid business entities and listed companies; • officers or investment professionals of the IPF manager making an investment in the fund in the amount of KRW100 million or more; and • other IPFs. Since 1 January 2015, establishing a single investor fund has been prohibited in South Korea, except for when the single investor is a certain type of prescribed investor, such as public funds established pursuant to laws (eg, the National Pension Fund), Korea Post, and mutual aid associations and mutual aid co-operatives (eg, the Korean Teachers’ Credit Union and the Military Mutual Aid Association). Traditionally, most of the investors in AIFs consisted of large institutional investors and financial institutions. Recently, however, an increasing number of high net worth individuals have started to invest in AIFs. 4.2 Side Letters The FSCMA permits investment managers of private funds to treat their investors differently in terms of dis - tributions of investment profits and losses by prescrib - ing such different treatments in their fund constituent documents but is silent on whether side letters can be used to arrange such differential treatments other than distributions of investment profits and losses or to what extent they could be used. Generally speak - ing, the legality of side letter agreements should be reviewed from the perspective of the investment managers’ fiduciary duty and the general obligation to prevent conflicts of interest among investors. There is no specific approval or disclosure requirement with respect to side letters. 4.3 Marketing of Alternative Funds to Investors Please see 4.1 Types of Investors in Alternative Funds .
The marketing of AIFs must be conducted by way of private placement to the eligible investors listed in 4.1 Types of Investors in Alternative Funds and must not be offered by way of public offering. In addition, the FSCMA provides a few more specific regulations on the marketing of GPFs, including the applicability of the suitability and appropriateness test, depending on the types of investors and the requirements for invest - ment advertisements. Finally, establishing a single investor AIF is prohibited except when the single investor is a certain type of prescribed investor, such as public funds established pursuant to specific laws (eg, the National Pension Fund), Korea Post, and mutual aid associations and mutual aid co-operatives (eg, the Korean Teachers’ Credit Union and the Military Mutual Aid Association). 4.5 High Net Worth or Retail Investors GPFs could be utilised as investment products that provide access to alternative investment strategies to high net worth individuals and other retail investors. A GPF can be offered with up to 49 non-professional retail investors per private placement offering. A GPF may have no more than 100 investors (excluding cer - tain institutional investors). In addition, the public fund investing in private funds regime under the FSCMA (PIPF) provides a public fund regime that can be used as a distribution channel for providing access to alternative investment strate - gies to a broader group of retail investors by way of public offering. While a PIPF may be offered by way of public offering to retail investors, it is subject to a set of diversification requirements including the prohibi - tion on investment in a single underlying private fund in excess of 20% of the total assets of the PIPF. 4.6 Private Placements The FSCMA generally does not permit managers, on its own, to market and advertise in the context of pri - vate placement. In addition, advertisement and mar - keting prohibits a later application of reverse enquiry exemption to an investment.
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