SOUTH KOREA Trends and Developments Contributed by: Je Won Lee, Kyu Seok Park, Dahye Cho and Justin Kim, Lee & Ko
still be deposited in advance along with the commit - ment letters. Amendments to the regulations on private equity funds The FISCMA previously distinguished private equity funds from hedge funds in the “private fund” category and allowed hedge funds to freely invest (except in the case of investments acquiring control over the tar - get), while maintaining a complex regulatory matrix on permitted investment securities, methods and return periods for private equity funds. By way of example, private equity funds were only allowed to invest by participating in business management through the appointment of directors or investing in 10% or more of the shares of the investment target and were pro - hibited from investment by way of lending funds. The previous regulatory regime under the FISCMA had therefore focused on the investment target and distin - guished private funds thereby. However, the FISCMA was amended on 20 April 2021, and the amended law took effect on 21 October 2021. Under the amended FISCMA, private funds are cat - egorised as “general private funds” or “institutional private funds”, and private equity funds under the previous law have transitioned to institutional private funds. Both types of private fund are allowed to invest freely, but the scope of investors for institutional pri - vate funds is limited to qualifying institutional inves - tors, including financial companies and listed com - panies meeting certain requirements, and the offering procedure for general private funds, which are open to individual and general investors, has become more rigorous. The most significant changes in the FISCMA amend - ment are therefore the change in regulatory frame - work from one categorising private funds based on the investment target to that of categorisation by type of investor, and the removal of restrictions on property management for private funds. As a result of these changes, the general partners operating private equity funds are able to structure the management of these funds in various ways, and so-called acquisition financing funds and mezzanine
funds are likely to appear in the market. In the past, as investment by way of loans was not viable, private equity funds were restricted from being granted put options from the counterparties selling shares in M&A transactions. The restrictions were put in place because put options, exercisable in the amount of the purchase price mul - tiplied by a certain interest rate, were regulated by supervisory authorities as they were deemed to be loans in substance. However, under the amended FISCMA, all the restrictions on property management have disappeared. Additionally, for institutional private funds, as inves - tors that may take part in these funds are limited to financial companies, listed companies meeting certain requirements and other institutional investors, market entry of newly formed general partners that do not have ready access to these investors has become more impenetrable. Under the current FISCMA, borrowing at the fund level was largely restricted and, as such, a private equity fund had to establish a special-purpose company to borrow funds and could not realistically borrow funds itself. However, the amended FISCMA has repealed this restriction to allow for borrowing at the fund level. Under the amended FISCMA, the number of investors that may invest in private equity funds has expanded from 50 to 100, and this expansion is interpreted as a regulatory easement. Amendments to the regulations on general partners The amended FISCMA additionally prescribes regula - tions on fund-managing personnel affiliated with the general partners to allow only those who are essen - tially in charge of the fund management duties at financial institutions or general partners to become fund-managing personnel. As the FISCMA to date had not specifically provided any restrictions on fund- managing personnel, the fund-managing personnel could consist of not only those essentially in charge of fund management, but also those related to the private equity fund’s investment target.
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