Fund Formation | Changes in Corporate Investment Structure Following the Introduction of the Business Development Company (BDC) System

The core of this system's introduction is that it establishes a public-offering investment structure through which ordinary investors may also participate in investment in venture and innovative companies.

In the existing venture investment market, funds were generally supplied through a structure centered on venture capital firms and institutional investors, but with the introduction of the BDC system, a new fund formation model that raises capital in the form of a public-offering fund and invests in venture and innovative companies has become possible.

This is assessed as a policy mechanism that expands the investor base while supplying the capital needed during the corporate growth stage more stably.

A BDC is designed as a corporate growth fund in the form of a listable collective investment vehicle, and certain investment regulations apply to fund operation.

For example, 60% or more of total assets must be invested in "primary investment target companies," such as unlisted venture and innovative companies or KOSDAQ companies below a certain size, and in consideration of investment risk, 10% or more of assets must be invested in safe assets such as government and public bonds and deposits.

The remaining assets may be operated at the fund's discretion within the scope of public-offering fund operation regulations.

For a BDC, investment ratio regulations apply in consideration of both the stability of asset management and the policy objective of supplying venture capital.

① Investment Ratio in Primary Investment Target Companies

A BDC must invest 60% or more of its total assets in "primary investment target companies."

Primary investment target companies include the following.

• Unlisted venture and innovative companies
• KONEX-listed companies
• KOSDAQ-listed companies (market capitalization of KRW 200 billion or less)
• Interests in venture funds in which investment has been completed (limited to existing shares)

However, to prevent investment from being concentrated in a particular sector, each investment target is recognized only up to 30% in calculating the minimum investment ratio.

② Obligation to Invest in Safe Assets

To manage investment risk, a BDC must invest 10% or more of its total assets in safe assets.

Examples of safe assets are as follows.

• Government and public bonds
• Cash and deposits and installment savings
• CDs
• MMFs

In other words, the BDC's asset structure takes the following form.

Fund formation is carried out through the following procedures.

① Designing the Investment Strategy and Fund Structure

The target industries for investment, the investment method, the fund size, and the investment period are designed.

② Recruiting Investors

Contributions are solicited from institutional investors or ordinary investors.

In the case of a BDC, a minimum subscription amount requirement of KRW 30 billion applies.

③ Establishing the Fund and Commencing Operation

After the fund is established, the target companies for investment are selected and investment is made.

In the case of a BDC, KOSDAQ listing takes place within 90 days after establishment.

A BDC has individual company investment limits in order to restrict investment concentration.

A BDC is subject to regulations prohibiting investment exceeding 10% of total assets and prohibiting the acquisition of more than 50% of the equity in a single company.

In addition, acts that circumvent the operational regulations, such as fund-of-funds investment through venture funds or concentrated investment in funds of the same management company, are also prohibited.

To prevent a fund's size from becoming excessively small, a BDC is subject to a minimum subscription amount requirement of KRW 30 billion.

In consideration of the characteristics of investing in unlisted companies, the fund maturity must be set at a minimum of five years or more.

In addition, a BDC must proceed with a KOSDAQ listing within 90 days after establishment.

In other words, investors can buy and sell BDC securities like stocks and trade them like an ETF.

The core objective of the BDC system is to revitalize the venture investment ecosystem, and it is a system intended in particular to create the following structure.

1. The BDC invests in a venture company
2. KOSDAQ listing after the company grows
3. Realization of investment returns
4. Distribution to investors

In other words, the policy goal is to form a virtuous cycle structure of investment → growth → recovery → reinvestment.

Considerations in Fund Formation

The BDC system provides companies and investment institutions with a new fund formation strategy.

Companies may need to review the following matters.

• The feasibility of forming a venture investment fund using a BDC
• Use of a KOSDAQ-listed fund structure
• Design of a venture company investment and exit strategy
• An operational strategy responding to investment ratio regulations

In particular, because a BDC is a public-offering venture fund structure in which ordinary investors may also participate, it is expected to play an important role in the venture investment market going forward.

A BDC has a listed public-offering fund structure that invests in unlisted companies and small and medium-sized KOSDAQ companies, and various regulations apply to its investment ratios and operational methods.

Fund formation is an area in which various legal issues arise together, such as the design of a collective investment structure under the Financial Investment Services and Capital Markets Act, the review of operational regulations, and the handling of listing and disclosure obligations.

Daeryun Law Firm comprehensively reviews the regulatory structure and fund operation requirements that follow the introduction of the BDC system and examines in advance the legal risks that may arise at the fund structure design stage, and provides the legal advisory needed in the process of establishing the investment structure and operational strategy.

It also provides legal support so that companies and management companies can use the system stably throughout the entire fund formation process, including fund establishment, review of the investment structure, conclusion of investment agreements, and handling of listing and disclosure obligations.

A BDC has a listed public-offering fund structure that invests in unlisted companies and small and medium-sized KOSDAQ companies, and various regulations apply to its investment ratios and operational methods.

Accordingly, a company or management company that pursues fund formation needs to sufficiently understand the system's structure and the investment regulations before proceeding with the fund design.

If you need assistance with a related matter, you are welcome to schedule a consultation with a finance attorney at Daeryun through the 🔗finance attorney legal consultation booking page.