The Potential of STOs in South Korea
Since ICOs were banned by the government in South Korea, some companies have turned their eyes to other countries such as Switzerland, Singapore, Bibraltar, Malta, Hong Kong, Estonia, the Cayman Islands, and the Virgin Islands, to conduct ICOs.
However, in South Korea, the ICO market has been experiencing stagnation in recent years due to security issues, and in response, the interest in ICOs have now shifted to STOs.
In the past, ICOs were able to issue cryptocurrency and get funded just with a business model, without the institutional means or investment protection provided by stocks or bonds. On the contrary, STOs issue cryptocurrency based on real assets such as stocks, bonds or real estate, which in itself can have the advantage of liquidity while also providing the same amount of protection as securities and real estate.
Unlike ICOs, STOs are regulated within existing legal regulations and the number of STOs overseas are growing. Also, in the United States, the number of STOs in Reg S and Reg 506(c) in Table 1 are increasing as well.
Table 1 STO in the United States
|Reg D||Reg S||Reg CF|
|Classification||Reg 504||Reg 506(b)||Reg 506(c)|
|Fundraising Amount||Up to $5 m||N/A||N/A||N/A||Up to $107 K|
|Investor||No restriction on the number of non-accredited investors||Up to 35 non-accredited investors||May not be sold to non-accredited investors||May be funded by non-US investors (including non-accredited investors)||May be funded by non-accredited investors|
|Period of prohibition of sale||6 months or 12 months||Generally, 40 days, may change according to issuance cycle||12 months|
The amendment to the Capital Market Law, which lowers investment requirements and the regulation of entry into the financial sector, has been passed and active discussions are underway on the possibility of STOs in South Korea through regulatory sandboxes.
Kim Jung-Han, the technical director of ICOPlatform, mentioned that “Currently, the ICO platform is reviewing the regulations and legal requirements of various countries such as the US, Singapore, Japan, and South Korea, and is strategizing to select the appropriate jurisdiction for STOs”.
“In the case of South Korea, we are considering various fund-raising models through private equity and public offerings along with legal advice. For a profitable real estate asset securitization model, we are considering incorporating STO with the REITs model. As an initial fund recruitment strategy for start-ups, the equity-type crowdfunding model combined with STO is likely to be the scheme that complies with the current laws.” said Kim.
[REITs Regulation in Korea]
|Division||REITs (“Commissioned REITs)||PFV (Project Finance Investment Company)||REF (Real Estate Fund)|
|Evidence Law||Real Estate Investment Company Act||Corporate Tax Law||Capital Market and Financial Investment Business Act|
|Competent Authority||Ministry of Land, Infrastructure, and Transport||Revenue||Financial Services Commission|
|Investment Type||Corporation/Paper Company||Corporation/Paper Company||Trust type / Company type|
|Capital||Minimum Capital 5 billion||Minimum Capital 5 billion||NA/Minimum net asset 1 billion won|
|Investment Target||More than 70% of real estate assets (no loans)||Large-scale facility investment/real estate PF loans||No Limit (for Company type, real estate is less than 70% of assets) real estate PF loans|
|Development Business||30% or less of total assets (100% for REITs development specialist)||No Limit||No Limit|
|Attendance/Registration Tax||30% reduction (Ends at the end of December 2014)||50% Reduction (Ends at the end of December 2014))||30% reduction (Ends at the end of December 2014))|
|Corporate Tax||Dividend income deduction when dividend is more than 90%||Dividend income deduction when dividend is more than 90% (Profit reserve taxable)||Trust type is not subject to corporate tax. Company type receives dividend income deduction if dividend is over 90%|
In the case of REITs, STOs are more advantageous in terms of regulation, as it is possible to increase liquidity through STOs and innovate through governance. However, commercialization is difficult, because of capital and other various establishment requirements as well as permission from the financial authorities.
Kim Jung-Han, the technical director, suggested the possibility of STO in South Korea by commenting, “The crowdfunding funding cap increased from 700 million to 1.5 billion and investment cap for non-accredited investors increased to 5 million won, which raised the fund recruitment conditions and lowered capital requirements, making crowdfunding more appealing for commercialization. In addition, due to increased liquidity, combining STO with crowdfunding will allow relatively quick investment return through the decentralized security token exchange and investors do not have to wait for an IPO. Companies may also benefit from higher corporate value resulted from increased asset value.”
Table 2 Types of Domestic Capital Recruitment in Korea
|Number of invitations||Procurement Limit (Current)||Procurement limit (improvement)||Limitations and Difficulty|
|Public Offering||No Limit||–||A lot regulatory Requirements|
|Small Capped Public Offering||Less than 1 billion||3 billion||Many regulatory Requirements|
|Crowdfunding||Less than 700 million||1.5 billion||Relatively less Regulatory Requirements|
|Private Placement||No Limit||–||Less than 50 people, relatively less Regulatory Requirements|
The possibility of STO in South Korea is still unclear due to the uncertain cryptocurrency regulations. STOs can be seen as a trend that accelerates capital market development from the viewpoint of digitization of real assets. The STO market in South Korea will be attracting a lot more attention in the future.
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