FinTechs belonging to this category operate crowdfunding, crowdinvesting and crowdlending platforms on which money is raised to invest in various projects, mainly start-up companies and real estate projects.
Crowdfunding is not a defined financial service, but generally used to describe donation-based crowdfunding (the investor donates the money to the project), reward-based crowdfunding (the investor receives an often symbolic consideration for his investment), equity-based crowdfunding (crowdinvesting: the investor participates in the profits of the financed project or acquires shares or debt instruments) or lending-based crowdfunding (crowdlending: the investor is reimbursed at the end of the project with or without interest).
Attitude of the country towards crowdfunding, crowdinvesting and crowdlending platforms
Financial authorities institutionalized investment-type crowdfunding following the amendment of the FISCMA in 2016 and announced measures to promote crowdfunding platforms by providing support measures for companies and actively encouraging investment. In addition, in 2020, financial authorities also announced their plans to promote the development of crowdfunding platforms by increasing funding for corporations, strengthening investment incentives for investors, and expanding support at the policy level.
Obligations and requirements to provide crowdfunding, crowdinvesting and crowdlending platforms described above
Investment-type crowdfunding is regulated as a crowdfunding brokerage service under the FISCMA, and in order to provide crowdfunding brokerage services, the service provider shall meet the following requirements and register itself: (i) it shall be a stock company under the Commercial Act or shall have established a branch office or any other business office necessary as a foreign crowdfunding broker, (ii) it shall maintain a minimum equity capital of KRW 500 million, (iii) its business plan has to be feasible and sound, (iv) it shall have personnel, electricity system, and other physical facilities sufficient to protect its investors and conduct the business in which it intends to engage; (iv) requirements regarding officers and major shareholders need to be met, (v) it shall have good financial standing and social credibility, and (vi) it shall have a system for preventing conflicts of interests, etc.
Lending-based crowdfunding is regulated by the Act on Online Investment-linked Financial Business and the Protection of Users. Thus, any person who intends to make loans to a designated borrower with the funds invested by investors with the intent to provide the funds to such borrower through an online platform and lending the right to receive the principal of such peer-to-peer loans and interest thereon to the investors needs to meet the following requirements and register itself: (i) it shall be a stock company under the Commercial Act, (ii) it shall maintain a minimum equity capital of KRW 500 million depending on the amount of peer-to-peer loan, (iii) it shall have personnel, electricity system, and other physical facilities sufficient to protect its investors and conduct the business in which it intends to engage, (iv) its business plan has to be feasible and sound, (v) it shall have an appropriate internal control system, (vi) requirements regarding officers and major shareholders need to be met, etc.
Additional comments regarding the legal situation for crowdfunding, crowdinvesting and crowdlending platforms or what FinTech’s must be aware of in this business area
Under the FISCMA, a person operating as a crowdfunding broker shall comply with relevant provisions under the FISCMA, such as announcing conditions to the issuance of securities, financial status, business plans, etc. on its website, issuing securities only after allowing exchange of opinions between investors and the issuer or between investors regarding the same, setting investment limits for each investor, not posting investment advertisements except for on its website, etc.
In addition, a person operating an online investment-linked financial business has to comply with restrictions pursuant to the Act on Online Investment-linked Financial Business and the Protection of Users, such as publishing information and receiving commission.
Market size for crowdfunding, crowdinvesting and crowdlending platforms and biggest companies in this business area
With respect to investment-type crowdfunding, 585 companies generated a total of KRW 112.8 billion during the four years following 2016, and the annual issued securities reached KRW 37 billion in 2019. Wadiz, the largest crowdfunding platform in Korea, recorded KRW 200 billion in funding in 2020. Wadiz provides investment-type crowdfunding and reward-based crowdfunding services.
Meanwhile, a total of 41 companies registered themselves as online investment-linked financial business entities by January 2022. In addition, the peer-to-peer loan market is expanding (from KRW 0.8 trillion at the end of 2017 to KRW 2.4 trillion at the end of February 2020) and is expected to grow up to 7.8 times in six years to KRW 10.2 trillion by 2023, according to the research centre at a stock brokerage firm. Korea's leading peer-to-peer companies include Tera Fintech (Tera Funding), Honest Fund, and People Fund Company (People Fund).
Additional comments regarding the economic situation for crowdfunding, crowdinvesting and crowdlending platforms or what FinTech’s must be aware of in this business area
It is worth noting that there is an analysis claiming that equity-based crowdfunding platforms are undergoing recession as a result of heavy regulation. Indeed, such crowdfunding platforms recorded the highest number of issuance of securities in 2019, but the number of issued securities were decreasing in 2020. As a result, the crowdfunding industry pointed out the limitations of the current policy, as it limits the total amount of investment.