1. Additional issuance of securities from closed REF
A. Limitations on Additional Issuance of Securities Through Closed-End REFs and Exceptions
- According to the Law on Financial Investment Services and Capital Markets (“FISCMA”), the real estate collective investment vehicle must be of a closed-end type – investors cannot request redemption of the collective investment securities issued by the vehicle (“Closed end REF“).
- Given that a closed-end FISCMA REF has a fixed term and generally its investors cannot exit until the end of that term, there is a need to prevent certain events that may dilute the capital interests of its investors. Therefore, further issuance of securities by the closed-end REF is limited unless exemptions set out in the FISCMA Implementing Decree and the Financial Investment Business Regulations apply. For example, additional issuance is permitted when existing investors are granted preferential rights to subscribe for additional collective investment securities to be newly issued by the closed-end REF in proportion to their holding ratios of collective investment securities.
- For reference, while the above limitation on additional issue does not apply to collective investment vehicles for private real estate (“Private REF”), which are reserved for professional investors (not general investors), in practice private real estate collective investment vehicles are created and managed subject to such restriction and additional issuance is permitted in exceptional circumstances.
B. Questions Concerning the Interpretation of the FISCMA Implementation Decree
- Regarding the interpretation of the wording “existing investors shall be granted preferential rights to subscribe for additional collective investment securities to be newly issued by the Closed-End REF, in proportion to their holding ratios of collective investment securities”, there was disagreement as to whether the new collective investment securities may be issued to a third party other than the existing investors in the event that one of the existing investors has lost its right of preemption.
C. Amendment of the Financial Investment Business Regulations and its Consequences
- To resolve disagreements over the interpretation of the above language, the Financial Services Commission amended the Financial Investment Business Regulations on 30 August 2022 by adding a new paragraph 1 to section 7-21 of the Financial Investment Business Regulations, which is set out at -down:
Article 7-21 (Closed-ended collective investment vehicle) ① “Case prescribed and published by the Financial Services Commission” according to paragraph 5 of Article 242 paragraph 1 of the Implementing Decree means the case where there are certain existing investors who are granted the preferential right to purchase new securities for collective investment according to paragraph 4 of Article 242 paragraph 1 of the Decree on application but do not exercise this right and the collective investment securities not purchased are offered to persons other than existing investors. [Added on August 30, 2022]
- The amendment clarifies that a third party other than the existing investors may participate in the additional issuance of collective investment securities by the closed-end REF, to the extent that there are new collective investment securities not purchased by the existing investors entitled to exercise preferential rights.
2. Calculation of the number of investors in private REF
A. Rules for aggregating the number of investors in a Private REF
- The total number of investors in a private REF under FISCMA must be 100 or less (among them, the total investors must be 49 or less), and in determining the total number of investors in the private REF, if another collective investment vehicle acquires 10 % or more of the total collective investment securities of that private REF, the number of investors in the other collective investment vehicle is added to the number of investors in the private REF.
- However, if the “other collective investment vehicle” above is one of the following, the number of its investors shall not be added to the number of investors in the private REF: (i) a private collective investment vehicle of collective investment vehicles under Article 80 (1) , point 5-2 of the FISCMA Implementing Decree, (ii) a vehicle for collective investment in real estate and special assets of collective investment vehicles in accordance with Article 80, paragraph 1, point 5-3 of the FISCMA Implementing Decree, and ( iii ) retail REITs of collective investment undertakings, the amount of whose investments in each of the collective investment vehicles referred to in section 80(1)(5-3) of the FISCMA Implementing Order, including a “common private collective investment vehicle, investing more than 50% of its total assets in real estate or special assets (collectively “OFF REF“).
B. Amendment of the FISCMA Implementation Decree with respect to the investment objectives of the retail real estate collective investment vehicle of collective investment vehicles and the retail REIT of collective investment vehicles
- Prior to the amendment of Article 80(5-3)(C) of the FISCMA Implementing Order on August 30, 2022, it was not clear in the interpretation of the clause “a common private collective investment vehicle investing more than 50% of its total assets in real real estate or special assets’, regardless of whether ‘real estate’ includes not only physical real estate but also real estate-related securities.
- With the amendment of the FISCMA Implementing Order on August 30, 2022, the term “immovable property” above was changed to “immovable property under section 229(2) of FISCMA”, which clarifies that the general private collective investment vehicle that invests more than 50% of its total real estate assets, including real estate-related securities, are also included in the excluded REFs. For your information, real property under Section 229(2) of FISCMA includes physical real property as well as securities related to real property.
- As a result, the investment objectives of the retail real estate collective investment vehicle fund of collective investment companies and the retail REIT of collective investment companies to which the above rule on the exclusion of the number of investors applies have been expanded to include a general private collective investment vehicle investing more than 50% of its total assets in real estate, including securities related to real estate.