The Financial Services Commission approved a set of legislative and regulatory revision proposals intended to establish rules on business development companies (BDCs) at the regularly scheduled meeting held on March 4. Under the auspices of the Financial Investment Services and Capital Markets Act (FSCMA), the revised rules to the Enforcement Decree of the FSCMA, the supervisory regulations on financial investment business, and the KOSDAQ market regulations of the Korea Exchange (KRX) will take effect from March 17, 2026, along with the revised FSCMA.
Key Revision Details
Rules regarding the operation of BDCs
BDCs will be required to invest at least 60 percent of total assets in their primary investment targets, such as unlisted startups or venture businesses, venture investment associations, and KONEX-listed or KOSDAQ-listed businesses. In order to promote reinvestments in the venture investment market after the recovery of initial investment, BDCs will be allowed to invest in venture associations and the KOSDAQ-listed companies that have market capitalization of up to KRW200 billion (which constitutes about 75 percent of all KOSDAQ-listed companies). However, to help prevent the potential of concentration toward certain sectors, only up to 30 percent of investments made in venture associations and KOSDAQ-listed companies each will be counted toward the calculation of the minimum investment requirement of 60 percent.
Investments can take the form of either purchasing shares or lending money. Share purchases will be limited to stocks and equity-linked bonds (convertible bonds, exchangeable bonds, and bonds with warrants). The proportion of money lending to the total amount of investments on primary investment targets should be limited to maximum 40 percent. In addition, the establishment of internal control mechanisms is required to ensure the appropriateness of money lending and the assessment and management of credit risks.
BDCs will be required to invest at least 10 percent of total assets in safe assets in the form of cash, savings, certificates of deposit (CDs), and money market funds (MMFs). Apart from the 60 percent minimum investment requirement in primary investment targets and the 10 percent minimum investment requirement in safe assets, BDCs will be able to manage up to 30 percent of their total assets on a discretionary basis in accordance with the existing rules on publicly offered funds.
BDCs will not be permitted to invest more than 10 percent of total assets in a single entity with the same investment method. The proportion of shares purchased should not exceed 50 percent of the invested company’s total shares. Moreover, BDCs will be prohibited from bypassing regulations through investing in the form of fund of funds.
Exemptions from the rules regarding the operation of BDCs
Since BDCs will mostly invest in unlisted stocks with low liquidity, a grace period of one year will be granted when there are unavoidable reasons for noncompliance, such as a change in asset prices, a business restructuring involving a spin-off, merger, etc.
In addition, although BDCs are required to satisfy the minimum investment requirement of 60 percent of total assets on primary investment targets within one year, an additional grace period of one year may be granted if a decision is reached by an investment review committee for the purpose of protecting investors’ interest. In a similar vein, a grace period of two years may be granted when it is considered to be necessary by the investment review committee if there are price increases in unlisted stocks pushing up the proportion of BDC’s investment in a single entity (with the same investment method) above the 10 percent threshold.
Investor protections
Considering that BDCs will be largely investing in unlisted stocks, BDCs will be required to have at least five years or more in maturity with a minimum subscription amount of KRW30 billion. To ensure responsibility in the management of funds, a seed funding of five percent will be required for subscription amounts of up to KRW60 billion and an additional one percent of seed funding for subscription amounts in excess of KRW60 billion. Moreover, BDCs will be subject to a lockup period of either minimum five years or a half of the maturity period (maximum ten years), whichever is longer in duration.
To make sure that investment decisions are made in transparent and appropriate ways, BDCs will be required to set up an investment review committee and carry out thorough evaluations on the growth potential and credit risk of their primary investment targets based on the outcome of external evaluations prior to making investments.
To improve the credibility and transparency in the valuation of venture businesses, BDCs will be subject to a quarterly assessment of fair market value and a semiannual assessment from an external evaluator.
Rules regarding the listing and disclosure of BDC securities
BDCs will be required to list BDC securities within 90 days from the day of being established. Considering that their primary investment targets are venture businesses, BDC securities will be listed on the KOSDAQ market. The listing of BDC securities will signify the listing of funds in the KOSDAQ market for the first time in 20 years.
In this regard, KOSDAQ market’s listing procedures and ongoing compliance rules (items subject to heightened supervision, delisting, etc.) have been prepared for BDC securities. Additionally, BDCs will be subject to the duty of disclosure when there is a change of more than five percent in the size of their investment assets (including money lending), or when there is a change in the material information with the invested company, and a regulatory foundation has also been established to impose sanctions for unfaithful disclosure practices.
Meanwhile, to provide an incentive for unlisted companies receiving investments from BDCs, BDC investments will be taken as an advantage for the screening of technological prowess when they apply for the special technology listing track. In the future, if they are able to successfully scale-up through KOSDAQ listing of their own, BDCs will be able to distribute profits to investors, and this will help to foster a virtuous cycle of capital flows.
Licensing requirements for BDC management entities
Current fund management companies (42 entities) that are authorized to manage all types of publicly offered funds (securities, real estate, money market, etc.) will be considered to have attained the license to operate as BDC management entities. For new entrants (venture capital firms and new technology investment businesses) wishing to obtain a license for BDC management entity, a special licensing process will be allowed to facilitate the entry.
First, new entrants will be subject to less stringent licensing criteria that are currently applicable to financial investment businesses when applying for a change in their business status.
Additionally, considering that BDCs will mostly invest in securities, the licensing requirements for BDC management entities will be identical to those required for collective securities investment services. BDC management entities will be required to have at least KRW4 billion in equity capital, four securities management experts, and one professional staff each for risk management, internal control, and information technology (IT). Up to two professional staff members each with minimum three years of experience in the management of venture capital or new technology investment funds who have completed a training course offered by Korea Financial Investment Association (KOFIA) will be recognized as securities management experts.
Lastly, for venture capital firms and new technology investment businesses, their previous experience of managing venture capital or new technology investment funds (for at least six years and with minimum KRW300 billion in average management volume) will be taken into account when granting license for the operation of BDC management entity.
Other regulatory improvements
The revised rules will grant more autonomy in the management of policy-based funds (publicly offered fund of funds), which largely invest in the private equity funds (PEFs) that have the government in a subordinated investment position, since they offer stronger safeguards for investors and considering the need for policy implementation. In this regard, the proportion of shares allowed to be invested in this type of PEFs will be expanded to 100 percent from the current level of 50 percent. The invested PEFs will also be permitted to invest in a special purpose company (SPC) jointly with an institution-only PEF. In addition, if there are violations of rules taking place due to unavoidable reasons, such as a change in the pricing of fund, a regulatory exemption will be granted for policy-based funds until their maturity.
Additionally, with regard to the investment of funds in equity-linked bonds (ELBs) and derivative-linked bonds (DLBs), considering the relatively low risk of investment involved and the low level of correlation between the management capability and the performance of funds, an exemption from the seed funding requirement of KRW200 million currently in place for certain types of funds (ETFs, index funds, MMFs, overseas funds of funds, etc.) will equally apply to the funds investing 50 percent or more in ELBs and DLBs. Moreover, a streamlined authorization process will be made available for the conversion of corporate structure of foreign financial investment businesses (e.g. a branch and a subsidiary) involving two different direct parent companies, insofar as the ultimate parent company remains the same and there are no changes in the core business function of the entities.
Further Plan
The revised rules will take effect from March 17, 2026, and relevant system upgrades at the KRX will be completed by April 2026. BDC management entities will go through a securities registration (with the Financial Supervisory Service) and a listing review process (with the KRX) prior to introducing and listing BDCs. Retail investors wishing to invest in BDCs prior to their listing will be able to make investments through either online and offline sales channels offered by relevant banks and securities companies. For investing in BDCs that are already listed on the KOSDAQ market, retail investors can trade them through their own mobile trading system (MTS) and/or home trading system (HTS) provided by securities companies.
The amended rules for introducing BDCs are aimed at striking a proper balance between the promotion of venture capital supply and the protection of ordinary investors. The FSC and related organizations will continue to work to ensure a seamless implementation of the revised rules and take follow-up measures to bring about improvements when it becomes necessary.
* Please refer to the attached PDF for details.