Fractional copyright ownerships are securities: Seoul

Musicow Inc., South Korea's first music copyright trading platform, will come under regulatory scrutiny, after the country's top financial regulator categorized tradable fractional ownership of music copyrights as investment securities. 

The decision by the Financial Services Commission (FSC) on Wednesday means Musicow will be subject to the country's Capital Markets Act like other financial services companies, after a six-month reprieve.

It also marked the first time for the country's financial authorities to define a type of intangible assets such as intellectual property rights and signaled that digital assets like non-fungible tokens could be treated like financial securities as well. 

"This ruling may give a hint at how digital assets like security tokens, backed by tangible assets such as real estate, stocks and paintings, will be categorized under the current regulations," an FSC official told The Korea Economic Daily.

Musicow buys the copyright of a song from the original creator and divides the claims into small fragments to sell part of the copyright fees to its members on the platform.

Its users can buy or sell a stake in copyrights on its platform like trading
investment securities. Musicow pays the fractional investors the copyright royalties on a monthly basis.

The startup, however, remained in the regulatory blind spot areas since its inception in 2016.

Judging by their investment purpose and the way of their trading, the music copyright claims should be regarded as similar to stocks, according to the FSC. 

The regulatory judgement comes as Musicow is preparing to go public either later this year or next year.

Thanks to its popularity among those in their 20s and 30s, the cumulative number of Musicow users reached 915,000 as of end-2021, with 274.2 billion won ($222 million) in accumulated trading volume. 

Of the total, 170,000 users have at least one experience of trading on the platform. Musicow currently trades copyrights of around 10,000 songs. 

In November of last year, a civil complaint was filed against Musicow on the grounds that it has not been scrutinized by regulators, despite engaging in the business of arranging the trade of copyright claims similar to financial securities.

After accepting the complaint, the FSC has reviewed Musicow's business since January of this year and reached the judgment at a regular meeting on April 20 of the Securities and Futures Commission, an oversight committee within the FSC. 

Generally, Musicow users believe they invest directly in music copyrights on the platform. But the FSC concluded that the copyright claims held by the investors are only "claims," payments of which cannot be guaranteed if Musicow goes under. 

Under the Capital Markets Act to apply to Musicow six months later, Musicow should have filed securities reports with the regulator, when it planned to raise more than 1 billion won from investors.

To comply with the regulations, it is also required to provide legal protection to its users to pay for their claims, in case it goes bankrupt; and to place the deposits paid by the users in accounts under their names at an outside financial services company. 

Additionally, Musicow must share details about the copyright claims and draw up its contract terms and conditions for its users. It will also ban Musicow from operating both primary and secondary businesses for copyright claims.

If it fails to meet such requirements by Oct. 19, 2022, the trading platform will likely face a penalty or be ordered to shut down business in the worst-case scenario.

In response, Musicow said it will split the business of buying music copyrights and dividing them into fragments into its subsidiary Music Asset so that it will focus on their trading and distribution.

Write to Jae-Yeon Ko and Heo Ran at yeon@hankyung.com
Yeonhee Kim edited this article