The marketing and sale of offshore fund products in Korea is governed by the Indirect Investment Asset Management Business Act (the AMBA) and its regulations. Under the regulations, a foreign management company is permitted to sell shares or beneficial certificates in the offshore fund to Korean investors, subject to certain restrictions and registration requirements. As no separate regulatory requirements or rules specifically apply to offshore hedge funds, the general rules for onshore funds under the AMBA apply. As a general matter, the types of funds covered under the AMBA are company and contractual funds, in addition to other indirect investment vehicles.

Regulatory regime

For sale of an offshore fund to Korean investors, an advance registration report on domestic sale must be filed with, and accepted by, the Financial Supervisory Commission (FSC) in accordance with the procedures set out in the applicable laws and regulations (unless the offer and sale is limited to qualified investors as discussed below).

Sales to qualified investors only

If the offer and sale of the offshore fund is limited to qualified investors as defined under the AMBA, the registration requirement is be exempt. In this case, the offshore hedge fund need not satisfy the various eligibility requirements.

The AMBA defines qualified investors to include:

• institutional investors under Article 17(1) of the Enforcement Decree of the Corporate Tax Act (these are comprised of financial institutions, such as banks, securities companies, insurance companies and asset management companies, and certain statutory corporations);
• pension funds under the Basic Act of Fund Management (60 acts are listed as the relevant laws under which the funds may be established);
• individual investors who invest in indirect investment securities in an amount equivalent to W10 billion ($10 million) or more issued by each indirect investment vehicle; and
• corporate investors who invest in indirect investment securities in an amount equivalent to W50 billion or more issued by each indirect investment vehicle.

As a separate matter, regardless of whether the offshore fund will be registered in Korea or only offered to qualified investors, the regulations provide that only Korean distributors (that is, banks, securities companies or insurance companies that are licensed with the FSC to distribute fund products) can conduct onshore marketing activities on behalf of foreign funds in Korea. Cross-border marketing of foreign funds is not permitted, so foreign funds may only be marketed in Korea by one or more eligible local distributors registered with the FSC in accordance with applicable law and regulations. However, if there are no marketing activities in Korea, the foregoing marketing restriction would not apply and an institutional investor (as defined under the Foreign Exchange Transaction Regulations) may directly invest in the offshore fund on a purely unsolicited basis.

Sales to non-qualified investors

If the offshore fund will be offered and sold to non-qualified investors, it must be registered with the FSC. To be eligible for registration, the offshore fund or unit trust and the foreign management company must meet various eligibility requirements as prescribed under the AMBA and its regulations. The offshore fund to be registered should, among others:

• have been issued (or be scheduled to be issued) under the law of an OECD member country, Hong Kong and Singapore;
• have been issued to many and unspecified investors;
• have been sold outside Korea at least to the extent of 10% of the total issue value;
• have been invested in foreign securities at least to the extent of 60% of the net assets;
• be available for redemption at the request of investors in the same manner as within or outside Korea and within 15 days from the redemption request;
• not have been invested in immovable property, foreign exchange or commodities, except for the investment in futures or options for hedging purposes;
• not be accompanied with a condition to purchase any other products (for example, insurance or pension) or services;
• not be used for making loans, except for call loans;
• not be used for short sale;
• not make borrowing, except for a temporary borrowing in the case of an unavoidable situation, such as to meet redemption requests, with a limit of up to 10% of the net assets; and
• not be issued by funds established abroad by Korean institutional investors (as specified in the Foreign Exchange Transaction Regulations) or their overseas subsidiaries, 50% or more of the equity of which was invested by the institutional investor.

In addition to the criteria above, the foreign management company that manages the assets of the concerned fund:

• should have assets under its management of W5 trillion or more at the end of the most recent fiscal year;
• should have a net asset amount (that is, the amount of total assets minus the amount of total liabilities) greater than its share capital amount at the end of the most recent fiscal year; and
• should not have been subjected to sanctions such as a fine or a suspension of business or more severe penalty for the past three years in or outside Korea.

Eligibility of offshore hedge funds

Given the typical structure and characteristics of offshore hedge funds, it would appear that many (or most) offshore hedge funds would have difficulty meeting the various eligibility requirements listed above. A few eligibility requirements could represent hurdles to the registration of an offshore hedge fund.

As noted above, the offshore hedge fund must be issued (or scheduled to be issued) under the law of an OECD member country, Hong Kong or Singapore. If the offshore hedge fund has been established in a jurisdiction that is not a member of the OECD, Hong Kong or Singapore (such as a Cayman Island fund), it would not be eligible for registration in Korea.

Also as noted above, the offshore fund must have been issued by way of public offering in the foreign jurisdiction. If the offshore hedge fund is issued in a private placement to only certain investors (or a class of investors), it might not be able to satisfy this public offering requirement.

Recent developments

In response to the Ucits III framework, the Korean Financial Supervisory Service (FSS) has recently issued guidelines setting out the format and content requirement when preparing the Korean prospectus and, among other things, requires the creation of a simplified prospectus to be used in Korea. Several offshore Ucits III funds have been registered with the FSC for sale to Korean retail investors. However, if the Ucits III framework will be used in its entirety, there might be some inconsistencies with the Korean regulations that would need to be resolved.

The Ministry of Finance and Economy of Korea (MOFE) announced in February 2006 a proposal for enacting a new law by consolidating 14 different sets of Korean capital market-regulating laws. With this integration, about 40% of the current regulatory restrictions are expected to be abolished or otherwise eased and the sale of offshore fund would be one possible area for further deregulation. MOFE appears to have plans to submit the draft of the new law to the National Assembly by the end of this year to take effect from 2008.

Author biographies

Young Man Huh Kim & Chang Young Man Huh is a senior partner of Kim & Chang offices. With many years in corporate practice with Kim & Chang and work experience at Linklaters (1999 to 2000), he has extensive experience in the practice areas relating to financial institutions, including investment trusts companies, hedge funds and private equity funds, capital market transactions and M&A transactions. Huh also served as a Judge Advocate in the Republic of Korean Army from 1990 to 1993. He is a member of Korean Bar Association and he was admitted to the Bar of Korea in 1990. Huh received his LLB from Seoul National University, College of Law in 1988, and he was educated at Judicial Research and Training Institute of the Supreme Court of Korea in 1990. He was a visiting scholar at Harvard Law School from 1998 to 1999. He is conversant in Korean and English. Hee-Jung Shim Kim & Chang Hee-Jung Shim, an attorney at Kim & Chang, received her LLB from Seoul National University, College of Law in 1994, and she was educated at Judicial Research and Training Institute of the Supreme Court of Korea in 1998. She received LLM from Columbia University in 2005. Shim has extensive experience in areas relating to investment trust companies and funds. She is a member of the Korean Bar Association. She speaks Korean and English. Pil Kook Lee Kim & Chang Pil Kook Lee, an attorney at Kim & Chang, received a bachelor's degree from the University of Maryland (1994) and JD from the George Washington University National Law Centre (1997). He has been a member of Kim & Chang since 1997 and has extensive experience in acquisition or establishment of financial institutions (securities companies, asset management companies, banks) and advises on regulatory matters. He is a cmember of the American Bar Association and the Maryland State Bar Association. Lee is fluent both in English and Korean.