“If the issuer goes bust, what happens to my investment?” ... Law firms expand legal advisory services in the token securities era

[Financial News] As the token securities (STO) system approaches implementation and a new corporate fundraising market opens, a key legal issue is how much investors can recover if an issuer or trading platform goes bankrupt. Even for the same fractional investment product, the level of protection in bankruptcy may vary depending on the rights investors acquire and how the assets are managed. Accordingly, legal advice from major law firms is expanding beyond regulatory reviews to include protection of investor assets, liability for damages, and the design of contractual structures to prepare for insolvency.

According to Financial News’ reporting on the 11th, with the token securities system set to take effect on February 4 next year, demand for legal advice from related companies is growing, while reviews of issuance and distribution structures and investor protection measures are also becoming more concrete.
Token securities use distributed ledger technology, such as blockchain, to record and manage the issuance of securities and the associated rights. They are expected to be introduced in stages not only for fractional investment securities backed by a range of assets, including real estate and music copyrights, but also for existing financial products such as stocks, bonds, and funds.
In particular, the extent to which investors’ rights are protected if an issuer or platform goes bankrupt varies depending on the type of security and the contractual structure.
Kim Si-mok, a partner in the Financial Group at Yoon & Yang, explained that trust beneficiary certificates and business-based investment contract securities—the two leading types of tokenized fractional investment securities—carry different insolvency risks.
For trust beneficiary certificates, the underlying assets are segregated as trust property and, in principle, are not included in the bankruptcy estate even if the trustee goes bankrupt. By contrast, if business-based investment contract securities lack a separate bankruptcy-remote structure, assets of the joint business may not be protected if the issuer goes bankrupt, making it difficult for investors to recover their money.
Kim added, “The underlying assets of trust beneficiary certificates are protected because, under the nature of a trust, trust property is kept separate from the trustee’s own assets and is therefore not included in the bankruptcy estate even if the trustee goes bankrupt.”
He also pointed out that, without a separate bankruptcy-remote structure, assets of the joint business may not be protected under business-based investment contract securities, and that the impact of a platform’s bankruptcy likewise depends on how the assets are owned, held, and managed.
Whether investors can seek damages from an issuer or platform if they fail to recover their investment is also a key issue. However, a business operator cannot be held legally liable solely because an investment loss has occurred.
According to Kim, if false statements or omissions concerning material information in a securities registration statement or prospectus cause losses, investors may seek compensation from issuers and other parties legally liable under Article 125 of the Capital Markets Act. Liability may also arise under Article 64 of the Act for securities firms’ violations of laws and regulations or negligence in their duties, while a platform’s unlawful conduct committed intentionally or negligently may give rise to tort liability under Article 750 of the Civil Act.
However, a simple business failure or decline in asset value is distinct from liability for damages. Another limitation is that even if liability for damages is legally established, it may be difficult to recover the actual losses if the other party goes bankrupt and lacks sufficient assets.
To prepare for these risks, law firms are reviewing contractual structures that separate investors’ rights from a business operator’s assets and ensure those rights can remain in effect even after business operations cease.

Bae, Kim & Lee said that, as the institutional framework for token securities takes shape, the focus of legal advice is shifting from assessing the feasibility of a business to designing actual issuance and distribution structures.
Lee Jeong-myeong, a member of Bae, Kim & Lee’s TMT Group and Future Finance Strategy Center, explained, “Recently, the focus has shifted toward advising companies preparing to launch actual businesses on the assumption that the system will take effect.”
Whereas legal advice previously centered on the legal feasibility of issuing token securities, the applicability of regulations, and designation as an innovative financial service, practical reviews have recently expanded to cover underlying assets and investor rights structures, licensing for issuance and distribution, distributed ledger operating systems, and the design of contracts and trusts.
He stressed the importance of clearly setting out in contracts the ownership of underlying assets, methods for distributing returns, and procedures for transferring related operations, so that investors can exercise their rights even if an issuer or platform goes bankrupt or suspends its services.
Lee emphasized, “What matters for investor protection in token securities is ensuring that investors’ rights are legally protected and can be exercised even if business operations are interrupted due to the bankruptcy of an issuer or platform, for example.”
To that end, depending on the business structure, options under consideration include using a trust or separating assets attributable to investors from a business operator’s own assets. The aim is to reduce disruption from a suspension of business by setting out in advance how underlying assets will be managed and disposed of, how returns will be distributed, and how operations will be transferred.
However, these measures do not prevent all investment losses or guarantee the return of principal. Even if a trust protects the underlying assets, their value may still fall, and liability for damages must be assessed based on specific legal requirements, including unlawful conduct and the occurrence of loss.
There are also calls for further legal reforms to protect investors even after the system takes effect. Kim of Yoon & Yang identified bankruptcy remoteness for business-based investment contract securities and the transfer of rights in co-ownership-type investment contract securities as key areas requiring improvement. He noted, “The legal framework for investment contract securities needs to be refined further to protect investors and facilitate smooth distribution.”
Financial authorities are also studying measures to improve the tradability of fractional investments in investment contract securities and protect investors. Bankruptcy remoteness for business-based investment contract securities and methods for transferring rights in co-ownership-type investment contract securities are among the issues under review.
The market for legal advice related to token securities is also becoming more diverse. In addition to securities firms and fractional investment platform operators, asset managers, trust companies, and technology platform companies are exploring related businesses. Business models using a range of assets and rights—including real estate, bonds, carbon credits, music copyrights, and patents—are also becoming part of the scope of legal advisory work.
Through its Future Finance Strategy Center, which is primarily made up of digital finance and information technology (IT) experts, Bae, Kim & Lee is strengthening collaboration among specialists in related fields, including capital markets, trusts, financial transactions, insolvency, personal data protection, and foreign exchange transactions.
New areas for legal review include structures for tokenizing and issuing domestic assets overseas, as well as the future use of stablecoins to settle transaction proceeds and pay dividends and interest. As the market grows, demand is also expected to increase for advice on internal controls, dispute resolution, insolvency, and international financial regulations, beyond licensing and issuance structure design.

[email protected] Yoo Seon-jun Reporter