Facilitating Financing for Innovative Firms
The Financial Services Commission (FSC) announced on Nov. 1 a set of measures to reform the capital market to support innovative growth of the Korean economy and job creation.
The measures include easing regulations to facilitate financing for innovative companies, foster professional investors and strengthen their roles, improve the system for initial public offerings (IPOs), expand the role of the Korea New Exchange (KONEX), and strengthen the fund brokering function of securities firms.
The government plans to diversify financing methods for innovative companies. It has decided to raise the limit of a small-scale public offering from the current 1 billion won (US$887,000) to 10 billion won (US$8.87 million).
It will also make it easier for companies to raise funds through a private placement of equities. Under the current law, a funding round is recognized as a private placement when the company recommends up to 50 people to participate in it. Under the new regulation, a funding round will be regarded as a private placement when the number of actual investors is 50 or less, regardless of the number of people requested to invest in it.
Furthermore, when the target investors of a private offering are professional investors, the company can use social media advertising and other means of public notice, as well as a one-on-one subscription recommendation.
The FSC will also introduce the business development company (BDC) system. A BDC is a company set up for investment purposes. It invests in unlisted companies and KONEX companies after offering shares for public subscription or listing them without specifying investment targets. In other words, general investors will be also able to invest in unlisted firms easily through a BDC listed on the Korea Exchange (KRX).
The government has decided to improve the nation’s capital supply system across the board so that smaller and venture companies won’t experience a financial crunch.
The South Korean capital market is underdeveloped compared with advanced countries as domestic companies have thus far relied on loan guarantees by state-run institutions or banks to meet their funding needs.
To promote innovation-based economic growth and create jobs, it is essential to create an environment where innovative companies can receive sufficient funds in a timely manner.
In the United States, the size of corporate bond issuance is more than two or three times larger than bank loans. However, the combined amount of corporate bond issuance in South Korea came to 235.4 trillion won (US$208.87 billion) in 2017, only 29 percent of the total balance of domestic business loans (814.4 trillion won, US$722.63 billion).
The intermediation functions of the capital market are also focused on listed companies so it hasn’t been of much help for companies in an early or medium stage that need funds to finance their growth. In particular, only 2.2 percent of small and mid-sized companies was able to raise capital through direct financing in 2017.
The financial authorities will also make it easier for individual investors to become professional investors. Currently, individuals and general corporations are required to have more than 500 million won (US$444,168) worth of investment in financial products and an annual income of over 100 million won (US$88,810) or total assets of more than 1 billion won (US$887,626). Those who qualify these conditions need to register with the Korea Financial Investment Association (KOFIA) to work as professional investors. Accordingly, investment bankers, lawyers, accountants, angel investors and those with investment banking qualifications can become a professional investor. The government will abolish the procedure of registering with KOFIA and replace it with a review of qualifications by securities companies.
The discretion of an IPO manager will be also expanded. They will be responsible for calculating the initial price and allocating new shares on its own when pushing ahead with an IPO from now on. However, the individual supply will remain at 20 percent considering the opposition of individual investors and the allocation methods will be improved in order for individuals to be equally provided with the amount of stocks for public subscription.
The government has also come up with plans to foster KONEX companies, which play a role as a ladder in listing on the KOSDAQ market. It will reduce qualitative assessment items and allow to voluntarily calculate the price for offering in a bid to activate the transfer to the KOSDAQ market. It will also differentiate the basic balance of 100 million won (US$88,763) depending on investment experience and risk taking capability in order to expand participation from individual investors. The government has eased the minimum qualifications for underwriters. Currently, a securities company cannot manage the IPO of a company when it owns more than a 5 percent stake in the company. However, the government is planning to allow asset management companies to operate funds when it is favorable to investors even when they are shares acquired by affiliated securities firms.
In addition, it will ease license regulations on securities companies specializing in business financing and simplify their applicable regulations. Small and medium-sized enterprise (SME)-specialized securities firms will be able to be set up with registration alone, instead of license, and the minimum capital has greatly reduced to 500 million won (US$443,223). The government will also convert the regulation of investment banking business conduct to ex-post regulation and simplify the license system of investment bankers.