Crowdfunding, a global fad of people clubbing together to fund projects of all kinds, will reach new heights in Korea, when the country opens the door for start-ups to issue shares through the fledging capital-raising method.

Dubbed equity crowdfunding, as it offers investors an equity stake in return for cash investment rather than rewards, products or interest payments, the new scheme goes into effect Monday, with the effectuation of a related law. Hopes are high that it would channel much-needed capital to the local start-up world, while providing new investment opportunities for individuals in this era of low interest rates.

“Through crowdfunding, we hope that entrepreneurs get a chance to turn their creative new ideas into reality and run a successful business. Hopefully, it will lead to a start-up investing boom among retail investors,” Yim Jong-yong, chairman of the regulator Financial Services Commission, said last week at an event celebrating the launch of a hub site for equity crowdfunding platforms.
 

The government-run website, www.crowdnet.or.kr, is envisioned as the gateway to equity crowdfunding for entrepreneurs and investors alike, offering introductions to the basic rules, investor-friendly information about some 30,000 local start-ups as well as links to government-certified websites where the fund-raising campaigns take place.

As of Sunday morning, the site did not carry any data on start-ups or links to crowdfunding platforms.

According to industry sources, four platforms Yinc, Wadiz, OHMYCOMPANY and OpenTrade are likely to launch services Monday, having registered with the FSC. More are expected to follow suit in the coming weeks.

Under the local rules, individuals can invest up to 2 million won ($1,668) in a start-up in any 12-month period, with a total cap per year set at 5 million won. The shares are locked-in for one year after purchase.

The investment cap is higher at 10 million won per start-up and 20 million won per year for those deemed as professional investors and whose annual financial income exceeds 20 million won. There is no limit at all for angel investors, or professionals who specialize in investment in early-stage business ventures.

Investors wishing to divest after the lock-in period can do so at K-OTC BB, or Korea Over-The-Counter Bulletin Board, a market for nonlisted stocks.

Government and industry officials hope equity crowdfunding will invigorate the local start-up ecosystem, helping solve the “Death Valley” funding drought faced by companies after the initial funding dries up and before they start generating revenue.

“I hope that through equity crowdfunding, the start-up ecosystem evolves into one where good ideas become businesses and that businesses become new engines of our economy,” said Rep. Shin Dong-woo of Saenuri Party who led drafting of the law governing crowdfunding.

According to Small and Medium Business Administration, there are about 7,000 angel investors in Korea as of 2014 and their investments total 80 billion won.

For equity crowdfunding to take off in Korea, the key is investor trust, some experts say.

“Unlike stock investments in listed companies, equity crowdfunding is based on highly asymmetric information. In other words, risk is high for investors,” said Chun Chang-min, a researcher at Korea Capital Market Institute.

By law, businesses pitching for funds through crowdfunding must disclose business information, but the disclosure rules are far from perfect.

Investors must be properly warned of the high-risk nature of the investment. Many of the businesses pitching for funds will fail, given the high failure rates of early-stage start-ups, and in that case, investors will lose all their money, experts said.

Precisely for that reason and to protect investors, the investment cap is set at a low level of 2 million won per start-up, said Kim Hak-su, a FSC director. A top concern for FSC now is the crooks.

In one recent case of crowdfunding fraud, a company was caught in November last year, posing as a crowdfunding platform and raising a total of 700 billion won from 30,000 small-time investors with a false promise of 100 percent guarantee of their original investment.

Globally, $16 billion has been raised through crowdfunding last year. The government-run Korea Institute of Science and Technology Evaluation and Planning forecasts that Korean crowdfunding overall will balloon from 52.8 billion won in 2012 to an 800 billion won-1.1 trillion won industry.

Equity crowdfunding:

-Start-ups 7 years old or younger can crowdfund through registered platforms
-Star-ups can raise up to 700 million won per year
-Individuals can invest 5 million won per year, 2 million won per start-up
-Investors can't sell the shares for one year after purchase
-Shares can be traded at over-the-counter stock market K-OTC BB

By Lee Sun-young (milaya@heraldcorp.com)