Korea New Exchange set to offer new direct funding channel to startups


South Korea’s financial regulator said Thursday that a new stock market dedicated to small and medium-sized enterprises would open by the end of this year, offering greater direct financing opportunities to promising startups.

The Financial Services Commission said it will accelerate steps to launch the new market, temporarily named “Korea New Exchange,” by working out listing conditions and public disclosure rules.

The domestic stock market is made up of the main bourse, KOSPI, for blue-chip shares and the junior KOSDAQ with its focus placed on tech-oriented companies.

The envisioned new market will help startups to tap into fresh funding sources, mainly institutional investors keen to discover companies with unique market positions and technologies.

The plan for the new stock market came as the Korean government is trying to help nurture more small companies to strike a balance in policies that have long favored conglomerates.

The new financing channel for SMEs is also expected to help address the distorted funding channels. Despite the government’s repeated requests for extending loans to SMEs, local lenders continue to prefer cash-rich chaebol groups.

Although details are yet to be worked out, the FSC said qualification requirements for listing on the KONEX would be much softer than those of existing stock markets.

SMEs would likely be allowed to enter the KONEX when they get a proper auditing assessment and meet certain conditions related to their balance sheets. In detail, candidate firms should have been running for 3-10 years with revenue of at least 1.5 billion won and a paid-in capital of 500 million won.

The Korea Exchange, the country’s bourse operator, might review qualifications for the KONEX candidates in the initial stage, while the official listing channel would be managed by designated brokerages.

Market participants would be limited to professionals such as brokerages, funds, financial institutions, banks and insurers.

Retail investors would be able to join the market indirectly by putting their money in the funds investing in the KONEX.

The KONEX is expected to demand fewer public disclosures for the companies to be listed on the new market, limiting the obligatory announcements to vital ones such as embezzlement involving company officials.

The FSC said it is in talks with other government agencies to offer tax incentives to companies entering the KONEX. Another option that is being reviewed is to make it easier for KONEX-listed firms to move to the KOSDAQ.

If the KONEX is activated, startups would draw direct funding at a lower cost, thereby speeding up their expansion.

But the new market is not without concerns. Modeled after the British AIM market, the SME-oriented KONEX might undercut the already weakened position of KOSDAQ. In Japan, the Tokyo Stock Exchange set up a similar small-cap alternative market named Tokyo AIM in partnership with the London Stock Exchange in 2008 but recently decided to shut it down this July due to the disappointing level of participation of potential firms.

By Yang Sung-jin (insight@heraldcorp.com)