Learning from Korea's Special IPO Track for Startups
By Shane Shin, Founding Partner, Shorooq Partners
Having co-founded Shorooq Partners with Mahmoud Adi in 2016 and coming from a Korean background, I visit my hometown a few times every year to interact with Korean founders, investors, journalists, and government officials to get updates on the VC landscape in the country. One notable development in Korea we wish to introduce one day to the Middle East is a special fast-track listing of innovative startups on the Korean Exchange (KRX).
KRX was created in 2005 through the integration of other Korean exchanges to form a single consolidated exchange that exists today, with three markets for equity trading – KOSPI, KOSDAQ, and KONEX. The KOSPI is the benchmark for medium to large capital stocks, home to well-known corporations like Hyundai Motor Company, Samsung and LG Electronics, while KOSDAQ, modeled after NASDAQ in the US, is for small and medium-sized enterprises (SMEs) and venture companies primarily in IT, biotech, entertainment, software and game industries. KONEX is the smallest and most recently launched market exclusively for early-stage SMEs and startups to raise funds prior to listing on KOSDAQ.
2005 – Special Listing Track for Technology-Based Companies
KRX’s proposals to relax the conditions and facilitate listings of SMEs on the KOSDAQ were first approved in 2005. The special listing process has allowed companies with technological prowess to undergo a technical assessment by two external evaluation agencies, regardless of financial performance or business size at the time, and those that obtain technology evaluation grades above a certain level have been qualified to request for a simpler, preliminary screening examination for listing on KOSDAQ.
The special listing track overlooks immediate profitability and near-term performance of SMEs to provide them with funding and growth opportunities, as long as they possess innovative ideas, technologies or capacities for business scalability and growth. Companies that are listed through the special track also enjoy a few years of exemptions from financial and qualitative requirements that other companies are required to comply with in order to stay listed.
Since its inception, KOSDAQ has seen a pronounced increase in initial public offerings of technologically innovative companies listed through the special track, from just 2 in 2005 to 31 in 2021, with a total of 143 specially listed companies until last year.
Initially, the special technology exception has greatly benefited pharmaceutical and biotech companies that had invested in a lot of capital on R&D without making profits until later stages of company development. In fact, 65% of the 143 specially listed companies have been bio-related companies, and out of the 21 bio-tech and pharmaceutical companies that went public on KOSPI and KOSDAQ markets in 2021, 15 companies (71%) were through the special track. It was not until December 2014 that an aerospace tech company became the first non-bio company to go public on KOSDAQ using the special track.
Over the recent years, Korea has made additional amendments to attract more IPOs by further lowering the threshold for companies amidst the rise of high-tech and innovative sectors such as AI, blockchain, big data, 5G services, smart farms, AR/VR and fintech. In 2019, review criteria for the special track were modified by industry to measure a) innovativeness of relevant sectors in the 4th industrial revolution and b) technical assessment of biotech companies, as the standards had failed to consider different characteristics of each industry and still focused on financial performance of startups that were yet to mature in the market.
Previous criteria like sustainability of business and procurement of new revenue streams were replaced with technological innovativeness and relevance of core technologies. Scalability and growth potential were valued over immediate revenue or profits after listing. For biotech companies, additional qualifications were specified and added to evaluate their business on possession of core technology and pipelines, records of technology transfer, R&D activities by research personnel and progress of clinical trials, to mention just a few.
2016 – Special Listing Track for Companies Recommended by Underwriters
After introducing the special listing track for technology-based companies in 2005, as aforementioned, the KRX unveiled another listing track for firms recommended by underwriters in late 2016. Today, the special technology growth system on the KOSDAQ market is largely divided into 1) technology-based special listing and 2) growth-based special listing.
Under this special track that focuses on growth, the underwriter that recognizes the firm’s growth potential can recommend it for listing with relaxed financial requirements and without technology assessment.
Instead, the underwriter must grant investors a “put-back option” in 6 months after listing for the sake of investor protection (i.e. individual investors that participated in the IPO have a put option that allows them to sell shares of the firm back to the underwriter at 90% of the IPO offer price within 6 months after listing). In addition, any underwriter or IBs will be restricted from recommending another firm for a year if any firm they have recommended in the past 3 years gets delisted or falls under surveillance as an administrative issue from failing to meet financial requirements after a five-year grace period for specially listed companies.
2016 – Tesla Listing Track for Unprofitable, Promising Companies
Korea has continued to expand the special listing system by introducing another exemption called ‘Tesla listing’ for tech startups, following Tesla’s successful IPO in 2010 on the NASDAQ exchange despite reporting net losses. This special Tesla listing track gives unprofitable, yet promising Korean startups a chance to go public on the KOSDAQ without the need to pass a technology evaluation.
Of course, companies that want to take advantage of this system must achieve the following requirements to qualify – the market capitalization should exceed Won50bn and the company should have reported 1) Won30bn or more in sales in the year prior to listing, and 2) an average sales growth rate of 20% or more in the two previous years.
Moving forward
In the first quarter of 2022 alone, 8 companies have entered the KOSDAQ market through the special fast-track exemptions. Considering that a total of 19 companies went public on the KOSDAQ over the same period, vs. just 1 on the KOSPI, it is not an overstatement to say that Korea’s KOSDAQ has seen a surge of IPOs led in part by fast-track opportunities for easier listing.
On the bright side, the tech entrants via special listing tracks based on innovations and technological prowess have become diverse, ranging from artificial intelligence to big data, VR and AR, beyond the usual healthcare names frequently seen just a few years ago. On the downside, many investors have suffered at the hands of companies that failed to produce tangible financial results after initial public listings.
Recently in February this year, a Korean biotech company called SillaJen, which had entered KOSDAQ under the special track for technology-based companies, faced delisting risks and was given a second grace period by the KRX to improve its business and financial performance. Once the largest stock on KOSDAQ by market cap, trading of SillaJen has been suspended since May 2020 over embezzlement accusations and other criminal charges against key executives. What’s worse, numerous other firms that have been listed via the special track have also been suspended from trading due to poor performance and rejection of the auditor’s opinions, to mention just a few.
This has not only raised concerns regarding reliability of special listing systems operated by the KRX, but also led to the conclusion among dissatisfied investors that the special track lacks credibility and objectivity altogether.
As a result, the Korean Exchange is once again revising and preparing a new evaluation model to conduct a more in-depth and objective evaluation of firms subject to the special listing tracks. Korean press reports that KRX expects to complete the revision in July and apply the changes as early as August this year, with a higher threshold for allowing startups to qualify for listing.
While we will continue to monitor and report notable initiatives as well as prominent changes within and outside of the Middle East, we are very excited that Dubai launched a new project - Nasdaq Dubai Growth Market – in October 2020 to support local and international SMEs raise capital through IPOs. The new Growth Market will enable fast-growing companies a cost-effective listing on the region’s international exchange, as part of the Dubai Future District initiatives, if the companies are valued below USD250million with a minimum operating history of just one year.
We have yet to witness successful IPOs of innovative startups on the Growth Market and beyond, but we will continue to serve as local founders’ partners and help drive the momentum towards a future economy where promising, ambitious startups can achieve the next phase of expansion with ease.
After all, it has taken Korea more than 15 years and will take more time to devise a foolproof special listing system that works in the best interest of startups and private investors.
But we believe everything starts with a thought, a discussion, and an action. Please join us in our dialogue and journey of shaping the VC landscape in the MENAP region.
For starters, we wholeheartedly agree that SMEs and startups are a key engine of our economy. How can we better facilitate access to capital markets for local startups? How can we apply a special track to provide startups with more funding opportunities, while avoiding future dilemmas that might arise from special exceptions and privileges? How can we come up with better solutions and services that work in the local context for our founders?
