The Establishment of Korea New Exchange (KONEX)

Financial Services Commission (FSC) has recognized the difficulties of small and medium-sized enterprises (SMEs) when listing their companies on the stock market. Thus, the Commission has introduced the Korea New Exchange (KONEX) as a means to tackle this problem.

Why was it necessary?

Over eighty percent of SMEs’ funds depend on bank loans. This strong dependency on bank aggravates the financial structure of SMEs. However, it is hard for SMEs to take advantage of other forms of capital markets because of their small managerial size and high listing requirements.

Another problem is the equity gap between growth period and maturity period. The following chart will help you better understand.

As shown above, sufficient funding is available in the form of angel investor (AI) or venture capital (VC) in the early stages (6~7years) of SMEs, and initial public offering (IPO) and private equity funds (PEFs) can act as a source of capital after 12 years. The problem is the equity gap that exists between the two phases. After the withdrawal of AI and VC funds, the lack of fund is simply too challenging to deal with for most SMEs. Other countries have taken measures to fill this equity gap. ForRepublicofKorea, the establishment of KONEX is expected to help SMEs fill this equity gap and establish solid foundation throughout the entire course of the development.

What are the advantages of listing on KONEX?

One of the obstacles that SMEs encounter in listing their stock is the cost of listing maintenance. KONEX plans to reduce these expenses through exemption of SMEs from securities registration statements and quarterly reports.

KONEX is designed as a stepping stone for SMEs before they can reach the listing requirement for KOSDAQ and KOSPI. Following diagram shows the positioning of KONEX in terms of different entry levels. Companies listing in KONEX will be required to meet the minimum standards of entry which will be around 1/10 to 1/3 of what is required in KOSDAQ. On the other hand, companies that have the capacity to list on KOSDAQ will not be permitted to enter KONEX.

SMEs, usually eight years after their establishment and with revenue of over forty billion won, may list their stock on KOSDAQ instead of KONEX. Then, they may list their stock on KOSPI after approximately twelve years with revenue of one trillion won.

Who will invest and what is the procedure?

Only professional investors such as funds, banks, insurers and financial institutions will be authorized to invest in companies listed in KONEX.

Financial advisory services system has been introduced as a way to assist and provide information to SMEs in the KONEX listing process. As far as experience in the field is important, securities firms are preferred candidates for advisory position. Before being listed in KONEX, SMEs will be reviewed and thoroughly checked by advisory personnel for any factors that will render a particular SME ineligible for listing. Once qualification is met, SMEs will be put on the to-be-listed company’s stocks to professional investors. After SMEs make it to KONEX, advisors will perform liquidity provider (LP), hold IR events, and submit company reports.

More advantages…

Financial institutions will be encouraged to invest in SMEs, especially in its early stage of establishment. Financial policy institutions, such as Korea Finance Corporation, securities firms, venture capital, and many other organizations will establish a task force group to discuss future investment networks. Tax incentives can be provided as a measure to increase the amount of funding given to SMEs. Listing procedures can be simplified for a company moving from KONEX to KOSDAQ to encourage financial institutions to invest in SMEs. One year of obligatory safe deposit of securities certificates will be reduced to six months, and various other measures will also be implemented to effectively implement the new KONEX policy.

The Financial Services Commission anticipates the foundation of Korea New Exchange to provide new growth opportunities for SMEs, to create a healthy system for SMEs’ financial structure, and to discover SMEs with high-potential.

Moon Hee Park (moonheepark@korea.ac.kr)

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