Equity Crowdfunding Market Entry in South Korea

Crowdfunding market in South Korea has been formed about 2 years ago, and expanded at a rapid growth rate. The government has lowered the entry regulations for platform agencies and encouraged foreign agencies to enter the market by specifically making a space in the qualification. However, none of the foreign crowdfunding platform has entered the market yet despite of its feasibility and attractiveness. This article is intended to give you a brief background of the market and considerations for the market entry procedure as a foreign investor.

Market Introduction: Emerging at early stage
In July 2015, the National Assembly has passed an amendment (so-called “crowdfunding Act”) to Financial Investment Services and Capital Market Act. They stated the purpose of the Act is to provide a better circumstance for startups to raise fund to sustain their momentum through a crowdfunding platform in which a large number of small investors participate. They took account of both market vitalization and investor protection by lowering entry regulation for a crowdfunding agency and restricting an investment ceiling for each investor.
The market is now at its early stage, ignited in the beginning of 2016 relatively later than other developed countries. For the case of the developed countries like the United Kingdom, Japan, and the United States, their crowdfunding market growth rate was profoundly remarkable. For three years from the beginning of the market, the market size in the United Kingdom since 2012 has increased from £267M to £3.2B at a compound annual growth rate (CAGR) of 130%. The market in Japan and the United States also had increased at a CAGR of 81% and 101% in the order.
As of now, this two-year aged market has been surging by all means like the following examples. Comparing ’16 to ’17, crowdfunded amount increased to 271MM Won by 64%, 169 crowdfunded firms were piled up and increased by 66%, and most importantly individual investors has been almost tripled up to 15,553 and increased by 181%. This rapid growth rate of momentum is deemed to last for more than years as more investors to be aware of attractive investment market.

Crowdfunding platform types and players
Crowdfunding market could be categorized in three types by its investment characteristic and purpose: Donation, Equity, and Debt crowdfunding.
Firstly, in donation-crowdfunding, donors generally donate small amounts, an average of 75,000 Won per donor, to such an inspired creator, social activity, or personal campaign without expecting in any return. Tumblbug and Naver Happybean are two popular donation-based crowdfunding platforms for providing a variety of donation fields and convenient payment system.
Secondly, in equity-crowdfunding, investors literally invest up to 500M Won into the company in return for a piece of its equity. It is typically used to raise money to fund the launch or growth of a company who is also seeking for investment from angel investors or venture capitalists. In South Korea crowdfunding is being operated by two platforms: Securities firm and specialized agency. Currently Wadiz and OpenTrader are the main player taking over the half of the market as the first-mover advantage.
Lastly, in debt-crowdfunding, lenders make a loan with the expectation to be paid back their principal and interest. It is basically a lending service like the bank in a different way of borrowing small amounts of money from multiple people rather than from one bank. Thus, relative to other types of crowdfunding, strict law is applied to this business. Eight-percent and Tera Funding are the major players in the market that are popular for a variety of loan products.
In this article, we will focus on equity crowdfunding market among others and the way to dive into the market.

Market entry options: Registration as most feasible
There are two ways to enter the market: registration as an official agency and M&A with an existing player. Prior to the research, we hypothesized that the right of a crowdfunding business can be transferred in a form of license, so purchasing the license from the existing player could be another way to enter the market. However, the business can only be run once a particular firm has been registered to Financial Services Commission.
– Entry option 1 (Registration): Direct way to enter the market as a new player through registration procedure to Financial Services Commission. Further considerations are expected such as legal entry barrier for foreign investment, qualification to become a crowdfunding agency, and registration procedure.
– Entry option 2 (M&A): Taking over the management control by acquiring the existing players’ shares is another way to enter the market. It is not required by law to get approval for this matter of changing major shareholder. Further considerations are expected such as acquirer’s financial capacity and willingness, analysis on target companies, strategic synergies, and so on
At this moment, we are not going further into the M&A option since it contains classified financial information. Instead, we would like to introduce the registration entry option that is direct and feasible way to foreign investors along with resolutions for the concerns of legal entry barriers, qualifications, and registration procedure.

No legal entry barrier exists for foreign investor
Fundamentally, it has to be figured out whether the equity-crowdfunding market is allowed for foreigner to make investment.
Among 1,145 categories of industry defined by Korea Standard Condustrial Classification, 61 categories are classified negative list for foreign investment since such categories function mostly as public administration and seriously influence to the community.
Equity crowdfunding business belongs to “Other Financial Support Service Business,” one of the negative list. However, regulations on Foreign Investment and Introduction of Technology clearly made an exemption stating prohibition is exempted in case of other financial support service business excluding bill clearing or financial product exchange service. Therefore, Equity crowdfunding business does have no restriction for foreign investment.

Registration qualification: relatively lower hurdle for human and financial resources, strict to the management qualification and their business plan
There are 5 parts of a major consideration to register online small investment brokerage: 1) corporation / branch / installation of office, 2) major shareholder / executive / validity of corporation, 3) validity of business plan, 4) financial ability and state, 5) manpower / computation design / interest deconfliction system.
Financial Service Commission states that “Contrary to low hurdle for finance entry base and human resources or facilities, the requirement soundness business plan and qualification of major shareholder / executives are the critical factors. It can be inferred that the main concern of domestic authorities is whether the foreign investment can be beneficial to start-up or VC without a risk of disturbing the domestic financial market. Following is the brief description of each factors.
1. Corporation / branch / installation of office: Corporation should be under the domestic commercial law, Initiator should operate a comparable size of business to small investment brokerage in foreign, Domestic office should exist.
2. Major shareholder / executive / validity of corporation: Major shareholder and executive should be free from any unlawful activities.
3. Validity of business plan: Corporation should demonstrate their validity of business operation.
4. Finance ability and financial state: Over 5 hundred million net worth is required.
5. Manpower / computation design / interest deconfliction system: Essential employees are required for internal control, computing division, data processing, facilities and to control conflict of interest

Registration process takes two months
Financial services commission is a government institute that deals with registration of crowdfunding agency.
Once application is submitted to Financial Petition team. The application transfers to Department of Management to be examined. If supplementary document is needed, applicants need to conduct supplementary request and Financial Supervisory Service supports with re-evaluating application. After all the documents are fulfilled with criteria, registration is completed after internal payment. The duration of examination processing period is 2 months.
As for branch or corporate establishment in South Korea, below reference describe registration steps, required documents, and designated institution.
Reference 1: Branch establishment process and required documents
Reference 2: Corporate establishment process and required documents