Capital market reform proposed

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Capital market reform proposed

The government and the ruling Democratic Party have reached an agreement on reforming the capital markets to help smaller businesses secure financing, proposing broader access to crowdfunding and to a simplified fundraising process.

The goal of the reform is to reduce the dependency of businesses on bank loans and enable them to raise necessary funds through the capital markets.

Financial Services Commission (FSC) Chairman Choi Jong-ku said Thursday during a meeting held with Democratic Party lawmakers that the capital markets must play the right role in the financing process.

“We are at a point where changes in the capital markets are desperately needed,” he said.

He pointed out that while the world has more than 240 so-called unicorns, unlisted companies with a capital value of more than $1 billion, Korea only has a few.

“Considering that over 110 billion won [$97.1 million] is concentrated in money market funds and short-term deposits, the problem is not on the lack of funds but rather that the institutions delivering the supply aren’t properly doing their jobs,” Choi said.

“Once the improvement measures are enacted, innovation will be accelerated as the fundraising environment for small enterprises will be improved,” Choi said. “The measures will also create a lot of quality jobs in finance.”

According to the Financial Services Commission on Thursday, under the new capital market innovation project, the simplified small enterprise fund-raising procedure will now be available for amounts up to 10 billion won, up from the previous 1 billion.

The simplified system allows companies to seek investments by filing a short-form application with less government restrictions. Candidates over the threshold must submit a standard application, which requires detailed earnings reports and FSC approval.

The regulator is also doubling the amount that can be raised through crowdfunding.

Currently, companies less than seven years in existence are permitted to raise a maximum of 700 million won each year via crowdfunding. The limit is now 1.5 billion. The regulator is also opening this path to market to all companies.

Crowdfunding is no longer limited to those less than seven years old.

The government may also allow early-stage companies to securitize their assets, such as technologies and intellectual property rights, as a means of raising funds. The government hopes that these measures will not only encourage innovation but also increase job opportunities.

The FSC said it plans to announce more details of the proposed reforms and submit a full capital markets reform bill to the National Assembly in the first quarter of 2019.

Until now, most small companies have relied heavily on bank loans. The various regulations designed to protect small investors have made it difficult for start-ups and small companies to raise funds outside the banking system.

According to the FSC, 73.4 percent of funds raised by SMEs are from bank loans, while the capital markets only accounted for 2.2 percent of the total. Most of the rest comes from government institutions.

Last year, corporations sold 235 trillion won in bonds while they took out a total of 814 billion won of loans. Investments in small and medium-sized enterprises (SME) average about 1.7 billion won, which is only 11 percent of the average investment raised by small American companies and 7.45 percent of what their Chinese counterparts raise.

Since most SME investments are concentrated at the early stage of start-up development, the funds tend to dry up when they are needed most.

The FSC also said it plans to allow for the establishment of business development companies (BDC). BDCs are institutions that invest in start-ups and SMEs not publicly traded. They enable retail investors to access opportunities usually reserved for large institutions and wealthy investors.

The FSC will also lower the bar for being considered a qualified professional investor.

Under the current rules, in order to achieve that status, an individual needs a financial investment balance of more than 500 million won and an annual income exceeding 100 million won. A company needs more than 1 billion won in total assets and must be registered with the Korea Financial Investment Association to be granted that status.

The FSC said it will adjust the conditions, making them more subjective and flexible. Those with the ability bear financial losses and with sufficient expertise to navigate the markets will be considered qualified professional investors.

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