[Practical Finance] Investment Opportunities Found in 'K-OTC' Over-the-Counter Market

As of the 14th, LS Cable, Emart Everyday, SK Construction, IBK Investment & Securities, and others traded

[Asia Economy Reporter Kum Bo-ryeong] 'Cafe24, Webcash, Zinus, PPI.'

The commonality among them is that they were once companies traded on the Korea Over-the-Counter Market (K-OTC). Cafe24 was listed on the KOSDAQ market in 2018, Webcash and PPI were listed last year, and Zinus was listed on the KOSPI market last year. In addition, Samsung SDS, Mirae Asset Life Insurance, Jeju Air, Powernet, and Citree are also from K-OTC.

◆K-OTC providing new investment opportunities for investors= K-OTC is the only regulated over-the-counter stock market in Korea, operated by the Korea Financial Investment Association. It was established for trading unlisted stocks based on Article 286, Paragraph 1, Item 5 of the Capital Markets Act, "Business related to over-the-counter trading of securities not listed on a securities market," and Article 178 of the Enforcement Decree of the same Act (over-the-counter trading through associations, etc.).

It allows trading of stocks of large and medium-sized unlisted companies actively traded over-the-counter. The stocks eligible for trading are those of unlisted corporations subject to business report submission that have either a public offering record or have submitted a consent form to the Financial Investment Association. Bid and market price information is transparently disclosed, and since trading is conducted through securities firms, settlements can be safely executed. For investors seeking high risk and high return, it provides an opportunity to invest in unlisted companies with growth potential.

K-OTC is divided into three types. First, the K-OTC Market is a stock distribution market designed for general investors to trade stocks of unlisted companies that meet minimum entry requirements. There are no restrictions on participants, and orders can be placed via securities firms' Home Trading System (HTS), telephone, etc.

K-OTC Pro is a membership-based over-the-counter trading platform where professional investors and unlisted companies trade unlisted stocks and raise funds. There are no restrictions on target companies. Orders can be posted directly on the platform. The membership includes 60 institutions and 169 members, including securities firms and asset management companies.

K-OTC BB is known as a bid posting board for unlisted stock trading mediated by securities firms. There are no restrictions on participants, and the target companies are deposit-designated companies. Investors post bids through securities firms' telephone or branch visits and negotiate quantity and price with counterparties to conclude trades via a '1-to-1 negotiated transaction' method.

As of the end of last year, there were a total of 135 K-OTC companies (137 items). Small and medium venture companies accounted for 53.3% of the corporate group, and medium-sized companies accounted for 7.4%. With growing interest from shareholders and companies, the average daily trading volume increased from 650 million KRW at the end of 2016 to 4.03 billion KRW at the end of last year.

◆Can K-OTC companies be trusted? To newly register on K-OTC, companies must meet various conditions and complete procedures conducted by the Korea Financial Investment Association. One of the new registration conditions is that the company must not be in a state of full capital erosion as of the end of the most recent fiscal year according to the audit report. In this case, the amount of capital increase through paid-in capital and asset revaluation from the end of the most recent fiscal year to the registration application date is reflected in the capital.

Sales must be at least 500 million KRW, and the auditor must have issued an 'unqualified' audit opinion on the most recent fiscal year's financial statements. Issuing standardized securities according to the Korea Securities Depository's 'Unified Standard Securities Handling Regulations' or electronically registering stocks under the 'Act on Electronic Registration of Stocks and Bonds' is also a requirement. The company must have a name transfer agency contract and have no restrictions on stock transfer in its articles of incorporation to ensure smooth stock distribution.

Unlike registration, there is also a 'designation' system. Even if a company does not apply, the Korea Financial Investment Association can directly designate securities as trading targets. The designated securities must meet the same conditions as registered companies in terms of equity capital, sales, audit opinion, and stock distribution. Additionally, the company must submit business reports for the most recent fiscal year to the Financial Services Commission for disclosure and have a record of past fundraising or sales related to the securities.

Final bankruptcy, suspension of main business for more than six months, or conditions making the company's existence impossible, full capital erosion, 'adverse or disclaimer' audit opinions, or failure to submit regular settlement disclosure documents are grounds for deregistration or removal of designation. Deregistered or undesignated securities are given a liquidation trading period of up to 10 business days.

As of the 14th, representative companies trading on K-OTC include LS Cable & System, Emart Everyday, SK Construction, Shinsegae Tomboy, POSCO Construction, IBK Investment & Securities, and Hi Investment & Securities.