[Opinion] Is the Activation of the KONEX Market Really Necessary?

Seong Hee-hwal, Professor at Inha University School of Law

[Asia Economy Reporter Minji Lee] The Korea Exchange and financial authorities have rolled up their sleeves to revitalize the KONEX market. The KONEX market is a market where small and medium venture companies raise funds primarily from professional investors without being subject to public offering regulations. However, unlike the KOSPI and KOSDAQ markets, the KONEX market is stagnant, with both listings and trading being sparse. In response, in January, the two institutions announced plans to abolish the basic deposit requirement for general investors and the small investment-only account system to revitalize the KONEX market, aiming to implement these measures by the first half of this year.

The basic deposit system, which exists only in the KONEX market and not in other markets within the exchange, requires general investors to deposit at least 30 million KRW as a condition for market participation. The KONEX-exclusive small investment account allows trading within an annual limit of 30 million KRW even without the basic deposit, but it is limited to one account per person. Both systems are entry barriers established to suppress general investors' market entry or prevent excessive risk, considering the risks of the KONEX market. However, since the market is currently stagnant, the plan is to abolish these to promote market revitalization through active participation of general investors.

So, what about the following counterarguments?

① The KONEX market’s activation should be judged not by the number of traded items or trading volume but by the fundraising performance of small and medium enterprises and their transfer listings to KOSDAQ (i.e., even if trading volume is sparse, activation is not necessarily required). ② Due to the significant lack of information on KONEX-listed companies and concerns about investor damage, participation of individual investors in KONEX should be restricted by systems such as the basic deposit (30 million KRW). ③ The KONEX market has weak regulation and supervision, increasing the risk of unfair trading, so participation of general investors should be limited. ④ The KONEX market is a high-risk, high-return market, so indirect investment through funds rather than direct participation by general investors is preferable.

In fact, these four counterarguments were asserted in a press release titled “10 Misunderstandings and Truths about the KONEX Market,” distributed by the Financial Services Commission and the Korea Exchange shortly after the KONEX market’s launch in early July 2013. The authorities’ core position was that the KONEX market is a high-risk market with significant information asymmetry, raising concerns about investor damage; therefore, they intended to suppress entry of general investors with weak self-defense capabilities by imposing a minimum basic deposit of 300 million KRW. However, this intention has gradually weakened under continuous calls for market revitalization. The basic deposit, which was 300 million KRW at the market’s launch in 2013, was reduced to 100 million KRW in 2015, then lowered to 30 million KRW in 2019, and is now heading toward complete abolition in the first half of this year. What has happened over the past decade, and was this policy direction properly set?

This issue requires a macro-level judgment considering the overall listing policies of the exchange over the past 20 years. Riding the dot-com boom around 2000, numerous venture companies flooded into the KOSDAQ market like a tide. However, after the bubble burst and the tide receded, many companies were delisted, and the cries of general investors who suffered huge losses grew loud. In response, the exchange continuously strengthened listing requirements to enhance the soundness of the KOSDAQ market and introduced the ‘Delisting Substantial Review System’ in 2009 to raise the soundness of the KOSDAQ market to the level of the KOSPI market.

However, as excessive soundness led to market stagnation and even weakened the function of corporate fundraising through listings, listing requirements were relaxed after 2015. Various listing tracks were introduced, such as Tesla requirement listings, technology special listings, and growth potential special listings, allowing entry even for deficit companies if growth potential was recognized. Such relaxation of listing policies in the KOSDAQ market, the next stage after the KONEX market, inevitably directly affects candidate companies for the KONEX market. In other words, with the door to directly enter KOSDAQ widened, there is less need to go through the KONEX market. Moreover, as the government’s venture activation policies continue, venture investments are currently at an all-time high, reducing the number of companies seeking fundraising in the KONEX market.

Thus, the stagnation of the KONEX market may be collateral damage resulting from the activation of the KOSDAQ market and changes in the venture investment environment rather than a policy failure by the authorities. Nevertheless, whether it is a reasonable diagnosis and prescription to allow free entry of general investors into the KONEX market, originally launched as an institution-only private market, and to promote activation through their trading is questionable. It is necessary to maintain the basic deposit for general investors or devise sophisticated measures to minimize damage to general investors.

Professor Heehwal Sung, Inha University School of Law