Crowdfunding, The New Growth Engine Of Korea's Economic Development
Crowdfunding, The New Growth Engine Of Korea's Economic Development
  • 김유나(info@koreaittimes.com)
  • 승인 2013.12.09 19:20
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SEOUL, KOREA - Crowdfunding, an innovative fund-raising service, has the potential to be a new growth engine for Korea's future economic development, Kim Dong-yeon, chairman of Korea Finance Platform Co., said.

Kim Dong-yeon, chairman of Korea Finance Platform Co.,

In an interview with Korea IT Times, Chairman Kim said, "Employment by small and medium-sized enterprises (SMEs) accounts for about 80 percent of the nation's entire employment market. The employment effect of business start-ups on the labor market is great, beyond our imagination.”

"In a nutshell, business start-up, the creation and activation of start-ups companies, is the essence of the creative economy strongly propelled by the Park Geun-hye administration. Accordingly, crowdfunding will be of great help for the national economy as it boosts and keeps business start-ups, beyond its fund-raising service."

On the concept of crowd funding, Kim said, "Crowdfunding is the collective effort of the general public who seek investment returns after directly offering funds, regardless of its size, to business start-ups and venture companies.”

"In short, crowdfunding is an innovative service that enables individuals to directly participate in the domestic financial industry directly without being connected to banks or securities companies. It refers to a new fund transaction market that has changed the asymmetry of information from being rampant in the existing investment market to being one with more transparency."

Commenting that, in general, there are two types of crowdfunding, Kim said, "The first is the equity investment in which the individual investments in stocks of business start-ups and venture companies. Under this method, investors participate in the companies as a shareholder, seeking long-term vision of start-ups. Meanwhile, start-ups offer investors dividends, profits from stock transactions, or capital gains through IPO on a long-term basis.”

"The second is debt-financing in which individuals invest in the corporate bonds of business start-ups and venture companies. The method is often used to mobilize short-term funds and investors can receive due interest income.”

"On top of these methods there is a profit-sharing method in which investors can share revenue or profits with start-ups and a reward-type method in which start-ups offer products or services to investors."

Effects of crowd funding

Asked about the effects of crowdfunding, Kim said, "The biggest benefit is that business start-ups have another fund-raising window which has not been explored so far. A key reason why crowdfunding has come into the spotlight globally lies in the fact that it could innovatively change the existing market structure by attracting the general public into the institutional fund-raising market.

"In general, most founders start the business with their own capital or that of family members. However, in many cases such funds are exhausted very quickly. In such cases, they should receive governmental policy funds, assistance from financial institutions, or venture capital. But, it is not easy as they must satisfy certain conditions, including a break-even on the balance sheet, to get funds from financial institutions.”

"Moreover, domestic venture capitals do not invest in start-ups or small venture companies with short businesshistory. Accordingly, crowdfunding could be an alternative to venture capital by supplying necessary funds to start-ups or venture companies in a difficult time."

Noting that another characteristic of crowdfunding is that business start-ups or venture companies can secure funds directly from the general public, Kim said, "As a result, start-ups or venture companies can widely publicize their business models and products to a number of people,and investors can become ardent groups and customers that faithfully back up the companies.”

"Finally, crowdfunding is more convenient than existing fund-raising methods in terms of procedure and shortens the period necessary for fund-raising as it could mobilize funds 100 percent online."

Governmental support

Chairman Kim said that the most important thing as far as roles for the government is to offer some sort of safety toolsto attract the active participation of investors in crowdfunding.

"Crowdfunding is the kind of investment that is accompanied with risk. Accordingly, the government should offer institutional support in the initial stage to increase the number of the general public who hope to make investment in business start-ups through crowdfunding," he said.

"For instance, the government needs to provide investors in crowdfunding with income deduction or recognition of losses as expenses, even though it does not take responsibility for loss resulted from investment," he asserted.

"If the government allows deduction of investment income or a tax benefit to individuals who invested in start-ups likewise angel investors, it could be of a great help in attracting the general public's participation in crowdfunding," said Kim.

He also said that it is necessary to set up a separate exchange market where crowdfunding investors can trade corporate bonds or equities they hold.

"If such an exchange market is established, difficulty such as investors that cannot cash out their invested funds for a long period after investing in start-ups can be solved. To solve this problem, however, the monopoly of the Korea exchange market should be settled first," he said.

"In addition, I think the limit on an individuals' investment on business start-ups should be left to the discretion of the market, rather than trying to set a compulsory provision. An investor protection provision should also be made flexibly to keep a balance between market activation and the protection of investors, avoiding one-sided regulations,' said Kim.

 

Request to the government

Pointing out that Korea's investment market is showing signs of being like a money game owing to the asymmetry of information, the chairman said, "An excessive bubble has been created in the domestic financial market, however, it will never be sustainable.”

"On the other hand, crowdfunding can be regarded as a destructive innovation that can change the paradigm of the investment market. If the general public begins to make significant investments in business start-ups or venture companies, the sharing of information becomes more active and transactions become more transparent than before."

He continued, "However, crowdfunding is still a strange concept to many people. Accordingly, it is vital to attract the investor’s active participation in the initial stage. To this end, we need to publicize a new type of investment method, and crowdfunding can be that method as it is open to the general public. By doing so, individuals can actively participate in crowdfunding and activate the market.”

"The government, for its part, is required to provide side supports, while leaving the regulation to the discretion of the market as much as possible, rather than directly regulating the market. In particular, it is very important for the government to offer income deduction, recognition of losses as expenses, or tax favor to investors in order to attract their active participation."


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