It's been 18 years since the tech-heavy Kosdaq stock market introduced the so-called “special listing system,” which helps unprofitable companies to be listed on the Kosdaq market under special circumstances.
Biotech firms debuting on Kosdaq under this system usually present a rosy future during their IPO phase.
However, most of the companies that have used the special listing system are now being suspended from trading or delisted from the stock market.
Securities firms assisting such companies come under fire for taking unqualified companies public when market conditions are favorable and pocketing high fees.
Critics also say such biotech companies are luring investors with illusional projections for revenue and operating profit.
Recently, Cellivery, the first company that went public through the regulator’s “growth potential exception” policy, faced the possibility of delisting after receiving a disclaimer of opinion from its auditor.
Unlike the “technology exception” system, the threshold for listing is very low because most evaluations are omitted.
To benefit from the growth potential exemption system, a company only has to find a brokerage firm that can vouch for them and recommend them to the Korea Exchange. The KRX relaxes the listing criteria including profitability.
Other listing requirements include equity capital of at least 1 billion won and market capitalization of at least 9 billion won, and no technical evaluation is required.
In other words, the securities company is the only guarantor of whether the company has the potential to grow.
Cellivery entered the Kosdaq market in 2017 even though it was a loss-making company with an operating loss of 3.5 billion won ($2.6 million) and a net loss of 15 billion won.
However, Cellivery has not made a single operating profit since its listing and its losses have grown yearly. The company's operating losses grew from 4.1 billion won in 2018 to 17.6 billion won in 2020, and 66.9 billion won last year.
The issue lies in the fact that a majority of the companies included in the growth potential exemption policy are biopharmaceutical firms. Securities analysts are concerned that starting this year, such companies may face the risk of delisting due to their inclusion in the administrative issue category.
This is because most of the biotechs listed under the growth exemption -- such as Syntekabio, Bridge Biotherapeutics, Aptamer Science, and Prestige Biologics -- have posted continued annual losses since going public.
Minority shareholders will inevitably suffer if more stocks are suspended or delisted.
When Syntekabio went public, the company announced its goals to generate 51.8 billion won in revenue, and 37.2 billion won in operating profit by 2022.
However, it only generated 200 million won in revenue and an operating loss of 11.8 billion won.
As a result, many have started questioning how securities firms evaluate a company's growth potential.
They argue that more rigorous criteria are needed as companies are evaluated based only on future growth rather than profitability.
Of course, there is no doubt that the growth potential exemption can attract investment in potential companies and revitalize the IPO market.
However, the program is losing investors' trust by allowing companies to go public without clear criteria and stable financial performance.
The financial authorities and KRX need to strengthen financial monitoring of existing exempted companies to prevent another Cellivery case.
It is time for a detailed review of the growth potential exemption system, including establishing what is specified as growth potential.