[Special Listing Pros and Cons] ② Another Cellivery to Emerge... Only Retail Investors Shed Tears

Possibility of Multiple Companies Being Placed Under Management... Increased Individual Losses Due to Trading Suspension
"Special Measures Should Minimize Side Effects Through Post-Listing Management"

Editor's NoteThe number of special case companies listed on KOSDAQ is increasing every year. This year is no exception. Special case listings account for nearly half of all KOSDAQ-listed companies. However, controversy continues as companies debuting on the stock market through special case listings are facing delisting risks one after another. There is a growing call to strengthen the requirements for special case listings to protect individual investors. On the other hand, since special case listings have actively facilitated IPOs of highly growth-oriented companies, contributing to the development of the KOSDAQ market, there is considerable opposition to raising entry barriers as a blanket solution.

Concerns over special case listings are growing as Cellivery, the first company listed under the growth special case, faces delisting. Not only Cellivery but also companies listed this year through special case listings are expected to be designated as management targets one after another, meaning individual investors may continue to suffer losses due to trading suspensions.

Special case listed companies are exempt from being designated as management targets for five years from the year of listing based on sales, and for three years based on loss ratios. This is a benefit compared to general listed companies, which are designated as management targets if they meet any of the following: ▲sales below 3 billion KRW ▲annual losses exceeding 50% of capital more than twice in the last three years ▲operating losses for four consecutive years ▲capital below 1 billion KRW.

The problem is that the exemption period for many companies that entered the market through special case listings expires this year. This is because many companies debuted on the market through technology special cases in 2019.

According to the Financial Supervisory Service’s electronic disclosure system, companies such as UbioLogics and Appclon, listed in 2017, and Ewha Diagnostics, OliX, PharmAbcine, Cytogen, and Neofact, listed in 2018, have recorded annual losses exceeding 50% of their equity (loss before corporate tax) at least once in the past three years.

Proliferation of Insolvent Companies... Controversial Growth Special Case

The trading suspension of Cellivery has intensified controversy over the growth recommendation segment within special case listings. The growth special case is a system where a securities company submits a growth report on the company to the Korea Exchange without a technical evaluation by a professional assessment agency, allowing the company to be listed based on that. Even without immediate performance, if the securities company underwriting the listing guarantees growth, the company debuts on the stock market. The only conditions are having equity capital of at least 1 billion KRW and a capital erosion rate below 10%. It is considered the lowest threshold among the five KOSDAQ special case listing systems.

Starting with Cellivery in November 2018, a total of 19 companies have used growth as their foundation: five in 2019 (Ranix, OliPass, Lapas, Syntekabio, Bridge Biotherapeutics), seven in 2020 (Genolution, Selemix, Aptamer Science, Eoflow, Gobio Lab, Cliniomics, Alchera), five in 2021 (Prestige Biologics, Jin System, Rainbow Robotics, Samyoung S&C, Wanted Lab), and one in 2022 (Sun Bio). Notably, there is a concentration in the bio sector. Among these 19 companies, 14 (73.68%) are related to pharmaceuticals and bio, such as new drug development, diagnostics, and healthcare. This raises significant concerns that second and third Cellivery cases may emerge.

Cellivery was suspended from trading immediately after its five-year exemption period ended due to a refusal of audit opinion. This was caused by a rapid deterioration in its financial condition, recording an operating loss of 66.8 billion KRW and a net loss of 75.1 billion KRW last year. Despite being a deficit company with an operating loss of 3.5 billion KRW and a net loss of 15 billion KRW at the time of listing, it entered the KOSDAQ market, which is a side effect of the system.

Bridge Biotherapeutics, which failed the technology evaluation twice in 2019 but entered the market using growth potential, recorded sales of 3 billion KRW and an operating loss of 43.5 billion KRW last year. It has incurred continuous business losses before corporate tax for three consecutive years. Syntekabio, which debuted on the market in December 2019, also posted losses for three consecutive years. It was listed based on the assumption of achieving sales of 51.8 billion KRW and operating profit of 37.2 billion KRW last year, but actual sales were only 200 million KRW, and operating losses reached 11.8 billion KRW. Both companies are unlikely to avoid designation as management targets next year. A securities industry insider said, "Following Cellivery, a chain of insolvencies is anticipated, and no companies have entered the market through the growth special case this year. The Korea Exchange’s screening has become stricter, and securities companies are cautious and have refrained from underwriting."

Strengthening Technology and Disclosure... Enhancing Underwriter Expertise

If the number of stocks suspended from trading or delisted due to special case listings increases, small shareholders inevitably suffer losses, and the overall market impact could be severe. Therefore, there are calls to raise entry barriers. It is suggested to strengthen standards by recommending the presentation of achievable performance estimates during special case listings and to enhance management and supervision through interim performance reviews after listing. Since special case companies calculate market capitalization based on estimated performance for 3 to 5 years after listing, there are many calls to improve the system to prevent "performance inflation." Kang Sohyun, a researcher at the Korea Capital Market Institute, pointed out, "KOSDAQ is a market led by individual investors, but pharmaceutical and bio companies have high uncertainty of success. Individual investors find it difficult to understand the inherent risks of the pharmaceutical and bio industries and individual companies, making it hard to respond."

Accordingly, there is a strong demand for monitoring the financial structure of special case companies and strengthening technology and disclosure systems. Lee Seokhoon, senior researcher at the Korea Capital Market Institute, said, "Many special case companies continue to report large losses even after some time post-listing and fail to convert technology into sales. Financial authorities and the Korea Exchange need to develop disclosure systems related to technology and strengthen monitoring of disclosure violations or unfair trading by special case companies."

Since the growth segment within special case listings is particularly problematic, there is also a demand to strengthen the responsibility of securities companies acting as underwriters. Kang Sohyun emphasized, "Since listing requirements have been relaxed, the role of underwriters in discovering and evaluating capable early-stage growth companies is important. To prevent the listing of insolvent companies with insufficient technology and growth or based on false information, the expertise of underwriters should be enhanced to evaluate various technology companies."

The investment banking (IB) industry opposes strengthening listing requirements, arguing that it would hinder the activation of IPOs for companies with promising growth potential. They argue that various special case systems should be established to attract promising companies to the stock market. They also agree that poor performance should be seen as a kind of unavoidable growing pain. An IB industry insider criticized, "Raising the threshold for special case listings could undermine the original purpose of the special case listing system." A securities company insider said, "We should minimize side effects through strict management after listing." A Korea Exchange official said, "As of March, among 1,628 listed companies, 174 (10.6%) were designated as management targets within the last three years, whereas among 171 technology special case listed companies (as of the end of December 2022), only 10 (5.8%) were designated as management targets, showing a lower ratio."

This content was produced with the assistance of AI translation services.