​South Korea sees significant growth in crowd finance

February 21, 2017 • By TAB team

Asia has claimed the digital finance spotlight for a while now, with the Asian crowd finance market growing at a faster rate than its Western counterparts, influencing its evolution and attracting foreign capital.

Asia has claimed the digital finance spotlight for a while now, with the Asian crowd finance market growing at a faster rate than its Western counterparts, influencing its evolution and attracting foreign capital.

For example, China is the world’s biggest crowd finance market with over 9 million active users at the end of 2016. By late 2018, the volume of peer-to-peer loans alone is expected to reach 1.5 trillion yuan ($281B USD). The debt (P2P) marketplaces in Malaysia, Singapore, and Thailand are likely to grow exponentially in the near future, with industry publications citing these nations as major markets.

However, in this post we focus on South Korea. After some years of little development, the country is making big steps to establish crowd finance as an alternative form of financing. At the moment, South Korea is experiencing a crowd finance boom driven by nationals in search of ways to supplement their income and by a thriving creative ecosystem, with reward and debt crowd finance as the top two options for new investors. As of January 2017, there were at least 25 active crowdfunding marketplaces in South Korea, with a transaction value of $10M and these figures are expected to rise in the near future.

The South Korean market for crowd finance really took off in 2016, when the regulations legalising equity and reward portals, originally passed in 2015, were enacted. Regulations for peer-to-peer lenders soon followed, establishing a yearly cap of 10 million won for unaccredited investors. The aim of these measures was to boost job creation amongst the young and support the creative economy, establishing crowd finance as an alternative method of self-funding for start-ups and private citizens.

The measures were timely. Although the country boasts a competitive national industry spanning IT, automotive, filmmaking, and cosmetics, there is a chronic shortage of seed and angel investors, making lending a priority. Nascent companies also find it difficult to obtain public money to push past the launch phase.

Since the 2015 crowd finance regulations were enacted, debt-based crowd finance has become the number one funding typology in South Korea, as opposed to traditional forms such as bank loans and VC. Data from Crowdsurfer Pro shows that in the past twelve months more than 150 successful debt campaigns have been launched. They were run mostly by start-ups, and funded by accredited and non-accredited investors looking for smart investments and perks. In January 2016, two of the country's biggest equity marketplaces, CrowdNet and OpenTrade, launched to support fundraising for start-ups and SMEs. By August 2016 a total of 10.8 billion won ($9.4M USD) had been raised by 65 different campaigners involving non-accredited Korean investors.

These successes come on the heels of the biggest raise made so far by a South Korean crowd finance platform. In 2015 the reward-based portal Tumblbug raised $1.5 million to self-fund its portal for independent creators. To date, it has run 4,616 reward campaigns and raised more than $9.5M, offering an opportunity to local artists looking for a way to turn fan enthusiasm into a source of actual revenue without relying on government or venture capital support. Now, for example, more filmmakers are turning to crowdfunding to cover production costs and promote the resulting films to an international audience.

Although these figures are not as impressive as those of China or Malaysia, they confirm the positive projections of South Korea's Financial Services Commission. Recently, the body's chairman, Yim Jong-yong, has stated: "crowdfunding is taking root as a new route of raising capital for start-ups and small and medium-sized enterprises". Yet, in spite of this, it’s not all a bed of roses. There have been claims that crowd finance in South Korea has been only half a success. Some in the industry are sceptical that the success of national portals will hold in the long run, citing the strict investment restrictions imposed by the Parliament, and contending that global players like Indiegogo and Kickstarter still offer better chances of success for local entrepreneurs.

These concerns notwithstanding, the projections look promising. The transaction value of the South Korean crowd finance market is expected to grow at an annual rate of more than 20% in the next four years. This would mean a jump from the present value of $10M to $21M in 2021.

If this happens, South Korea will become one of Asia's fastest-developing alternative finance markets and an example to follow for other economies of the region that are yet sceptical about the benefits of crowd finance. We will keep an eye on this market, and keep you posted on any exciting crowd finance developments in South Korea.