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Kakao, South Korea's largest Internet conglomerate that manages applications and holds an almost 90% position in their respective markets, is managing an Initial Coin Offering (ICO) to raise funds for its blockchain project called Clay.
In March, Kakao released his first attempt to sell a token by establishing an entity in Switzerland. But, with the resistance of the Financial Services Commission (FSC), the company was unable to pursue its plans. In the absence of changes to the ICO regulatory framework in South Korea, how has Kakao been able to raise funds to create a blockchain project?
Private sale
On November 19, The Hankyoreh – a mainstream information channel focused on commercial activity in South Korea – reported exclusively that Kakao plans to raise about $ 300 million to develop its token.
One source told the local publication that most of the funds have already been secured by Ground X, a subsidiary of Kakao that focuses on blockchain operations. The source added that a Chinese venture capital company would be involved in selling tokens.
"The target amount is $ 300 million and Kakao is very close to ensuring its goal." A China-based venture capital executive held a meeting with Ground X in September and, even at the time, Ground X had plans to raise $ 300 million. "
As a private sale, only registered, accredited and authorized institutional investors can invest in the symbolic sale of Kakao. Considering that all Kakao meetings with accredited investors were kept in a confidential condition – without any information given to the media, unlike the ICO of Telegram in May – the company has planned a rigorous way to raise funds in order not to violate regulations in Japan, South Korea and even in the United States.
On 27 November, the president of the Securities and Exchange Commission (SEC) of the US Securities and Exchange Commission (SEC) stated that the vast majority of ICOs currently present in the global cryptocurrency market are considered to be under US law and stressed that if companies plan to raise money through a sales token, companies must register with the SEC or conduct a private sale.
"We do not believe Bitcoin is a security: many of the ICOs you see and talk about are securities and if you plan to offer or sell securities, you have to do so in accordance with our laws, we have been clear about this, recent actions have further underlined that our securities laws apply to the ICO space, and if people are going to raise money using Initial Coin Offerings, they either have to do it in a private placement or register with the SEC. "
Companies prefer not to conduct private token sales unless they are absolutely certain that the product they offer will attract large investors, because a private sale is just as difficult and complex from a legal standpoint as the increase in funding risk capital.
It can be argued that given the involvement of local financial authorities – and perhaps even the SEC – that conducting a private token sale is more resource-intensive than a traditional venture capital funding round.
For a company of the size of Kakao, it was of the utmost importance to comply with local and international regulations rather than complete the target amount of the funding. This naturally led the conglomerate to conduct a private sale on a public sale, which could have been more profitable.
Why Japan, not South Korea?
Ground X is based in Tokyo, Japan, and the decision to legally establish its blockchain initiative in Japan rather than South Korea by Kakao was probably a strategic move to circumvent the various regulatory obstacles related to cryptocurrencies that still exist in the country.
In the last three months, South Korea has seen significant progress in the regulation of cryptocurrencies. The government has officially provided commercial banks with permission to work freely with cryptocurrency exchanges and to provide virtual bank accounts for digital assets.
Blockchain technology has also been recognized as one of the pillars of the fourth industrial revolution, along with big data and artificial intelligence (AI), and the government has initiated initiatives to bring young talent into the blockchain sector.
However, the government's position vis-à-vis the ICOs remains uncertain and while the local financial authorities were to provide an official announcement on the regulatory status of domestic ICOs by the end of November, given the timetable, the government should delay the announcement again.
If the ICO conducted by Kakao is a private sale or a public sale, since the policies in South Korea remain undetermined, the company can not risk entering into conflict with local regulations by prematurely anticipating a private sale with institutional investors.
In December 2017, Chosun – another mainstream communication channel focused on businesses in South Korea – reported that the government was considering allowing institutional investors to participate in sales of private tokens. However, 11 months have passed and the government has yet to make a decision on this.
Legally, Kakao had to conduct its private sale in Japan with an entity based in Japan. But the implications of his blockchain initiative on his relationship with the Financial Services Commission (FSC) remain in question.
In July, Choi Jong-ku – the president of the FSC, Korea's leading financial watchdog – disapproved of Kakao's initial plans to run a public ICO and opposed Kakao's idea to complete a symbolic sale in overseas markets. Commissioner Choi said, warning Kakao:
"Even if there is no ban on cryptocurrency or trade in digital resources, there is the possibility that this will happen [Kakao ICO] they can be considered frauds or multi-level sales based on the emission method. Because the risk is very high in terms of investor protection, the government has a negative position on ICO. "
Speaking to Hankyoreh, a Kakao representative said that while fundraising could be considered a private sale, the company does not consider it as one:
"Kakao has assured strategic partners to help improve and grow the global blockchain ecosystem by obtaining new capital, it could be recognized as a private sale, but it is not open to individual investors and is owned by institutions that collaborate with Kakao. It is not possible to define exact numbers relating to the financing round and the company is not in a position to openly share the companies involved in the initiative, Kakao must first communicate with its partner companies. "
ICO regulatory framework just created in Japan
On November 27, Nikkei – a mainstream publication in Japan – reported that the Financial Services Agency (FSA) held a meeting on November 26 to discuss the state of ICO regulation in the country.
During the meeting, the FSA and other local financial authorities discussed cryptocurrency trade policies and allowed accredited investors to access national ICOs.
According to local reports, the FSA still restricts sales of public tokens.
The sale of tokens conducted by Kakao and Ground X falls within the newly created category by the FSA as a private sale aimed at institutional investors. Legally, the symbolic sale of Clay is fully compliant with the regulations of Japan, South Korea, the United States and any other major market.
Both Japan and the United States allow private token sales if approved by local authorities and South Korea allows companies and investors to invest in foreign ICOs.
Problem with the South Korean cryptocurrency market
The South Korean cryptocurrency market has been able to show signs of improvement in terms of infrastructure and regulation.
More recently, Upbit, the country's largest cryptocurrency exchange based on the daily trading volume provided by CoinMarketCap, has successfully obtained an ISMS license from the Governmental Agency for Security and Internet (KISA) after passing an assessment phase conducted by the government agency using a criterion with over 253 subsections.
Lee Seok-wu, CEO of Dunamu – a company invested by Kakao and Upbit's parent company – said:
"From the beginning of 2018, Upbit has worked tirelessly to improve the internal management system of the platform and the security measures to obtain the ISMS license.With high-level security experts and safety systems tested, the company will continue to create a safe trading environment and protect the data of its investors ".
The local cryptocurrency and blockchain space have seen progress, but multi-billion dollar companies like Kakao are leaving South Korea to establish blockchain initiatives that far exceed the $ 100 million mark – which in Silicon Valley is recognized as a mega round .
In October, Min Byung-doo – the chairman of the Korea National Policy Committee – warned the government of an inevitable scenario in which companies move from the country to start operations that could be worth billions of dollars in the long term.
Referring to the $ 4 billion ICO of Block.one and EOS, President Min stressed that the government can no longer fire ICOs, given the positive impact that token sales could have on the economy of South Korea.
"The government can not reject ICOs. It must allow companies to conduct an ICO. [ICOs have] become a new trend in the global market, and it is the responsibility and ability of the government to embrace new technologies. We can see that the flow of investments is clearly changing compared to ICOs and fundraising for the angels. ICO collected $ 1.7 billion for Telegram and $ 4 billion for block.one. It's getting bigger and bigger. "
As a result, the ICO market in Japan is thriving
Line, a direct competitor of Kakao as a dominant messaging application based in Japan, has recently released a new token called LINK.
The cryptocurrency and blockchain initiatives of Kakao and Line are structurally very similar. Both companies finance cryptocurrency trade – with Dunamu of Kakao running Upbit and Line, which directly oversee BitBox operations. The two companies have also created their unique cryptocurrencies to support their long-term vision in blockchain development.
The farsighted approach of the Japanese government towards the regulation of the cryptocurrency market has brought two internet conglomerates from South Korea (Line is owned by Naver, the biggest search engine of South Korea) to develop and release its own token in Japan, with national funding and international companies.
It is said that Kakao clay has raised $ 300 million and Link's market valuation remains uncertain. However, the two cryptocurrencies have the potential value of billions of dollars collectively in the long run, simply on the basis of the amount of funding raised by the two projects.
Line & # 39; s Link, for example, can be used in 94,000 locations in Japan when converted to line points on the BitBox exchange, demonstrating a level of adoption by merchants that most of the major cryptocurrencies still do not see.
"In addition to the use of LINK Points for other DApp services in the LINK ecosystem, residents in Japan can exchange LINK Points with LINE Points before converting them into JPY at par to make payments in over 94,000 locations in all Japan with LINE Pay or make purchases in various LINE services ", explained the Line team.
The scenario that the chairman of the Minor Korean National Policy Commission Byung-doo feared in October came to its realization faster than expected. The sudden sale of private Kakao tokens could potentially lead the South Korean government to speed up the process of regulating the local ICO market to facilitate the growth of the local cryptocurrency sector.
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