In the preliminary authorization competition for a dedicated over-the-counter exchange (distribution platform) for fractional investing, the KDX (Korea Exchange (KRX)) consortium and the NXT (NEXTRADE (NXT)) consortium were finally selected. Lucent Block, which had raised issues such as fairness concerns during the review process, was eliminated after receiving the lowest scores in items such as its business plan and equity capital.
On the 13th, the Financial Services Commission held a regular meeting and said it had approved the agenda item for "preliminary authorization of over-the-counter brokerage for revenue securities." According to the External Evaluation Committee's review, NXT scored 750 points, KDX scored 725, and Lucent Block came in at 653.
However, there is the issue of alleged technology theft concerning the NXT consortium that Lucent Block had previously raised. Reflecting this, the Financial Services Commission (FSC) granted approval on the condition that if an administrative investigation is launched by the Korea Fair Trade Commission under the Monopoly Regulation and Fair Trade Act, the review process for final authorization will be suspended.
Ko Young-ho, Director at the Financial Services Commission (FSC), said, "Whether there was technology theft was included in the review process, and the External Evaluation Committee judged that it was not technology theft," adding, "The Korea Fair Trade Commission (FTC) could reach a different conclusion, so we issued a conditional preliminary authorization, and if a disqualifying reason arises, we will revisit the authorization policy."
◇ "The OTC exchange for fractional investing is different from sandbox platforms"
The Financial Services Commission (FSC) distributed 19 pages of materials that day, disclosed the External Evaluation Committee's scoring results in detail, and even held a separate briefing. It appears to be a response mindful of the fact that President Lee Jae-myung mentioned the matter directly at a Cabinet meeting and that it has been addressed in politics.
The Financial Services Commission (FSC) drew a clear line that the OTC exchange for fractional investing, which was the subject of preliminary authorization, is significantly different from the distribution platforms operated under the regulatory sandbox. This is because, as capital market infrastructure, an OTC exchange must have sufficient capabilities to ensure a fair market order and protect investors. For small licenses in issuing securities business, the capital requirement is 1 billion won with two IT specialists, similar to existing investment brokerage standards. By contrast, for the OTC exchange, requirements were strengthened to 6 billion won in equity capital, one trade-matching specialist, and eight IT specialists.
Another key difference is that during roughly five years of sandbox operations, the distribution market for fractional investing was a small market generating about 150 million won in annual fee revenue.
The Financial Services Commission (FSC) emphasized, "In the case of an OTC exchange, it intermediates already issued securities, so its competitiveness lies more in stable order processing and trade execution, settlement linkage, and the prevention of unfair transactions than in expertise on underlying assets and fractional investing."
◇ Lucent Block, ranked third in the evaluation, lacked equity capital and a business plan
Above all, the External Evaluation Committee's scorecard was decisive. Lucent Block trailed the top-ranked NXT by 97 points and the second-ranked consortium by 72 points. The score gaps were especially large in equity capital, business plan, and conflict-of-interest prevention systems. For equity capital, Lucent Block's capital was significantly smaller than its peers, and the feasibility of its plans to raise investment funds and emergency financing was viewed as variable depending on circumstances.
As for the business plan, while Lucent Block has experience with distribution platforms as an existing innovative operator, it was evaluated as lacking a long-term strategy for operating an OTC exchange and having a low level of understanding of relevant laws and regulations. The External Evaluation Committee also judged that with 51% held by the largest shareholder and related parties, Lucent Block's ownership structure does not suit an OTC exchange.
At a briefing held after the regular meeting, Director Ko addressed Lucent Block's future management direction, saying, "Immediately after the meeting, we confirmed Lucent Block's intention to apply for issuance authorization, and we will proceed swiftly with follow-up procedures."
If Lucent Block obtains issuance authorization, it can continue its current business model. However, once the OTC exchange opens, distribution activities will be prohibited. If it does not apply for issuance authorization, then under the wind-down plan Lucent Block submitted last year for the event of nonauthorization, a real estate trust company will carry out real estate management, sale, and revenue distribution after convening a beneficiaries' meeting.