After independent candidate Han Dong-hoon won the Busan Buk-gu Gap by-election held on the 3rd, AI startup Upstage is on high alert. During the campaign, Han persistently pressed the conflict-of-interest controversy surrounding his opponent, former Blue House Chief of Future AI Planning Ha Jung-woo. At the center of the controversy over Ha's conflict of interest is Upstage.
While serving as chief of future AI planning, Ha Jung-woo held shares in Upstage, and controversy erupted when Upstage was selected by the Ministry of Science and ICT as one of five elite teams in the independent AI foundation model project, known as the "national team AI." In addition, Upstage secured a 560 billion won investment through the Public Growth Fund led by the Lee Jae-myung administration, which has also remained a source of controversy. Although Ha and Upstage said "there is nothing problematic," interest is growing over whether the issue will reignite as Han Dong-hoon has succeeded in his political comeback.
◇ Upstage likely to face close scrutiny during listing review
Upstage is currently preparing for an initial public offering (IPO) on the domestic stock market. In Dec. last year, it selected KB Securities and Mirae Asset Securities as lead underwriters, and UBS recently joined, moving preparations into full swing. Upstage is said to be coordinating the listing timeline and internally reviewing when to file a preliminary listing review application.
Upstage recently finalized the acquisition of AXZ, the operator of the portal "Daum," from Kakao, moving to boost its valuation. The strategy is to strengthen results through the Daum acquisition and, on that basis, enter the main board. But the unexpected variable of Ha's conflict of interest has become public.
Experts say the IPO of Upstage is unlikely to be scrapped solely over the conflict-of-interest controversy. However, it could be a burden in valuation and during the listing review. The Korea Exchange (KRX) conducts preliminary listing reviews with a focus on the sustainability and transparency of performance and management results. Lee Kyung-joon, head of investments at Aeol Asset Management, said, "Legal disputes or political controversies related to stock transactions can be subject to close examination in the management transparency section, including the process of changes in the equity of major shareholders or key related parties."
An industry source said, "Regardless of the fact that Upstage is a capable, promising startup, it will not be easy to justify, in the eyes of the public, being chosen as an elite team for the national team AI model while Ha held the company's shares." Upstage said, "The timing of the IPO has not been decided internally."
◇ "They say the AI office was not involved… but a conflict-of-interest duty report was filed"
Ha and Upstage have explained that it was impossible for the AI office to be involved in the selection process for the national project (national team AI). A Ministry of Science and ICT official also said, "We reviewed potential grounds for controversy as conflict-of-interest issues were raised regarding the selection of the national team AI elite teams, but nothing at all was problematic," adding that the ministry will release the second-round evaluation results as scheduled in Aug. However, as chair of the Council of AI Responsibility Officers and as the national CAIO (Chief AI Officer), Ha was the official responsible for overseeing each government ministry. This is confirmed in official documents.
According to a press release distributed by the Presidential Committee on AI in Sept. last year, the Council of AI Responsibility Officers is described as performing the function of securing execution of the committee's decisions by strengthening the linkage between national AI policy and each ministry's AI policies and projects. In effect, Ha was in charge of overseeing national AI-related policy. The national CAIO's role encompasses all ministry CAIOs, including the second vice minister at the Ministry of Science and ICT, which oversees the national team AI project, and the vice chair of the Financial Services Commission, who were included. In particular, the meeting of the Council of AI Responsibility Officers chaired by Ha in Sept. last year was held for 25 minister-level ministries, and AI budgets, policies, and projects were reportedly presented and discussed there. Contrary to the explanations from Ha and the Ministry of Science and ICT, the second vice minister at the ministry overseeing the national team AI project and the vice chair of the Financial Services Commission, which decided to invest 560 billion won in Upstage through the Public Growth Fund, reported directly to Ha.
There is also evidence that Ha and the Blue House already knew since last year that there was a potential conflict between Ha's AI chief duties and his interest in Upstage. In the Government Public Officials Ethics Committee notice filed by Ha on Nov. 7 last year, titled "Disclosure of reported facts of a public official's involvement in duties causing a conflict of interest," it was noted that while holding shares in Upstage, he attended the Advisory Council on Science and Technology and the Presidential Committee on AI and convened the first meeting of the Council of AI Responsibility Officers.
◇ "Conflict-of-interest controversy could spill over into the legitimacy of the national team AI and the Public Growth Fund"
Attorney Hong Jong-gi, managing partner at law firm Daham, who first raised suspicions about the stock transactions of Ha and Upstage, said, "Upstage issued no common shares other than stock options in 2021 and 2024," adding, "It appears Ha was not merely a part-time advisor to Upstage but a key figure eligible to receive 1% of total shares issued at the time of founding in return for being an important executive or employee, or for providing core technology, information, or know-how."
It is true that the connection between Ha and Kim Sung-hoon, founder and CEO of Upstage, is special. Kim joined Naver in 2017, oversaw the initial setup of the Clova AI organization and global AI research and development, and led the core related teams. Ha built ties while serving as the leader of Clova AI Research, one of several teams led by Kim.
An industry source said, "Given that Han Dong-hoon was called the 'grim reaper' for participating in investigations involving conglomerates such as SK, Hyundai Motor, and Samsung, as well as the special probe into the state capture scandal during his time as a prosecutor, he is likely to pursue the issue to the end," adding, "The conflict-of-interest controversy involving Ha could spill over into questions about the legitimacy of the national team AI selection and the Public Growth Fund, key AI initiatives of the Lee Jae-myung administration."