Wadiz, a South Korean crowdfunding company that has been operating at a loss for five consecutive years and experiencing complete capital erosion, has announced its intention to pursue an initial public offering (IPO). Concerns have arisen that the company’s valuation of 500 billion won, set three years ago, could be problematic.
In recent years, the Korean public market has allowed companies to attain high valuations as long as they pass the listing review. This has raised concerns that listing at an unreasonable valuation could harm individual investors.
On May 23, the investment banking industry reported that Wadiz intended to pursue an IPO, with Shinhan Securities and Mirae Asset Securities as the lead managers. As it is not yet profitable, Wadiz is preparing for a “Tesla qualification” listing.
Tesla Motors, a United States automotive and energy storage company, was successfully listed on the Nasdaq in 2010 despite years of net losses due to recognition of its advanced technology. Similarly, the “Tesla qualification” allows unprofitable but promising firms to raise funds via the stock market.
Wadiz has faced complete capital erosion, with five consecutive years of losses up to last year and negative total equity. Starting with a loss of 9.8 billion won in 2019 when it began filing audited financial statements, Wadiz posted operating losses of 24.5 billion won in 2020, 20.7 billion won in 2021, and 33.8 billion won in 2022 before reducing the loss to 17.3 billion won last year. However, revenue grew steadily, increasing from 11.6 billion won in 2019 to 39.6 billion won last year.
“There is a material uncertainty that may cast significant doubt about the company’s ability to continue as a going concern,” Wadiz’s auditor, EY Korea, said. “If the business improvement and financing plans are unsuccessful, the group may be unable to recover or repay its assets and liabilities at their carrying amounts in the normal course of business.”
Wadiz brokers crowdfunding projects and earn commissions, but it is deemed unprofitable due to the high costs of labor and marketing required to run the platform. Crowdfunding allows people who lack money but have a skill or idea to obtain the funds needed to create a product.
Wadiz has announced that it will return to profitability in the second quarter of this year. In 2021, Wadiz received an investment of 80 billion won from Lotte Holdings through a pre-IPO round, valuing the company at 500 billion won. To date, the cumulative investment amounts to 147.5 billion won. Major shareholders include Lotte Holdings, Shinhan Venture Investment, Smilegate Investment, Korea Investment & Securities, Korea Investment Partners, and Dt& Investment.
“Revenue grew 16% last year, and losses were cut by nearly half,” said a Wadiz official. “Since last year, revenue has been increasing as the advertising business has grown, and profitability is improving through lower marketing costs.”
Industry observers note that going public in a fully undercapitalized state is extremely rare. Such cases are rarely challenged and rarely approved.
Shinhan Securities and Mirae Asset Securities have been the lead arrangers since 2019. They are likely to face challenges selling a company with a series of losses and no significant technology at an enterprise value of more than 500 billion won.
“Companies can go public as much as they want, but if they try to push the valuation too far, retail investors will end up paying the price,” said a financial investment industry insider.
