The Financial Services Commission has begun revising regulations to introduce pre-demand forecasting and cornerstone investor systems in the initial public offering (IPO) market. The aim is to enhance the rationality of pricing and mitigate significant stock price drops following large-scale sell-offs immediately after listing.
On July 30, the Financial Services Commission announced that the proposed amendments to the Capital Markets Act, which will implement the pre-demand forecasting and cornerstone investor systems, are set to take effect on November 13. The commission is inviting public comments on the related enforcement decree and regulations regarding the issuance and disclosure of securities from today until September 8.
Pre-demand forecasting allows underwriters to gauge market demand for the offering price and volume from institutional investors before submitting the securities registration statement. This system is expected to improve the appropriateness of the offering price by reflecting market demand from the initial stages of setting the desired price range.
Eligibility for participation in pre-demand forecasting has been set at a total entrusted property of 30 billion won for general private investment firms and investment advisory firms, in line with the current demand forecasting system. However, the existing exception that allows a reduction to 5 billion won after two years of registration will not apply. The Financial Investment Association will establish minimum qualification requirements, including capabilities for business valuation and management of undisclosed information.
After preparing a due diligence report, underwriters will provide qualified institutional investors with information that will be disclosed through the future securities registration statement and gather their opinions on pricing and volume. This process will require a non-disclosure agreement (NDA), and the timing, recipients, and content of the information provided must be documented and managed. Violating the NDA by allowing a third party to use undisclosed information may constitute insider trading.
The cornerstone investor system involves pre-allocating a portion of the shares designated for institutional investors, with a condition of a lock-up period of at least six months. This aims to secure long-term investment-oriented institutions in advance, thereby enhancing trust in the IPO and alleviating the so-called 'IPO horror stories' caused by mass sell-offs immediately after listing.
To qualify as a cornerstone investor, in addition to meeting the pre-demand forecasting criteria, institutions must hold self-capital or entrusted property equivalent to at least 20 times the subscription amount. This relative standard is applied based on the subscription size, considering the varying scales of IPOs among companies.
To diversify the lock-up periods, 50% of the allocated shares will be locked for six months, 30% for eight months, and 20% for ten months.
The allocation limits for cornerstone investors will differ between KOSPI and KOSDAQ. Excluding shares allocated to general subscribers, employee stock ownership associations, high-yield funds, and KOSDAQ venture funds, KOSPI will allow up to 20% of the total institutional allocation for cornerstone investors, with individual investors capped at 10%. For KOSDAQ, the limits are set at 30% for total allocations and 20% for individual allocations.
To prevent abuse of the cornerstone investor contracts as a means of preferential treatment or risk transfer, cornerstone investor agreements cannot be made with institutional investors that have interests, such as major shareholders and related parties. Any actions that involve providing direct or indirect benefits conditioned on cornerstone investor agreements are also prohibited.
The Financial Services Commission plans to finalize the amendment process in line with the implementation schedule of the Capital Markets Act on November 13, following a public comment period for the proposed enforcement decree and regulations.
* This article has been translated by AI.
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