In November, the introduction of pre-demand forecasting and cornerstone investor systems in the IPO market is expected to increase the operational burden on securities firms. This is because the responsibility for providing information, selecting and managing investors, conducting due diligence, and establishing IT systems will fall on underwriters.
According to the financial investment industry on August 31, the Korea Financial Investment Association is operating a task force (TF) involving key IPO practitioners from major securities firms to gather industry opinions on the detailed operational plans for the pre-demand forecasting and cornerstone investor systems. The implementation date for these reforms is set for November 13.
Industry stakeholders are calling for clearer standards regarding the selection process for cornerstone investors, allocation and management of lock-up periods, and the scope of information provided in the securities registration statement. Establishing appropriate detailed procedures is deemed crucial to achieve the goals of expanding institutional investor participation and reducing stock price volatility immediately after listing.
Pre-demand forecasting is a system that allows underwriters to gauge institutional investors' demand for investments before submitting the securities registration statement. Cornerstone investors are long-term investors who are allocated a portion of the IPO shares in advance and are required to hold them for a specified period.
One of the biggest challenges is determining how much corporate information can be disclosed to institutional investors at the pre-offering stage. To assess investment demand before the registration statement is submitted, underwriters must provide a certain level of corporate information. However, discrepancies between the information provided beforehand and the content of the subsequent registration statement could lead to issues.
Particularly, if information that could influence corporate value or the offering price is disclosed to some institutions first, it could result in allegations of information asymmetry. Underwriters will face increased compliance burdens as they must manage what information is provided to whom, when, and how, while also keeping records for future verification.
Another challenge is how to allocate shares to cornerstone investors. According to a revision by the Financial Services Commission, 50% of the shares allocated to cornerstone investors will be subject to a six-month lock-up, 30% for eight months, and the remaining 20% for ten months. Some in the industry have expressed concerns that dividing the lock-up periods into multiple segments could complicate the allocation process during actual deals.
A securities firm representative stated, “There needs to be regulations on how to fairly and appropriately conduct subscription solicitations and demand assessments for cornerstone investors,” adding, “If the scope of information provision and record-keeping standards are not clear, the compliance burden on underwriters could increase.”
Following the introduction of the cornerstone system, the pressure to attract institutional investors is expected to grow. The implementation of the cornerstone system does not automatically lead to an increase in long-term institutional investors. Institutional investors must assess whether to invest before the offering price is finalized and cannot sell shares for a certain period, necessitating confidence in the company's fundamentals and valuation.
Another securities firm representative noted, “Given the current unfavorable conditions in the public offering market, participation may be even lower in the initial phase of the system's implementation,” adding, “The limited allocation of shares may also deter institutional investors, as the potential rewards may not justify the risks they would be taking.”
* This article has been translated by AI.
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