Investing 100 Million Won for Just 5 Weeks... What Are the Improvements for IPO Stocks?

Measures for Small Investors Insufficient
Higher Subscription Deposits More Advantageous
Fairness Controversy Persists

Overseas Already Favor Small Subscriptions
Financial Authorities Considering Partial 'Lottery System'

[Asia Economy Reporter Park Jihwan] Financial authorities have initiated institutional improvements to expand the allocation of initial public offering (IPO) shares to small investors. In South Korea, the structure is such that the allocation of IPO shares is influenced by the amount of subscription deposit, meaning the more deposit you have, the larger the allocation, which has led to ongoing fairness controversies. In contrast, foreign countries have subscription systems that consider small investors, such as prohibiting multiple account subscriptions through different securities firms.

According to the financial investment industry on the 3rd, the general investor subscription for Kakao Games, conducted over two days starting from the 1st, received subscription applications totaling 4,879.52 million shares for 3.2 million shares available. The final subscription competition rate was 1,524.85 to 1. Domestic individual investors pay a deposit to securities firms and receive IPO shares based on that deposit. It is estimated that about 24 million KRW in deposit is needed to be allocated one share of Kakao Games stock. Since the general investor subscription deposit rate is 50%, a deposit of 24 million KRW allows subscription for 2,000 shares, and considering the competition rate of about 1,500 to 1, it is calculated that one share can be allocated.

Similarly, an investor who deposits 100 million KRW can apply for about 8,300 shares and would be allocated 5 shares considering the competition rate. An investor who tried to invest in IPO shares with 20 million KRW would not be allocated even a single share in this subscription.

This is why there have been continuous criticisms that IPO share allocations in the subscription market are determined by the financial mobilization power of institutions or high-net-worth individuals. Since the more deposit you put in, the higher the success rate of subscription, the more intense the competition, the more small individual investors are marginalized.

The Financial Services Commission recently proposed revising the "Regulations on Securities Underwriting Business" to set half of the 20% of IPO shares allocated to general investors as a subscription section for small individual investors with deposits under 50 million KRW, and allocate the rest by lottery regardless of asset size. The main purpose is to allow individuals who pay smaller subscription deposits to purchase IPO shares. Currently, more than 20% of IPO shares are allocated to general subscribers, but within that amount, investors who pay larger subscription deposits receive more shares.

Compared to foreign cases, the domestic IPO subscription system allocates more shares to individual investors. According to the "Improvement Directions for the Advancement of Securities Underwriting Business" report published by the Korea Capital Market Institute in December 2018, the allocation ratio for general subscribers in South Korea is 20%, which is relatively higher than Hong Kong (10%), Japan (minimum 10%), and Singapore (minimum 5%). In terms of allocation ratio, the domestic situation is more considerate of individual investors compared to other countries.

The problem lies not in the quantity allocated but in the method. The uniform mandatory allocation method for general individual investors is considered unfair. In South Korea, customers with higher average asset balances or high-net-worth individuals often have larger subscription limits and receive priority allocation compared to general customers. Multiple account subscriptions through different securities firms are not prohibited, so small subscribers practically have almost no chance to receive IPO share allocations. Additionally, there are side effects such as short-term trading profits immediately after allocation by paying subscription deposits larger than actual demand.

In contrast, overseas systems consider small subscribers differently. In Japan, Hong Kong, Singapore, and others, mandatory allocation to general subscribers is based on prohibiting multiple account subscriptions and uses methods such as preferential treatment for small subscriptions and lotteries to enhance fairness among investors. Especially in Hong Kong and Singapore, fairness allocation criteria are included in the IPO listing regulations as general subscription allocation methods.

A Financial Services Commission official said, "Changes to the IPO subscription system are not amendments to the Capital Markets Act but changes to the Korea Financial Investment Association, so the institutional improvement process is not very complicated," adding, "We plan to promote institutional improvements through various discussions considering the industry and the reality of the IPO market."

This content was produced with the assistance of AI translation services.