Financial Services Commission Enhances IPO Soundness... Institutional Improvements to Prevent False Subscription

[Asia Economy Reporter Lee Jung-yoon] Financial authorities are taking steps to improve the soundness of initial public offerings (IPOs) by preventing fictitious subscriptions and enhancing the substance of institutional demand forecasting.

The Financial Services Commission (FSC) announced on the 18th that it has prepared improvement measures through discussions with experts and stakeholders to achieve the original purpose of the IPO market for unlisted companies and to develop it more fairly and soundly.

Until now, it has been difficult to confirm market demand for IPO public offering prices, making it challenging to set an appropriate price band. Additionally, during the subscription phase, fictitious subscriptions?where applicants request quantities exceeding actual demand to secure desired allocations?and excessive competition created a vicious cycle. After listing, prices often immediately hit the limit up or down repeatedly, effectively halting trading and causing sharp declines, raising concerns about investor losses.

In response, the FSC will strengthen responsibility for managing fictitious subscription demand. Lead managers will establish their own standards for verifying payment capability and allocate quantities to institutions participating in demand forecasting accordingly. For lead managers who fail to fulfill this verification obligation, the FSC will prepare grounds for sanctions such as suspension of business through inspections by the Financial Supervisory Service. During periods of fictitious subscriptions, lead managers may impose penalties such as significantly reducing allocated quantities and restricting participation in demand forecasting. Furthermore, institutions that do not specify the public offering price during demand forecasting will not be allocated shares, thereby strengthening the price discovery function of demand forecasting.

To calculate an appropriate public offering price, institutional demand forecasting will also be enhanced. Pre-demand surveys targeting institutional investors will be allowed even before the submission of the securities registration statement, and lead managers will be able to reasonably reassess and adjust the price range based on these surveys. The institutional demand forecasting period, which has conventionally lasted two days, will also be extended to ensure the selection of an appropriate public offering price.

Moreover, to minimize investor losses caused by delayed discovery of equilibrium prices and short-term price volatility after listing, measures will be taken to prevent sharp fluctuations in IPO stock prices. The FSC plans to establish a practice of mandatory holding by having lead managers allocate shares differentially according to the mandatory holding commitment period, preventing mass sales of IPO shares immediately after listing or upon expiration of the holding period.

To prevent monopolization of trading opportunities by a few and delays in discovering equilibrium prices, the price fluctuation range on the listing day will be expanded to 60?400% of the public offering price. Previously, the opening price was determined at about 90?200% of the public offering price, with intraday price fluctuations within ±30%. However, with this improvement, intraday prices from the opening to the closing price on the same day will be allowed to fluctuate between 60% and 400% of the public offering price.

To curb speculative overheating by institutions, the FSC is also considering establishing an "IPO Short-term Arbitrage Tracking System (tentative name)" to monitor sales of IPO shares by institutions without mandatory holding commitments and reflect this in future IPO share allocations.

Through these measures, the FSC analyzed that a foundation will be established where appropriate public offering prices are calculated and IPO shares are allocated based on actual demand and payment capability.

An FSC official stated, "We plan to complete major institutional improvements, including related regulation amendments, by the first half of next year," adding, "We will continue to operate a joint task force (TF) with related organizations and the industry to improve IPO market practices and supplement infrastructure to support market stabilization."

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