"Preventing False IPO Applications"... KOFIA Introduces Verification Process for Subscription Payment Capability

In the initial public offering (IPO) market, a new procedure will be established to verify investors' ability to pay the subscription amount in order to prevent insincere demand forecasting participation by institutional investors, such as 'fictitious subscriptions.'

On the 5th, the Korea Financial Investment Association announced amendments to the 'Regulations on Securities Underwriting Business' and the 'Best Practices for Lead Underwriting Business.'

This is a follow-up measure to the 'Measures to Prevent Fictitious Subscriptions and Enhance the Soundness of the IPO Market' announced by the Financial Services Commission last year.

First, the underwriting business regulations will introduce a method for lead managers to verify the ability to pay the subscription amount. For each demand forecasting participation, the total assets of entrusted property based on the stated equity capital or institutional investor commitment letter will be confirmed, or verification will be conducted according to internal regulations and guidelines prepared independently by the lead manager.

Institutions that participate in demand forecasting beyond their ability to pay the subscription amount will be subject to sanctions such as prohibition from allocation of public offering shares or designation as 'participants with insincere demand forecasting.'

Additionally, the preferential allocation of public offering shares to venture capital investment trusts and high-risk high-return investment trusts, which are scheduled to expire at the end of this year, will be extended until December 31, 2025.

For IPOs and public capital increases in the KOSDAQ market, to stabilize the bond market, from the first submission of securities registration statements after January 1 next year, the allocation volume for venture capital investment trusts will be reduced from 30% to 25%, and the allocation for high-risk high-return investment trusts (including these when high-risk high-return bond investment trusts are introduced) will be increased from 5% to 10%.

Regarding sanctions for insincere demand forecasting, some sanction regulations related to violations of mandatory holding commitments during demand forecasting participation will be revised to provide grounds for sanction reduction if the commitment compliance rate is 70% or higher, and grounds for sanctions will be established for institutions that fail to submit evidence of commitment compliance.

Regarding the amendment to the best practices, it is recommended to extend the demand forecasting period from the current 2 business days to at least 5 business days to enhance the substance of demand forecasting. However, shortening the period is possible depending on the schedule of fund demand, market conditions, and the scale of the public offering.

To expand the practice of mandatory holding by institutional investors, it is recommended to establish priority allocation principles by giving the highest weight to mandatory holding commitments, and grounds for non-allocation of public offering shares to institutions that do not state demand forecasting prices will also be established.

The public comment period for these amendments is from April 5 to 25, during which related opinions can be submitted through the association's website.

After the comment period ends, the Self-Regulatory Committee will review and approve the amendments within this month, and they will be implemented from the 1st of next month.

Matters related to verifying the ability to pay the subscription amount will apply to cases where securities registration statements are first submitted after July 1. Designation of participants with insincere demand forecasting will be implemented after a guidance period starting January 1 next year.

Changes to the allocation ratios for venture capital investment trusts and high-risk high-return investment trusts will apply from the first submission of securities registration statements after January 1 next year.

Lee Bong-heon, head of the Self-Regulation Department at the Korea Financial Investment Association, said, "Although verifying the ability to pay the subscription amount may feel somewhat burdensome at first, it will improve fictitious subscriptions and short-term stock price volatility that have repeatedly occurred in some popular public offerings. In the mid to long term, it will serve as an opportunity to restore investor confidence so that the IPO market can develop fairly and soundly."

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