[Inside Chodong] Investor Protection with Complicated Prospectuses?

Regulatory authorities are introducing various improvement measures following the controversy over the 'performance inflation' allegations against the newly listed company Padu. Since the end of last year, the authorities have been focusing on enhancing the soundness of the initial public offering (IPO) market and are now anxiously concerned that their hard work might collapse.

To devise practical solutions for this issue, they are also gathering opinions from various stakeholders. Measures to strengthen transparency to protect investors stand out. The Financial Supervisory Service (FSS) recently held a meeting with the Korea Exchange, the Korea Financial Investment Association, lead underwriters, and the KOSDAQ Association to promote fairness and trust in the IPO market. Related parties gathered to identify problems in the current listing procedures and discuss improvement plans amid controversies over IPO-related reliability. Considering recent cases where financial performance information was insufficiently provided, the FSS decided to verify monthly performance data immediately before submission when reviewing IPO securities registration statements.

The authorities’ efforts to establish a robust framework by preparing various recurrence prevention measures deserve praise. However, if efforts to create an environment where investors thoroughly review the meticulously examined securities registration statements are not simultaneously pursued, the problems are bound to recur.

Recently, competition for subscription to public offering shares in the IPO market has been intense. Funds are pouring in to secure even one more share. Cases of sharp price increases compared to the offering price on the first day of listing, with expanded price fluctuation ranges, have become frequent. The majority of individual investors who invest in public offering shares firmly believe that selling on the first day of listing will yield profits. Some investors do not even fully understand the business of the newly listed companies.

It is even more difficult to understand the business content of companies listed through the technology special listing system. Even if the lead underwriter explains the process of valuing the company in detail, it is not easy to comprehend. The prospectus describes in as much detail as possible the process of calculating the appropriate corporate value by multiplying the average price-to-earnings ratio (PER) of comparable companies based on projected sales and profits two to three years later. However, without understanding the business, it is difficult to judge whether the projections are excessive or reasonable. Even for Padu, a system semiconductor fabless company, a lot of time must be spent understanding unfamiliar terms.

The prospectus for Doosan Robotics, which attracted 33 trillion won in public offering subscriptions from general investors, is no different. Although 600,000 people rushed to subscribe on the first day to receive shares, it is unknown how many investors actually read the prospectus thoroughly. Doosan Robotics’ listing lead underwriter selected not only domestic listed companies such as Samik THK and Raontech but also traditional Japanese industrial robot manufacturers Fanuc and Yaskawa Electric, as well as Swiss company ABB as comparable companies to calculate the appropriate corporate value. They based it on estimated net profit figures for 2026, explaining that 2026 is expected to be the year when the collaborative robot market expands and Doosan Robotics’ sales stabilize across business sectors. An annual discount rate of 15% was applied to convert the estimated 2026 net profit to present value as of the end of the first half of 2023. The basis for calculating the annual discount rate was the average weighted average cost of capital (WACC).

Most investors subscribe to public offering shares without reading the prospectus, and even among those who do, it is unclear how much they understand. Although the securities registration statement and prospectus contain extensive information and monthly performance data will now be included, it is uncertain whether this will have a practical effect.

The FSS emphasized that the operational system of listing lead underwriters must shift to be investor-centered. No matter how tight the safety net is, it is impossible to protect all investors who do not read the prospectus.

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