[Market Trust Shaken by Samchundang]③Regulatory Gaps, Persistent Risks

Current Laws Can Regulate, But Application Is Complex
Need for Consistency and Zero Tolerance Like the US SEC

Editor's Note
Behind the controversy over Samchundang Pharmaceutical's dramatic stock price fluctuations lies a chronic and structural problem: the excessive ambition of KOSDAQ-listed technology companies and loopholes in the market system. This crisis, which wiped out tens of trillions of won in market capitalization in an instant and threw investors into panic, is particularly painful because it has seriously damaged the credibility that the K-bio industry has painstakingly built. We examine whether the technological blueprints Samchundang Pharmaceutical presented to investors are realistic, and what institutional shortcomings led to this situation.

[Market Trust Shaken by Samchundang]①Blueprints Without Substance

[Market Trust Shaken by Samchundang]②The Art of Promotion That Sways Investor Sentiment

[Market Trust Shaken by Samchundang]③Regulatory Gaps, Persistent Risks

Another issue highlighted by the Samchundang Pharmaceutical incident is the common practice of concealing crucial details, which serve as the basis for key decisions, during disclosures such as technology agreements, while exaggerating these details during external promotions. Legally sensitive disclosures are kept to an absolute minimum, whereas much more discretionary promotional activities present overly optimistic figures that merely reflect what "might be possible," causing investors to perceive them as substantial benefits. Such behavior must be prevented.

On April 14, Suho Jung, an attorney at Renaissance Law Firm, commented in an interview that Samchundang Pharmaceutical’s act of exaggerating contract sizes was “not because there are no laws to regulate such actions, but because the application is difficult,” adding, “Current laws can still be used to control these behaviors.” He explained, “The clause on unfair trading in the Capital Markets Act punishes acts intended to obtain financial gain by omitting important information that could mislead investors. However, for criminal punishment to occur, the 'intent to gain' must be proven. If the company has disclosed somewhere that the figures are estimates, it becomes difficult to prove a crime and impose penalties.”

Jeon In-seok, CEO of Samchundang Pharm, is speaking at a press conference held on the 6th of this month at the Samchundang Pharm headquarters in Seocho-gu, Seoul. Photo by Yonhap News

Specifically, he suggested that the 'market disruption' provision could be applied. Attorney Jung said, “Article 178-2, Paragraph 2, Clause 4 of the Capital Markets Act (market disruption) is established solely on the risk of causing misunderstanding, regardless of intent, and allows for a fine of up to 1.5 times the benefit gained. If a company headlines an amount that is not even confirmed and hides details under the guise of contractual confidentiality, this provision should be seriously considered.”

Ultimately, this points to the need to bridge the gap between formal disclosures to investors or the public and discretionary promotional activities by companies. For example, the practice of including impressive figures only in press releases, while burying conditionalities or uncertainties in the disclosures, must be eliminated.

Attorney Jung emphasized, “If the contract amount is disclosed in a press release, the same information should be submitted as a fair disclosure, and it should be mandatory to clearly distinguish between confirmed and estimated amounts. Protecting the name of the partner company or contract conditions as trade secrets is understandable, but it cannot be a secret whether the figure is confirmed or merely an estimate assuming, for example, ten years into the future.”

Tae-Seop Um, an attorney at OKIMS Law & Company, also found that Samchundang Pharmaceutical’s promotional practices could potentially violate the Capital Markets Act. He explained, “They publicly released combined figures for unconfirmed royalties and projected sales without distinguishing them from confirmed contract amounts. If these were not explicitly stated as estimates and the basis was not disclosed, it could constitute ‘omission of information likely to mislead.’” He added, “However, to determine whether a specific company or case is illegal, additional confirmation is needed regarding specific facts, such as whether executives or major shareholders sold shares or raised funds before and after the press release, and how the basis and assumptions for the estimates were actually presented.”

Regarding institutional improvement, Attorney Um said, “The biggest issue with the current disclosure system is the lack of explicit regulations requiring the separation of confirmed amounts and estimates.” He continued, “A standard form should be implemented for technology transfer contract disclosures, making it mandatory to distinguish between contract payments, milestone payments, methods and assumptions for royalty estimates, and notifications about uncertainties.” He added, “The requirements for predictive information in securities registration statements should also apply equally to press releases and fair disclosures, and sanctions should be imposed in case of violations.”

Attorney Um also noted, “While the U.S. Securities and Exchange Commission (SEC) does not have separate regulations mandating the distinction between upfront payments, milestones, and royalties in ad hoc disclosures (Form 8-K), in annual and quarterly reports (such as 10-Ks), companies are required to disclose the total milestone amounts and the range of royalty rates. Similar guidelines should be considered for domestic disclosure regulations.”

The Financial Supervisory Service launched a special task force (TF) on April 10, including academics and clinical experts, to embark on a comprehensive overhaul of pharmaceutical and biotech disclosure systems. The TF aims to complete new guidelines within the first half of the year, clarify the basis of estimates in securities registration statements, and, in particular, ensure thorough consistency between press releases and official disclosures to eliminate investor confusion at its root.

US SEC: Objective Facts Only, No Subjectivity or Interpretation

Inside and outside the market, calls are growing for the urgent introduction of non-tolerance principles and a tightly regulated system on par with the SEC, the world’s largest capital market. The US market is one where the strict scientific review of the Food and Drug Administration (FDA) and the rigorous financial regulation of the SEC are interlocked with no gaps. The core of US federal securities law and SEC regulation is to thoroughly eliminate the management’s subjective interpretation and to enforce only objective facts.

The most notable difference is the strict application of the 'fair disclosure regulation.' The SEC requires strict consistency regardless of the 'channel' through which corporate information is distributed. Under the fair disclosure rules, listed companies must ensure perfect consistency not only in official electronic disclosures but also in press releases, on their corporate websites, and even on social media (SNS) and in executive interviews. Promoting “clinical success” in a press release while noting “lack of statistical significance” in disclosure documents is considered double-dealing and is immediately subject to SEC investigation as “market deception” in the US capital market.

Regulation of future revenue projections is also robust. To be protected under the “safe harbor” provision of the US Private Securities Litigation Reform Act (PSLRA), companies must do more than use boilerplate disclaimers—they must detail the specific risks and worst-case scenarios for each pipeline. If only favorable interim data are released before the full data set is analyzed, and negative results later emerge, companies are automatically obligated to report them immediately.

The consequences for violating these regulations are incomparable to Korea’s designation as an “unfaithful discloser” or simple penalty points. The SEC can impose punitive fines, initiate criminal prosecution against executives, and strip them of their executive qualifications. Most significantly, shareholders who have suffered losses due to a falling share price can file class action lawsuits demanding astronomical compensation, serving as a powerful post-incident control mechanism that can threaten the very existence of a company.

Elizabeth Holmes of Theranos, who deceived investors by claiming diseases could be diagnosed with a single drop of blood, was stripped of her executive status at listed companies by the SEC for 10 years and ultimately sentenced to more than 11 years in prison along with an order to pay about 600 billion won in damages for securities fraud. Intercept Pharmaceuticals, which was developing a treatment for liver disease, was entangled in a shareholder class action for failing to sufficiently inform investors of side effect risks, resulting in a settlement of about 73 billion won. Aibelle Therapeutics also had to bear strict legal responsibility for board oversight negligence after becoming aware that some clinical data had been manipulated, yet delayed reporting, drawing a strong condemnation from the FDA.

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