FSC announces improvement of IPO lead underwriting system
Establish grounds for sanctioning inadequate due diligence … Lead underwriters to receive compensation even if listing fails,
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, ‘[Seoul=Newsis] Reporter Wooyeonsoo = #. A securities firm in charge of corporate IPO listing overlooked the fact that the company’s sales plummeted from 17.7 billion won in the first quarter to 60 million won in the second quarter while conducting the due diligence for the IPO. Although the annual sales estimate also changed, the firm did not reassess the offering price, and as a result, the stock price plummeted after the company announced its performance for the third quarter three months after listing.’,
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, ‘#. B securities firm, which won the underwriting task for a company’s KOSDAQ listing by proposing a high offering price, forced the IPO despite recognizing significant issues within the company during the due diligence process. The company faced potential patent infringement lawsuits and suspicions of embezzlement by the CEO and related parties, yet B firm proceeded with the IPO without properly evaluating the eligibility for listing.’,
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, “On the 9th, the Financial Services Commission (FSC) held a meeting with the industry led by Deputy Governor Kim Jung-tae of the FSC to announce ‘Improvement Measures for IPO Lead Underwriting’. This decision was made due to a series of controversies, including overvalued offering prices and omission of investment risk factors in prospectuses, which significantly undermined the capabilities of lead underwriters and the trust in the IPO market.”,
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, ‘Since the Pado incident, the FSC has been reviewing improvement measures through a task force (TF) set up in December last year.’,
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, ‘Deputy Governor Kim stated, “We will establish grounds for sanctions against inadequate due diligence,” and emphasized, “We will hold accountable for the corresponding responsibilities for formal due diligence and inadequate examination.” If reliance on the lead underwriters’ autonomous sense of responsibility was previously expected, going forward, legal responsibilities will be enforced to normalize the IPO market.’,
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, ‘Grounds for sanctioning inadequate due diligence will be established in the Financial Investment Business Regulations. It will be mandatory for the executives of lead underwriting firms responsible for due diligence to verify the due diligence plan and progress and approve the final due diligence report. They will also disclose the responsible executives for due diligence and due diligence verification procedures by revising the securities registration form.’,
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, ‘Furthermore, to prevent formal corporate due diligence by lead underwriters, compliance regulations on corporate due diligence items, methods, verification procedures, etc., will be specified. It will be mandatory to conduct interviews with management regarding new business development plans, fund-raising plans, and to validate the documents submitted by the company through methods such as market information, expert opinions, meetings with company trade partners, and departmental staff interviews.’,
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, ‘Additionally, there will be improvements in the lead underwriters’ fee structure. So far, lead underwriters have not received any compensation if a listing fails despite investing significant time and resources to prepare for the listing, leading to an incentive for lead underwriters to push for listings indiscriminately.’,
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, ‘First, it will be mandatory to include provisions regarding compensation until the termination of the principal underwriting contract in the contract. Moreover, receiving fees not specified in the contract will be prohibited, and the composition of fees (underwriting, lead, performance), payment conditions, etc., will be transparently disclosed by revising the disclosure format.’,
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, ‘The plan also includes making it mandatory for lead underwriters to establish internal guidelines for determining the offering price. ‘,
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, ‘Currently, there are only regulations on the method of predicting demand that determines the offering price, and cases have occurred where excessive estimates, inappropriate selection of comparative companies, and lack of consistency in evaluations exist. For example, a company engaged in the liquor distribution business was evaluated using global luxury manufacturing companies and leading domestic beverage manufacturers as comparative companies for the price-earnings ratio (PER) calculation.’,
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, ‘In order to prevent the omission of key investment risks, contentious issues found during exchange inspections, internal deliberations within lead underwriters will be made mandatory. Additionally, the mandatory establishment of internal control standards that have been declaratively stipulated will be concretized through the revision of the takeover business regulations.’,
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, ‘Deputy Governor Kim emphasized, “Although lead underwriters have the freedom to perform their duties, the FSC will take strict measures if trust in the market is significantly damaged.”‘,
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