On December 19, 2022, the Financial Services Commission announced the “Measures to Improve Soundness in IPO Market including Prevention of Fictitious Subscription,” which intends to (i) make institutional investor demand forecasts in IPOs more effective for the assessment of appropriate offering price band, (ii) prevent fictitious oversubscription by institutional investors participating in demand forecast by having IPO underwriters make allocations based on their confirmed capabilities to pay for the subscribed and allocated shares, and (iii) prevent excessive share price fluctuations immediately after IPOs, including through allowing room for more share price movements on the day of the IPO.
 
Based on the above proposed measures, the financial authorities have implemented follow-up measures, such as amending the Business Regulations on Underwriting Securities (the “Underwriting Business Regulations”) and the Best Practices for Lead Managers (the “Best Practices”).  On April 5, 2023, the financial authorities announced the “Notice of Proposed Amendment to the Underwriting Business Regulations to Improve Soundness of IPO Market,” and on April 26, 2023, the amendment to the Financial Investment Business Regulations were approved.  The key contents are as follows.
 
More Effective Demand Forecasting
 
The Best Practices have been amended to require at least a five business days’ demand forecast period to ensure effective demand forecasting, subject to adjustment if necessary by taking into account the issuer’s funding schedule, market conditions and IPO size.  In addition, IPO shares may not be allocated to institutional investors who are deemed to have no or little contribution to the determination of offering price, such as those who did not provide their offer or presented excessively high or low prices during the demand forecasting period.  The amendment will take into effect for IPOs for which a registration statement is filed on or after July 1, 2023.
 
Meanwhile, an amendment bill to the Financial Investment Services and Capital Markets Act has been proposed and is currently under review by the National Assembly.  The bill proposes to (i) introduce a cornerstone investor system, where preferential allocation of a portion of IPO shares may be made to credible expert institutional investors to hold those shares for agreed holding periods, in order to promote stable share prices after an IPO and (ii) permit the testing-the-waters with institutional investors before the filing of registration statements.
 
Prevention of Fictitious Oversubscription
 
The amendment to the Financial Investment Business Regulations has obliged lead managers to confirm subscribers’ capabilities to pay for subscription prices.  The allocation of IPO shares without confirming such capabilities may be deemed as an unsound business activity, and subject to sanctions such as an administrative fine.  In addition, the amended Underwriting Business Regulations have established a specific criteria for confirming capability to pay for the subscription price (i.e., (i) to verify the equity capital, in the case of proprietary assets, and the total amount of assets of each entrusted asset group participating in demand forecasting, in the case of entrusted assets, or (ii) to verify such capabilities according to internal regulations/guidelines prepared by the lead manager), and any institution that participates in demand forecasting in excess of its capability to pay the subscription price may be designated as an unfaithful participant of demand forecasting and allocation of IPO shares to such investor may be prohibited.

The regulation on confirmation of capabilities to pay for subscription prices will be applicable from the registration statements initially filed on or after July 1, 2023, and the designation of unfaithful participants for forecasts in excess of capabilities to pay will take effect from January 1, 2024, after a grace period.

Prevention of Excessive Fluctuations in IPO Share Price

In order to prevent multiple individual investors from suffering losses due to a sharp drop in IPO share prices immediately after an IPO, (i) the Best Practices have been amended to permit underwriters to make differential allocations based on different lock-up periods so as to prevent sale of a large volume of IPO shares in a short period of time after the expiration of a single mandatory lock-up period (to take effect on July 1, 2023), and (ii) the Detailed Enforcement Rules of the KOSPI Market Business Regulations have been amended to change the share price trading range on the day of the IPO to 60%~ 400% of the offering price (currently, 63%~260% of the offering price) to promote active trading on the day of the IPO without suspension, thereby providing investors with fair trading opportunities and expediting the discovery of an equilibrium price in the market (to take effect on June 26, 2023).

It is expected that the follow-up measures to the “Measures to Improve Soundness in IPO Market including Prevention of Fictitious Subscription” will enable subscription and allocation of IPO shares based on actual demand and payment capabilities and provide for the development of a more effective and fairer IPO market.

[Korean Version]