The financial authorities will grant preferential rights to institutions that promise not to sell short the newly issued shares under the mandatory holding commitment priority allocation system introduced in July this year. The maximum period for the mandatory holding commitment will be expanded from the current three months to six months, and penalties for violations, non-subscription, and non-payment will be strengthened. This is a measure aimed at curbing participation in demand forecasts that only seek short-term profits. The participation of small financial investment companies, which lack evaluation capabilities, in demand forecasts will also be restricted. The lead underwriters will strengthen the internal allocation standards for public offerings to prevent them from focusing solely on maximizing commission income and to enforce mandatory holding for any pre-acquired shares.
On the morning of the 21st, the Financial Services Commission held a joint seminar on 'System improvements for the IPO and delisting system for sustainable capital market value-up' at the Korea Exchange in Yeouido, Seoul, with the Financial Supervisory Service, Korea Exchange, Korea Financial Investment Association, and the Capital Market Research Institute, and announced the 'IPO system improvement plan' containing these details.
The Korean IPO market has been operated primarily for short-term profit investment, resulting in frequent distortions in the pricing and stock price trends after listing. Even institutional investors, who should act as long-term investors, often sold their allocated newly issued shares immediately after listing. Seeking only short-term profits has led to overheating in demand forecasts and no proper pricing of newly issued shares, which resulted in a vicious cycle of sharp increases in stock prices only on the day of listing, followed by declines. The IPO system improvement plan announced by the financial authorities that day aims to resolve these issues and shift the IPO market to an 'investment based on corporate value.'
① Prioritize allocation to mandatory holding commitment institutions and strengthen scoring
The government has decided to introduce the mandatory holding commitment priority allocation system in July. This aims to create an atmosphere where institutional investors participate in demand forecasts cautiously based on corporate value assessment. More than 40% of the allocation for institutional investors will be prioritized for institutions that have made a commitment. To enhance the effectiveness of the system, if the committed amount falls short of 40%, the lead underwriter will acquire 1% of the public offering amount (with a ceiling of 3 billion won) and hold it for six months. However, to ensure a smooth establishment of the system, only 30% will be prioritized until the end of this year, with 40% to be applied starting in 2026.
The maximum scoring period for the mandatory holding commitment will also be expanded from three months to six months. The current scoring period awards two points for 15 days, three points for one month, and five points for three months. A new six-month commitment will be added with a score of seven points. Director Ko Sang-beom stated, 'Currently, the proportion of shares allocated to institutional investors under the mandatory holding commitment is at a low average of 19%. We expect that implementing the priority allocation system and strengthening the scoring will increase this proportion.'
The mandatory holding commitment for policy funds such as high-yield funds and KOSDAQ venture funds will also be expanded. Until now, 5% to 25% of the public offering amount has been separately allocated to policy funds. Moving forward, separate allocation benefits will only be granted for amounts with a minimum mandatory holding commitment of more than 15 days.
Penalties for violations of the mandatory holding commitment, non-subscription, and non-payment will also be strengthened. Among the 45 violations that occurred last year, only five received penalties for participating in demand forecasts. Director Ko noted, 'In the future, we will operate restrictions primarily focused on limiting participation in demand forecasts and will clearly quantify the criteria for reduction to apply them strictly.'
② Strengthening thresholds for participation in demand forecasts by small private equity managers and discretionary investment firms
Additionally, the authorities have decided to strengthen eligibility for participation in demand forecasts. Last year, the number of instances of institutional investors participating in demand forecasts reached 1,900, indicating overheating. There have been criticisms that small private equity managers and discretionary investment firms, lacking evaluation capabilities, contribute to unproductive overheating. The government had previously examined eligibility requirements (two years after registration + 5 billion won in total entrusted assets or 30 billion won in total entrusted assets) only when private equity firms and discretionary investment firms participated with their own assets, without specific criteria for fund and discretionary asset participation. Moving forward, the same eligibility criteria will be applied to fund and discretionary asset participation.
However, if private equity managers and discretionary investment firms commit to holding for more than three months, the eligibility for participation in fund and discretionary asset offerings will remain under the existing method. The regulations for existing funds and discretionary contracts will be deferred until the end of this year. Director Ko stated, 'After the system improvements, we will evaluate whether to alleviate the overheating in demand forecasts and reconsider adjusting the total entrusted asset criteria if necessary.'
Participation in demand forecasts using funds of funds, foreign paper companies, and other indirect means will be restricted. When both the investing and invested funds participate concurrently based on the total fund asset amount, it could cause adverse effects by circumventing the capital contribution ability requirements. Particularly in private equity, multiple indirect contributions are possible, enabling participation that far exceeds actual capital contribution capability. Therefore, the government plans to exclude the invested fund contributions from the capital contribution ability under fundamental principles, except when proved that the invested fund will not participate in the demand forecast.
It will also be a principle to exclude foreign institutional investors with no transaction history and difficult-to-confirm legitimacy from the allocation of newly issued shares. However, if they submit specific evidence indicating that they are operating overseas, their legitimacy will be acknowledged.
To prevent the phenomenon of concentration on the first day of demand forecasts, the government will reform the first-day scoring system. The existing scoring structure awards three points for the first day, two points for the second day, and one point for the third to fifth days. There has been criticism that high scoring on the first day leads to concentration. Consequently, the government will grant the same score for the first through third days. 1.5 points will be awarded for the first through third days, and one point for the fourth and fifth days.
③ Reevaluation of the introduction of cornerstone investors and pre-demand forecasts
Lastly, the government will strengthen the roles and responsibilities of lead underwriters. To this end, the government will continuously push for the introduction of cornerstone investors and the pre-demand forecasting system. This initiative was attempted during the 21st National Assembly through amendments to the Capital Market Act but was discarded due to the expiration of the assembly session. The cornerstone investor system, implemented in Hong Kong, Singapore, Europe, etc., allows pre-allocation to institutional investors before submitting a securities declaration, conditional on protection deposits for a certain period. It is regarded positively for expanding long-term investors. The pre-demand forecasting used in the United States is expected to assist in rationally establishing offering prices by considering market evaluations from the initial price band setting phase.
The internal allocation standards for lead underwriters' newly issued shares will also be specified. Although the 'IPO underwriter work improvement plan' announced in May last year mandated the establishment of internal criteria for allocation of newly issued shares, specific criteria remain insufficient. The government plans to specify essential elements when establishing internal criteria. Expected elements may include methods for priority allocation of mandatory holding commitments, group (tier) settings, allocation criteria for each group, and criteria for weighting.
The mandatory holding for pre-acquired shares by the lead underwriter will also be strengthened. Currently, in the KOSDAQ market, shares acquired by lead underwriters within six months of applying for listing review are subject to mandatory holding based on price disparity rates (offer price - pre-acquisition price). To enhance accountability, the authorities plan to reduce the price disparity rate from 50% to 30%, and increase the minimum mandatory holding period from one month to three months.
The government plans to swiftly complete necessary measures such as amending the regulations of the Korea Financial Investment Association in the first quarter and amending exchange regulations in the second quarter, implementing actionable items immediately from April. Provisions requiring internal system reform or investor guidance that require preparation time will take effect starting in July. As for the introduction of cornerstone investors and the pre-demand forecasting system, which require legal amendments, the government will push for the submission of relevant amendments to the Capital Market Act by the second quarter.