The Financial Services Commission announced that a revision bill for the Financial Investment Services and Capital Markets Act (FSCMA) intended to adopt the cornerstone investor system passed the plenary session of the National Assembly on April 23. Along with the previously passed bill on security token in January this year, this revision bill constitutes a crucial part of the government’s capital market policy reform agendas.
Key Revision Details
a) Introducing preliminary book building
Preliminary book building allows bookrunners to survey market demand before a price band for IPO is determined through the disclosure of a securities registration statement. Under the current law, the act of soliciting for subscription is prohibited prior to the securities registration statement being filed. Thus, it could be seen as a violation of the law if a bookrunner seeks to survey demand (price, quantity, etc.) from institutional investors by providing them with company information prior to the filing of a securities registration statement.
In this regard, the revised FSCMA will grant an exemption to this rule to allow preliminary demand forecasting. Bookrunners will be able to engage in preliminary book building to examine market demand from the stage of establishing an initial price band, and this will facilitate the process of price discovery and help them arrive at a more optimal market price.
b) Establishing rules on cornerstone investors
The cornerstone investor system allows the pre-allocation of shares from the portion of IPO shares allocated for institutional investors to those who have agreed to a lockup of at least six months. In this regard, the revised FSCMA introduces the cornerstone investor system as an exemption to the rule prohibiting the solicitation or subscription prior to the filing of a securities registration statement.
The introduction of cornerstone investors will help to foment investor confidence in the IPO market by ensuring a steady engagement of institutional investors in advance for the medium- to long-term, while effectively addressing the problem of excessive price declines in publicly offered shares shortly after their IPOs.
For cornerstone investors, the government will make sure to bring in place a rigorous set of measures intended to prevent conflicts of interest through a revision to subordinate statutes. Moreover, the part of shares pre-allocated to cornerstone investors will not originate from the portion of IPO shares initially allocated for retail investors (25 percent) but will come from the portion of IPO shares allocated for institutional investors (50 percent for KOSPI and 15 to 35 percent for KOSDAQ), which should raise no concern regarding the issue of fairness between institutional and retail investors.
Further Plan
The revised FSCMA will take effect six months after promulgation. In the meantime, the government will continue to have close communication with institutional and retail investors and underwriters to draw up specific rules regarding preliminary book building, allocation cap for cornerstone investors, and conflicts of interest in a revision to subordinate statutes.
* Please refer to the attached PDF for details.