[KOSDAQ Inflated Listings] 4: To Prevent Irresponsible IPO Pricing... Disclose Forecasting Rationale and Clarify Accountability

Strengthen underwriter accountability through put-back options and fee escrow
Publish annual comparisons of post-listing earnings target attainment rates and other metrics

Cases continue to emerge in which KOSDAQ-listed companies that set their offering prices based on earnings forecasts fail to meet their targets. Experts stressed that, to prevent IPOs with inflated offering prices, mechanisms should be introduced to strengthen underwriters' accountability, and the basis and assumptions behind earnings forecasts should be disclosed to investors in greater detail.

In an interview with The Asia Business Daily, Kim Daejong, a professor in the School of Business at Sejong University, said, "Expanding put-back options is an effective way to strengthen underwriters' accountability for setting offering prices. Rather than applying them uniformly for at least one year to all technology-based special listings, it would be preferable to apply them on a differentiated basis to companies that rely heavily on earnings forecasts or carry higher risks." A put-back option gives IPO investors the right to sell their shares back to the underwriter within a specified period. Seo Jiyong, a professor in the School of Business at Sangmyung University, said extending the put-back option period "is effective in curbing inflated offering prices," adding, "However, it should be applied selectively after examining the reasons for any earnings shortfall." By contrast, Lee Seokhun, a senior research fellow at the Korea Capital Market Institute, said that it is difficult to regulate the market through rules and penalties alone. He attributed the lack of effective market checks on underwriters to an investor base focused on short-term gains.

One proposal seen as worth considering to strengthen accountability is to defer payment of part of the underwriting fee for a set period and then pay it based on the company's performance. Professor Kim said, "I believe it would also be quite effective to place 20-30% of the underwriting fee for an initial public offering (IPO) in escrow for one to two years and link its release to the company's performance. The higher the offering price an underwriter sets at the time of listing, the greater the likelihood that it will not receive the deferred fee later. This would give underwriters an incentive to prepare more conservative and objective earnings forecasts for companies." Professor Seo said, "(Deferring fees) helps strengthen accountability after the fact," adding, "The assessment should take into account not only the rate at which earnings targets are met, but also the thoroughness of due diligence and disclosures."

The market has also discussed introducing an "IPO Performance White Paper." The idea is to publicly compare forecast and actual performance by underwriter for several years after listing. The proposal comes with a caveat: precise standards would be needed for administrative sanctions, such as suspending an underwriter's business, when the gap is large. Professor Kim said, "An 'IPO Performance White Paper' should be introduced. If forecast revenue and operating profit at the time of listing were compared with actual results over three to five years and made public, the market could naturally assess how accurately each underwriter evaluated companies." On penalties, he cautioned, "We should be careful about suspending an underwriter's business solely because the discrepancy between forecasts and actual results is 70-80%, since the performance of companies using the technology-based listing track can fluctuate significantly depending on market conditions and technology development schedules." Professor Seo said, "I support disclosing the reliability of forecasts by underwriter. The initial forecasts should be presented alongside the reasons targets were missed." However, he noted, "Rather than imposing penalties based solely on the discrepancy, authorities should establish whether there was false reporting or a breach of due diligence obligations. Under current law, a business suspension can last up to six months; extending it to one year would require a legal amendment."

Some also argued that the key assumptions underlying earnings forecasts should be disclosed transparently to reduce information asymmetry between investors and companies. Professor Kim said, "The key basis for earnings forecasts should be disclosed in as much detail as possible so that investors can assess them. Companies should disclose whether supply contracts have actually been signed, the contract amounts and delivery schedules, and their expected cost ratios and production capacities. For information that constitutes a trade or business secret, it would be preferable to redact the details while disclosing key figures and verifiable evidence. Forecast revenue should be calculated according to standardized methods based on objective data such as contracts, orders, production capacity, delivery schedules and market share, rather than on vague projections that 'the market will grow significantly in the future.'" Professor Seo proposed, "Companies should distinguish confirmed contracts from expected orders and disclose revenue recognition schedules and cost assumptions. Trade secrets can be addressed through confidential reviews by independent institutions."

Others emphasized that disclosing assumptions and scenarios is more important than simply providing figures. Research Fellow Lee said that if only the final figures were presented, it could be difficult for investors to make decisions based on them, and that the same applied to institutional investors. He added, "If companies can explain the assumptions behind a forecast scenario, how it could produce those results, and how results might be somewhat lower, that could help make the information more accountable. If performance falls short because the assumptions were wrong, that may be understandable. If investors can learn why the forecasts were inaccurate, they may have somewhat greater confidence in the underwriter."

Another proposal is to keep a record of the assumptions submitted by companies and underwriters at the time of listing so that the market can assess them. Professor Kim said, "The most important thing is to clearly establish who is accountable for the earnings forecasts made at the time of listing. Records should be kept of what information each company and underwriter submitted and what assumptions they used to set the offering price." He added, "There is a need for ongoing public comparisons, by underwriter, of technology-based special listing companies' rates of meeting earnings targets one, three and five years after listing, their rates of financial distress, and investor returns. This would allow the market to evaluate underwriters' ability to select companies."

Ultimately, experts agree that a carefully designed system is needed. The goal is to avoid blocking innovative companies from listing while ensuring that unreliable forecasts carry consequences. Professor Kim said, "Because technology-based special listings are intended to help innovative companies access the capital market, the system should be improved by holding companies accountable for unreliable forecasts and excessively high offering prices, rather than by making listings more difficult. We should leave room for companies to grow while preventing a system in which individual investors suffer losses because of baseless, overly optimistic projections." Research Fellow Lee said, "It is difficult to regulate the entire market through penalties," but added, "Although cautiously, I agree that regulation is needed in areas where the market is not functioning properly."

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