[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 of KOSDAQ-listed companies that set their offering prices based on earnings forecasts failing to meet their targets. Experts say that preventing IPOs with inflated offering prices requires measures to strengthen underwriters' accountability and more specific disclosure to investors of the basis and assumptions behind earnings forecasts.

In an interview with The Asia Business Daily, Kim Daejong, a professor in the Department of Business Administration at Sejong University, said, "Expanding the put-back option, or the right to request a share repurchase, is an effective way to strengthen underwriters' accountability for setting offering prices." He added, "Rather than applying it uniformly for at least one year to all companies listed under the technology growth listing track, it would be preferable to apply it on a differentiated basis to companies that rely heavily on earnings forecasts or face higher risks." A put-back option allows IPO investors to sell their shares back to the underwriter within a specified period. Seo Jiyong, a professor in the Department of Business Administration at Sangmyung University, said extending the put-back option period "is effective in curbing inflated offering prices," adding that "it should be applied selectively after examining the reasons for any earnings shortfall." In contrast, Lee Seokhun, a senior research fellow at the Korea Capital Market Institute, said the market is difficult to regulate 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 viewed as a possible way to strengthen accountability is to defer payment of part of the underwriting fee: holding it back for a set period and paying it out based on the company's performance. Professor Kim said, "I believe it would also be quite effective to place 20-30% of IPO underwriting fees in escrow for one to two years and link their payment to the company's performance." He explained, "The higher an underwriter values the offering price at the time of listing, the greater the chance it may 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 that "the assessment should reflect 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 proposal is to publish comparisons of each underwriter's earnings forecasts and companies' actual results over several years after listing. One caveat is that precise standards would be needed for administrative penalties, such as suspending an underwriter's business, when there is a large gap between forecasts and results. Professor Kim said, "An 'IPO Performance White Paper' should be introduced. If forecast revenue and operating profit at the time of listing are compared with actual results over three to five years and made public, the market can naturally assess how accurately each underwriter evaluated the company." On penalties, he advised, "It would be necessary to exercise caution before immediately suspending an underwriter's business solely because the gap between forecasts and actual results is 70-80%," because "the performance of companies developing new technologies 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 and the reasons for any shortfalls should be presented together." However, he noted, "Rather than imposing penalties based only on the size of the gap, authorities should determine whether there was false reporting or a breach of due diligence obligations. Under current law, a business suspension can last no more than six months, so extending it to one year would require a statutory amendment."

Some also called for transparent disclosure of the key bases for earnings forecasts to reduce the information imbalance between investors and companies. Professor Kim said, "The key bases for earnings forecasts should be disclosed in as much detail as possible so investors can verify them." He added, "It would be preferable to disclose whether orders have actually been contracted, the contract sizes and delivery schedules, and the expected cost ratios and production capacity. For information that constitutes a trade secret or other confidential business information, the details can be redacted while key figures and verifiable evidence are made public. Rather than relying on vague forecasts such as 'the market will grow significantly in the future,' standards should require revenue forecasts to be based on objective information such as contracts, orders, production capacity, delivery schedules and market share." Professor Seo proposed, "Confirmed contracts should be distinguished from expected orders, and revenue recognition schedules and cost assumptions should be disclosed. Trade secrets can be addressed through confidential reviews by independent institutions."

Others stressed that disclosing assumptions and scenarios matters more than the figures themselves. Lee said, "If only the final results are presented, it may be difficult for investors to make decisions based solely on them," adding that institutional investors are no exception. He continued, "If the scenarios underlying a forecast explain the assumptions under which a particular outcome could occur, as well as the possibility that the outcome could be somewhat lower, that could help make the information more accountable." He added, "If results fall short because the assumptions were wrong, that can be understandable. If investors can learn why a forecast was inaccurate, they may have somewhat greater trust in the underwriter."

Another proposal is to keep a record of the assumptions submitted by companies and underwriters at the time of listing so 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. A record should be kept of what information the company and underwriter each submitted and what assumptions they used to set the offering price." He added, "There should be ongoing public comparisons, by underwriter, of technology-track 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 assess underwriters' ability to select companies."

Experts agree that more sophisticated policy design is ultimately needed. The goal is to ensure that poor forecasts carry consequences without blocking innovative companies from going public. Professor Kim said, "Since the technology growth listing track is intended to help innovative companies enter the capital market, it should be improved by holding those responsible for poor forecasts and excessive offering prices accountable, rather than by making listings more difficult." He stressed, "Companies' growth potential should be allowed to flourish, while preventing individual investors from suffering losses because of unsupported, overly optimistic projections." Lee said, "It is difficult to regulate the entire market through penalties alone," but added, "Although I would express this cautiously, I agree that regulation is needed where the market is not functioning properly."

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