Cornerstone Investor System to Take Effect for First Time on Nov. 13; IPO Shares Subject to Up to 10-Month Lockup

Financial Services Commission: Cabinet Approves Amendments to Enforcement Decree of Capital Markets Act

The system requiring cornerstone investors, who receive advance allocations of shares in initial public offerings (IPOs), to hold the shares for up to 10 months will be implemented for the first time on November 13.

The Financial Services Commission said on November 3 that the Cabinet had approved amendments to the Enforcement Decree of the Capital Markets Act, introducing pre-demand surveys and a cornerstone investor system.

A pre-demand survey allows an IPO underwriter to gauge institutional investors' desired purchase prices and order volumes for shares before filing a securities registration statement. By reflecting market demand before setting the indicative price range, the system is expected to enable more appropriate IPO pricing.

The asset-size requirements for professional investors eligible to participate in pre-demand surveys are the same as the current eligibility requirements for participating in bookbuilding. However, for general private fund managers and discretionary investment managers, only the requirement to have at least 30 billion won in total assets under management will apply; the relaxed requirement of 5 billion won for firms registered for at least two years will not apply.

After preparing a due diligence report on a company, underwriters and other parties may provide eligible institutional investors with information about the company that is expected to be disclosed later through a securities registration statement, and ask about their demand, including desired purchase prices and order volumes.

The cornerstone investor system allows some of the shares allocated to institutional investors in an IPO to be allocated in advance to institutional investors that agree to a lock-up period of at least six months. It is expected to help build investor confidence in IPOs by securing stable, long-term institutional investors in advance, and to ease the so-called IPO pricing problem, in which share prices fall sharply due to heavy selling of IPO shares immediately after listing.

To participate as a cornerstone investor, an investor must meet the pre-demand survey eligibility requirements and hold equity capital or assets under management worth at least 20 times the volume of its share subscription. The threshold is based on relative rather than absolute size, given the wide variation in IPO sizes. This also opens up opportunities for small and midsize institutional investors to participate as cornerstone investors.

The lock-up periods for allocated IPO shares have been staggered. Investors may not sell 50% of their allocated shares for six months, 30% for eight months, and the remaining 20% for 10 months. This measure is intended to prevent a concentration of selling that could occur if lock-up periods ended all at once.

Of the shares allocated to cornerstone investors, 50% will be subject to a six-month lock-up, 30% to an eight-month lock-up, and 20% to a 10-month lock-up. This takes into account the risk of concentrated selling if cornerstone investors' lock-up periods were to end on the same date.

The caps on the volume of IPO shares that may be allocated in advance have been set differently for the KOSPI and KOSDAQ markets. Because KOSDAQ IPOs are smaller and a larger share of their offerings is set aside for policy funds, applying the same standards as for KOSPI IPOs could leave fewer shares available for cornerstone investors and reduce institutional investors' incentive to participate. Within the remaining allocation for institutional investors, excluding allocations for retail investors, including individuals; employee stock ownership associations; and policy funds, such as high-yield funds and KOSDAQ venture funds, the overall and individual caps are 20% and 10%, respectively, for KOSPI IPOs, and 30% and 20%, respectively, for KOSDAQ IPOs.

The amendments also prohibit interested major shareholders and related parties from entering into cornerstone investor agreements, preventing the system from being misused to favor affiliates or shift risks onto them. They also prohibit the exchange of direct or indirect benefits in return for entering into a cornerstone investor agreement.

The amendments will be promulgated this month and are scheduled to take effect on November 13.

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