Newsletter | December 2016, Issue 4
	SECURITIES
	Financial Regulatory Authorities Jointly Announce Reform Measures for the Initial Public Offering (“IPO”) System
	On October 5, 2016, the Financial Services Commission (“FSC”), the Financial Supervisory Service (“FSS”), the Korea Exchange, and the Korea Financial Investment Association jointly announced proposed measures for reforming the IPO system (the “Measures”).
	By the first quarter of 2017, the Measures are expected to take effect after being incorporated into the Enforcement Decree of the FSCMA, the Korea Exchange Regulations, the Subscription Business Regulations, and the Template Form of Securities Issuance Report.
	While the Measures maintain the basic framework of listing and public offering, they offer different listing and public offering options for an issuer and its lead manager.
	Key Points of the Measures
	A. Lead Manager’s Strengthened Discretion on Book Building Procedure, and Obligation to Provide a Put-Back Option
	Under the current system, it is customary for a lead manager to include all institutional investors for book building.
	On the other hand, the Measures allow the lead manager to include certain institutional investors on the IPO book building, and also provide a legal basis for the lead manager to treat certain trustworthy institutional investors as priority.
	To maintain the robust offering price, the Measures require the lead manager to provide a put-back option to general investors subscribing listed shares. The investors should be entitled to exercise the put-back option for at least a month following the IPO.
	B. Optional Disclosure of the Basis for Calculating the Offering Price in the Securities Registration Statement
	Under the existing system, the securities registration statement must disclose the basis for calculating the offering price. This requirement has been criticized for its lack of flexibility, and for its tendency to induce the use of a uniform pricing method.
	To address such shortfalls, the Measures give the lead manager an option to decide whether or not to disclose the basis for calculating the offering price in the securities registration statement.
	In short, the Measures would give the lead manager flexibility (options) on different methods for calculating the offering price.
	C. Use of Auction-Based or Single Agreed Offering Price Permitted
	Under the existing system, all offering price is undertaken uniformly through the general book building method. Such a method, however, has been criticized for restricting the issuer and lead manager’s freedom in determining offering prices.
	To address such a criticism, the Measures permit the issuer and its lead manager to use an auction-based pricing method, or to agree on a single IPO price through mutual consultation. Where the single IPO price is agreed upon, the issuer and lead manager will be required to provide general investors subscribing new shares with a put-back option. Such an option must be exercisable for at least one month following the IPO, with the goal of preventing the possibility of over-estimating the demand.
	D. Lead Manager Allowed to Receive Preemptive Rights, and Expanded Liability for IPO Managers
	The Measures allow the IPO’s lead manager to receive preemptive rights for new shares as compensation for providing its services (including offering the put-back option), besides receiving fees from the issuer. This will permit the lead manager to partake in a financial gain arising from the issuer’s future growth.
	Additionally, under the Measures, all financial investment companies participating in the IPO as managers will be exposed to liability, if the securities issuance report includes inadequate disclosures. Regulators hope this measure will encourage the issuer and its lead manager to be more responsible in conducting the IPO than under the current system.
	E. Strengthened Regulation of Institutional Investors Participating in Book Building
	The Measures restrict an institutional investor from future book building procedures, if such an institutional investor participates in book building in bad faith.
	Also, the lead manager can, at its discretion, exclude, for example, a certain institutional investor, who provides unreasonable information during the book building, or a major shareholder of a company who undertook the IPO in the preceding one-year period. Alternatively, the lead manager can demand such an institutional investor or major shareholder to hold their new shares for at least six months following the IPO.
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	Sun Hun Song shsong@kimchang.com Tae Han Yoon thyoon@kimchang.com Soobin Ahn soobin.ahn@kimchang.com
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