[E-Daily Marketin JI YEONG-EUI Reporter] A path is opening up for companies preparing for an initial public offering (IPO) to secure long-term investors in advance of their listing. The “cornerstone investor” system, under which institutional investors receive a pre-allocation of a certain volume of shares before the offering price is finalized in exchange for agreeing not to sell the shares for at least six months, will be introduced this November.
From the company’s perspective, the advantage lies in securing “major investors” before the listing, thereby reducing the uncertainty surrounding the success of the public offering. On the other hand, institutional investors must decide on their investment before the price is set and may have their funds tied up for up to 10 months. Given the recent slump in IPO stock prices, analysts predict that the system will likely be used only on a limited basis—primarily for high-quality, large-scale IPOs—during its initial implementation.
According to the investment banking (IB) industry on the 30th, the amended Capital Markets Act, which includes the cornerstone investor system, will take effect on November 13. In line with this, the Financial Services Commission is pushing to amend subordinate regulations covering eligibility requirements and allocation limits.
Cornerstone investors are investors who receive an advance allocation of a portion of the public offering shares intended for institutional investors in exchange for holding them for an extended period. According to the FSC’s amendment, 50% of the allocated shares will be subject to a six-month lock-up period, 30% to an eight-month lock-up period, and the remaining 20% to a ten-month lock-up period.
Limits will also be placed on the scale of advance allocations. On the KOSPI, up to 20% of the allocation intended for general institutional investors may be allocated to cornerstone investors first, while on the KOSDAQ, up to 30% may be allocated. The individual institutional limits are 10% and 20%, respectively.
Once the system is established, companies and underwriters will be able to reduce the uncertainty surrounding IPOs. Preliminary demand forecasting—which involves gauging institutional demand for price and volume prior to the submission of the securities registration statement—will also be permitted, allowing market reactions to be factored in from the very beginning of setting the target offering price range. Financial authorities expect that securing long-term investors in advance will help mitigate the phenomenon of stock prices plummeting immediately after listing due to massive sell-offs by institutional investors.
The problem lies in the institutions’ calculations. Not only must they evaluate companies earlier than in standard demand forecasting, but they are also prohibited from selling their allocated shares for at least six months. In a market like this year’s, where many stocks trade below their offering price after listing, this burden is bound to increase.
As of the 24th, only five of the 26 companies that went public this year have maintained share prices at or above their offering prices. The remaining companies have fallen an average of 44% from their offering prices. Even Deokyang Energygen—the only company among this year’s IPOs to have been listed for more than six months—traded 15.2% below its offering price.
In the early stages of the system’s implementation, the key challenge will be determining how effectively institutions can be attracted. In particular, since investment decisions must be made before the offering price is finalized, the scope of corporate information disclosure and confidentiality management remain key issues. It is reported that the Korea Financial Investment Association plans to discuss detailed operational procedures—such as pre-marketing and information management—through a task force (TF) involving IPO specialists from major securities firms.
Market observers believe that institutional investors will be reluctant to make active long-term commitments until the first successful case emerges. However, it is generally assessed that the domestic IPO market can only establish itself as a new benchmark for success if large, high-quality companies secure cornerstone investors and demonstrate the ability to stabilize share prices after listing.
An official from an asset management firm commented, “From an institutional investor’s perspective, it’s not simply a matter of being the first to receive shares,” adding, “The biggest burden is having to make an investment decision before the price is finalized and then being unable to take any action for 6 to 10 months even if the stock price drops afterward. In a situation like the current one, where IPO performance is poor, they have no choice but to be even more selective.”
