Further to the Financial Services Commission’s December 16, 2022 release on its proposed measures to improve on the soundness of the Korean IPO market, including preventing fictitious IPO subscriptions, amendments have been made recently to the Regulations on Financial Investment Business (the “Financial Investment Regulations”), the Regulations on Securities Underwriting Business (the “Securities Underwriting Regulations”), and the Standards and Guidelines for Book-Running Lead Management (the “Lead Manager Standards”), all of which will become applicable to Korean IPOs that initially submit the securities registration statement on or after July 1, 2023.  These changes are expected to effect, and in some ways, increase the responsibilities and duties of bookrunners in a Korean IPO. 

I.    REGULATIONS ON OBLIGATIONS AND METHODS BY BOOKRUNNERS OF CONFIRMING SUBSCRIBER'S ABILITY TO PAY

A.    Bookrunner Obligated to Confirm Subscriber’s Ability to Pay Share Subscription Price

Applicable to Korean IPOs submitting the securities registration statement on or after July 1, 2023, recent amendments to the Financial Investment Regulations and the Securities Underwriting Regulations will require bookrunners (regardless of whether they are called underwriters, lead managers, managers, bookrunners, global coordinators, or other similar titles) to confirm the subscriber’s ability to pay the share subscription price prior to allocating IPO shares, a violation of which may constitute an unsound business activity under the Financial Investment Services and Capital Markets Act and subject the relevant bookrunner to fines and other penalties. 

Bookrunners will be obligated to confirm the subscriber’s ability to pay the share subscription price by using one of the two methods described below:

(i)    Standard Method: Depending on the properties and assets of the institutional investor participating in the book-building exercise, intrinsic property should be confirmed by reference to its equity capital, and assets under management should be computed by aggregating the total assets of all of the individual accounts participating in the bookbuilding:

●    Where the equity capital shall be the amount of equity capital in the individual balance sheet of the immediately preceding financial quarter (if unavailable, for the prior quarter), and asset under management shall be the average balance during the 3 months prior to the date of bookbuilding participation (if established for less than 3 months, the applicable period is reduced accordingly); and

●    The relevant institutional investor shall provide to the bookrunner a confirmation undertaking containing the equity capital and/or total assets described above and signed by the representative director (or the head of the Korean branch in the case of Korean branch of a foreign entity) or the compliance officer, and the bookrunner shall check the subscriber’s ability to pay the share subscription price by reference to the sum of the equity capital and/or the total assets in such confirmation undertaking; or

(ii)    Alternative Method: Confirm the institutional investor’s ability to pay the share subscription price in accordance with the internal regulations and/or guidelines established with the prior approval of the representative director (or the head of the Korean branch in the case of Korean branch of a foreign entity) or the compliance officer.

II.    GROUNDS FOR SANCTIONS AGAINST PARTICIPANTS WITH UNFAITHFUL DEMAND FORECASTING

A.    Prohibition on Allocation of IPO Shares to Institutional Investors Lacking Capacity to Pay Share Subscription Price
Pursuant to the recent amendments to the Securities Underwriting Regulations, the proposed participation amount of an institutional investor participating in the bookbuilding must not be more than the amount of share subscription price such investor would be capable of paying.  If an institutional investor’s proposed participation amount exceeds the amount such investor would be capable of paying, the bookrunner must not allocate any IPO shares to such account, and needs to report such unfaithful bookbuilding participation activity to the Korea Financial Investment Association (the “KOFIA”). The KOFIA may designate such bookbuilding participant as an unfaithful bookbuilding participant provided that KOFIA may exempt such designation in case of a simple misunderstanding or mistake. 

B.    Penalties for Institutional Investors Failing to Provide Supporting Materials Requested by Lead Manager 
If an institutional investor fails to comply with the lead manager’s request for supporting material in connection with a lock-up commitment without justifiable cause or provides false information, the lead manager must report the same to the KOFIA and will be prohibited from allocating IPO shares to such institutional investor.  Prior to this regulatory amendment, there was no regulatory source to impose penalties on institutional investors that fail to provide the supporting materials requested by the lead manager in connection with a lock-up commitment, but with this regulatory amendment, there will be a regulatory source to subject such institutional investors to penalties for failing to comply with such lead manager’s request for supporting materials. 

III.    AMENDMENT TO THE LEAD MANAGER STANDARDS REGARDING THE BOOKBUILDING PERIOD AND THE ALLOCATION FOR LOCK-UP COMMITMENTS
A.    Bookbuilding Period Required to be Open for 5 or More Business Days
Prior to this recent amendment to the Lead Manager Standards, there were no explicit guidelines on how long the bookbuilding period must be kept open, so in practice, it was not uncommon to have bookbuilding periods of 2 business days. However, to ensure that sufficient time is available for adequate price discovery, the Lead Manager Standards has been amended to require that the bookbuilding period be open for 5 or more business days, provided that the bookbuilding period may be varied if necessary in consideration of the timeline for the issuer’s funding needs, market conditions, offering size, etc. 
Furthermore, this recent amendment to the Lead Manager Standards also prohibits allocation of IPO shares to institutional investors that fail to provide a proposed IPO price in the bookbuilding process, except in certain limited circumstances.

B.    Setting Principles for Priority Allocation for Lock-up Commitments
Even prior to this recent amendment, the Lead Manager Standards did require that IPO shares be “preferentially” allocated to bookbuilding participants that commit to a lock-up arrangement whereby such bookbuilding participant commits to not selling or otherwise disposing, etc. the IPO shares for a certain period of time after the IPO, which has shown to reduce extreme price fluctuation of the share price in the initial period immediately after the IPO. To further promote institutional investors’ entry into such lock-up commitments, this recent amendment to the Lead Manager Standards will require that bookrunners set the principles on giving “priority” allocation to bookbuilding participants that commit to such lock-up arrangements. Each bookrunner may establish its own principles, such as giving the highest weight to those agreeing to a lock-up, or having differentiated allocations depending on the lock-up period, which, with the approval of the compliance officer, may be varied in consideration of the IPO stock or market conditions.

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Bae, Kim & Lee LLC has extensive experience and expertise in advising on the most sophisticated and high-profile IPOs in Korea.  Please do not hesitate to contact us with any queries regarding this Legal Update.