The Initial Public Offerings Law Review: South Korea
There is only one centralised exchange in Korea, the Korea Exchange (KRX), which operates three equity trading markets: the Main Board (KOSPI), the Korean Securities Dealers Automated Quotations (KOSDAQ) market and the Korea New Exchange (KONEX) markets. The listing of equity for Korean initial public offerings (IPOs) is conducted on those three markets.
The KRX is one of the major exchanges in the Asia region. It has good market capitalisation and is a vibrant, attractive market with one of the highest liquidity rates in Asia and a high transaction volume relative to its market capitalisation. Investors can invest in a number of world-renowned Korean companies listed on the KRX, such as Samsung Electronics, Hyundai Motor Company and LG Chem.
The Korean IPO market has expanded significantly in tandem with the exceptional growth of the Korean economy and Korean businesses. The outbreak of the covid-19 pandemic has led to a renewed surge in securities trading, which has resulted in a further increase in liquidity in the Korean securities markets in recent times.
In 2020, the total amount of capital raised through IPOs increased by 40.6 per cent to 4.5 trillion won from the previous year. The IPO by Big Hit Entertainment (now known as HYBE Corporation), the management company of the world-famous idol group BTS, was recorded as the largest Korean IPO in 2020, raising 960 billion won.
A recent trend observed in the Korean IPO market is the increasing use of diverse and specialised forms of IPOs, with the introduction of the Special Technology Assessment Track and the increasing use of specialised vehicles, such as special purpose acquisition companies (SPACs), exchange-traded funds (ETFs) and real estate investment trusts (REITs).
Regulation of IPOs is also evolving in line with this trend and the revamping efforts of Korean regulators and the KRX to increase the attractiveness and competitiveness of the Korean stock markets. For example, the KRX recently announced that it will amend its regulations to relax some of the listing requirements for future growth companies and will extend the time required for those companies to satisfy profit requirements.
Korean regulators have also been continuously developing policies and improving the system to give more autonomy and responsibility to issuers and underwriters throughout the IPO process. As a result of those new developments, coupled with the increase in liquidity in the securities markets, a large number of mega-sized IPOs are anticipated in 2021. Billion-dollar IPOs that are expected to take place in the second half of 2021 include those by LG Energy Solution, Krafton, KakaoPay and KakaoBank. There is a strong expectation that IPOs in 2021 will break the all-time highest record for total capital raised through IPOs, which is currently 10.1 trillion won in 2010.
With regard to foreign listing applicants, the first successful KOSDAQ listing of a foreign issuer, the US biotech company Psomagen, via the Special Technology Assessment Track near the end of 2020 was a noteworthy event in that it was the first of its kind by a foreign issuer. This was quickly followed by another foreign issuer, the US biotech company NeoImmuneTech, listing on the KOSDAQ via the Special Technology Assessment Track in early 2021.
The Special Technology Assessment Track alleviates certain listing requirements, such as having to satisfy certain profit tests, for new KOSDAQ listing applicants; however, until 2018 this special track had only been available to Korean issuers and not foreign issuers. As this special track became available to foreign listing applicants in certain qualified jurisdiction, there has been a great increase in interest by foreign companies to list on the KOSDAQ, especially those in the biotech industry.
Overall, the current trends in the IPO market can be characterised by the increase of mega-sized IPOs, banking on the significant liquidity and active participation of retail investors, as well as the increase of non-standard IPOs through the use of the Special Technology Assessment Track in the KOSDAQ market and the increase of SPACs, ETFs and REITs. Regulation of IPOs and the IPO market is evolving along with these trends.
The Korean IPO market is primarily regulated by the Financial Investment Services and Capital Markets Act (the Capital Markets Act) and the KRX's listing regulations for the various markets. The Financial Services Commission (FSC) and the Financial Supervisory Service (FSS) are the financial regulators under the Capital Markets Act that oversee and regulate the public offering regulations. The KRX supervises the listing process in accordance with the listing regulations.
i Main stock exchanges
The history of the Korean stock market can be traced back to the establishment of the Korean Stock Exchange in 1956, which merged with two other Korean exchanges in 2005 to form the single exchange that exists today, the Korea Exchange (KRX). The KRX currently operates four markets: KOSPI, the KOSDAQ market, the KONEX market and the KRX Derivatives Market. Of those four markets, the KOSPI, KOSDAQ and KONEX markets are the markets for equity trading.
KOSPI is the benchmark exchange market of Korea. It first opened in 1956, and large corporations – such as Samsung Electronics, Hyundai Motor Company, LG Electronics, Naver and Kakao – are listed on this market. KOSPI 200 companies, in particular, attract keen attention from investors, both home and abroad.
KOSDAQ was launched in July 1996 for the purpose of providing capital to start-up companies and small and medium-sized enterprises (SMEs) in tech-savvy areas, such as IT, biotech and cultural technology. KOSDAQ-listed companies tend to be relatively new and young and include companies in relatively young industries, such as the entertainment, software and game industries. Examples of KOSDAQ-listed companies include Celltrion Healthcare and Kakao Games.
KONEX is a relatively new market that launched in July 2013. It focuses on listings by SMEs that do not meet the standards of KOSPI or KOSDAQ. KONEX aims to provide capital to early-stage SMEs. Although KONEX is not yet considered to be very active, it is often used as a stepping stone to a KOSDAQ listing.
Listing on the KRX offers many benefits. From the perspective of companies preparing for an IPO, it has become relatively convenient to raise capital thanks to the recent revitalisation of the IPO market and regulatory efforts to increase the competitiveness of listings on the KRX. For example, a listed company may, by resolution of the board of directors, exclude shareholders' pre-emptive rights (which in Korea is statutorily required, with certain exceptions) when issuing new shares to third parties, which makes it easier for listed companies to raise capital through public offerings. The fact that capital gains tax is not applicable to trading stocks listed on a KRX market (with the exception of trading by major shareholders) is another factor that makes the Korean capital markets attractive to investors.
Most Korean companies tend to prefer listing on the KRX rather than a foreign exchange. In 2006, Gmarket listed on Nasdaq, and HanaTour's global depositary receipts listed on the London Stock Exchange; however, after those listings, Korean companies did not actively list in overseas exchanges until recently, with Coupang's IPO on Nasdaq in 2021. Owing to the success of Coupang's Nasdaq IPO, there has recently been increased demand from Korean companies to list overseas. The KRX is also increasing efforts to remain competitive, so there may be further changes to the regulations relating to IPOs in the near future.
ii Overview of listing requirements
The listing requirements for the KOSPI and KOSDAQ markets are summarised in the tables below.
Listing requirements for the KOSPI market2
|Years in operation since incorporation||At least 3 years.|
|Business size||Equity capital||At least 30 billion won.|
|No. of shares to be listed||At least 1 million shares.|
|Distribution of stocks||There must be at least 500 general shareholders (i.e., the shareholders other than the largest shareholder and significant shareholders), and any one of the following shares requirements must be met:|
(one of options (a) to (e))
|(a) The following sales and profit requirements must be met:|
|Restriction on disposal of shares held by the largest shareholder, etc|
|Transfers of shares||No restriction shall be placed on transfers of shares.|
|* 10 per cent of the number of stocks to be listed, if more than 50 million stocks are to be listed.|
Listing requirements for the KOSDAQ market3
|Classification||Standard company||Technology growth company|
(Special Technology Assessment Track)
|Based on profitability and sales||Based on market valuation and growth potential||Exceptions for technology assessment||Recommendation on growth potential|
|Distribution of stocks (optional)||There must be at least 500 minority shareholders and:|
|Management performance and market valuation (optional)|
|The company must be evaluated by a specialised assessment institution, and the result must be an A rating or higher.||The company must be an SME whose growth potential has been evaluated and recommended by the listing sponsor.|
|Audit opinions||Unqualified opinion for the latest business year.|
|Management transparency||Satisfaction with qualifications of outside directors and the standing auditor.|
|Other requirements||No restrictions on transfers of shares.|
|Other qualitative requirements||Comprehensive consideration of corporate growth potential and sustainability, management transparency and stability, investor protection, sound development of the KOSDAQ market, characteristics of the industry sector, impact on job creation and contribution to the national economy.|
For listing on the KOSDAQ market, the special listing track for technology growth companies (the Special Technology Assessment Track) is also available. The Special Technology Assessment Track provides opportunities for SMEs with exceptional technology to be examined by external assessment institutions and to be listed even without meeting the profitability requirements; even if the present operating results may not be impressive, a company with strong technology and potential to grow can be listed on KOSDAQ either through a professional assessment institution's technological assessment or on the recommendation of a listing arranger. Most of those listings are conducted via the former method.
A technology growth company is a company that has received at least an A grade and a BBB grade or higher on the assessment of its technology by multiple specialised assessment institutions. Early-stage SMEs focusing on biotech, artificial intelligence, IT solutions or robotics that cannot generate enough revenue or profits are increasingly getting listed on KOSDAQ through the Special Technology Assessment Track.
iii Overview of law and regulations
The IPO market is primarily regulated by KRX's listing regulations, which are applied to the listing process, and public offering regulations under the Capital Markets Act, which are applied to the public offering process.
KRX listing regulations
Details of the listing process and requirements are set forth in the KRX listing regulations. The most important process is the listing eligibility review process. A company must prepare and file with the KRX an eligibility review application (ERA) for the listing eligibility review.
Important documents that are required in an ERA include:
- separate and consolidated financial statements of the three most recent fiscal years and auditor's audit reports;
- written confirmation of the safekeeping of the stocks held by the largest shareholders and the safe custody certificate of the stocks held by the largest shareholders issued by the Korea Securities Depository; and
- the register of shareholders and the register of beneficial shareholders as of the end of the latest fiscal year.
In preparation for the ERA, the underwriter must conduct due diligence of the issuer in accordance with the FSS's Standard of Financial Investment Company's Due Diligence. Once the listing eligibility review is approved by the KRX based on the ERA, the remaining steps of the IPO process may be completed.
Public offering regulations under Capital Markets Act
The most important points in the IPO process in the context of the public offering regulations under the Capital Markets Act are the submission of the securities registration statement (SRS) and the date the SRS becomes effective. Restrictions on activities relating to the IPO can be categorised into three stages.
Prior to the SRS filing
The Capital Markets Act states that '[n]o securities shall be publicly offered or sold, unless and until a securities registration statement is filed by the issuer and accepted by the Financial Services Commission in connection with the public offering or sale of the securities.' This been interpreted to mean that prior to the filing of the SRS, any offer, solicitation or sale of securities in respect of a public offering is prohibited. The term 'solicitation' broadly refers to the following activities (solicitation activities):
- informing persons that such securities are to be issued or sold; or
- carrying out procedures – such as advertisement through newspapers, broadcasting or magazines; distribution of printed materials, brochures or leaflets; holding roadshows; and exchange of electronic communication, among other things – that are conducted for the purpose of soliciting the purchase of the securities to be publicly offered or sold.
All solicitation activities are prohibited until the SRS relating to the offering has been filed with and accepted by the FSC. Exemption from categorisation as a solicitation activity is available under the Capital Markets Act if the information provided to the investors is limited.
After the SRS has been filed and accepted by the FSC, until the SRS comes into effect, there are some restrictions on solicitation activities under the Capital Markets Act. It is possible to conduct limited solicitation activities, orally or in writing, once the SRS has been filed and accepted, but only through limited methods, such as using the preliminary prospectus filed with the FSC. In that case, the contents of the preliminary prospectus must be consistent with what is contained in the SRS.
The waiting period is typically 15 business days for a public offering of shares; however, if a major change must be made and applied to the SRS, the waiting period may have to restart, which will increase the actual time required at this stage.
After the SRS becomes effective
Once the SRS becomes effective, solicitation activities can be carried out by use of the registered prospectus. The parties may confirm the offering price and proceed with the allocation and payment process.
The offering process
i General overview of the IPO process
Below is a brief overview of the legal procedures that are generally required during a KRX IPO process. Preparation of the ERA and the SRS filing are the most important processes.
|Initial Preparation||Application for designation of external auditors: application is filed to the FSS.||Pre-preparation and preparation usually takes between two and three months.|
|Appointment of a lead manager (managing underwriter).|
|The lead manager notifies the KRX of the plan for the listing eligibility review.|
|Preparation||The company's internal structure and internal regulations:|
|Underwriters' due diligence (e.g., general corporate, finance and accounting) and legal due diligence.|
|Prior consultation with the KRX is required before the date of the ERA submission.|
|Listing eligibility review||ERA is submitted.||Usually two months.|
|Listing eligibility review: the KRX's examination of qualification standards (e.g., document review and interview).|
|Approval of listing eligibility review.|
|Firm commitment underwriting and SRS filing||Preparation of the SRS, preliminary prospectus and other attachments. For IPOs with international tranches, offering documents must also be prepared concurrently.||Two to three months.|
|Receipt of auditor's comfort letter.|
|Determination of offering price range.|
Firm Commitment Underwriting Agreement.
|SRS submission (FSS's DART website).|
|SRS becomes effective (typically 15 business days after submission).|
|IPO||Fixing of the Offering price.||Roughly 10 to 15 days.|
|Submission of amendments to the SRS with the pricing information.|
|Filing of securities issuance performance report.|
|Listing||Application for registration of paid-in capital increase and new listing.|
|Approval of new listing and commencement of trading.|
The expected time frames set forth in the table above are only indicative, based on usual practice under typical circumstances. The actual time required may vary on a case-by-case basis.
ii Pitfalls and considerations
In addition to the general IPO procedures that have been discussed, below are some other considerations that should be taken into account:
Concurrently with conducting an IPO on the KRX, it is common to also offer an international tranche to investors in the United states or other jurisdictions outside Korea, based on exemptions to public offering rules in those jurisdictions. It is especially common for mega- sized IPOs to contain international tranches.
When there is an international tranche, the laws and regulations of not only Korea but of all other relevant jurisdictions must be complied with to ensure that the offering will not inadvertently violate or trigger a public offering obligation in such jurisdiction.
For Korean IPOs with international tranches, it is common to prepare offering documents in English and to undertake other procedures typically followed by transactions under Rule 144A or Regulations S of the US Securities Act of 1933, as amended.
If there will be an international tranche, restrictions, requirements and processes for the international tranche should also be considered, in addition to the Korean law requirements discussed herein, and care should be taken to, among other things, avoid any material asymmetry in terms of information in the offering document for the international tranche and the SRS.
Designated auditor system
A company that is preparing for an IPO in Korea must make a request to the FSS for a designated auditor. The designated auditor is, in principle, determined randomly. As such, the company's accounting auditor may not be the same entity as the designated auditor of the financial statements during the IPO process.
This may require coordination between the accounting firms in comparing and organising financial statement metrics, which will affect the process of obtaining the comfort letter from the accounting firm for the IPO. The issuer and the underwriter should discuss these issues with the accounting firm in the early stages of the IPO.
iii Considerations for foreign issuers
Listing a holding company v. operating company
If the foreign listing applicant is a holding company, mechanisms to restrict its sale or disposal of shares in its subsidiaries (including operating companies) must be put in place. Since the mechanisms may restrict the listing applicant's future efforts to restructure its group or undertake an M&A, the preference in general is to list an operating company rather than a holding company.
However, using a holding company in a jurisdiction that has been proven to work as the listing vehicle, such as Hong Kong or the Cayman Islands, is also possible. For example, mainland Chinese companies must obtain approval from the China Securities Regulatory Commission to list on a foreign exchange, which procedurally may require more time and incur more fees; therefore, such companies have, in the past, listed their Hong Kong or Cayman Islands holding company for listing on the KRX.
If the foreign listing applicant is from a jurisdiction that is not one of the qualified jurisdictions prescribed under the listing regulations, the foreign listing applicant must establish a Korean holding company for the listing of shares or equity on the KRX.
Korean depository receipts
Foreign listing applicants may have to list by way of Korea depository receipts (KDRs) rather than listing the shares directly. Where the local laws and regulations relating to shares would be incompatible with Korean law requirements, it may not be possible to list the shares of the foreign listing applicant from such a jurisdiction, in which case KDRs may be the only viable option. Korea has recently adopted an electronic registered shares regime, which may not be compatible with the laws of the home jurisdiction of the foreign listing applicant, so foreign listing applicants would most likely have to list by way of using KDRs rather than direct list of its shares on the KRX.
If listing KDRs, the underlying shares will be kept by a local custodian for safe-keeping which will be deposited into the KSD's account and the KSD will issue and list the KDRs.
Amendment to constitutional documents and adoption of internal regulations
The KRX requires that certain items be included in the constitutional documents of the foreign listing applicant, unless prohibited by the laws of the jurisdiction of such foreign listing applicant. The lead Korean counsel and the local counsel must carefully compare and analyse the relevant corporate laws of Korea and the local jurisdiction to recommend what changes should be made to the constitutional documents.
The amendments will include changes that aim to incorporate, among other things, certain shareholder protection measures (e.g., more stringent voting requirements on certain issues and pre-emptive rights) and corporate governance features (e.g., Korean law requirements relating to outside directors and the standing auditor).
A foreign listing applicant must also adopt or strengthen internal regulations and policies to meet the standard required by the KRX.
Certain corporate governance requirements
There are certain Korean corporate governance requirements with which foreign listing applicants may not be familiar, but that they must adopt if they are to list on the KRX. Below are some of those Korean corporate governance features:
An outside director is a non-executive director that does not usually engage in the day-to-day management of the company and is required to satisfy certain independence requirements, which may differ from the independence requirements for independent directors in other foreign jurisdictions. Among other things, a quarter of the board of directors must comprise outside directors, even for foreign listing applicants.
The standing auditor (sometimes called a 'statutory auditor') regime is considered to be an important corporate governance mechanism in Korea that cannot be found in most other jurisdictions. A standing auditor is different from an external independent auditor (i.e., an external accounting firm); he or she is a person that has a permanent position within the company and reviews not only the company's financial and accounting matters but also all other audit and compliance-related matters. He or she also has the authority to make recommendations to the board of directors.
An audit committee that satisfies comparable requirements can be established instead of appointing a standing auditor.
To ensure that the standing auditor or the audit committee can properly perform their corporate governance functions, Korean law and regulations prescribe their authorities and protection mechanisms.
If a foreign company wishes to list on the KRX, it set up a comparable auditor or audit committee system, if not already provided for under the laws of its home jurisdiction. This includes incorporating relevant provisions into its constitutional documents to the extent not prohibited under the law of the foreign company's home jurisdiction.
i Corporate governance requirements of KRX-listed companies
At least one-quarter of the directors of a listed company must comprise outside directors. A company with total assets of 2 trillion won or more must have three or more outside directors that comprise the majority of the total number of directors, and an audit committee must be established with at least two-thirds of its members comprising outside directors.
A company that is only preparing to list on the KRX is not required to appoint an outside director until listing; it must appoint outside directors on or by the first regular shareholders' meeting held after its listing. In most cases, however, most companies preparing for a KRX listing fulfil the above requirements prior to the submission of the ERA.
ii Major disclosure obligations of KRX-listed companies
A KRX-listed company must publish an annual business report within 120 days of the end of the fiscal year, and semi-annual or quarterly reports after the end of the semi-annual period or quarter.
Irregular disclosure (material events)
A KRX-listed company must disclose significant events concerning its financial status, change of management, operational and production activities, receivables and liabilities, investment activities, profit and loss analysis, financial settlements and legal actions. It must further disclose significant events of its holding and subsidiary companies when those events occur.
A KRX-listed company may voluntarily disclose, at its discretion, information that may affect its business or the investors' investment decision.
In the event of market rumours and media-related issues, the KRX may request that the KRX-listed company provide responses of its position, and the KRX-listed company must provide its response within a limited time.
Outlook and conclusion
Korea's IPO market is growing rapidly and is entering a new golden age of IPOs. In conjunction with such growth, more and more retail investors are investing in such IPOs.
To mitigate the side effects of such rapid growth (e.g., steep price declines immediately following an IPO), Korean regulators have been implementing new measures to rapidly react to such situation. For instance, to provide more opportunity for retail investors to invest in IPOs, financial regulators have introduced measures such as requiring equal allocation for at least half of the IPO shares allocated to retail investors, pursuant to which every retail investor in an IPO that has made minimum subscription deposits would have an opportunity to subscribe for at least one IPO share.
At the same time, to deter overheating of the IPO market and maintain stability in the market, financial regulators have also forbidden IPO investors from making multiple subscription deposits with multiple underwriters in an IPO.
Korea's IPO market is expected to grow even more robustly in the future. As such, it will be necessary to monitor the developments being made in regard to the various legal issues.