Equity capital markets in South Korea: regulatory overview

A Q&A guide to equity capital markets law in South Korea.

The Q&A gives an overview of main equity markets/exchanges, regulators and legislation, listing requirements, offering structures, advisers, prospectus/offer document, marketing, bookbuilding, underwriting, timetables, stabilisation, tax, continuing obligations and de-listing.

To compare answers across multiple jurisdictions visit the Equity Capital Markets Country Q&A tool

This Q&A is part of the global guide to equity capital markets law. For a full list of jurisdictional Q&As visit www.practicallaw.com/equitycapitalmarkets-guide.

Wonhyung Kim, Yoon & Yang LLC
Contents

Main equity markets/exchanges

1. What are the main equity markets/exchanges in your jurisdiction? Outline the main market activity and deals in the past year.

Main equity markets/exchanges

The equity market of the Korea Exchange (KRX) consists of the:

  • KOSPI market. This market was launched in 1956 and is mainly used for medium to large-sized blue chip companies. It has a total market value of KRW1,310 trillion. There are currently 762 companies listed on the KOSPI market and the transaction amount per day is KRW5,897.4 billion.

  • KOSDAQ market. This market was launched in 1996 and is mainly used for small to medium-sized venture companies and companies with potential for growth. It has a total market value of KRW194 trillion. There are currently 1,069 companies listed on the KOSDAQ market and the transaction amount per day is KRW4,484.9 billion.

  • KONEX market. This market was launched in 2013 and is mainly used for initial start-up, small to medium- sized venture companies. It has a total market value of KRW2.6 trillion. There are currently 75 companies listed on the KONEX market and the transaction amount per day is KRW590 billion.

The KOSDAQ market and the KONEX market have more of a lax listing requirement in comparison to the KOSPI market. However, if a company is listed on the KOSPI market, this helps build public trust regarding the company and is also an effective marketing tool.

Market activity and deals

A total of 15 foreign companies are listed on the KRX (four are traded on the KOSPI market and 11 on the KOSDAQ market).

There was no foreign company which became newly listed on the KRX in 2015. Although it was known that multiple foreign companies incorporated in China, the United States, Indonesia, the Philippines and the United Kingdom were under preparation to be listed on the KRX, especially the KOSDAQ market, none of them made it into the market in 2015.

In 2015, 16 companies became newly listed on the KOSPI market and 122 on the KOSDAQ market, recording the largest amount of new listings in recent years. One of the most important IPOs in 2015 in the KOSDAQ market was the listing of DoubleUGames Co, Ltd securities in the amount of KRW277.7 billion.

 
2. What are the main regulators and legislation that applies to the equity markets/exchanges in your jurisdiction?

Regulatory bodies

The Korea Exchange (KRX) markets are regulated by the Financial Services Commission, the Financial Supervisory Service, and the KRX. The Financial Services Commission reviews registration statements submitted, and if needed, requests additional reports, conducts investigation, and imposes sanctions under section 120 and section 131 of the Financial Investment Services and Capital Markets Act (FISCMA). However, the actual receipt, review and investigation of registration statements are conducted by the Financial Supervisory Service (Table 20, Enforcement Decree of the FISCMA). The KRX establishes and enforces regulations related to IPOs, disclosure, and business operations (among other things). It has a market audit committee that investigates suspicious trading activities and/or members and resolves disputes (sections 386 to 401, FISCMA).

Legislative framework

Trading activities in the KRX equity/securities market are regulated by the:

  • FISCMA.

  • Korean Composite Stock Price Index (KOSPI) Market Business Regulation and its enforcement rules.

  • Korean Securities Dealers Automated Quotations (KOSDAQ) Market Business Regulation and its enforcement rules.

  • KONEX Market Business Regulation and its enforcement rules.

Regulations on the Issuance and Disclosure of Securities (a notification by the Financial Services Commission) and Regulations on the Underwriting Business (rules of the Korea Financial Investment Association) and their respective enforcement rules are also applicable.

 

Equity offerings

3. What are the main requirements for a primary listing on the main markets/exchanges?

Main requirements

The Korea Exchange (KRX) evaluates the listing eligibility of companies through formal listing review requirements (quantitative criteria) and qualitative review requirements (qualitative criteria). The formal listing review requirement is the qualification a company must meet to apply for preliminary listing review (for example, the business operations of a company, the business outcomes and shareholders). Without meeting this requirement, a company will be unable to apply for a preliminary listing review by the KRX. Qualitative review requirements include the continuity of the company, transparency of the business operations, and protection of investors (see below). If a company does not satisfy a certain criterion under the qualitative review requirements, the KRX will determine the listing eligibility of the company based on a comprehensive review of other criteria.

The listing requirements differ from market to market (that is, the KOSPI market, KOSDAQ market, and KONEX market).

Quantitative criteria

KOSPI market. The following requirements must be met for a company to be listed on the KOSPI market (section 29, KOSPI Market Listing Regulation):

  • The company must have been in operation for three or more years.

  • The expected number of shares to be listed must be one million or more.

  • The paid-in capital must be KRW30 billion or more.

  • There must be 700 or more ordinary shareholders.

  • The company's recent sales must amount to KRW100 billion or more and the previous three year sales average must amount to KRW70 billion.

  • The company has recognised operating profit, profit as containing income and loss before income taxes, and net profit.

  • The company's return on equity (ROE) and profits must meet one of the following:

    • ROE is at least 5% (in the most recent year) and at least 10% (three-year sum);

    • profit is at least KRW3 billion (in the most recent year) and at least KRW6 billion (three-year sum); or

    • a company with KRW100 billion of shareholders' equity has at least 3% ROE or at least KRW5 billion profit, and has positive operating cash flow.

  • The company must have received an "appropriate" auditor's opinion in the previous year.

  • There must be no provision in the company's articles of incorporation limiting the transfer of shares.

The fifth to the seventh requirements listed above (and the sub-requirements under the seventh requirement) can be alternatively satisfied by meeting one of the following conditions:

  • The sales amount of the latest fiscal year must be at least KRW100 billion, and the base market capitalisation at the application date of the initial listing must be at least KRW200 billion.

  • The profit of the latest fiscal year must be at least KRW5 billion, and the base market capitalisation at the application date of the initial listing must be at least KRW200 billion.

  • The base market capitalisation at the application date of the initial listing must be at least KRW600 billion, and equity capital must be at least KRW200 billion.

Qualitative review

The qualitative review involves the review of the:

  • Continuity of the company. This includes the continuity of operations, stability of finance, and other business issues (including the existence of conflict and litigation).

  • Transparency of the business operations. This includes corporate governance, internal control systems, and fiscal transparency.

  • Protection of investors. This includes disclosure transparency, protection of minority shareholders (including existence of a lock-up period), and stock market integrity.

The above is generally also applicable for the IPO of foreign shares. However, global blue chip companies that have been listed at qualified foreign securities markets (for example, NASDAQ, Tokyo Stock Exchange, and the London Stock Exchange) for five years or more that meet certain requirements may be exempt from qualitative review.

Minimum size requirements

The minimum number of shares to be listed on the KOSPI market is one million.

Trading record and accounts

No specific requirements exist.

Minimum shares in public hands

The company must meet one of the following requirements:

  • Ordinary shareholders (shareholders excluding the largest shareholder, related parties, and major shareholders (shareholders that each hold 10% or more of the company)) must hold 25% or more of the total shares, or five million or more shares.

  • Publicly offered shares must account for 25% or more of the total shares, or five million or more shares.

  • Publicly offered shares must account for 10% or more of the total shares and the number of publicly offered shares based on the paid-in capital (or the base market capitalisation as at the application date of the initial listing) is as follows:

    • KRW50 billion to KRW100 billion (or KRW100 billion to KRW200 billion): one million shares or more;

    • KRW100 billion to KRW250 billion (or KRW 200 billion to KRW500 billion): two million shares or more; and

    • KRW250 billion or more (or KRW500 billion or more): five million shares or more.

  • If the shares are simultaneously publicly offered domestically and abroad, the shares must account for more than 10% of the total number of shares, and the number of domestically publicly offered shares must be at least one million (if the share has a face value of KRW5,000).

 
4. What are the main requirements for a secondary listing on the main markets/exchanges?

Main requirements

Listing requirements for secondary listing (in the case of a foreign company listed on a foreign stock exchange) are generally the same as for a primary listing (see Question 3, Main requirements). This is with the exception of:

  • The share distribution requirement, where the number of ordinary shareholders that acquired shares through domestic public offering must be 700 or more, and other requirements for share distribution (for example, minority shareholders must own 25% or more of the total number of outstanding shares) are exempt (section 53(1)(2)(A), KOSPI Market Listing Regulation).

  • The lock-up period requirement is not applicable (section 52(2)(1), KOSPI Market Listing Regulation).

A new system has recently been implemented for the secondary listing of a foreign company that has been listed at a qualified foreign stock exchange for three years or more. If the company meets certain minimum requirements, the corporate governance standards of the country of incorporation will be acknowledged. If a foreign company listed at a qualified foreign stock exchange for three years or more appoints one or more outside director(s), and appoints a statutory auditor or establishes an audit committee, the requirements of corporate governance generally required for domestic companies are not applicable (section 77(3) and section 78(3), KOSPI Market Listing Regulation).

Minimum size requirements

The minimum number of shares to be listed on the KOSPI market is one million.

Trading record and accounts

No specific requirements exist.

Minimum shares in public hands

The number of ordinary shareholders that acquired shares through domestic public offering must be 700 or more, but other requirements for share distribution (for example, minority shareholders must own 25% or more of the total number of outstanding shares) are exempt (section 53(1)(2)(A), KOSPI Market Listing Regulation).

 
5. What are the main ways of structuring an IPO?

An IPO is usually made by way of the issuance of new shares, the sale of existing shares, or both methods at the same time.

The issuance of new shares is a type of public offering where a company issues new shares to sell to 50 or more unspecified investors that result in the increase of capital. The sale of existing shares is another type of public offering where the shares already held by the existing shareholders are sold to 50 or more unspecified investors (under which existing shareholders will be able to recover their investment funds).

In the past, the sale of existing shares was regulated. This was due to the fact that financing the company with new funds raised was considered to be desirable. Recently, the sale of existing shares has been permitted without the need for regulation.

If new shares are issued, the share ratio of the existing shareholders will decrease. For the sale of existing shares, the control of a company can be protected against financial investors after the company is listed.

An issuing company applying for listing must submit a registration statement to the Financial Services Commission that includes information on the equity that will be publicly offered or sold.

 
6. What are the main ways of structuring a subsequent equity offering?

Certain restrictions that do not apply to non-listed companies apply to listed companies regarding capital increase and determining the issuing price. The capital increase of a listed company through an IPO is provided under section 165-6 of the Financial Investment Services and Capital Markets Act (FISCMA).

In principle, a listed company can issue new shares by offering them only to its shareholders, in which case the existing shareholders must subscribe for new shares according to their ownership ratio. In addition, third party allocation is possible, under which new shares are issued to third parties. However, this is only allowed in certain circumstances (for example, for the purposes of new technology development in co-operation with the third party) because it may infringe on the pre-emptive rights of existing shareholders.

A public offering for a listed company can be categorised into ordinary public offering and shareholder-priority offering. An ordinary public offering is when the opportunity to subscribe for new shares is provided to unspecified persons (that is, the general public) including existing shareholders, and new shares are issued to those who subscribed. A shareholder-priority offering is when the opportunity to subscribe for new shares is provided first to existing shareholders, and then to unspecified persons for the unsubscribed portion of shares.

 
7. What are the advantages and disadvantages of rights issues/other types of follow on equity offerings?

See Question 6 for ways in which a listed company can increase its capital through the issuance of new shares (for example, by offering them to shareholders).

When offering to shareholders, the control of the company will not be diluted because the original ownership percentage will be maintained. The cost of issuance is less and the issuance procedure is simple, however if a large amount of shares are to be issued, offering to shareholders may not be suitable. This is because a large amount of unsubscribed shares may exist (depending on the financial situation of the existing shareholders).

Third party allocation (including an ordinary public offering) must be supported by the company's articles of incorporation because the pre-emptive rights of the shareholders may be infringed.

 
8. What are the main steps for a company applying for a primary listing of its shares? Is the procedure different for a foreign company and is a foreign company likely to seek a listing for shares or depositary receipts?

Procedure for a primary listing

The process for a primary listing is as follows:

  • Listing preparation phase. This phase involves the:

    • execution of a primary broker agreement;

    • due diligence conducted by the primary broker (for example, amendment of the articles of incorporation and adjustment of internal control systems); and

    • pre-IPO consultation with the Korea Exchange (KRX).

  • Preliminary review phase for listing (KRX). This phase involves the:

    • submission of request for the preliminary listing review;

    • preliminary listing review;

    • review of the listing committee; and

    • notification on the result of the preliminary listing review.

  • IPO preparation phase (Financial Supervisory Service). This phase involves the:

    • submission and review of registration statement;

    • effectuation of registration statement; and

    • public offering.

  • IPO phase (KRX). This phase involves the:

    • submission of IPO application;

    • approval of IPO; and

    • trading of shares.

Procedure for a foreign company

In general, the procedure above equally applies when listing a foreign company, with the exception of the following:

  • A foreign company that wishes to be listed does not need to apply to the Securities and Futures Commission for the appointment of an external auditor. The foreign company can appoint a domestic or foreign accounting firm as its external auditor (although the firm will need to be qualified to a certain level).

  • When listing foreign securities, the issuing company applying for listing must appoint an IPO agent (a person that has an address or residence in Korea) to represent and act as an agent before the KRX (section 14, KOSPI Market Listing Regulation).

  • Global blue chip companies that have been listed at qualified foreign securities markets for five years or more and that meet certain requirements may be exempt from qualitative review (see Question 3, Qualitative review).

 

Advisers: equity offering

9. Outline the role of advisers used and main documents produced in an equity offering. Does it differ for an IPO?

The main advisers on an equity offering are as follows.

Investment banks

An investment bank, acting as the primary broker manages the public offering process (for example, conducting due diligence).

Law firms

Law firms provide legal advice to issuers on the public offering procedures and assist in preparing documents that meet the filing and disclosure obligations.

Accounting firms

Accounting firms provide any necessary accounting services that relate to the public offering.

Primary broker

In the case of an IPO, the primary broker also oversees the overall procedures including the execution of a primary broker agreement and the actual IPO.

The first part of a registration statement provides information on public offering and sales and the second part of a registration statement provides information on the issuer (section 125(1), Enforcement Decree of the Financial Investment Services and Capital Markets Act (FISCMA); sections 2 to 6, Regulations on the Issuance and Disclosure of Securities). The registration statement must be submitted with the articles of incorporation and the corporate registry of the issuer, and a copy of the minutes of the general meeting of shareholders or board of directors at which the corporate resolution for the equity offering was made. For public offering, the preliminary listing review documents provided by the Korea Exchange confirming that the equity is suitable for listing must also be submitted (section 125(2), Enforcement Decree of the FISCMA). Items to be listed in the registration statement or attachments may be different if the issuer is a foreign company (sections 2 to 11, Regulations on the Issuance and Disclosure of Securities).

Certain documents must be submitted when listing at the KOSPI market. The following must be submitted when applying for the preliminary listing review (Tables 1 and 2, Enforcement Rules of the KOSPI Market Listing Regulation):

  • The preliminary listing review form.

  • Financial statements and audit reports for the previous three years.

  • The largest shareholder's commitment letter of continuous holding of shares.

  • The Korea Securities Depository's confirmation of custody of shares owned by the largest shareholder.

  • The certificate forms for the shares (alternatively, the stock transfer agency's certificate proving that the shares were issued in the uniform securities certificate form).

  • Certified copy of corporate registry.

  • Articles of incorporation.

  • The current shareholder roster from the most recent fiscal year-end and the shareholder roster of the beneficial shareholders.

The following must be submitted when applying for an IPO (Table 3, Enforcement Rules of the KOSPI Market Listing Regulation):

  • The IPO application form.

  • Specifications on the IPO.

  • IPO agreement.

  • The certificate forms for the shares (alternatively, the stock transfer agency's certificate proving that the shares were issued in the uniform securities certificate form).

  • Confirmation letter of the record in the depositor's registry.

  • Certificate for payment of shares.

  • Certified copy of corporate registry.

  • Copy of report on the result of stock issuance.

  • Statement on stock distribution.

  • Copy of the share transfer agency agreement.

 

Equity prospectus/main offering document

10. When is a prospectus (or other main offering document) required? What are the main publication, regulatory filing or delivery requirements?

Prospectus (or other main offering document) required

An issuing company applying for listing that has received approval at the preliminary listing review must submit a registration statement to the Financial Services Commission through the Financial Supervisory Service. A registration statement provides information on the issuer and the securities, and is a disclosure document that becomes the basis of investor solicitation. An issuer must submit a registration statement prior to publicly offering or selling its securities, and can only solicit investors after the registration statement has been accepted by the Financial Services Commission.

A prospectus is an investment solicitation document that is provided to investors for the purpose of soliciting securities investments. A prospectus must be submitted to the Financial Services Commission on the day the relevant registration statement becomes effective (section 123-1, FISCMA). In principle, this means after a certain period has passed since the acceptance of the registration statement (five days for secured bonds, collateralised bonds, and asset-backed securities and seven days for unsecured bonds) (section 120, FISCMA).

If a preliminary prospectus or a short-form prospectus is used for the solicitation of an offer prior to the effective date of the registration statement, the prospectus must be attached and submitted to the Financial Services Commission on the day the registration statement is submitted (section 125(1), Enforcement Decree of the FISCMA).

Main publication, regulatory filing or delivery requirements

The issuing company must make the investment prospectus available to the general public at the following locations (section 123(1), FISCMA; section 13(1), Enforcement Rule of the FISCMA):

  • Company headquarters.

  • Financial Services Commission.

  • The place in which affairs relating to the subscription are handled.

An investment prospectus must be used when soliciting an offer to invest in securities and such securities cannot be acquired or sold if the investment prospectus is not delivered to an investor (section 124(1), FISCMA).

 
11. What are the main exemptions from the requirements for publication or delivery of a prospectus (or other main offering document)?

Delivery of a prospectus is exempt for the issuance or sales of securities to the following investors (who have a lesser need to be protected) (section 124(1), FISCMA; section 132, Enforcement Decree of the Financial Investment Services and Capital Markets Act (FISCMA)):

  • Professional investors.

  • Accounting firms, credit rating agencies, persons who provide accounting, consulting and similar services to the issuer with an officially recognised qualification certificate (for example, a certified public accountant, appraiser, attorney-at-law, patent attorney, tax accountant) and related parties to the issuer.

  • Persons who expressed their intent to refuse receipt of an investment prospectus in writing, by phone, cable, facsimile, e-mail or similar telecommunication methods.

 
12. What are the main content or disclosure requirements for a prospectus (or other main offering document)? What main categories of information are included?

A prospectus must include identical information as the registration statement and must not omit any material facts (section 123(2), Financial Investment Services and Capital Markets Act (FISCMA)). The first part of a registration statement must provide information on the public offering and sales. The second part must provide information on the issuer (section 125(1), Enforcement Decree of the FISCMA; sections 2 to 6, Regulations on the Issuance and Disclosure of Securities).

First part of the registration statement

The first part of the registration statement must include:

  • General information about the public offering or sales.

  • Rights to the securities.

  • Investment risks to acquiring the securities.

  • Information on the underlying assets (in the case of derivative-linked securities).

  • Opinion of the underwriter (where an underwriter exists).

  • Purpose of raising funds.

  • Information regarding market-making and stabilisation.

  • Other matters necessary to protect investors.

Second part of the registration statement

The second part of the registration statement must include:

  • Overview of the company.

  • Scope of the business.

  • Financial information.

  • An auditor's report.

  • Information on the organisation of the company (for example, board of directors) and its affiliated companies.

  • Information on the shareholders.

  • Information on the officers and employees.

  • Information on the promoters.

  • Information on transactions with related parties.

  • Supplementary schedules.

  • Changes and progress to matters provided in the report on material facts and non-periodic disclosure matters.

  • Information about contingent liabilities.

  • Details on the usage of funds.

  • Other matters necessary to protect investors.

A separate statement on the working capital of a registrant is not required, but it can be calculated based on the items related to finances listed above.

An auditor's report must be attached when submitting a registration statement and the accounting standards used in the report must be in accordance with South Korean International Financial Reporting Standards (K- IFRS). Under the standards, a separate working capital statement is not required.

If the accounting standards of a foreign company are different from the accounting standards provided under the Act on External Audit of Stock Companies, the following information must be submitted together with an auditor's report (section 169(3), FISCMA; section 190(2), Enforcement Decree of the FISCMA; sections 4 to 13(1), Regulations on the Issuance and Disclosure of Securities):

  • The specific differences between the accounting standards of the foreign company and the Korean accounting standards.

  • How the differences affect the financial statements of the relevant company.

  • Summarised financial statements for the two most recent business years applying Korean accounting standards for comparison purposes.

However, the above information does not need to be provided if the following are both satisfied (sections 4 to 13(2), Regulations on the Issuance and Disclosure of Securities):

  • The financial statements of the foreign company are based on the International Accounting Standards (IAS) or the US GAAP.

  • The financial statements were audited and have received approval under the laws of the jurisdiction where the company is incorporated or listed.

 
13. How is the prospectus (or other main offering document) prepared? Who is responsible and/or may be liable for its contents?

An issuing company applying for listing drafts the registration statement (including the prospectus) based on the advice of the primary broker, the accounting firm, and law firm. The primary broker will review the contents of the draft registration statement based on information obtained from due diligence, the opinion of an outside auditor, and the legal review conducted by a lawyer.

There are civil and criminal liabilities regarding the prospectus.

Civil liabilities

The following person(s) are liable for damages inflicted upon any person as a result of acquiring securities by including a false description or representation of any material fact in a registration statement and/or an investment prospectus (including a preliminary investment prospectus and short-form investment prospectus) or omitting a material fact (section 125(1), Financial Investment Services and Capital Markets Act (FISCMA)):

  • The registrant of the relevant registration statement and the directors of the issuer at the time of filing the registration statement.

  • A person who instructed or executed the preparation of the registration statement.

  • A certified public accountant, a certified appraiser, a specialist in credit rating, an attorney-at-law, patent attorney or tax accountant who certified with his signature that the descriptions of the registration statement or the supplements to that registration statement are correct.

  • A person who consented to include his statement of evaluation, analysis, or verification in the description of the registration statement or the supplements to that registration statement, and confirmed that statement.

  • The underwriter or broker of the securities.

  • A person who prepared or delivered the investment prospectus.

  • The seller of the securities at the time the registration statement for sale was filed, if the case involved the sale of securities (as opposed to the issuance of new securities).

However, the above person(s) will not be liable if either (section 125(1), FISCMA):

  • He can prove that he was unable to discover the inclusion or omission of information even if he had exercised reasonable care.

  • The person who acquired the securities knew of the inclusion or omission of information at the time when he made an offer to acquire the securities.

Criminal liabilities

A person who falls under any of the following will be sentenced to imprisonment of up to five years or to a fine of up to KRW200 million (section 444(13)(c), FISCMA):

  • A person who included a false description or representation of any material fact in a registration statement or omitted a material fact.

  • A person who signed the registration statement as the representative director or a director of the issuer while knowing the fact that there was a false statement or representation of a material fact or an omission of a material fact.

  • A certified public accountant, appraiser, or an expert in credit rating who signed a document to certify that the document is true and correct while knowing the fact that there was a false statement or representation of a material fact or an omission of a material fact.

In addition, if a person solicits to offer, sell or let any other person acquire securities without submitting an investment prospectus to the Financial Services Commission or delivering an investment prospectus, he will be punished by imprisonment of up to one year or by a fine of up to KRW30 million (section 446(21) to (23), FISCMA).

Penalty surcharge or administrative measures

When the registration statement has not been filed, or there exists a false description or misrepresentation of a material fact in the registration statement, the Financial Services Commission can either (section 132, FISCMA; section 138, Enforcement Decree of the FISCMA):

  • Disclose relevant facts to the public.

  • Order the registrant of that registration statement, an issuer, seller, underwriter, or intermediary of securities to make a correction to that statement.

  • Suspend or prohibit the issuance of such securities or any other transaction.

Furthermore, in the case of the above violation of the disclosure requirements, the Financial Services Commission can impose a penalty surcharge on a person within the limit of 3/100 of the amount of the public offering or sale written on the relevant registration statement (or KRW2 billion if 3/100 of the amount of the public offering or sale exceeds KRW2 billion) where that person is any of the following (section 429(1), FISCMA):

  • The registrant of the relevant registration statement and directors of the issuer at the time of filing the registration (referring to persons in a similar position if there is no director, or promoters if the registration statement was filed before the company was incorporated).

  • A person who instructed a director to conduct business by using his influence over the company who instructed or executed the preparation of the registration statement.

  • A person who conducted business in person under the job title of director who instructed or executed the preparation of the registration statement.

  • A person, other than a director, who conducted the business of the company by using a title which may give the impression he is authorised to conduct the business of the company (such as honorary chairman, chairman, president, vice-president, executive director, managing director, director, or others) who instructed or executed the preparation of the registration statement.

  • A certified public accountant, a certified appraiser, a specialist in credit rating, an attorney, a patent attorney, a tax accountant, or any similar person with an officially recognised qualification certificate, who certified with his signature that the descriptions of the registration statement, or the supplements to it, are true and correct (including organisations to which any of them belong).

  • A person who consented to include his statement of evaluation, analysis or verification in the descriptions of the registration statement, or the supplements to it, and confirmed that statement.

  • An underwriter or intermediary of the securities.

  • A person who prepared or delivered the investment prospectus.

  • The seller at the time the registration statement for sale was filed, if the case involved a sale of securities.

 

Marketing equity offerings

14. How are offered equity securities marketed?

An investment prospectus must be used when soliciting an offer to invest in securities. The securities cannot be acquired or sold if the investment prospectus is not delivered to an investor (section 124(1), Financial Investment Services and Capital Markets Act (FISCMA)).

Only licensed financial investment business entities are allowed to advertise any financial investment instrument, and the advertisement must include the name of the financial investment business entity, descriptions of the financial investment instruments, and the risks contingent on the investment (section 57, FISCMA).

 
15. Outline any potential liability for publishing research reports by participating brokers/dealers and ways used to avoid such liability.

An investment trader or investment broker must not disclose to the public or provide research and analytical data on certain securities to a specific person from the date an agreement for public offering or sales has been executed to 40 days from the initial listing of the securities (section 71(4), Financial Investment Services and Capital Markets Act (FISCMA)). The person in violation of this requirement will be punishable with imprisonment for up to five years or a fine of up to KRW200 million (section 444(8), FISCMA).

In addition, no financial investment business entity is allowed to commit any of the following acts when making an investment recommendation (section 49, FISCMA):

  • Providing false information.

  • Providing a decisive judgment on an uncertain matter, or providing information that is likely to mislead and cause an uncertain matter to be considered to be certain.

  • Using a method of real-time conversation (for example, a personal visit and/or telephone call) without an investor's request for an investment recommendation.

  • Continually repeating investment recommendations, despite the investor to whom an investment was recommended having revealed an intention to reject the recommendation.

  • Soliciting investment in exchange of providing a loan, without a request from an investor for the loan, or intermediation, arrangement or representation that is likely to undermine the protection of investors or sound trade practice.

A person in violation of the first two points above will be subject to imprisonment of up to three years or a fine of up to KRW100 million (section 445(6), FISCMA). A person in violation of the last three points will be subject to an administrative fine of up to KRW50 million (section 449(1)(22), FISCMA).

 

Bookbuilding

16. Is the bookbuilding procedure used and in what circumstances? How is any related retail offer dealt with? How are orders confirmed?

Bookbuilding is a process whereby a primary broker proposes a public offering price band for the public offering of corporate equity to understand the demand (price and quantity) to determine its acquisition price when publicly offering equity.

Bookbuilding is conducted by surveying institutional investors, the primary broker, and issuing company based on the bookbuilding results to determine the final public offering price. However, if the amount expected to be publicly offered is KRW5 billion or less, the public offering price of shares can be determined regardless of the bookbuilding results (section 5(1), Regulations on the Underwriting Business).

After the submission of the registration statement and prior to the subscription date, the primary broker must announce the subscription guidelines according to the contents of the investment prospectus (including the preliminary investment prospectus and short-form investment prospectus) under the joint signature of the issuer and the primary broker. For a period of approximately two days after the effective date of the registration statement, the primary broker will receive subscriptions from investors based on standards previously disclosed to such investors whose identities have been previously confirmed. After the subscription deadline, the primary broker will aggregate the subscription results and allocate shares to the investors based on certain allocation standards.

 

Underwriting: equity offering

17. How is the underwriting for an equity offering typically structured? What are the key terms of the underwriting agreement and what is a typical underwriting fee and/or commission?

Based on the level of risk that an underwriter may be subject to, underwriting methods can be categorised into:

  • Firm commitment underwriting. This is where an underwriter first fully subscribes for all securities and subsequently sells the securities to investors.

  • Standby underwriting. This is where the underwriter acquires the securities not subscribed for by investors.

  • Best efforts offering. This is where an underwriter looks for investors under its name or on the issuer's behalf, and the risks related to the issuance is borne by the issuer.

In general, the underwriting fee is 1% to 2% of the public offering amount. However, in the case of foreign companies, the underwriting fee is 3% to 8% due to the complexity of the issuing procedure.

 

Timetable: equity offerings

18. What is the timetable for a typical equity offering? Does it differ for an IPO?

For an ordinary public offering, the following timetable applies:

  • 35 days pre-deadline. Board resolution for the issuance of new shares and disclosure and reporting of the board resolution.

  • 33 days pre-deadline. Appointment of a primary broker and execution of the relevant agreement(s).

  • 32 days pre-deadline. Submission of registration statement.

  • 21 days pre-deadline. Effectuation of the registration statement and submission and disclosure of the investment prospectus.

  • 20 days pre-deadline. Public announcement of the issuance of new shares.

  • 19 days pre-deadline. Request for issuance of new shares.

  • Two weeks pre-deadline. Notification of confirming issuance price.

  • Seven to eight days pre-deadline. Subscription of the employee stock ownership association and the general public.

  • Two days pre-deadline. Aggregation of subscription results and notification of share allocation and refund of excess subscription funds.

  • One day pre-deadline. Payment for shares and notification on subscription results.

  • Deadline. Corporate registration of capital increase and submission of the report on the results of share issuance.

  • One day post-deadline. Withdrawal of capital paid in for shares.

  • Six days post-deadline. Application for listing.

  • Eight days post-deadline. Distribution of share certificates.

The timetable for an IPO is as follows:

  • Preparation:

    • appointment of auditor;

    • external audit;

    • execution of primary broker agreement;

    • board of directors' meeting;

    • shareholders' meeting;

    • execution of share transfer agency agreement and issuance of uniform securities certificates;

    • notification of plan to apply for preliminary listing review;

    • reviewing and audit on accounting;

    • share lock-up; and

    • formation of employee stock ownership association.

  • 98 to 39 days pre-deadline. Request for preliminary listing review; notification of results after review.

  • 38 days pre-deadline. Execution of agreement on underwriting and public offering.

  • 37 days pre-deadline. Determination of anticipated public offering price.

  • 34 days pre-deadline. Submission of registration statement and preliminary investment prospectus.

  • 18 days pre-deadline. Effectuation of registration statement; submission and disclosure of investment prospectus.

  • 17 to 11 days pre-deadline. Holding of investors relations events.

  • 11 to nine days pre-deadline. Notification and implementation of bookbuilding.

  • One week pre-deadline. Determination of final public offering price; submission of report on final public offering price and submission of investment prospectus.

  • Four to five days pre-deadline. Notice for subscription; subscription.

  • One day pre-deadline. Announcement of share allocation; payments for shares; application for new listing.

  • Deadline. Notification of uniform custody; corporate registration of capital increase; submission of the report on the result of share issuance.

  • Three days post-deadline. Notification of approval of listing and disclosure.

  • Six days post-deadline. Trading of shares.

An IPO takes longer than ordinary public offering due to additional procedures, for example, the examination of the Korea Exchange.

 

Stabilisation

19. Are there rules on price stabilisation and market manipulation in connection with an equity offering?

Price stabilisation

Information relating to price stabilisation is provided in section 176(3) of the Financial Investment Services and Capital Markets Act (FISCMA) as follows:

  • Purpose. To promote price stability of issued shares for a certain period of time to stimulate active subscription and facilitate sales.

  • Facilitator. The financial investment company as listed in the registration statement, which will acquire securities.

  • Agent. This can be the executive of the issuer, the holder of the securities sold, a company or its executives that is a related party of the issuer, an agent appointed by the issuer, or the holder of the securities for stabilising purposes.

  • Time period. From 20 days before the subscription deadline to the subscription deadline.

  • Price limitation. The lower of either the trading price immediately before the commencement of the stabilising operation, or the average sales price for 20 days prior to the first day of the stabilising operation.

  • Notification period. Immediately after the stabilising operation is put into place.

  • Reporting deadline. The following day after transactions occurred for the stabilising operation.

Market manipulation

Information relating to market manipulation is provided in section 176(3) of the FISCMA as follows:

  • Purpose. To facilitate active subscription of securities by preventing an excessive price decrease through creating a supply and demand for the securities publicly offered and sold.

  • Facilitator. The financial investment company as listed in the registration statement, which will acquire securities.

  • Agent. The underwriter of the securities publicly offered and sold.

  • Time period. Within the time period of one to six months from the listing date, as agreed on under the underwriting agreement.

  • Price limitation. Must purchase below the public offering price and must sell at a price higher than the public offering price.

  • Notification period. Before market manipulation occurs.

  • Reporting deadline. The following day after transactions occurred for the market manipulation.

 

Tax: equity issues

20. What are the main tax issues when issuing and listing equity securities?

No taxes are imposed specifically for public offering and the listing of shares. However, in the process of applying for corporate registration regarding the increase of paid-in capital due to the issuance of new shares, the company must pay registration/licence tax and local education tax (section 28(1)(6) and section 150, Local Tax Act).

Stamp tax must be paid when issuing share certificates, which is KRW400 per certificate (section 3(1)(9), Stamp Tax Act).

 

Continuing obligations

21. What are the main areas of continuing obligations applicable to listed companies and the legislation that applies?

There are several areas of continuing obligations applicable to listed companies.

Periodic disclosure (business report)

A company with listed securities must submit an annual business report, semi-annual reports, and quarterly reports within a certain period after its business year to the Financial Services Commission and the Korea Exchange (KRX) (sections 159 to 160, Financial Investment Services and Capital Markets Act (FISCMA)).

Report on material facts

If a material event occurs, a listed company must submit a report on the details of the event to the Financial Services Commission by the day immediately following the day on which the event occurred (section 161, FISCMA). A material event under the law includes:

  • Changes to management.

  • Increase or decrease of capital.

  • Decision to merge, acquisition or disposition of treasury stocks.

  • Listing at a foreign stock exchange.

  • Certain other events for foreign companies.

Disclosure of merger

Under the FISCMA, a listed company is required to submit a report on the results of a merger, division, transfer of business, or acquisition and disposition of treasury stocks.

Disclosure of key management issues

A listed company is required to report to the KRX any facts or decisions of key management issues within the same day or by the following day of the occurrence of the event (for example, a resolution of the board of directors) (section 7, Disclosure Regulation). The obligation to disclose arises when events relating to the following occur:

  • Business or sales.

  • Issuance of securities.

  • Investment matters.

  • Credits and debts.

  • Income and loss.

  • Settlement of balances.

  • Corporate governance.

  • Company litigations and disputes.

  • Shareholders' meeting.

Substantial shareholding report (5% report)

A shareholder is required to file a report with the Financial Services Commission if all of the following apply (section 147, FISCMA):

  • A person, with its related parties, acquires 5% or more in a listed company.

  • There is a change in the aggregate of the number of stocks held by the substantial shareholder by 1% or more of the total number of shares.

  • The purpose of the substantial shareholding has changed (for example, to simply invest or to participate in management).

Major shareholding report

An executive or a major shareholder of a listed company is required to report the status of shareholding and any changes to the Securities and Futures Commission and the KRX (section 173, FISCMA).

 
22. Do the continuing obligations apply to listed foreign companies and to issuers of depositary receipts?

After listing equity or depository receipts on the Korea Exchange, foreign companies have the same disclosure obligations as provided in Question 21. However, the submission deadline for foreign companies is slightly extended, and if the foreign company has submitted any documents equivalent to the reports (see Question 21) in its home country, it can submit a translation of the documents without following the format prescribed under the Korean law (section 159, Financial Investment Services and Capital Markets Act (FISCMA); section 176, Enforcement Decree of the FISCMA).

In addition, a foreign company has an obligation to disclose within two business days from the date when the following occurs (section 176(5), Enforcement Decree of the FISCMA):

  • A restriction on the transfer of equity securities, nationalisation of the foreign company, or an amendment to laws and regulations of a foreign country that has a significant impact on the foreign company or its investors.

  • There is a public tender offer, price stabilisation, or market manipulation in a foreign country with regard to securities of the foreign company.

  • It becomes subject to a measure taken by a foreign financial supervisory agency or a foreign stock exchange on account of a violation of a relevant law or regulation.

  • When it becomes subject to a measure taken by a foreign stock exchange, such as suspension or termination of trading, or de-listing.

 
23. What are the penalties for breaching the continuing obligations?

Periodic disclosure/report on material facts

If a representative, officer or an employee of a company:

  • Fails to submit a periodic report or a report on material facts, he may be subject to imprisonment of up to one year or a fine of up to KRW30 million.

  • Misrepresents or omits a material fact, he may be subject to imprisonment of up to five years or a fine of up to KRW200 million.

The relevant company may also be subject to a penalty surcharge for the violations (sections 429(3), 444 and 446, Financial Investment Services and Capital Markets Act (FISCMA)).

When a periodic report or a report on material facts has not been submitted, or when such a report misrepresents or omits a material fact, the Financial Services Commission can disclose the relevant facts to the public and order a company obligated to submit such a report to make a correction to that report, or suspend or prohibit the issuance or any other transaction of those securities (section 164, FISCMA).

Furthermore, a person who submitted the report, the directors of the company, and a person who falls under any of the following provisions will be liable for damages sustained by a person who acquired, or disposed of, securities issued by a company due to a false description or representation of a material fact (section 162, FISCMA):

  • A person who instructed a director to conduct business by using his influence over the company.

  • A person who conducted business in person under the job title of director.

  • A person, other than a director, who conducted the business of the company by using a title which may give the impression he is authorised to conduct the business of the company (such as honorary chairman, chairman, president, vice-president, executive director, managing director, director, or others), who instructed or executed the preparation of the registration statement.

Disclosure of key management issues

A listed company can be designated as an unfaithful disclosure company if it fails to comply with the disclosure obligations with respect to significant business matters, reverses the disclosure, or makes change to the disclosure. The Korea Exchange can then suspend the trading of that unfaithful disclosure company, make public the designation that it is an unfaithful disclosure company, or impose on the unfaithful disclosure company a fine for non-compliance with the disclosure obligations (section 36 et seq, KOSPI Market Disclosure Regulation).

Substantial shareholding report

If a representative, officer, or an employee of a company:

  • Fails to submit a substantial shareholding report, he may be subject to imprisonment of up to three years.

  • Misrepresents or omits a material fact, he may be subject to imprisonment of up to five years or a fine of up to KRW200 million.

The relevant company may also be subject to a penalty surcharge for such violations (sections 429(3), 444 and 446, FISCMA). In the circumstances above, the exercise of voting rights of the relevant stocks held in excess of 5% of the total number of outstanding voting stocks will be limited for six months (sections 150 and 151, FISCMA).

Report on ownership status of certain securities by officers

If a representative, officer, or an employee of a company:

  • Fails to comply with the investigation request of the Securities and Futures Commission, he may be subject to imprisonment of up to three years or a fine up to KRW100 million.

  • Makes a misrepresentation or fails to make a report, he may be subject to imprisonment of up to one year or a fine up to KRW30 million (sections 444 to 446 and section 449, FISCMA).

 

Market abuse and insider dealing

24. What are the restrictions on market abuse and insider dealing?

Restrictions on market abuse/insider dealing

Four types of unfair trade practices are regulated under the Financial Investment Services and Capital Markets Act (FISCMA):

  • Insider trading.

  • Market price manipulation.

  • Unfair trading of a more general, fraudulent nature.

  • Acts disrupting market order.

Insider trading. Insiders include the following:

  • Employees.

  • Executives.

  • Major shareholders.

  • Person(s) having authority to grant permission or authorisation.

  • Person(s) having entered into a contract with the company.

  • Person(s) having directly received the material information from any of the above listed person(s).

Insiders cannot use any material non-public information (that is, any information that may produce a significant impact on investors' investment judgment, and that has not been disclosed yet to the public in a certain manner) related to the business of a listed company (including a company that will be listed within six months) in trading or other transactions (section 174, FISCMA).

In addition, if an employee, executive, or major shareholder of a listed company sells securities of the company within six months of purchase, the company will be permitted to require the return of any profits from the purchase and sale regardless of the use of any insider information (section 172, FISCMA).

Market price manipulation. Market price manipulation, or stock price manipulation, refers to the act of changing the price of securities by artificial manipulation. To prohibit market price manipulation, FISCMA categorises and regulates the following types of market price manipulation (section 176, FISCMA):

By fictitious transactions.

By false indications.

By price fixing or stabilisation.

By manipulation of related market prices.

Unfair trading. The following acts in connection with trading (including, in the case of securities, public offering, private placement and sale) or other transactions of financial investment instruments are prohibited (section 178(1), FISCMA):

  • Utilising an unfair means, scheme or trick.

  • Attempting to earn money, or any financial gain, by using a document containing a false description or representation of a material fact, or an omission of a description or representation of a material fact necessary to prevent others from being misled, or any other description or representation.

  • Using an inaccurate market price with an intention to attract another to trade or make any other transaction in financial investment instruments.

Furthermore, no one can disseminate a rumour, use a deceptive scheme, or make a threat, with an intention to trade or make any other transaction in financial investment securities or attempt to cause a fluctuation in the market price (section 178(2), FISCMA).

In other words, FISCMA prohibits fraudulent conduct of a more comprehensive, general scope, in order to regulate all unfair trade practices related to financial investment securities falling outside the scope of market price manipulation or insider trading.

Acts disrupting market order. Recently, there have been other instances of activities that disrupt market order and undermine market integrity. In response, the FISCMA has been amended to introduce a provision prohibiting activities that disrupt market order. The new provision, which came into effect on 1 July 2015 (section 178-2, FISCMA):

  • Prohibits certain usage of material non-public information that had not previously been defined as unfair trading.

  • Regulates activities that unfairly influence market price even if there was no intention to do so, such activities include:

    • using the material non-public information of a listed company that has been acquired indirectly (second- or third-hand);

    • unfairly acquiring the material non-public information of a listed company (for example, through hacking or theft) or acquiring the information indirectly and using the information; and

    • using market information that is self-generated, or engaging in stock trading after indirectly acquiring the market information.

Penalties for market abuse/insider dealing

Violation of the prohibition on the use of material non-public information. market price manipulation or unfair trading can be punishable by imprisonment of up to ten years or a fine of up to KRW500 million. However, if triple the amount of profit or avoided loss as a result of the violation exceeds KRW500 million, the fine can be up to triple the amount of profit or avoided losses (section 443-1, FISCMA). In addition, the offending party is liable for compensating the damage suffered by other investors (sections 175, 177 and 179, FISCMA).

Violation of the new prohibition on market disruption can be punishable by a penalty surcharge of up to KRW500 million. However, if one and a half times the amount of the profit or avoided loss by the violation exceeds KRW500 million, the penalty surcharge can be up to this amount (section 429-2, FISCMA).

 

De-listing

25. When can a company be de-listed?

De-listing

Voluntary de-listing requires a special resolution in a general shareholders' meeting by consent of a majority of the shareholders, as well as certain investor protection measures such as redemption of shares owned by ordinary investors. On request for de-listing, the listing and public disclosure committee will review whether investor protection measures have been conducted and decide whether to approve the request for de-listing. If the investor protection measures are inadequate, the commission can deny the request for de-listing.

Compulsory de-listing of listed securities can occur in the following circumstances:

  • Failure to submit periodic reports.

  • Unsatisfactory opinion by an auditor.

  • Capital encroachment.

  • Insufficient distribution of shares.

  • Insufficient trading volume.

  • Inadequate governance structure.

  • Violation of disclosure requirements.

  • Insufficient turnover.

  • Insufficient market capitalisation or share price.

  • Commencement of rehabilitation or bankruptcy proceedings.

The typical compulsory de-listing procedure is as follows:

  • Occurrence of a deficiency.

  • Designation as a stock to be watched.

  • Deficiency worsens.

  • Suspension of trading of listed stocks and notification of suspension to listed company.

  • Filing of objection (if applicable).

  • Review by listing committee.

  • Decision and notice of de-listing.

  • Settlement trading.

  • De-listing.

During 2015, 12 stocks were de-listed from the KOSPI market and 18 stocks were de-listed from the KOSDAQ market.

Suspensions

Suspension of trading is imposed in the case of an event having a material impact on the stock of a listed company so that it can be adequately communicated to investors. Suspension of trading is imposed when the listed company is subject to any of the following:

  • Grounds for de-listing under the listing rules.

  • Expiration of de-listing grace period.

  • Conditions for being on the Korea Exchange watch list for potential de-listing are satisfied.

  • Fraudulent or falsified stock certificates.

  • Non-compliance of inquiry request.

  • Designation as unfaithful disclosing company (for example, retraction of public disclosure and changes to material disclosed information).

  • Occurrence of a major disclosure event with material effect on the share price or trading volume.

  • Major changes in share price or trading volume due to rumours or media reports.

 

Reform

26. Are there any proposals for reform of equity capital markets/exchanges? Are these proposals likely to come into force and, if so, when?

It has been proposed to amend the Enforcement Decree of the FISCMA, the Regulations on the Issuance and Disclosure of Securities and other regulations so as to expand the scope of professional investors and reform the regulations on public offerings. The gist of the proposal is to relieve the requirements for individuals and companies subject to outside audit requirements to qualify as professional investors.

Under the current law, an issuance of new shares is deemed a public offering if a company offers a sale of new shares to 50 or more ordinary investors. Furthermore, among the listed companies, individuals, ordinary companies, local governments, foreign nationals and foreign companies, those who would have qualified as professional investors in principle are rather classified as ordinary investors in the context of a public offering and are included in the calculation of 50 or more ordinary investors. However, with the proposed amendment in place, all those individuals, companies, and so on who qualify as professional investors would be excluded from the aforementioned calculation of 50 or more ordinary investors subject to the offer of sales in the context of public and private offerings. There has been a prior announcement of legislation on 20 January 2016 regarding this amendment. The relevant legislation is under process. However, the timeline for the actual enforcement of the amendment has not yet been determined.

 

Online resources

Financial Supervisory Service

W www.fss.or.kr

Korea Exchange

W www.krx.co.kr

Korea Financial Investment Association

W www.kofia.or.kr

Korea Securities Depository

W www.ksd.or.kr


Contributor profiles

Wonhyung Kim, Partner

Yoon & Yang LLC

T +82-2-6003-7531
F +82-2-6003-7016
E whkim@yoonyang.com
W www.yoonyang.com

Professional qualifications. Korea 2002; New York, USA, 2010

Areas of practice. Capital markets; general corporate law issues; liabilities of directors and statutory auditors; mergers and acquisitions; general corporate finance; securitisation/structured financing; project financing/real estate financing; derivatives transactions; initial public offering/international capital markets; acquisition financing; collective investment/private equity; mergers and acquisitions among financial institutions; financial regulation/corporate disclosure; international contracts; foreign investment.

Languages. Korean, English, Japanese


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