[Exclusive] KakaoPay Scam Prevention Law to Be Introduced

Rep. Lee Yong-woo to Propose Capital Markets Act Amendment Next Month
Key Point: Introduction of Insider Trading Pre-Notification System

Repeated Stock Option Listing Exploitation
91% Stock Option Exercise After Special Listing

Experts Say "Lock-up Period Needed for Stock Options"
Democratic Candidate Lee Jae-myung Also Pledges "Stock Option System Improvement"

On the 3rd, attendees are taking a commemorative photo after the KakaoPay KOSPI listing ceremony held at the Korea Exchange in Yeouido, Seoul. From the left: Song Young-hoon, Deputy Director of the Korea Exchange KOSPI Market Headquarters; Ahn Sang-hwan, Chairman of the Korea IR Association; Jung Hyung-jin, Korea Representative of Goldman Sachs Seoul Branch; Lim Jae-jun, Director of the Korea Exchange KOSPI Market Headquarters; Son Byung-doo, Chairman of the Korea Exchange; Ryu Young-joon, CEO of KakaoPay; Kim Joo-won, Vice Chairman of Kakao; Jang Seok-hoon, President of Samsung Securities; Park Tae-jin, Head of JP Morgan Securities Korea; Jung Woo-yong, Vice Chairman of the Korea Listed Companies Association Policy Committee. Photo by Kang Jin-hyung aymsdream@

[Asia Economy Reporter Ji Yeon-jin] A bill is being promoted that requires executives and employees of listed companies to notify the market in advance when exercising stock options and selling their company shares. This so-called “KakaoPay Eat-and-Run Prevention Act” aims to prevent ordinary investors from suffering losses during the process in which KakaoPay’s management exercised stock options after listing and gained hundreds of billions of won in profits.

On the 19th, Lee Yong-woo, a member of the National Assembly’s Political Affairs Committee from the Democratic Party of Korea, announced that he had prepared an amendment to the Capital Markets Act to introduce an “insider trading pre-notification system” targeting listed companies.

The amendment includes provisions that insiders such as executives and employees of listed companies must obtain prior approval for their trading plans from the audit committee or full-time auditor before trading stocks. The company must report and disclose this to the Korea Exchange and the Financial Supervisory Service. Additionally, insider shares can only be traded after 90 days have passed from the disclosure date, and when submitting the trading plan in advance, the timing of the sale must also be specified. This amendment was submitted to the National Assembly’s Legislative Office on the 17th, and it is planned to be proposed after consultations are completed following the Lunar New Year holiday.

Rep. Lee said, “In the United States, stock options are regulated through an insider trading pre-notification system,” adding, “While it may be difficult to completely prevent eat-and-run cases like KakaoPay by introducing a pre-notification system in Korea, it will help avoid stock price drops caused by sudden large-scale sales by management.”

On the same morning, Lee Jae-myung, the Democratic Party’s presidential candidate, also wrote on Facebook, “Institutional investors’ mandatory holding commitments and restrictions on the exercise period of stock options by executives of newly listed companies, similar to employee stock ownership lock-up, are necessary to prevent a second KakaoPay eat-and-run.”

Earlier, KakaoPay CEO Ryu Young-jun and other executives exercised stock options and sold KakaoPay shares worth 90 billion won through a block deal about a month after the company’s listing in November last year. CEO Ryu purchased KakaoPay shares at 5,268 won per share through stock options and sold them at 204,017 won per share, realizing a profit of approximately 46.8 billion won. However, KakaoPay’s stock price plunged 6% on the day the management’s sale disclosure was made and has continued to hit new lows recently. The impact has spread not only to KakaoPay but also to affiliates such as Kakao and KakaoBank. Kakao’s stock price fell below 90,000 won that day, halving compared to June last year, and KakaoBank’s stock price, which had soared to the mid-90,000 won range in August, plummeted to the low 40,000 won range.

Stock options give company executives and employees the right to purchase the company’s shares at a predetermined price. Since stock options can be exercised two years after they are granted, they are generally exercisable immediately after listing. They were introduced in Korea in 1997 as part of a performance-based compensation system. They have long been a kind of culture in the startup industry because they are effective for growth companies with limited cash to recruit talented personnel and motivate employees.

The problem is that, as with KakaoPay, there have been repeated controversies over immediate profit-taking after listing. According to an analysis by the Financial Supervisory Service of stock option exercises by 58 companies listed through special listing from 2015 to 2019, 51 companies (87.9%) granted stock options, and 91.5% of the exercised stock options (43.7%) were concentrated after listing. Special listings are for companies recognized for their technology and growth potential, most of which are deficit companies, leading to criticism that only executives and employees benefited from stock option exercises.

Experts advise that, like employee stock ownership, regulations banning sales for a certain period after listing are necessary for stock options as well. Hwang Se-woon, a research fellow at the Korea Capital Market Institute, said, “Because incidents like KakaoPay can be repeated, a lock-up period for stock options is necessary.” Lee Sang-hoon, a professor at Kyungpook National University Law School, said, “Stock options are a kind of insider trading under company law,” adding, “Regulation is necessary because insiders have information advantages.”