[Beginner's Guide] Warning on Unfaithful Disclosure Companies Annoying Small Investors... What Are the Investment Precautions?

[Asia Economy Reporter Kwon Jae-hee] One of the main channels through which investors can obtain reliable information about the companies they invest in is 'disclosure.' But what if even the disclosures cannot be trusted? This would cause financial losses to investors, right? Such incidents should not happen, but unfortunately, they do occur in reality. Recently, executives of companies listed on the KOSDAQ market were arrested for manipulating stock prices by disclosing false information. So, let's take a look at the types of unfaithful disclosures that investors should be aware of.

What is Unfaithful Disclosure?

Companies listed on the stock market have an obligation to inform investors about important management matters, financial conditions, and other information that could affect stock prices. Listed companies must disclose key information, and failing to do so faithfully is called 'unfaithful disclosure.'

What are the Types of Unfaithful Disclosure?

They can be broadly categorized into disclosure reversal, disclosure modification, and failure to disclose.

Disclosure reversal refers to retracting or denying information that has already been disclosed. This includes cases where the disclosed content is fully canceled, denied, or replaced with equivalent information.

For example, if a listed bio company named A disclosed that its COVID-19 diagnostic kit had received approval from the U.S. Food and Drug Administration (FDA), but it turns out to be false, and the disclosure is fully canceled, this would be considered unfaithful disclosure due to disclosure reversal.

Disclosure modification occurs when there is a change in an important part of previously disclosed information. For instance, if a secondary battery materials company named B disclosed that it had signed a contract worth over 500 billion KRW, but later revises the contract amount to 5 billion KRW, the significant difference from the initially disclosed amount would result in the company being designated as an unfaithful disclosure entity.

Lastly, failure to disclose means not reporting important management matters within the disclosure deadline or providing false disclosures. Suppose there is a drama production company named C. Rumors spread in the market that C has signed a supply contract with Netflix, causing significant volatility in C’s stock price. The stock exchange then requests an inquiry disclosure from C, setting a specific deadline by which the company must disclose whether the rumor is true or false. C must respond within the deadline set by the exchange; otherwise, it will be designated as an unfaithful disclosure entity.

Are There Any Sanctions for Companies with Unfaithful Disclosures?

[Image source=Yonhap News]

Yes, there are. This is one of the main roles of the stock exchange. The exchange imposes penalty points on companies with unfaithful disclosures, ranging from 4 to 8 points per incident. If a company receives 5 or more penalty points, its trading will be suspended for one day. If a company is designated as an unfaithful disclosure entity three or more times within two years, it may be subject to a delisting review due to lack of listing eligibility. Also, if the accumulated penalty points exceed 15 within one year, delisting may occur.

Disclosure is not only an obligation of listed companies but also a promise to investors. Acts that deceive investors who trust and invest in the company should never happen. Incidents like those involving ShillaJen and Osstem Implant, where only individual investors suffered losses, must not recur. We sincerely hope that our market matures into a healthy capital market, and we support the wise investments of all beginner investors today as well.

Editor's Note[Beginner Investor's Guide] is a smart investment guide for 'Joorini (stock + child)' investors. We will kindly and easily explain stock stories that are unfamiliar to beginner investors.