Startups Angry Over the 'Stock Fraud Prevention Act'

Mandatory Disclosure 30 Days Before Stock Trading
"Stock Price Drops When Exercising Stock Options
Concerns Over Reluctance to Go Public Due to Profit Realization Burden"

With the implementation of the so-called "Stock Dumping Prevention Act" aimed at preventing insiders of listed companies from using undisclosed information, concerns are growing in the startup industry. The core of the law, the pre-disclosure system for insider trading in listed companies, mandates that executives or major shareholders of listed companies disclose large-scale stock transactions at least 30 days in advance. This expands the existing system, which only required post-disclosure of insider share transactions, into a "pre- and post-disclosure" framework. However, there are concerns that startups may become reluctant to go public due to this, leading to potential side effects.

According to the Financial Services Commission (Chairman Kim Byung-hwan), the detailed provisions of the pre-disclosure system for insider trading in listed companies, stipulated in the "Partial Amendment to the Act on Capital Markets and Financial Investment Business (Capital Markets Act)," came into effect on the 24th of last month.

[Image source=Beomryul Newspaper]

Accordingly, insiders such as major shareholders and executives must pre-disclose their trading plans when conducting transactions amounting to "1% or more of the total issued shares" or "50 billion KRW or more," based on the cumulative amount over the past six months. They must report the expected transaction amount, anticipated transaction price and quantity, and the trading period at least 30 days before the start of the transaction. Violations may result in fines of up to 2 billion KRW.

The Financial Services Commission promoted the introduction of the pre-disclosure system for insider trading in listed companies as a national agenda in 2022. According to a press release from the Financial Services Commission in September 2022, the system was based in part on overseas examples, such as the United States, where insiders are already required to submit pre-trading plans for stock transactions. The amendment to the Capital Markets Act, originally proposed by former Democratic Party lawmaker Lee Yong-woo, passed the National Assembly's Legislation and Judiciary Committee and was approved by the plenary session of the National Assembly in December last year.

However, the startup industry has expressed reservations about the pre-disclosure system for insider trading. Most startup employees hold stock options. Since the value of stock options increases as the company's value grows, they serve as a major motivation for employees.

The startup sector fears that if stock option exercises are pre-disclosed after going public, stock prices will fall, reducing the value of stock options and making it harder to attract top talent.

Seo Soo-bin, CEO of Poaf, a startup operator, said, "After the implementation of the pre-disclosure system, startups face a larger drop in stock prices compared to large corporations, making it harder to attract talented personnel," adding, "The increased burden on realizing profits may actually discourage companies from going public."

However, the Corporate Legislation Team of the Korea Listed Companies Association stated regarding the pre-disclosure system for insider trading, "The purpose is to provide meaningful information to investors in advance about stock transactions that may be morally questionable, allowing them to avoid losses. While we understand the difficulties startups face in recruiting talent, listed companies have a broad base of potential investors, so it is natural that matters related to shares should be accessible to everyone."

They added, "While this system may be a sufficient reason for companies to hesitate to go public, it is not enough to give up the listing system, which is called the 'ladder of growth.'"

Additionally, a lawyer from a law firm who requested anonymity said, "The reason for going public is to raise funds, and startups must bear this level of burden to secure third-party capital," emphasizing, "This system is necessary to protect investors' funds."

Kim Ji-hyun, Legal Newspaper Reporter

※This article is based on content supplied by Law Times.