[Inside Chodong] The IPO Bubble Has Burst

Nine Newly Listed KOSDAQ Companies Plunge on Debut
IPO Prices Set Above Expected Range in Succession
Years of Debate Over Introduction of Cornerstone Investors

Since the 24th of last month, all nine newly listed companies on the KOSDAQ market?Airrain, Tomocube, HEM Pharma, Toprun Total Solution, Alux, Sungwoo, Clobot, Wavevis, and Cmes?have seen their stock prices fall below their initial public offering (IPO) prices on their first day of trading. The feared IPO price bubble has burst. It is not easy to dismiss the consecutive declines of these nine companies as a temporary phenomenon caused by the sluggish domestic stock market. Considering that hundreds of trillions of won flowed into the IPO subscription market over the past year, it is time to consider institutional improvements to ensure appropriate IPO price setting.

In June last year, the Korea Exchange expanded the allowable price fluctuation range on the first day of trading for newly listed companies. Since then, a new formula has emerged in the IPO market where investors who buy IPO shares and sell them on the first day do not incur losses. Trillions of won poured into IPO subscriptions for companies with a market capitalization of around 100 billion won. As the IPO market heated up, the number of prospective companies seeking to list also increased. Last month, a new company entered the KOSDAQ market roughly every two days.

As the enthusiasm grew, the proportion of IPO prices set above the upper limit of the expected price range also increased. Even among the nine companies that recently recorded negative returns compared to their IPO prices on the first day, all set their IPO prices above the upper limit of the expected price range.

Airrain conducted a demand forecast targeting institutional investors from the 15th to the 21st of last month. The final IPO price was set at 23,000 won, higher than the expected range of 16,000 to 18,500 won. On the 8th, the day it entered the KOSDAQ market, the opening price was 16,450 won. It dropped to 15,200 won before closing at 17,590 won, finishing within the range proposed by the underwriter.

Tomocube, which was listed a day before Airrain, experienced a similar situation. The underwriter’s expected IPO price range was 10,900 to 13,400 won, but after the demand forecast, the IPO price was set at 16,000 won. On the first day of trading, the closing price fell about 37% below the IPO price to 10,050 won.

HEM Pharma also set its IPO price at 23,000 won, exceeding the upper limit of the expected range of 19,000 won. On the first day, its stock price dropped 28.7% compared to the IPO price.

Regulators are also considering measures to address the issue of IPO price overvaluation. The 'Measures to Enhance the Soundness of the IPO Market' announced at the end of 2022 included consideration of introducing a cornerstone investor system. The need for cornerstone investors was also mentioned during industry consultations on improving IPO underwriting regulations in the first half of this year. The cornerstone system allows institutional investors to receive shares in advance by agreeing to hold a certain amount of shares for a long term. Since it requires allowing subscription activities before the submission of the securities registration statement, amendments to current laws are necessary, which has delayed implementation. There may be controversies over preferential treatment since shares are allocated to certain qualified institutions. On the other hand, cornerstone investors cannot sell their shares for a certain period, which helps reduce stock price volatility in the early stages of listing.

Currently, looking at the trading trends of newly listed companies, institutional investors who receive IPO shares through demand forecasts sell most of their holdings on the first day of listing. This method of selling on the listing day has been profitable for institutions up to September this year. Regulators have been considering the introduction of cornerstone investors for several years. Now is the time to reach a conclusion.