[Insight & Opinion] Conflict of Interest Among IPO Underwriters: Retail Investors Ultimately Bear the Cost

Lead Underwriters Inflate Offering Price for Fees
Principle of Retail Investor Protection Ignored
Urgent Need for Structural Reform, Including Post-Listing Accountability

The listing process of Theborn Korea was not a simple initial public offering (IPO); rather, it starkly revealed the imbalance caused by structural issues that are repeatedly seen in our capital market?namely, conflicts of interest among underwriters and information asymmetry between market participants. Although the listing appeared to be a success, in reality, it resulted in the fundamental principle of investor protection being disregarded.

Theborn Korea is a leading domestic food service franchise company, well known among the general public due to the popularity of its founder, Baek Jongwon, and his media appearances. However, popularity and corporate fundamentals are entirely different matters. The industry has already reached its growth limits in the domestic market. Concerns have persisted about the company's long-term profitability due to its fixed cost structure, ongoing conflicts between headquarters and franchisees, and changes in consumption patterns following the COVID-19 pandemic.

Nevertheless, the lead underwriters, Korea Investment & Securities and NH Investment & Securities, did not adequately reflect these structural risks. Instead, they highlighted excessive growth prospects based on past performance and Baek Jongwon's personal brand, and set the final offering price at an overly high level. As a result, the stock price, which surged briefly after the listing, soon plummeted, causing significant losses for retail investors. As concerns over deteriorating performance and questions about the company's intrinsic value became more pronounced, the stock price has failed to recover to the offering price level.

The problem is that, despite this aggressive pricing, the underwriters collected an acquisition fee of 4.8%, amounting to approximately 4.9 billion KRW, which is among the highest in the industry. Typically, such a fee rate is applied only in exceptional cases, such as for innovative companies that are difficult to list or for companies with weak financial structures. Theborn Korea was perceived as relatively stable in terms of sales volume and brand recognition, and a more conservative approach to pricing was warranted. However, the underwriters made decisions that maximized their own profits through the listing, and ultimately, the burden was entirely shifted onto retail investors.

Such practices are a representative example of "governance risk" from an ESG perspective. Corporate governance does not refer solely to the decision-making of internal management. The standards and procedures by which financial institutions?especially intermediaries like underwriters, who play a critical role in the capital market?evaluate companies and introduce them to the market are also core aspects of governance. In this case, the two lead underwriters deliberately downplayed or ignored key factors that the market should have considered, such as owner risk, structural limitations of the industry, and precedents of similar companies being delisted in the past.

Ultimately, this incident highlights once again that individual investors are placed in the most vulnerable position amid information asymmetry. Large securities firms and institutional investors can minimize risks based on internal analysis and market data, but retail investors find it difficult to grasp the logic behind offering price calculations or to identify structural weaknesses in the company. In such circumstances, if even the underwriters make conflicted decisions, the market inevitably loses trust.

The case of Theborn Korea is a warning that fundamental reform is needed in the listing review system and the compensation structure for underwriters. Pursuing a listing solely for short-term profit ultimately undermines the company's sustainability and, furthermore, erodes the trust that underpins the entire capital market. Ensuring transparency in the offering price determination process, strengthening the post-listing accountability of underwriters, and redesigning the fee structure are all essential steps. Above all, actions that seek to maximize private gain in a public market should no longer be tolerated, not only as a matter of business ethics but also as a matter of law.

Kim Kyuil, Professor at Michigan State University