The Financial Supervisory Service (FSS) of Korea has been getting increasingly strict with its review of securities registration statements. Recently, it published its guidelines for investors after analysing the companies that raised capital with public disclosures announcing that they are entering into new business areas.
Recently, there has been an increasing number of Kosdaq-listed companies raising capital by announcing entrance into new business areas such as so-called green growth, solar energy and resource development. The FSS, however, has been suspicious about the authenticity of these announcements. It noted that companies with poor financial conditions and operational results, with frequent changes in the controlling shareholders, tend to make such announcements about new business areas as the putative reason for capital increases. However, after such public offerings, the companies usually show minimal improvements in their financial conditions and operational results while failing to properly disclose the progress of their new business activities.
The FSS pointed out that when struggling listed companies increase their capital through public offerings to enter new business areas, there is a distinct possibility that the capital may not be actually used for the new business, creating an investment risk for investors (through delisting). So when investors invest in such companies, they need to be careful in their investment decisions and do proper due diligence on the status and progress of these companies in the new business areas, use of proceeds and delisting risk, among other factors, through careful review of public disclosure documents, including securities registration statements and regular reports.
Given this backdrop, the underwriting departments of securities firms are showing a tendency to best-efforts underwriting contracts in order to avoid any liabilities from underwriting such offerings.
The FSS stated that it will conduct a stricter review of securities registration statements for companies that announce entrance into new business areas, tighten its review of such companies' regular reports to provide investors with all material information (such as use of proceeds and progress in the new business areas), and rigorously discipline those companies that violate public disclosure rules, such as omission of material matters.