Securities underwriting

Securities underwriting (유가증권 인수/有價證券引受) refers to the process by which investment banks raise investment capital from investors on behalf of corporations and governments that are issuing securities (both equity and debt capital). The services of an underwriter are typically used during a public offering.

This is a way of selling a newly issued security, such as stocks or bonds, to investors. A syndicate of banks (the lead managers) underwrites the transaction, which means they have taken on the risk of distributing the securities. Should they not be able to find enough investors, they will have to hold some securities themselves. Underwriters make their income from the price difference (the "underwriting spread") between the price they pay the issuer and what they collect from investors or from broker-dealers who buy portions of the offering.

Statutory ground
Under the Capital Markets and Financial Investment Services Act (the "Capital Markets Act" 금융투자업 및 자본시장에 관한 법률), underwriting means the act of handling the tasks necessary to facilitate a smooth public offering, and further, taking on the risk of an issuer in the event that the offered securities are not sold.

Accordingly, the Capital Markets Act provides for ‘firm-commitment underwriting’, in which underwriters acquire all or part of the securities with an intent to have them subscribed by third parties and ‘stand-by underwriting’, in which underwriters agree to acquire the remaining securities if they are not subscribed.

In addition, although the old Securities and Exchange Act provides for ‘best effort underwriting’, in which underwriters receive commissions and conduct solicitation for offering or sale of securities on behalf of an issuer or directly or indirectly conduct part of the offering or sale of securities, it was excluded from the concept of underwriting in the Capital Markets Act.

Accordingly, with respect to a public offering of securities, underwriters that performed ‘best effort underwriting’ are not held liable for any omissions or misstatements included in a registration statement.

Underwriting with respect to indemnity, force majeure, etc.
The clauses regarding indemnity, force majeure, success fees and over-allotment options included in an underwriting agreement differ from case to case since they are determined by mutual agreement of the parties. With regard to indemnity, an underwriting agreement usually has the following provisions:
 * (i) the issuer shall indemnify underwriters from the damage caused to the issuer unless it is caused by the underwriters’ wilful misconduct or gross negligence;
 * (ii) the issuer shall, in principle, indemnify underwriters from all losses suffered by underwriters in connection with the public offering except for losses caused by underwriters’ wilful misconduct;
 * (iii) the issuer shall indemnify underwriters from any damage caused by a claim filed by a third party against underwriters in connection with any activities performed for the public offering; and
 * (iv) if it was determined by the relevant authorities that (i) or (iii) above are invalid and that both the issuer and the underwriters are found jointly liable, the issuer and underwriters shall share the liability according to the fault ratios of the parties, but the underwriters’ liability shall be limited to the amount of the commissions received by them.

With respect to success fees, in case of the issuance of non-guaranteed bonds, underwriters generally receive 0.3 percent of the total face value of the non-guaranteed bonds issued. In case of equity securities, success fees vary case by case.

As for over-allotment options, the Regulation on Securities Underwriting (RSU 유가증권인수에 관한 규정), which is published by the Korea Financial Investment Association (KOFIA) and prescribes the matters necessary for financial investment institutions to underwrite securities or conduct solicitation activities for offerings or sale of securities, provides for the green shoe option.

The amount of the over-allotted securities should not exceed 15 percent of that of the offered securities, the exercise date of the over-allotment option is set by the managing underwriter and the issuer within 30 days from the date of commencement of trading and the issuance price of new securities issued as a result of exercise of the over-allotment option is the offering price.

In addition, if securities are over-allotted, the managing underwriter must exclude underwriters and their interested parties, interested parties of the issuer and others who have material interests in the relevant public offering (such as service providers to the issuer or underwriters) from over-allotment.

Regulations of Underwriting Arrangements
As described above, the KOFIA, a self-regulatory organisation, published the RSU, which provides for the matters which should be included in the managing underwriting agreement, limitations on the managing underwriter, restrictions on allotment of securities being offered and limitations on unfair underwriting activities, etc.

The managing underwriting agreement should include, among other things, matters concerning:
 * confirmation and survey of the issuer’s business performance, sales and financial soundness;
 * guidance and examination of finance, accounting and tax management of the issuer;
 * consultation and guidance regarding listing requirements of the KRX;
 * examination of the information included in the registration statement; and
 * examination of the reputation of the issuer and its largest shareholder.

Furthermore, the RSU prescribes that if an issuer and its interested parties hold not less than 5 percent of the shares of a financial investment institution or if a financial investment institution holds not less than 5 percent of the shares of an issuer, such financial investment institution may not perform underwriting for a public offering of the issuer’s securities.

The RSU also has provisions regarding allotment of the securities being offered, for example, in the case of an initial public offering for a company’s listing on the KRX, 20 percent of the shares being offered should be allotted to members of the issuer’s employee stock-ownership plan, 20 percent should be allotted to ordinary subscribers and the remaining shares should be allotted to institutional investors.

Finally, the Capital Markets Act prohibits stock brokerage companies which perform underwriting from conducting unsound underwriting activities such as demanding or promising that the issuer purchase the relevant securities after a public offering or allotting securities to subscribers in a discriminatory manner.