KKT’s Auction Suspension: A Call to Revisit Cornerstone Investors

Robin: “When a problem arises, let’s solve it. KKT’s auction has been suspended because there were insufficient qualifying lots, and it will switch to bookbuilding and allocation. The central issue remains how to assign a reasonable value to KKT. I suggest revisiting the introduction of cornerstone investors, creating an IPO allocation mechanism for potentially promising startups whose valuation models are unfamiliar to the market.” ---- A cornerstone-investor framework was actually discussed in 2018. But after GGR listed in the United States, discussion of the issue stopped. Supporting regulations and ways to address fairness in allocations still need to be developed. ---- Nurturing Unicorns: A Proposal to Allow Cornerstone Investors — October 30, 2018 Commercial Times — Peng Zhenling, reporting from Taipei To help Taiwan’s unicorns grow, Financial Supervisory Commission Chair Ku Li-hsiung said on the 29th that he had asked the Taiwan Stock Exchange to collect information from other countries and study allowing cornerstone investors to enter before an initial public offering (IPO), within specified ownership proportions and price ranges. Companies could then secure investment from prominent institutional or corporate investors before listing, strengthening their investment value and stabilizing their share prices after listing. While discussing cornerstone investors, Ku also raised two concerns. First, there were calls to remove the profitability requirement under the current private-placement rules: after securities have been privately placed with selected investors for three years, the company must be profitable before those securities can be converted for public offering and release. The commission could study removing that requirement, but doing so would revive a previously criticized problem—very cheap prices for selected investors, creating opportunities for arbitrage. He therefore had reservations about liberalization. Second, legislators wanted to follow Hong Kong in allowing unequal voting rights for shares, giving startup shareholders more room to structure their arrangements. Ku believed this could harm corporate governance. Hong Kong’s capital market has a larger proportion of institutional investors, whereas retail investors account for more than 60% in Taiwan. He had serious doubts about whether they could make sound investment choices under unequal voting rights. During a visit to the exchange by the legislature’s Finance Committee, legislator Shi Yifang said this was the era of startups. Had Tesla been subject to Taiwan’s listing rules in its early days, it might not have been able to list and would not have gone on to create a US$60 billion market capitalization. He questioned Taiwan’s alternative listing criteria, noting that no large-market-cap company without profits had yet listed under them, preventing the creation of Taiwanese unicorns. Exchange President Lih-Chung Chien said that after the alternative listing criteria took effect, he personally visited Gogoro to understand its future fundraising and development plans. Gogoro emphasized that it had generated revenue but was not yet profitable, and sought room for regulatory liberalization. First, IPO rules required auction underwriting for exchange and over-the-counter listings. Gogoro’s capital base was too large, so an auction might be unsuitable and could affect pricing. Second, an IPO required cornerstone investors to subscribe for a large portion of the offering. The securities dealers association also planned to recommend that startup IPOs of at least NT$2 billion be exempt from priority application of auction underwriting and be allowed to bring in cornerstone investors subscribing for 40–60%. Cornerstone investors would be barred from being company insiders or related parties, and a six-month to one-year share lock-up would be required to reduce potential abuses.