SEC draft memo calls for disclosure of cornerstone investors in IPOs

THE SECURITIES and Exchange Commission (SEC) is proposing a new policy requiring the identification of cornerstone investors in the final prospectus of initial public offerings (IPOs).

In a draft memorandum circular (MC) released for public comment on Jan. 19, the SEC calls for the identification of cornerstone investors in IPOs, defined as those committing to subscribe to a company’s shares before the public listing.

Other proposed requirements include that a cornerstone investor’s placement must be at IPO price; the IPO shares placed are subject to a lock-up for a 30-day period starting from the listing date; and each cornerstone investor may have representation on the board of the registered issuer, provided it owns the minimum required shares for election.

“In line with the commission’s function to formulate policies and recommendations on issues concerning the securities market, it is hereby imperative for issuers in an IPO and intending cornerstone investors to observe these guidelines during an IPO,” the draft MC said.   

The SEC’s proposal further suggests that cornerstone investment agreements, guaranteeing share allocation, should be included in the material contracts of the issuer’s registration statement sent to the commission.

The issuer should also ensure that cornerstone investors are not provided with any material information beyond what is in the final prospectus.

The SEC added that the cornerstone agreement should be signed prior to the submission of the issuer’s preliminary prospectus to the commission, while the cornerstone investor should commit to purchase the shares as long as the final offer price is within the agreed preferred range.  

The prospectus, the commission also said, should contain information such as the number of participating cornerstone investors and their respective profile descriptions; number and type of securities proposed to be issued or offered to cornerstone investors; and nature of sales or subscriptions.

At the same time, the prospectus should include the number and characteristics of securities that are sold privately to cornerstone investors, along with the prices and other pertinent information related to the cornerstone investment.

According to the SEC, cornerstone investors have been shown to “stimulate investor demand in an IPO” and lend credibility to the company that is planning to have a public listing.  

“In the same light, having cornerstone investors in an IPO is seen to boost confidence and deliver a positive signal to the market. Their participation not only promotes the success of the IPO but also upholds a degree of confidence in the stability of the company’s share price thereafter,” the draft MC said.

China Bank Capital Corp. Managing Director Juan Paolo E. Colet said in a Viber message that the policy would help create “a more conducive IPO market.”

He said that cornerstone investors play a role in signaling the credibility of the issuer and de-risking the IPO process.

“The lack of clear rules on cornerstone investors has been a perennial concern in the local equity capital markets,” Mr. Colet said.

“The SEC’s proposed guidelines will finally provide the needed regulatory clarity to facilitate cornerstone investments in IPOs. This is an important step in creating a more conducive IPO market. If we can attract high-quality cornerstone investors, then that would indicate greater confidence in our market,” he added.

Meanwhile, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said that the proposed policy would help develop and attract more local and international investors.  

“This promotes greater transparency, level playing field, and accountability when it comes to better managing cornerstone investments, especially in further protecting the interest of the investing public, especially retail investors,” he said.

“This also provides greater protection to the general investing public when it comes to equal access to information. There would be no undue advantage by a select group of investors to the detriment of retail investors,” he added.  

Public comments on the SEC’s draft MC will be accepted until Feb. 1. — Revin Mikhael D. Ochave