Regulators call for caution as Korea’s SPACs keep hitting upper trading limits

Korea’s financial watchdog, the FSS, is closely monitoring Korea’s “SPAC fervor” as the listed SPACs keep hitting the upper daily trading limits.

An article is Wednesday’s Korea Herald reports -

“SPAC fervor” is continuing in Korea’s stock market, as repeated warnings failed to curb investors’ appetite for the new investment vehicle, designed to give direct access to M&A deals.

At the center of the investment fever for SPACs, or special purpose acquisition companies, is Mirae Asset, a leading financial group that is a well-known brand for mutual funds for individual investors.

Mirae Asset 1st SPAC (A121950:KOE), listed on the Kosdaq, rose by the daily limit of 15 percent yesterday (March, 23) to 3,810 won per share.

The stock hit the upper limit in seven out of a total eight trading sessions since its market debut on March 12. Yesterday’s price is more than double its IPO price of 1,500 won ($1.32).

Hyundai Securities 1st SPAC (A122350:KOE), which debuted on Kosdaq last Friday, and Daewoo Securities Green Korea SPAC (A121910:KSC), traded on the main Korea Exchange, also surged by the daily limit.

“The profitability of SPAC investment is difficult to measure until the company completes an M&A deal, but there seems to be acute investor interest in SPAC shares,” said Kim Hyung-ryeol, an analyst at NH Securities & Investment Co.

“Retail investors seem to have high hopes on SPACs that the companies will deliver hefty returns through M&A deals, but they need to remember that the higher its stock price goes, the greater their investment risk gets.”

The financial authorities are on the alert, as the white-hot market reception stoked concerns over a possible price bubble and that retail investors may get burnt.

The Financial Supervisory Service said in a statement yesterday (March 23) that the financial regulator and the bourse operator Korea Exchange, hand and hand, are conducting “intensive monitoring” of related stocks for any attempts to manipulate stock prices or irregular transactions.

“We’re closely watching the situation and will take measures if deemed necessary to stabilize the market,” Kim Seong-tae, an official at the Korea Exchange’s market oversight division.

Last week, the bourse operator issued a statement urging investors to exercise caution when investing in Mirae Asset 1st SPAC, saying the stock had gained significant ground in a short period of time.

“The FSS will put SPAC shares on the watch list for investors to take heed or order the firms to report what drove sharp stock movements in regulatory filings in case of unreasonable stock fluctuations,” an FSS official said, reported by Yonhap News on March 19.

“Overheating trends have been seen in a string of newly-listed SPAC shares,” the official said.

Responding to Korea Exchange’s request to clarify any possible reason for the recent stock price hikes, Mirae Asset said:

“We believe there is nothing that could have affected such a rapid rise in stock prices. At the moment, we’re not looking into any specific merger target or contacting any firm for that reason.”

In case of company liquidation, shareholders may get less than what they paid for the IPO, and those who bought the shares in the market at higher prices could suffer bigger losses, it warned.

According to local rules, a SPAC must merge with a company with assets exceeding 80 percent of its value within 36 months of listing, otherwise it must liquidate and distribute the escrow funds to shareholders.

“Under local rules, SPACs would go after a deal one year after their inception in order to avoid corporate taxes, which is why SPACs should be considered as long-term investment,” the Korea Institute of Finance said in a note.

High prices of SPAC stocks may hinder M&A deals, the sole purpose of the SPACs, experts said.

The unlisted firms that could be targeted by SPACs may feel a price burden when negotiating the terms of the merger, because of the SPACs’ bloated market value, they said.

Still, more SPACs are lining up for IPOs.

Tomorrow (March 25), Tong Yang Value Ocean SPAC (A122290:KSC) will get listed on the main bourse, followed by Shinhan 1st SPAC and Kyobo-KTB SPAC in April. Hidden Champaign, established jointly by Meritz Securities and Samsung Securities, is preparing for an IPO in May.

“The sharp gains seem to be partly driven by speculative investors who seek fast returns,” said Shim Jae-yup, an analysts at Meritz Securities Co., adding SPAC shares are appealing to retail investors because their stocks are cheap and they are new kinds of investment vehicles.

“The steep rises, however, are not justifiable since no specific details related with M&As have been released from the M&A-focused firms,” Shin added.

(Source: Korea Herald, Yonhap News, Korea Times )