At least 180 investors to file class-action suit over startup's bloated IPO

Finance

Published: 17 Nov. 2023, 18:51 Updated: 18 Nov. 2023, 15:33

At least 180 investors to file class-action suit over startup's bloated IPO

Fadu, a fabless solid-state drive (SSD) and controller company, faces a class action suit from investors who argue that the company violated the Capital Market Act. FADU headquarters in Gangnam District, southern Seoul, on Nov. 16. [NEWS1]

Initial public offerings (IPOs) are facing challenges in Korea as investors question the eligibility of some corporate listings for not disclosing information that could be pivotal to their stock prices.

Stocks under scrutiny include those of FADU, a fabless solid-state drive (SSD) and controller company, and EcoPro Materials, an EV battery materials maker.

FADU, which was established in 2015, went public on the tech-heavy Kosdaq in August through the technology-growth special listing track. It counts SK hynix as a business partner.

Hannuri Law is preparing to file class-action suit against FADU and its IPO underwriters — NH Investment & Securities and Korea Investment & Securities — for not disclosing their weak second-quarter earnings prior to debut.

The parties are demanding compensation for damage from the entities, citing violations of the Capital Market Act. Around 180 people, who invested more than 10 billion won ($7 million), had registered with Hannuri Law to join the class action suit as of Friday morning.

FADU’s revenue in the second quarter was 59 million won, far down from 17.6 billion won in the previous quarter. Third-quarter revenue remained weak at 300 million won.

“FADU and underwriting brokerage firms would have known about the shocking revenue in early July, which is almost zero,” said Hannuri Law in a statement on Nov. 15. The company should have suspended the IPO, it added.

Before it went public, FADU told investors that it estimated its annual revenue for this year to total 120.3 billion won. Its total revenue through the third quarter was less than 18 billion won.

“It would have been a regulatory violation if FADU had disclosed its future earnings information before the official announcement period,” said Choi Jong-kyung, an analyst at Heungkuk Securities. “But FADU could've voluntarily released its second quarter earnings during the announcement period that came a week after its Kosdaq debut.”

Fadu's third-quarter was the first period when it was required to report earnings since it debuted on Aug. 7

Choi said voluntary disclosure, which is commonly seen from other companies, would have been the “moral obligation of a listed firm.”

FADU cited “a slump in the SSD market beyond expectation” as the reason for its poor earnings in a statement on Nov. 13.

NH and Korea Investment & Securities both declined to comment on the matter, but an NH spokesperson noted that “it would be difficult for the underwriter to know about a company’s future earnings unless it promotes the information aggressively.”

FADU’s stock price was down more than 40 percent from its IPO price as of Friday.

EcoPro materials faced similar controversy after an earnings flip-flop.

The company reported 6.9 billion won in operating loss in the July-September period compared to 7.1 billion in operating profit in the previous quarter. That turnaround was reported on Nov. 14, after the company's subscription period ended but before its Friday debut.

EcoPro Materials CEO Kim Byung-hoon, who had insisted that the IPO price was “not that high,” apologized on Nov. 14 for the deficit.

He cited a fall in mineral prices and the price burden of raw materials inventory.

EcoPro Materials closed up 58.01 percent on its first trading day, despite those concerns.

“The stock performed very well, considering that its IPO price was determined at the lower range of the band, as it was not popular” during the subscription period, Choi said.

Competition rate for its subscription for institutional investors hit a record low this year.

The low volume of shares circulated on the first trading day, which was around 17 percent, and the blanket ban on short selling from earlier this month — which drove up the prices of related stocks in EcoPro and EcoPro BM — were contributors, analysts said.

The first day's price increase “doesn't mean it will be able to avoid the controversy faced by FADU, as the price will fluctuate,” Choi added.

“The timing of their listing may not be illegal, but it may raise questions over morality, which could affect investors’ trust in the market,” said Won Chae-hwan, a business professor who teaches finance and risk management at Sogang University.

BY JIN MIN-JI [jin.minji@joongang.co.kr]