By Cho Jin-seo
Staff Reporter

The introduction of "shell" companies specialized in backdoor listings is drawing massive attention from individual investors, raising concerns over their uncertain business prospects and a possible price bubble.

The so-called SPACs (special-purpose acquisition companies) raise funds from the KOSPI or the Kosdaq stock market, and then use the money in mergers and acquisitions (M&As) of small, promising companies.

The first of its kind was designed by Daewoo Securities and was opened to individual investors this week. The initial public offering of Daewoo Securities Green Korea SPAC received some 2.28 trillion won in commitments from individuals for sales of shares worth only 26 billion won ― a competition ratio of 87 to 1.

Such exuberance is rare in ordinary companies' public share offerings. But it was mainly non-expert investors who showed the enthusiastic response. When the shares were allotted to institutional investors a week ago, the competition was only 2.9 to 1 for the shares.

Financial regulators say they are staying alert.

``Recently, SPACs are receiving a big response from the market. We will monitor these companies so they can perform a role in efficient capital allocation to promising small companies and encourage long-term investment,'' said Cho In-kang, director general of the capital market bureau of the Financial Services Commission.

As popularity soars, some institutions are already selling the right to their shares to outside markets at a premium even before the shares begin trading on the KOSPI. Web sites of various outside markets showed up to a 20-percent premium, Thursday.

SPACs are paper companies without any real assets. Their sole mission is to buy good companies cheaply and float them on the stock market. Investing in the initial public offering of a SPAC is inherently a gamble, because investors are blocked from information on the companies the SPAC buys, and at what price.

The only barometer for investors is the capacity of its management who conduct the M&A activities. In the case of Daewoo's SPAC, it's likely to be Lee Ji-hyung, former head of Goldman Sachs Asset Management in Korea. Lee is a nephew of South Korean President Lee Myung-bak.

An official at the Korea Exchange warned that the new scheme may bring unexpected results to investors and to regulators as well.

``This is the first time SPACs are being adopted in South Korea, so we will have to wait and see how they develop, and establish more safety measures accordingly,'' a corporate lawyer at the KRX said.

After the Daewoo SPAC, a number of others are lining up to launch their own on the stock market. So far, applications have been filed by Daewoo, Mirae, Hyundai and Tong Yang, while Shinhan and Woori have also applied for pre-inspection from regulators.

SPACs have been in operation since the 1990s in the United States. They are one of the tools investment bankers use to leverage their capital. The scheme is similar to private equity funds in that they both use other people's capital to buy target companies via M&As.

The difference is that private equities receive investment from a limited number of partners such as banks, insurance companies and rich individuals, while SPACs draw money from the public via the stock market.

This makes SPACs more transparent than private equities, but on the other hand they may create a price bubble among individual investors who have relatively little knowledge on the complexity of M&As.

To prevent catastrophic losses to individuals, the KRX has set a rule that requires SPACs to refund at least 90 percent of the raised fund to investors if they fail to complete a merger or acquisition within three years of establishment. But the real danger is when they do succeed in completing M&As, and then the share price falls.

``We do not have safety measures set for such cases. Once an M&A is completed, then the price will only depend on the market,''a Daewoo official said.

Studies show that more than half of the M&A cases fail to raise the enterprise value. The market is also relatively limited in South Korea where big companies are mostly owned by family-run conglomerates.

cjs@koreatimes.co.kr