The Financial Supervisory Service on Thursday warned retail investors to be cautious of initial public offerings launched by promising but still loss-making companies, stressing that short-term gains may not be achievable.

“As the rules allow (loss-making) companies (but with growth potential) to launch an IPO, profits may not occur within a short period of time after listing,” the FSS said in a statement.

As part of efforts to encourage budding companies to draw investment, the government has been lowering regulatory hurdles for their market debuts, by reviewing their growth potential instead of their current balance sheets.

The special IPO rule was applied to 17 companies, chiefly biotechs developing medical devices and therapies, of a total of 28 companies that went public on the secondary Kosdaq market.

The remark came amid growing investment appetite by local retail investors seeking to profit from a bull market.

Thanks to record-low interest rates and a stock market rebound in the second half of last year, individual investors showed high enthusiasm for IPO stocks.

While the total number of IPOs decreased year-on-year from 73 in 2019 to 70 last year, the volume of IPOs increased by 40.6 percent from 3.2 trillion won ($2.89 billion) to 4.5 trillion won.

The stocks listed on the main Kospi and the tech-laden Kosdaq were oversubscribed 956 times by retail investors on average last year, nearly double that of 2019.

The FSS urged investors to check stock allocation policies set by companies planning to go public which typically earmark different portions for institutional, retail investors and employees. Allocation and distribution methods could differ depending on their policies, it said.

Even if an IPO was priced at the high end of its price band, it doesn’t guarantee high returns, the financial watchdog said.

“When investing in public offerings, it is necessary to carefully examine investment risk factors such as future business plans and the basis for calculating public offering prices,” it said.

By Park Han-na (hnpark@heraldcorp.com)