Since the Shanghai Stock Exchange (the “SSE”) was inaugurated in 1990, China’s securities market has been active for over 28 years. In 2018, the Public Offering Review Committee (the “Review Committee”) under the China Securities Regulatory Commission (the “CSRC”) reviewed 186 IPO applications, greenlighting 111 and rejecting 59, with 26 either suspended or struck from the review list. This represents an approval rate of 60%, which is 18% lower than that of 2017, and 71% lower if considering the number of companies passing the review.
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With respect to industries engaged in by successful IPO applicants, the top three spots were taken by: computer, telecommunications and other electronic device manufacturing; special equipment manufacturing; and chemical raw material and chemical product manufacturing, with 13, 11 and 10 companies garnering the CSRC’s approval, respectively, whereas manufacturing, information transmission, software and information technology services were among the sectors suffering most from governmental rejection.
The year 2018 witnessed 105 new listings in the market, raising a total of RMB 137.8 billion of capital, which represents a 36% drop compared to 2017, signifying a tightening trend in IPO financing as a whole. Notably, however, as the Review Committee put more weight on the size and profitability of IPO seekers when reviewing their applications, both the company scale and financing amount of each successful applicant were perceptibly larger, as evidenced by the fact that the average financing amount per company in 2018 was 2.5 times that of the year before.
Overall, it could be said that the market environment is only a partial reason for both the number of successful applicants, and the total value of financing in 2018, being at a low point of the past decade, while the CSRC’s ramped-up efforts in IPO review, and more rigorous vetting standards, also play a part.
The time it takes to complete an IPO review in mainland China relies heavily on the regulatory policies in force and the regulators. It is not unheard of for some prospective issuers to wait more than 300 days from the acceptance of their application to the commencement of the CSRC’s review. During such long wait, an IPO candidate must maintain strong and sustained profitability, a stable and clear ownership structure, and compliant disclosure of information; otherwise, it is very likely that the applicant will fail the CSRC’s examination. This long wait in a queue for pre-listing review is also known as a “landslide dam phenomenon” in China. But this phenomenon was significantly relieved in 2018 when the number of candidates pending official review nearly halved, dropping from 480 at the beginning of the year to 260 at the end.
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The enhanced efficiency of the newly elected Review Committee is not the only reason why the “landslide dam” issue was no longer prominent in 2018. The “withdrawal tide”, whereby IPO prospects rescinded their applications, should also count itself as a contributor. Against the backdrop of the CSRC’s increasingly stringent review and raised profitability threshold requirements applicable to IPO hopefuls, 196 companies withdrew their applications for IPOs in 2018, accounting for a 35% increase compared to that of 2017. The discharge of applications pending in the “landslide dam” would be conducive to the normalisation of China’s IPO review.
In addition, the CSRC promulgated on March 30, 2018 the Several Opinions on Allowing Innovative Enterprises to Issue Stocks or Depository Receipts on a Pilot Basis in the Mainland, setting forth relatively relaxed IPO review criteria for innovative companies, including, for the first time ever, downplaying the importance of net profits and net assets, and allowing companies that bear losses to go public. Since then, an impressive array of innovative enterprises, from the biopharmaceutics, information technology, high-end manufacturing, new energy and new materials and other emerging sectors, including Foxconn Industrial Internet, have debuted their IPOs on China’s A-share market with unprecedented efficiency, thanks to the authority’s significantly curtailed review time.
For now, IPOs in China are still subject to regulatory approval, and the process, which consists of four steps – (1) restructuring, (2) tutorship, (3) application and review, and (4) issuance and listing of shares and continued monitoring – remains the same. On paper, it normally takes about a year for a company to go through the whole process from restructuring to listing, whereas in reality, this process tends to take about one-and-a-half to two years.
On November 5, 2018, Mr.
Xi Jinping, the General Secretary of the CPC Central Committee and the President of China, announced at the opening ceremony of the first China International Import Expo that the SSE would launch a new science and technology innovation board (the “Tech Board”), adopting a pilot registration-based IPO regulatory system, with a view to offering more financing options to innovative companies with vigorous growth and great potential but hindered by rigid IPO requirements, such as profitability threshold.
Regulatory documents on the Tech Board that have been officially published and implemented show that a registration-based system could be secured, in a top-down way, by four strategies.
- Firstly, the CSRC is likely to delegate responsibility for reviewing applications for IPOs on the Tech Board to the SSE, turn its focus to the registration of Tech Board IPOs, and reinforce its supervision on the stock exchange and the entire listing process. Also, a higher standard is brought in for information disclosure by companies seeking IPOs and their advisors/service providers.
- Secondly, a series of market-oriented reforms are put in place regarding rules on issuance and underwriting of shares on the Tech Board. As a result, the market will act as a deciding factor of price, size and pace of share issuance, and institutional investors will take the helm on price inquiry, price-setting, share placement and other aspects of IPOs, all to ensure that the share price on each IPO will fit patterns in the market.
- Thirdly, the rules of the Tech Board introduce a differentiated mechanism for continuous monitoring of companies upon their listing on the board. To be more specific, all-inclusive listing criteria are set up to allow different types of enterprises to access the capital market; requirements for information disclosure are narrowed down and more to the point; and share reduction becomes more feasible and practical, via a more relaxed voting system, more stringent post-listing supervision by sponsors, more flexible share incentives, and a stricter delisting standard that ensures the unqualified will be weeded out and the fittest will survive.
- Lastly, the CSRC and the SSE have jointly formulated rules for trading on the secondary market of the Tech Board, in order to: introduce an investor suitability scheme; lessen the limitation on the rise and fall of stock prices; and adjust the minimum number of stocks traded in a single transaction, so as to accommodate innovation demand and the high risks associated with the Tech Board.
In essence, the transformation of the CSRC’s role demonstrates that on the whole, the reform of China’s securities market aims at easing control and letting the market decide. Whether an IPO application could succeed will no longer solely rely on the judgment of governmental regulators on the applicant, while factors contributing to the result gravitate towards a higher standard of information disclosure and evaluation by the market. In that sense, the Tech Board is not only an instrumental addition to the existing listing boards, but also a testing ground for reform where the market takes control in weighing up the IPO applicants.
On the regulatory level, however, there is still a lot of room for interpretation of the approval power held by the CSRC and the SSE in IPO registration.
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It remains to be seen to what extent the regulators will continue taking a hard line in vetting prospective IPOs, and how far they will respond to the trends of market-oriented reform of the Tech Board on further regulations to be published and future practice to be taken.
So far, mainland China still has two stock exchanges, namely the SSE (Main Board) and the Shenzhen Stock Exchange, or the SZSE (Main Board, SME Board and ChiNext), and each board has its own niches and requirements. Notably, the Tech Board, which is to be established by the SSE, and has been styled as an important effort to “increase capabilities of serving innovative tech companies, better accommodate the market and relegate more functions to the market”, will be independent of the existing Main Board of the SSE, and have markedly different vetting rules from the existing ones. In comparison to the current review regime, where IPOs are reviewed by the CSRC, the upcoming Tech Board will have a two-step registration process, as described below according to its draft regulations: (i) an issuer shall first submit its application documents to the SSE for its substantive review; and (ii) after the passing of the review, the application and relevant documents shall be delivered to the CSRC for merit-based registration. This process essentially shows that part of the CSRC’s review power over IPOs is delegated to the SSE.
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The fundamental system of IPO laws in China has not gone through any significant change. It still consists of the Company Law, the Securities Law, the Measures for the Administration of Initial Public Offerings and Listings, and the Measures for the Administration of Initial Public Offerings and Listings on the ChiNext as promulgated by the CSRC, and listing rules and other detailed rules published by stock exchanges regarding information disclosure, related-party transactions and other matters.
The proposed Tech Board is to have a set of rules and regulations that are both in common with, and distinct from, the existing IPO laws. What makes the two alike is that they are both based on the Company Law and the Securities Law. But the Tech Board also has its own unique regulations and stock exchange self-regulatory rules, which include:
- three regulations promulgated by the CSRC, namely, the Several Opinions on Allowing Innovative Enterprises to Issue Stocks or Depository Receipts on a Pilot Basis in the Mainland, the Implementing Opinions on the Establishment of the Science and Technology Innovation Board at the Shanghai Stock Exchange and the Adoption of Pilot Registration, and the Measures for the Continued Monitoring of Companies Listed on the Science and Technology Innovation Board;
- (ii) ten regulatory documents published by the SSE for public comments, including the Rules for the Review of Issuance and Listing of Shares on the Science and Technology Innovation Board, the Implementing Methods for the Issuance and Underwriting of Shares Listed on the Science and Technology Innovation Board, and the Share Listing Rules of the Science and Technology Innovation Board; and
- (iii) other rules released to complement the foregoing, such as the Rules of China Securities Depository and Clearing Corporation Limited on the Registration of Securities (2013 revised) and the Rules of China Securities Depository and Clearing Corporation Limited on the Registration and Clearing of Shares Listed on the Science and Technology Innovation Board (For Trial Implementation).
In mainland China, the key instruments involved in an IPO are a prospectus and a legal opinion. A prospectus provides the basis on which potential investors make their decisions about investment. The CSRC has set up strict rules regarding the form and contents of the prospectus, and made it the minimum requirement as regards information disclosure by each issuer. A prospectus is prepared by an issuer with the help of its sponsor and other advisors/service providers, and is signed by the issuer and all of its directors, supervisors and senior officers to testify to the truthfulness, accuracy and completeness of its contents. The sponsor and its representative in charge of sponsor matters are required to review the prospectus and give comments on it. The lawyer of the issuer is responsible to give comments and issue a legal opinion on all legal matters relating to the issuer’s intended IPO. Aside from the prospectus and legal opinion, the sponsor also needs to give its recommendation opinion and issue a sponsor’s letter regarding the IPO. Moreover, the sponsor and the lawyer should prepare a sponsor’s work report and a lawyer’s work report, respectively, for the offering.
Guidelines released by the CSRC on contents and forms of prospectuses set out the minimum requirements for information disclosure regarding IPOs. All information that would have a material impact on investors’ investment decisions should be disclosed, no matter whether it is explicitly provided in the guidelines or not. Each issuer is required to pre-disclose its preliminary prospectus on the website of the CSRC after the CSRC accepts its application documents, and before the Review Committee reviews the application documents. Once the CSRC approves the application, the issuer may proceed to publish its preliminary prospectus and conduct IPO promotion and price inquiry together with the lead underwriter. Before shares are subscribed for, the issuer should post its complete prospectus, containing an issue price and an IPO & listing announcement, on the websites designated by the CSRC and the stock exchange where it is to be listed. In addition, the Securities Law makes it clear that an issuer must make public its financial and accounting reports if it intends to offer new shares to the public pursuant to law.
According to the Securities Law, the Measures for the Administration of Information Disclosure by Listed Companies and other relevant regulations, the documents that a listed company is obliged to disclose include regular reports and ad hoc reports. Regular reports include annual reports, interim reports and quarterly reports. In case of a major event which is likely to cause a material impact on the trading price of the securities issued by a listed company, but is not yet known to its investors, the listed company is obligated to promptly report to the CSRC and the stock exchange concerned, and disclose to the public.
An important change in 2018 is a revision of the delisting mechanism for listed companies. In July 2018, the CSRC released the Decision on Revising the “Several Opinions on Reforming, Improving and Enforcing the Delisting System for Listed Companies”. Afterwards, both the SSE and the SZSE rolled out detailed rules to implement this regulatory document. All these, taken together, form a brand-new delisting regime. The revision made by the CSRC mainly concerns three aspects:
- firstly, the rules on compulsory delisting are fleshed out, and in particular, it is provided that trading of shares of any listed company that commits fraud in its issuance of shares, fails to comply with material disclosure requirements, or performs any other material illegal act involving national, public, ecological, production or public health safety or security, shall be suspended or ceased altogether by the relevant stock exchange in strict accordance with law;
- secondly, the responsibilities of stock exchanges in delisting are emphasised and reinforced; and
- thirdly, regulations are in place to ensure that the controlling shareholder, actual controller, directors, supervisors, senior officers and other relevant personnel of a company delisted due to material violation of law are held liable.
The implementation of the foregoing rules is instrumental in normalising delisting, and subjecting delisting to both market forces and the rule of law. At the same time, these rules help add vitality to the capital market while safeguarding the order of the market and public interests.
In relation to a company’s IPO, if there are any false records, misleading statements or major omissions in its prospectus, documents prepared by advisors/service providers or other documents for information disclosure, the company and persons directly responsible for the above misconduct, as well as the sponsor, related advisors/service providers working for the company and their respective personnel responsible for the above misconduct will be held civilly, administratively or even criminally liable according to the Securities Law, the Criminal Law and other applicable laws and regulations. As such, the disclosure responsibilities of a company listed on the Tech Board and its advisors/service providers will be more demanding, as the proposed registration-based system is designed to have the IPO review process count less on the regulator’s review and decision-making regarding IPO applicants and more on the sufficiency, consistency and intelligibility of information revealed in application documents prepared by the applicants and their advisors/service providers, giving the market more initiative on appraising the values of IPO hopefuls.
Misconduct on the part of any advisor/service provider of an IPO aspirant, or any personnel of such advisor/service provider, may hinder the IPO process of the aspirant. As provided for in the Decision on Revising the “Provisions of China Securities Regulatory Commission on the Implementing Procedures for Administrative Permissions” released in March 2018, if an advisor/service provider, or any of its personnel providing service to a company which applies for administrative permission, is suspected of committing an illegal act, and therefore is under investigation by the CSRC or any of its local counterparts or by a judicial body, and the illegal act is of the same kind as the service rendered by it to the company, or may have a material impact on the market, so long as the case is not closed, the CSRC will reject the application. According to the rules of the Tech Board currently available, if the sponsor or any advisor/service provider of a company is under investigation as aforesaid or subject to any other regulatory sanction that is not lifted, the SSE will suspend review of the proposed IPO.
For good measure, upon its successful IPO, a listed company needs to take note of laws and regulations relating to lock-up of shares held by shareholders, limitations on share reduction and short-swing trading, ban on insider trading, sensitive period, information disclosure, etc.
- See Article 13 of the Securities Law, Article 26 and Article 30 of the Measures for the Administration of Initial Public Offerings and Listings and Article 11 of the Measures for the Administration of Initial Public Offerings and Listings on the ChiNext.
- See the “Overview” page on SZSE’s official website: ( Hyperlink ) about/overview/index.html, as last visited on Feb.
- See Article 41 of the Measures for the Administration of Initial Public Offerings and Listings.
- See Article 41 of the Securities Law.
- See the article titled CSRC issues the “Decision on Revising the ‘Several Opinions on Reforming, Improving and Enforcing the Delisting System for Listed Companies’” on the CSRC’s official website at ( Hyperlink ) /t20180731_342018.htm, last visited on Feb.
- See Articles 69, 173, 192 and 193 of the Securities Law of the People’s Republic of China and Article 160 of the Criminal Law of People’s Republic of China.
- See Section 2 of Chapter 14 of the Share Listing Rules of the Science and Technology Innovation Board of the Shanghai Stock Exchange.
- See Article 61 of the Rules for the Review of Issuance and Listing of Shares on the Science and Technology Innovation Board of the Shanghai Stock Exchange (draft for comments).