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1. The China Securities Regulatory Commission (CSRC) recently released the Guidelines for the Application of Regulatory Rules: About the Shareholder Information Disclosure by the Companies Applying for IPO (hereinafter referred to as “the Guidelines”). So to implement the Guidelines, what will SZSE consider in reviewing stock issuance and listing of enterprises on the ChiNext Board?
A: The Guidelines shall apply to the reviewing of stock issuance and listing of enterprises across different boards. SZSE will move fast to put it into implementation after earnest study and comprehension. For the regulatory purpose, the Guidelines is intended to enhance the supervision of the shareholder information disclosure by the pre-IPO companies. It represents an important measure the CSRC has adopted to firmly uphold the core principles of the Central Economic Work Conference and implement the working requirement to “prevent capital from expanding in a disorderly fashion”. It is expected to greatly guard against “shadow shareholders” from illegally “creating wealth”, and further improve the quality of listed companies from the source. As to the regulatory logic, the Guidelines follows three major principles – respecting the basic implications of the registration-based IPO system, learning from the best international practices, and displaying the Chinese characteristics and the stage of development. It, therefore, fully attests to a fact that the reform of the registration-based IPO system aligns its basic requirements with actual needs with respect to institutional improvement. Seen from regulatory contents, the Guidelines pursues a problem-oriented approach. It preferentially deals with some prevailing issues, which include equity holdings by proxy, abrupt share purchases right before IPO, and share purchases at abnormal prices. Designed to bolster institutional weaknesses at a faster pace, it is extremely pertinent and instructive to the steady development of the ChiNext Board.
SZSE, along with issuers and intermediary agencies, will earnestly implement the requirements put forth by the Guidelines in many aspects of work like the reviewing of stock issuance and listing of enterprises, so as to further optimize the market ecosystem. On this basis, it is guaranteed that the development of the ChiNext Board and the reform of the registration-based IPO system can go further steadily.
2. What specific measures will SZSE adopt in reviewing stock issuance and listing of enterprises on the ChiNext Board, so as to implement the requirements set out in the Guidelines?
A: Under the guidance of the CSRC, SZSE will intensify and coordinate regulatory efforts to steadily press ahead with the reviewing of stock issuance and listing of enterprises on the ChiNext Board. Priority will go to the following aspects of work:
First, dealing with the applications for new projects properly. The companies that file their IPO applications after the release of the Guidelines shall implement the requirements set out by the Guidelines in full upon their applications, by cleaning up their equity held by proxy, disclosing shareholder information, and submitting special commitments in accordance with the applicable laws and regulations. Sponsor institutions shall conduct special inspections and issue verification opinions on the three types of issues – equity holdings by proxy, abrupt share purchases right before listing, and share purchases at abnormal prices. While dealing with the IPO applications, SZSE will focus on checking whether issuers and intermediary agencies have handled relevant matters in line with the Guidelines and whether the new shareholders recognized within 12 months before the IPO applications can meet the requirements for the lock-up period.
Second, handling the existing projects by category. For the projects under review and the projects that have passed the review of the Listing Committee but haven’t been registered yet, SZSE will promptly notify the concerned issuers and intermediary agencies to supplement and verify the shareholder information for disclosure. For the companies that do not involve any of the issues such as equity holdings by proxy, abrupt share purchases, and obviously abnormal prices for share purchases or the companies that have explained or disclosed the foregoing issues during the previous stage for review and inquiry, the review procedures shall be processed as normal after they submit special commitments as prescribed.
Third, unifying inquiry standards. SZSE will ask reasonable inquiry questions based on actual conditions of companies, with the scope of disclosure and verification for similar issues remaining consistent. During the review, SZSE will pay particular attention to the disclosure and verification of shareholder information submitted by companies. Varying measures are adopted for companies falling into different situations, and supplementary inquiries are issued in a targeted way. Priority is given to the information disclosure and verification of the individual shareholders who purchase shares at obviously abnormal prices and the multi-level nested institutional shareholders.
Fourth, making sure responsibilities can be fulfilled substantially. Given the key points of information disclosure review formulated and released in the previous stage, SZSE will go further to make sure issuers can assume the primary responsibility for information disclosure and that intermediary agencies can fulfill the responsibility for verification, thus exercising rigid control over IPOs. Where the pre-IPO companies fail to truthfully explain or disclose their shareholder information, or their intermediary agencies fail to perform their due diligence obligations, they will be investigated and punished by SZSE severely, and transferred to the competent authorities for timely handling in the event that they are suspected of violating laws and regulations.
Fifth, intensifying regulatory coordination. SZSE will further enhance regulatory coordination and information sharing with relevant authorities, so as to create a supervisory synergy. Where companies are found with the problems concerning the anti-money laundering (AML) management, anti-corruption requirements, and other domains, the CSRC will be notified and requested to initiate the consultation procedures. Market entities can consult and make feedback to SZSE in a timely manner, if they have major doubts about the specific application of the Guidelines.
3. How will issuers and intermediary agencies carry out information disclosure and verification properly, after the Guidelines is implemented?
A: Issuers shall act in good faith, disclose information truthfully, accurately, and completely, and implement the requirements of the Guidelines in terms of norms, commitments, disclosures, and other aspects. First, issuers shall strictly regulate the equity holdings by proxy. If such holdings are passed down from the past, they shall be terminated according to law before the IPO applications are submitted, and the situation shall be fully disclosed in the prospectus. Second, issuers shall assure shareholder eligibility through the form of special commitment. It shall explicitly be undertaken and disclosed that shareholders contain neither entities that are prohibited from holding shares according to laws and regulations nor intermediary personnel related to the ongoing issuance, and that issuers don’t fall under any circumstances where equity is used for tunneling. Third, issuers shall fully disclose or explain shareholder information as required. The basic information on the new shareholders recognized within 12 months before the IPO applications shall be fully disclosed in the prospectus. It is necessary to indicate the basic information on the individual shareholders who purchase shares at obviously abnormal prices and the natural persons upon look-through of the shareholders that present complicated shareholding structures and purchase shares at obviously abnormal prices. If financial products such as private investment funds serve as shareholders, the supervisory incorporation shall be disclosed. Fourth, issuers shall urge relevant shareholders to implement the lock-up requirements. The new shareholders recognized within 12 months before the IPO application shall undertake that the newly held shares shall not be transferred within 36 months from the date of acquisition, and the related issuers shall supervise the implementation of such requirement.
Intermediary agencies such as sponsor institutions and securities service institutions shall work diligently and dedicatedly, and verify the shareholder information disclosed by issuers according to the Guidelines. First, they shall urge issuers to disclose shareholder information and verify the disclosed information in a comprehensive and thorough way. Institutional or individual commitments alone cannot be used as the basis on which verification opinions are issued. The information under comprehensive, thorough verification includes, without limitation, various types of objective evidences such as shareholder agreement, transaction consideration, source of funds, and payment method. It shall be ensured that the documents issued are authentic, accurate and complete. Second, for the shareholders who purchase shares at abnormal prices and present complex equity structures, they shall adopt the look-through verification methods to verify these shareholders’ basic information, shareholding background, and other types of information to ensure that they don’t fall under any of the circumstances: equity holdings by proxy, illegal share holdings, or tunneling.
4. After the release of the Guidelines, the market has paid great attention to the lock-up arrangements for shares of new shareholders and the application transition of the Guidelines. Could you please tell us more about the two aspects?
A: To make the equity structure of a pre-IPO company more transparent, the company still needs to do the shareholder information disclosure in accordance with the Guidelines, although the company whose IPO application has been accepted before the release of the Guidelines is not governed by the share lock-up requirements set out in the Guidelines for new shareholders. Meanwhile, sponsors shall perform supplementary checks in strict accordance with the Guidelines.
The Guidelines increases the period of time required by the recognition of unannounced shareholding to 12 months before the IPO application is announced, and both capital increase & share expansion and share transfer are recognized as unannounced shareholding. New shareholders need to disclose, verify and lock their shares in accordance with the Guidelines. In addition, where new shareholders receive shares transferred from controlling shareholders and actual controllers, they must follow other provisions of the CSRC and SZSE on the lock-up requirements for the shares held by controlling shareholders and actual controllers.
