Regulation of IPOs in China

IPOs in China are essential for enterprises seeking to attract investment. Unlike developed countries that typically employ a disclosure-based system for regulating IPOs, China did not traditionally follow this approach.

In China, an IPO can be conducted on one of three primary stock exchanges: the SSE, the SZSE, or the BSE.

The IPO regulatory reform aimed to replace the old system with a new registration-based system, intending to foster a more open and transparent environment for companies going public and for investors seeking new market opportunities.

The CSRC has implemented the Sponsor Due Diligence Standards, imposing stringent requirements on intermediaries to enhance the efficiency and transparency of sponsors in the capital market. Additionally, the CSRC has issued Guidance on the Drafting of Working Papers for Sponsored Securities Listing Businesses, which offers comprehensive guidelines to intermediaries on preparing the necessary documentation for Chinese IPOs and other stock market transactions.

It is important to note that launching an IPO project in China involves steps common to many jurisdictions, including due diligence of the company before listing on a Chinese stock exchange, document preparation (such as the Prospectus), and approval by the CSRC. For those seeking to understand the intricacies of entering the IPO market in China, this material may prove invaluable.

Why do many prefer going public through an IPO?

Conducting an IPO in China provides companies with access to the public capital market, enabling them to attract substantial investment. This method can be more efficient than traditional approaches like bank loans, as it allows companies to raise capital from a broad spectrum of investors.

Launching an IPO in China enables a company to secure funds for financing various strategic initiatives, including business expansion, new product development, acquiring other companies, or enhancing operational efficiency. Consequently, conducting an IPO on a Chinese exchange becomes a robust mechanism for achieving strategic objectives. This step fortifies the company's financial foundation and enhances its prestige and competitiveness in both domestic and international markets.

Benefits of choosing the IPO route:

  • Raising capital through the public sale of shares.
  • Using shares as compensation for employees.
  • Improving terms for securing loans and financing.
  • Funding strategic initiatives.
  • Enhancing reputation and brand visibility.
  • Creating liquidity for early investors.

Every corporation planning to conduct an IPO in China must adhere to the stringent regulatory requirements established by the CSRC.

Regulation of IPOs in China

In 2023, the CSRC issued 57 institutional rules pertinent to the complete IPO registration system. Concurrently, various exchanges and relevant departments promulgated 108 supporting institutional regulations. This initiative aimed to ensure the effective operation of the new IPO system and foster a conducive environment for the capital markets' growth.

As part of the measures introduced by the CSRC, the Commission has mandated regulators to meticulously examine IPO applications to prevent unscrupulous entities from entering the market. The CSRC is dedicated to safeguarding investors' interests and maintaining equitable market conditions. These measures encompass thorough evaluations of the financial stability of companies seeking IPOs and monitoring their adherence to established standards.

The regulator is also broadening its oversight of listed companies. In its commitments, the CSRC has expressed its intention to prevent the illegal dilution of major shareholders' assets, including practices such as short selling. The Commission urges listed companies to increase their dividend payouts and implement specific measures to enhance market value management.

Brokers have been advised to bolster their internal controls to safeguard investors' interests. Furthermore, stock exchanges have been directed to prioritize the detection of fraudulent activities during the review of IPO applications and to enhance oversight of corporate disclosures. The regulator underscores the importance of transparency and the reliability of data presented to the market. Additionally, exchange-traded fund operators have been encouraged to reduce fees for investors, thereby making these funds more attractive and accessible.

Listing in China: differentiating the registration system from the approval system

Aspect

Approval (before reform)

Registration (after reform)

Primary authority

CSRC

Stock exchanges

Role of CSRC

Central, comprehensive review and approval

Supervisory, final approval based on exchanges' recommendations

Documentation

Extensive, including financial and legal reports

Reviewed primarily by stock exchanges

Share pricing

Determined by CSRC

Market-determined, reviewed by exchanges

IPO process complexity

High

Streamlined

Time to market

Longer

Shorter

Flexibility and efficiency

Lower

Higher

Transparency and confidence

Moderate

Raise

Key requirements

Below, we outline the process and requirements for a foreign issuer to launch an IPO in China, highlighting the key steps and critical considerations involved. Here are the essentials:

  1. Eligibility: only companies limited by shares registered in China can launch an IPO on the China Stock Exchange. Foreign-owned joint ventures are an exception.
  2. CSRC assessment: the CSRC conducts a thorough review of IPO applications, often rejecting them for issues such as non-compliance with qualifications, lack of sustainable profitability, conflicts of interest, procedural issues, inadequate disclosures, corporate governance, compliance, financial discrepancies, and faulty reports.
  3. Registration system: the introduction of the registration system emphasizes the importance of internal controls, transparency, integrity, and accuracy of disclosures.
  4. IPO process:
    • Due Diligence: conducted by legal advisors to ensure compliance with IPO requirements.
    • Restructuring: necessary corporate restructuring to optimize business and financial health.
    • Preparing for listing: submission and amendment of registration statements, thorough review of financial and business documents.
    • Application: submission of IPO documents to the regulator, decision made within 90 to 120 days.
    • Entering the market: regulatory approval authorizes the issuer to list shares on the open market.
  5. Importance of the prospectus: a detailed Prospectus is crucial for attracting investors, ensuring informed investment decisions, and facilitating ongoing interactions with regulators.
It's important to consult specialized experts to navigate the legal and procedural complexities of listing on the Chinese stock exchange.

Capital

For major stock exchanges in China, the qualification requirements for the total value of issued shares, market capitalization, and financial performance adhere to established regulations. However, these requirements allow for necessary adjustments reflecting the unique characteristics of the company’s business. These can be summarized as follows:

Requirement

Details

Capital

Total share capital after issuance

At least 30 million yuan (approx. 4.3 million USD)

Public share issuance

Shares issued to the public must represent more than 25% of the company's total shares

Large capital

If total share capital exceeds 400 million yuan (approx. 56 million USD), the proportion of publicly issued shares must be higher than 10%

Market capitalization and financial performance

Net profit

Positive net profit for the last three fiscal years, with cumulative net profit exceeding 30 million yuan

Net cash flows or business income

Cumulative net cash flows from business activities over the last three fiscal years exceeding 50 million yuan (approx. 6.9 million USD), or cumulative business income over the last three fiscal years exceeding 300 million yuan (approx. 42.3 million USD)

Total value of shares before offering

At least 30 million yuan

Intangible assets

Proportion of intangible assets (excluding land use rights, water rights, mineral rights, etc.) at the end of the last financial period must not exceed 20% of net assets

Unrecovered losses

No unrecovered losses at the end of the last financial period

Additional requirements

Minimum market capitalization

Total share capital for main board applicants and SMEs before listing must be at least 30 million yuan

Working capital

No specific working capital requirements for IPO applicants, but listed companies must publish interim and annual financial statements

Electronic payment eligibility

Shares must be eligible for deposit, clearing, and settlement through an electronic platform managed by the China Securities Depository and Clearing Corporation Limited

Documentation

Applying for a listing on a Chinese stock exchange involves adhering to various procedures and submitting a comprehensive set of documents. The general list of typically required documents includes:

  1. Declaration of intent: a statement expressing the company's intention to go public.
  2. Prospectus: a detailed document outlining the company's business operations, financial status, management team, and terms of the share issuance.
  3. Audited financial statements: financial statements audited for the past three years.
  4. Corporate documentation: the company's articles of incorporation, corporate governance policies, internal control regulations, and other operational documents.
  5. Shareholder information: details about current shareholders, the ownership structure, and any changes in capital structure over recent years.
  6. Strategic plan for the upcoming years, including development strategies and financial projections.
  7. Significant contracts and obligations: documentation of key contracts and liabilities.
  8. Regulatory compliance: evidence of compliance with regulatory requirements, including inspection reports and necessary permits.
  9. Management information: information about the company's management and key employees.

These documents must be submitted to the appropriate regulatory bodies, such as the CSRC and the stock exchanges where the company intends to list its shares.

For more detailed information on this topic, you can seek consultation on IPO market regulation in China from YB Case experts. Engaging qualified specialists early in the IPO process is crucial to ensuring compliance with all regulatory requirements.

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