Financing methods available to New Third Board listed enterprises

A multilevel capital market has taken shape in China. The New Third Board is playing an increasingly prominent role as one of the main levels of the market, particularly by providing a good platform and opportunity for the long-term development of unlisted public companies.

Listing on the New Third Board greatly raises the profile of an enterprise and its brand. Listing guides the enterprise to be compliant in its daily operation and improves its capital structure. More significantly, it gives enterprises diversified financing channels to satisfy their capital needs.

Q: What distinctive financing methods are available to enterprises listed on the New Third Board?

A: Compared with non-listed companies, there are two main distinctive methods of financing available to enterprises listed on the New Third Board, those being preferred share offerings, and private placements.

Q: What are preferred shares? How many types are there, and how are they characterized?

A: The State Council’s Guiding Opinions on Launching a Preferred Share Pilot Project, issued 30 November 2013, set out a definition of preferred shares as a specified class of share other than generally specified common shares, the holders of which have preference over holders of common shares in the distribution of company profits and remaining property but whose rights to participate in the decision-making and management of the company are limited.

Two features are evident from the foregoing definition.

First, holders of preferred shares have priority over common shareholders when the company distributes profits and remaining property.

Second, holders of preferred shares have restricted participation rights in a company’s decision-making and management – though it should be emphasized that they do not completely lack voting rights.

Preferred shareholders have voting rights under certain circumstances, including the issuance of preferred shares, revision of articles of association provisions relating to preferred shares, a one-time reduction or aggregate reductions of the company’s registered capital exceeding 10%, and merger, division, liquidation or change in corporate form of the company.

Preferred shares can be classified into four types.

First, cumulative preferred shares and non-cumulative preferred shares, depending on whether unpaid dividends from preceding years can be cumulated.

Second, participating preferred shares and non-participating preferred shares, depending on whether the shareholders enjoy a share in the remaining profits, over and above their predetermined dividend percentage.

Third, convertible preferred shares and non-convertible preferred shares, depending on whether they can be converted into common shares under specific conditions.

Fourth, callable preferred shares and non-callable preferred shares, depending on whether the issuer of the preferred shares can purchase the preferred shares at a set consideration.

Q: What exactly does private placement on the New Third Board mean? Is private placement only possible after successfully listing on the New Third Board?

A: Private placement refers to the act whereby an enterprise that has applied to list or is listed on the New Third Board offers company stock to specific investors.

Pursuant to paragraph 4.3.5 of the Business Rules of National Equities Exchange and Quotations (for Trial Implementation) issued by National Equities Exchange and Quotations. (NEEQ) on 20 December 2013, a listing applicant that simultaneously applies to list its stock on NEEQ and make a stock offering is required to disclose the information in its prospectus.

Here it can be seen that an enterprise is not required to have successfully listed before it makes a private placement, it can do so in the course of its application to list on the New Third Board. In practice, an enterprise proposing to list will be occupied with discussions among investors and determining matters relating to a private placement while it is applying to list on the New Third Board.

Q: Provide a brief description of the market maker system.

A: The principal means of transferring the stock of enterprises listed on the New Third Board at present include market maker transfers and negotiated transfers. Compared to traditional negotiated transfers, market maker transfers are relatively new and have great potential. The method is deemed one of the most important innovations on the New Third Board.

The definition of a market maker is set out in NEEQ’s Regulations on the Administration of the Market Making Business of Market Makers on the National Equities Exchange and Quotations (for Trial Implementation), issued 5 June 2014. The regulations stipulate that a market maker is a securities company or other institution that, subject to the approval of NEEQ, issues bid-ask quotes on NEEQ and which performs its closing obligations with investors based on its quotes, to the extent of the quantity of its quotes.

Of course, it cannot be said that all securities companies are qualified to engage in market making business. NEEQ has set out several conditions which a securities company must satisfy in order to qualify. Among others, they must be qualified to run a self-operated securities business and have a dedicated market making department including the necessary personnel. They must also institute a managerial system over their market making business and set up a technical system exclusively for their market making business.

The market maker system as it currently exists on the New Third Board has not been fully delivered or achieved in terms of its capacity to enhance market liquidity and elicit enterprise value. However, the authors remain confident that the market maker system will reveal its huge potential on the New Third Board in future.

Jiang Shengyang is a partner and Tang Yu is an associate of AnJie Law Firm