The National Equities Exchange and Quotations (NEEQ, also called the “New Third Board”) is an important component of China’s multi-level capital market. As of May 2019, more than 10,000 enterprises were listed on NEEQ, including a number of high-quality enterprises with great development potential. Restricted by the liquidity and financing options in NEEQ, it has become an urgent need for many NEEQ-listed enterprises to list on other exchanges. This article analyzes the current or potential IPO options for NEEQ-listed enterprises based on the current regulatory environment and existing cases.
CURRENT DOMESTIC AND OVERSEAS LISTING
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IPO on the A-share market. Pursuant to the decisions of the State Council on Issues Concerning the National Equities Exchange and Quotations, qualified NEEQ-listed enterprises may directly apply to a stock exchange for a listing. From the provisions per se, NEEQ-listed enterprises may directly go public on a stock exchange without examination or approval. However, this conclusion goes against China’s IPO approval regime and regulations. For this reason, the system of transfer from NEEQ to other markets has not been implemented.
In practice, when a NEEQ-listed enterprise applies for domestic listing, it will go public again on the A-share market and get delisted from NEEQ (generally after listing approval). Moreover, the regulator pays special attention to consistency between the information disclosed to NEEQ and the contents of the listing application document. Some enterprises, after comprehensive consideration, choose voluntary delisting from NEEQ before applying for an initial public offering (IPO). However, the risk of this method is that the enterprise will be deprived of a financing platform if its listing on the A-share market is unsuccessful. In addition, NEEQ has recently tightened regulations on voluntary delisting of enterprises before an IPO application.
In March 2019, China launched a NASDAQ-style Science and Technology Innovation Board (STIB) that contains many new features. In addition to a pilot registration system, profitability is no longer a key indicator for the board, creating an opportunity for listing NEEQ-listed enterprises. There are more than 25 NEEQ-listed enterprises (including those delisted before application) among the IPO applicants for the STIB.
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Delisting from NEEQ + Listing on H-share market. Like domestic listing, previously NEEQ-listed enterprises that seek to go public in Hong Kong have to be delisted from the New Third Board first. Compared with the A-share market, the H-share market has a lower threshold and looser examination and approval processes. Its advantages are a shorter listing period, favourable base of international investors, convenient re-financing options, and the benefit of expanding overseas businesses or reputation. Therefore, some enterprises go public on the H-share market instead of the A-share market. Huatu Education is one such example.
Delisting from NEEQ + listing in Hong Kong using red chip and/or VIE structure. Due to regulations that restrict access to foreign capital, some NEEQ-listed enterprises are unable to, or find it inconvenient to go public in Hong Kong directly. Listing in Hong Kong using a variable interest entity (VIE) and/or a red-chip structure after delisting from NEEQ is one of the options for such companies. The key to this method lies in domestic and overseas restructuring. The advantages of this are the exemption from domestic approvals and from restrictions on the circulation of domestic shares on the H-share market. For example, Koolearn and Ever Sunshine Lifestyle Service went public in Hong Kong using the VIE/red-chip structures.
The New Third Board + H-share market. In April 2018, NEEQ and the Hong Kong Stock Exchange executed a memorandum of understanding on cooperation allowing NEEQ-listed enterprises to go public in Hong Kong without delisting. In addition to the advantages of listing overseas, it offers enterprises access to both domestic and overseas financing platforms. Although overseas regulators also pay attention to the consistency of disclosed information, they focus mainly on material substantive discrepancies and require no special explanation. For instance, TopAlliance Biosciences has listed on both the New Third Board and the H-share market, and two other companies are waiting for Hong Kong Stock Exchange approval.
Overseas markets, however, differ from the domestic market in terms of industry or business recognition, market valuation, and regulations, and also the cost of an overseas IPO is higher. Enterprises seeking overseas listing should take these factors into consideration.
Other paths. In addition to a direct IPO, some NEEQ-listed enterprises choose other methods to go public on domestic or overseas capital markets, such as (1) domestic backdoor listing. For example, Jiuding Group went public through the acquisition of Zhongjiang Real Estate and Wenlv Science and Technology through the takeover of Yunnan Tourism; (2) acquisition of the NEEQ-listed enterprise by a listed company. For example, Dun’an Artificial Environment’s acquisition of Jinglei, and Black Sesame’s acquisition of Liduoduo; (3) overseas listing through a subsidiary carveout. For example, Mobvista Technology was carved out from Mobvista and listed in Hong Kong.
POTENTIAL IPO PATHS
A direct listing or spin-off listing on the Science and Technology Innovation Board (STIB). Though NEEQ-listed enterprises need to be delisted first to apply for a listing on the science and technology innovation board like with the other boards of the A-share market, the registration system adopted by the STIB is consistent with the idea behind the transfer mechanism of the New Third Board. It cannot be ruled out that the STIB will be connected with the NEEQ transfer system in the future.
Moreover, the STIB allows spin-off listings of A-share listed companies. Many NEEQ-listed enterprises are subsidiaries controlled by listed companies. Currently, NEEQ-listed enterprises with listed companies as controlling shareholder can’t apply for a listing. It is hoped that such NEEQ-listed enterprises will be allowed to apply for listing on the STIB. Although the specific system for spin-off listing has yet to be introduced, it will offer another option for NEEQ-listed enterprises controlled by listed companies.
Further development and competition of domestic and overseas capital markets offer NEEQ-listed enterprises diverse options for listing. Enterprises, however, should not take these routes blindly. It is best to consult investment banks, lawyers and other professional intermediaries and take actual conditions into consideration to find the most suitable path to an IPO.
Jeremy Dai is a partner at AnJie Law Firm. He can be contacted on +86 10 8567 5988 or by e-mail at jeremydai@anjielaw.com. Liu Xiaomin is a partner at AnJie Law Firm. She can be contacted on +86 10 8567 5988 or by e-mail at liuxiaomin@anjielaw.com
