IPO review highlights for NEEQ-listed companies

The number of National Equities Exchange and Quotation (NEEQ) listed companies submitting IPO applications is on the rise due to inadequate access to capital on the NEEQ with poor liquidity. July 2017 saw 22 NEEQ-listed companies submitting IPO applications to the IPO Review Committee of the China Securities Regulatory Commission (CSRC), compared with eight from the beginning of the year to early July 2017 (see the accompanying table), of which seven were granted approval and one received a review cancellation notice. Of the seven approved companies, five have launched an IPO and the other two are still waiting.

The authors have summarized the CSRC’s IPO review focuses for NEEQ-listed companies based on relevant documents disclosed by the five companies listed in the table that have launched an IPO, including without limitation their prospectus, attorney’s work report and legal opinion. The following sections provide an overview of these review focuses.

Trading of the listed shares on the NEEQ. In feedback to Guangpu, the CSRC requested the intermediaries to provide “a description about trading of the issuer’s shares when they were being listed on the National Equities Exchange and Quotation” and “a disclosure on change of shareholders immediately upon the filing”. In oral feedback to Xintian, the CSRC required intermediaries to “conduct an examination on those who became shareholders after the issuer’s listing on the NEEQ, and provide a statement as to whether any affiliation or transfer of benefits was involved”.

According to replies of the two companies, Guangpu’s shares were traded only once when they were being listed on the NEEQ, i.e., the equity transaction closed on the date of listing. Xintian’s shares were traded frequently on the NEEQ with transactions occurring on 41 trading days, but the trading volume represented just 1.58% of Xintian’s total share capital. Verification by intermediaries showed no abnormal transactions or transfer of benefits.

In addition to trading of the applicant’s shares on the NEEQ, the CSRC was especially concerned about whether there was any transfer of benefits involving new shareholders, given that the prospective issuers had been listed on the NEEQ. Feedback from intermediaries revealed that transactions in shares of the two above-mentioned companies were not complicated and had not resulted in the number of shareholders increasing to more than 200. Intermediaries had issued opinions based on statements from relevant shareholders and examination on details related to share transactions, although the examination on issuers frequently traded on the NEEQ was supposed to be highly time consuming.

Valuation adjustment mechanism (VAM) or any other special arrangements. In its initial feedback to Guangdong Topstar Technology, the CSRC asked if there was any special agreement or arrangement (e.g., a VAM agreement) between Topstar and Industrial Innovation Capital Management, Fortune Venture Capital, Jiujiang Tonghui (later renamed to Jiujiang Huarong Tianze Hengli Investment Centre), Sanzheng Financial and Gaofuxin Venture Capital, given the fact that the issuer received additional capital contribution from Industrial Innovation in November 2013, and from the other four companies in December 2014. The CSRC also asked for the reasons and rationality for the VAM agreement between Industrial Innovation, Fortune VC, Huarong Hengli, Gaofuxin VC and Wu Fengli, Yang Shuangbao and Huang Daibo (all shareholders). Additionally, it requested the issuer to state whether the VAM agreement had any impact on its equity structure, and complied with article 15 of the Measures for the Administration of Initial Public Offering and Listing on the Growth Enterprise Market.

Before Topstar’s capital restructuring, Industrial Innovation, Fortune VC, Huarong Hengli and Gaofuxin VC made additional capital contributions to Topstar and agreed on VAM provisions that included, but were not limited to, performance compensation, share repurchase arrangements, veto power, and priority claims in liquidation in the Supplementary Agreement on Capital Increase signed with Topstar and its other shareholders. In June 2015, with a view to facilitate the IPO process of Topstar, these four companies entered into the Contract on Suspending the Supplementary Agreement on Capital Increase with other shareholders of Topstar, and the VAM agreement with Topstar was terminated.

In its second feedback to Topstar, the CSRC asked again whether there was any special agreement or arrangement between the four companies and the issuer, or its actual controller or controlling shareholder. To give a satisfactory reply to the CSRC, the four companies entered into the Contract on Terminating the Supplementary Agreement on Capital Increase with other shareholders of Topstar in November 2016, by which they agreed that the VAM provisions would cease to have any effect, as if they never existed.

We can see from the CSRC’s feedback that it regards VAM provisions seriously because they might violate article 15 of the Measures for the Administration of Initial Public Offering and Listing on the Growth Enterprise Market. Therefore, a NEEQ-listed company that submits an IPO application should ensure that its VAM agreement or any other special arrangements with its shareholders or investors be handled properly as soon as practicably possible.