New ChiNext rules provide answers for old grievances

The China Securities Regulatory Commission (CSRC) officially published on 16 May 2014 the Measures Governing Initial Public Offerings and Listings on ChiNext and the Interim Measures Governing the Issuance of Securities by Companies Listed on ChiNext (refinancing measures), which came into effect as of the date of publication on 16 May.

The measures for ChiNext

ChiNext has been operating for nearly five years since its launch in 2009. The lack of adequate requirements for share issuance under the system established in the initial stage of ChiNext has become an increasingly prominent issue. On the one hand, ChiNext is not flexible and inclusive enough in handling the requirements for sustained growth in the performance of companies, so that a group of startup companies with substantial fluctuations in performance were denied access. On the other hand, it has set relatively high financial access indicators, failing to meet the financing needs of more growth-oriented and innovative small and medium-sized enterprises (SMEs). Because of these issues, there was an urgent need for ChiNext to revise the former rules.

The revised measures contain 57 articles in six chapters, covering general principles, conditions for share issuance, issuance procedures, information disclosure, supervision and management, as well as legal liability and supplementary provisions. The main amendments are: first, the financial access indicators are appropriately relaxed by cancelling the requirements for sustained growth in performance; second, other conditions for share issuance are streamlined and information disclosure discipline is strengthened; third, the protection of the legitimate rights and interests of small investors and initial public offering (IPO) reform are enforced comprehensively. The Circular on Further Improving the Guidelines for ChiNext Sponsorship (CSRC announcement [2010] No. 8) is also rescinded. As a result, the reporting companies on ChiNext are no longer limited to those in the nine major industries.

Relaxing financial access indicators and removing requirements for continued growth in performance. The existing financial indicator requirements are revised as: “A company shall be profitable continuously in the last two years, and have an accumulated net profit of no less than RMB10 million (US$1.6 million) in the last two years; or a company shall be profitable in the last one year, and have operating revenue of no less than RMB50 million in the last one year.” These revised indicators are simplified because the mandatory requirement for growth in financial indicators is removed, and companies with a certain amount of revenue are allowed to seek a listing, as long as they have one year of profit records. This will cover more SMEs.

Streamlining other conditions for share issuance and strengthening constraints on information disclosure. The conditions for share issuance under the original rules – such as tax payment by share issuers; no significant risk regarding debt repayment; hold-up of funds; connected guarantees; compliance by and well defined responsibilities of directors, supervisors and senior management; and deposit of the raised funds into specific accounts – are revised as those required for information disclosure.

Refinancing measures

The refinancing measures consist of 68 articles in six chapters, covering general principles, conditions for the issuance of securities, issuance procedures, information disclosure, supervision, penalty and supplementary provisions. The major particulars are: first, concise, unified conditions are set for the issuance of securities, and the constraint mechanism of refinancing is reinforced; second, a “small, speedy” private placement mechanism is introduced, under which an issuer is not required to engage sponsors or underwriters, and a decision to approve or reject an application will be made within 15 working days from acceptance of the application; third, listed companies can sell their non-public issued shares to specific buyers for reducing financing costs; fourth, the self-discipline function of a board is stepped up to strengthen the sense of responsibility of management for refinancing.

Strengthening the responsibilities of issuers and market-related players for their positions. ChiNext, characterised primarily by the listing of a group of private companies and possessing the advantages of a new market, has laid a foundation for further implementation of a more market-oriented refinancing system. The refinancing measures adopt a principle for offer pricing that “fluctuates in line with market conditions” by linking refinancing pricing to the prices on the secondary market. The duty discipline for intermediaries, such as sponsors, is strengthened accordingly so that the market operational mechanism can play an effective role.

Optimising the conditions for share issuance by emphasising information disclosure. The refinancing measures regulate and enhance the concept of “capital discipline, market discipline and integrity discipline”, reinforce the mechanism for investors to take their own risks, and are aimed at regulating information disclosure, the integrity of subject parties, and commitments to prevent fraud involving share issuance and safeguard fairness. Clear conditions are set for share issuance. Flexible matters such as sustained profitability are not determined substantively.

Establishing a “scientific, convenient and efficient” financing system. Through the creation of a policy to allow one-off decisions at annual shareholders’ meeting, and to allow its implementation through several board meetings, an array of measures to support “small, speedy” financing mechanisms will be introduced, such as the removal of the requirement to engage sponsors and underwriters, application of summary procedures, broadening of the scope for the sale of its own shares, and launch of “whirlwind share issuance”. As a result, the overall costs of listed companies could be reduced, and the market risks associated with financing decisions, securing of approvals and a long issuing and listing process could be minimised as well.

Significance of the measures

The relaxation of financial access standards and the expansion of industry coverage under the measures are conducive to better serving SMEs seeking a listing on ChiNext, especially those innovative companies with substantial fluctuations in sustained performance, and with strong cyclical features, as well as those growth-oriented and innovative companies with huge future development potential and current low levels of profitability.

The refinancing measures encourage mergers and acquisitions, helping enhance the growth potential of companies on ChiNext, and further expand the exit channels of venture capital and private equity for diverting more social funds to innovative industries.

Yao Zhengwang is a partner at Zhonglun W&D Law Firm