The National Equities Exchange and Quotations (NEEQ), commonly known as the “new third board”, is the first corporate securities exchange approved by the State Council. It is operated by National Equities Exchange and Quotations Co (NEEQ Co).
Following the State Council’s publication of the Decision on the Issue Regarding NEEQ at the end of 2013, the China Securities Regulatory Commission (CSRC) modified the Measures Governing the Supervision of Non-listed Public Companies and related review guidelines, and NEEQ Co amended the Business Rules for NEEQ (Trial Implementation).
Based on the above decision, measures and business rules (collectively, the new rules), the new third board is positioned as a market platform for the public transfer and issue of shares – for the purpose of financing – and the conduct of M&As by small, medium and micro-sized innovative, entrepreneurial and growth unlisted enterprises, as well as for the delivery of information, technology and training services to market participants. As the new third board is expanding across China, this is very good news for most of these enterprises.
Article 2.1 of the business rules states that a joint-stock company that applies for a listing must meet the following requirements: i) the company must be established according to the law and subsist for at least two years. If it is a limited liability company, it must be fully transformed into a joint-stock company by converting the shares at the original net book value of assets. Its subsistence may be counted from the date of the establishment of the limited liability company; ii) it must have well-defined business and the ability to continue as an ongoing business; iii) it must have a sound corporate governance mechanism and carry out its operations in a lawful and regulated manner; iv) it must have well-defined shareholding, and the issue and transfer of its shares must be legal and compliant; v) it must be recommended by a lead securities firm and subject to its ongoing supervision; and vi) other requirements as specified by NEEQ Co.
For a detailed interpretation of the listing access requirements, please refer to the Applicable Basic Standard Guidelines on Listing Requirements of NEEQ (Trial Implementation), published by NEEQ Co. Under the new business rules, any company seeking a listing on the new third board is no longer required to be recognised as a high-tech enterprise or registered in a high-tech park, and may not be making a profit yet. The thresholds for trading shares on the new third board are lower than the requirements for the issue and listing of shares on the main board, small and medium enterprise board, and ChiNext.
Under article 2.1 of the business rules, “a joint-stock company applying for a listing on NEEQ is not subject to the restrictions on the nature of the ownership of a shareholder”. Therefore, any Chinese domestic joint-stock companies that meet the listing requirements, including private enterprises, state-owned enterprises and foreign-funded enterprises, may apply for a listing. No special requirements are imposed on the proportion of shareholding owned by state-owned or foreign-funded enterprises, or on the industry background of shareholders.
However, if the joint-stock company has a state-owned or foreign-funded enterprise as its shareholder, it is required to submit the approval documents on the setup of state-owned equity issued by the state-owned assets management department, and confirmation documents on foreign-owned equity issued by the competent department of commerce, in addition to the regular listing application documents.
A lead securities firm recommendation and ongoing supervision system is implemented for the new third board. Enterprises should enter into an agreement on recommended listing and ongoing supervision with securities firms qualified for such recommendations. The lead securities firms will conduct preliminary due diligence on the enterprises to confirm whether they meet the listing access requirements, and whether they are willing to be recommended.
Then, the lead securities firm will assist the enterprises in completing shareholding structure reform (if any), conduct due diligence and prepare application documents in conjunction with intermediaries such as lawyers and accountants. The application documents will be submitted after these intermediaries perform their respective internal review procedures.
As mandated by the State Council’s decision, the CSRC will switch to a supervisory approach that places emphasis on strengthening information disclosure obligations during and after the listing. For a joint-stock company which has less than 200 shareholders during its application, the CSRC will grant exemption approval and will no longer conduct any review prior to the listing or issue approval documents. The company may apply to NEEQ Co directly for listing approval.
If the number of shareholders is over 200 as a result of the transfer of shares by the shareholders, the company no longer needs to reapply to the CSRC for approval. The number of shareholders of a listed company may be over 200, but a joint-stock company that has over 200 shareholders during an application needs to apply to the CSRC for approval. After its review, the CSRC will not submit the application to the Public Offering Review Committee for review. After the company obtains approval documents from the CSRC, it may apply to NEEQ Co for completing the listing procedures.
Listing is often faster on the new third board. Generally speaking, it will take about two to three months in case a company needs to carry out shareholding structure reform. A lead securities firm will spend about one to two months, including feedback time, on on-site due diligence and internal review. The review by NEEQ Co, or the CSRC, will take two months, including feedback time.
Shares may then be registered and traded following this review. The whole process is expected to take about six months. Of course, if a company needs to make rectification due to its own legal or financial barriers, the above-mentioned time will be adjusted with the progress of the rectification.
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