At the opening ceremony of the first China International Import Expo on 5 November 2018, President Xi Jinping mentioned that a Science and Technology Innovation Board (STIB) would be established on the Shanghai Stock Exchange, coupled with the piloting of a registration system.
Instantly, the STIB and the registration system became a hot topic. The establishment of the STIB foreshadows the official launching of the stock offering review registration system into China’s capital market development.
On 30 January 2019, the Chinese Securities Regulatory Commission (CSRC) issued the Implementing Opinions for the Establishment of the Science and Technology Innovation Board on the Shanghai Stock Exchange and the Piloting of a Registration System. On 1 March 2019, the Shanghai Stock Exchange issued complementary rules such as the Rules of the Shanghai Stock Exchange for Reviewing the Offerings and Listings of Stocks on the Science and Technology Innovation Board, officially opening the front door to the STIB and the registration system.
Under the new operation rules, the new stock offering and listing review system, i.e., the registration system, applies to all enterprises proposing to offer and list on the STIB.
Currently, the approval system is implemented for the review of stock offerings on the main boards and second boards in China, with securities regulators conducting a review of the offering matters applied for by the issuer, and the public offering only permitted to proceed after approval.
Under the approval of offering review system, the regulators are required to conduct a pro forma review of the application material submitted by the issuer, and to conduct a substantive review of the issuer and the stock it proposes to offer.
At the core of a stock offering review under the approval system are the administrative reviews by the regulators, with the effect and consideration of administrative factors far greater than of market factors.
As the market has developed and matured, offerings, reviews and administration have all become disconnected from the market. The objective of the registration system is to change such disconnection and to change the core factors of a review, pushing administrative factors into the background and allowing the market to become the “decider” of stock offerings.
Under the registration system, an issuer wanting to offer securities for financing purposes should submit to the securities regulator the documentation required to be made public in a comprehensive manner, and apply for registration. The substantive conditions that affect trading, such as the issuer’s financial strength, industry prospects, offer size and price, etc., are not a key focus of the offering review, and the securities regulator does not render a value judgment on these conditions.
If the securities regulator does not raise an objection within the statutory period, the application enters into effect and the issuer can publicly offer stock. The core of a review under the registration system focuses on disclosure of information by the issuer.
Pursuant to the CSRC and Shanghai Stock Exchange regulations, the issuer is required to submit offering application documents to the Shanghai Stock Exchange, and the exchange will conduct a review of the documents from the perspective of sufficiency, consistency and understandability, based on the STIB review rules.
If the application documents pass review, they are submitted to the CSRC, which carries out the registration procedure. The offering may only proceed after registration. If the application documents do not pass review, the stock exchange will terminate the offering and listing review.
The specific procedure is as follows: the issuer engages a sponsor and submits the offering and listing application documents → the stock exchange checks and accepts the application → the stock exchange reviews the application documents → the issuer and the intermediary firms conduct the necessary supplementary investigations and verifications, and supplement or revise the application documents → the stock exchange submits its review report to the listing committee for deliberation → the stock exchange issues its consent opinion or termination decision → submission is made to the CSRC to carry out the registration procedure → the issuer proceeds with the public offering.
It should be noted that the registration system and approval system are not “either/or” opposing concepts. Although an offering review under the registration system puts more emphasis on the role of the market, registration is not permission, and certainly does not signify that the regulators are foregoing oversight of securities offerings or doing away with review altogether.
Under the registration system, as the emphasis of review shifts, the role and the functional positioning of the regulators will also change correspondingly. The power to review stock offerings will shift from the CSRC to the stock exchange.
Under the registration system, the stock exchange, as the first gate in the review of a stock offering and listing, will stringently review the registration documents submitted by the issuer, procure the due carrying out of the information disclosure work by the issuer, and issue the review opinion consenting or terminating the offering and listing of the stocks.
The stock exchange does not directly render a judgment on the substantive content of the documents in its review, but rather focuses on whether the issuer has fully disclosed all relevant information from a perspective of sufficiency, consistency and understandability.
In contrast to a review under the approval system, which emphasizes the “truthfulness, accuracy and completeness” of the disclosed information, a review under the registration system focuses on the “sufficiency, consistency and understandability” of the information, with “truthfulness, accuracy and completeness” being the joint responsibility of the issuer and the intermediary firms.
This is where the heart of a review under the registration system lies, and is also the new positioning and division of tasks of the functions and roles of the various market participants under the registration system.
The outcome of the stock exchange’s review is submitted to the CSRC for confirmation, which then carries out the registration procedure. Oversight of the rules for offering reviews, review entities, the review process and outcomes, etc., will remain with the CSRC. On this basis, the CSRC will intensify supervision during and after offerings and listings, focus on strengthening development of the market legal system, and regulate the handling of major violations of laws and regulations.