By Tao Zhang
On November 30, 2013, the China Securities Regulatory Commission (the “CSRC”) unveiled its reform plan on China’s IPO system—Opinions on Moving Forward the Reform on IPO System (the “Opinions”). Although the reform plan outlined in the Opinions fall short of making an official shift of its IPO system from an approval-based to a registration-based system, the Opinions give a strong indication that China intends to move in that direction. There is a strong expectation that the current PRC Securities Laws will eventually be revised to introduce the registration-based IPO system .
The Opinions aim to improve China’s IPO system to be more market-oriented and further protect the rights and interests of stock investors, especially small and medium sized investors; and certain new measures are introduced in respect of marketization, disclosure of information and indemnity mechanism.
I. New Measures for Marketization
Various fund raising options are outlined in the Opinions, and it encourages the combination of the issuance of preferred shares and the issuance of convertible notes, allows (i) the old stock to be sold and issued upon the IPO, (ii) the underwriters to control the pricing-related matters and (iii) the issuers to decide the method and timing for issuance.
II. New Measures for Disclosure of Information
After the guidance agreement with the issuer has been signed, the sponsor must disclose the progress of its guidance work both on its website and to the CSRC’s counterpart located in the issuer’s company registration city, and the sponsor must also disclose the contents and results of its guidance work on its website upon the completion of its guidance work. The issuer’s draft prospectus will be posted on the CSRC’s website upon the filing, thereafter the issuer’s information and financial data may not be revised discretionally.
The CRCS will suspend its approval process in the event that any internal-contradictions or substantial inconsistencies are made in the draft prospectus, and the relevant sponsor representative will be prevented from making any further IPO applications during the following 12 months. Suspicious cases which involve false statements, misleading information or material omissions made in the filing documents or relevant legal documentations (the “Misconduct”) will be transferred to the CSRC’s inspection department, and upon the filing for further inspection, the CSRC will suspend any other IPO applications submitted by the relevant agencies. In the event that any Misconduct is proven true, the CSRC will reject that issuer’s IPO application during the following 36 months from the date of verification; also, the relevant agencies or other parties will be subject to legal punishments as well.
In addition, the Opinions require the prospectus to be drafted in plain language so as to make it more readable and further to facilitate the review and supervision by the small and medium sized stock investors.
As you can see, the Opinions leave the stock investors to make judgments on whether the issuer is worthy of investment, and the CSRC will only review the IPO filing documents from the legal perspective.
III. New Measures for Commitments and Indemnity Mechanism
On the one hand, the Opinions state that the disclosure of information will be the key consideration regarding an IPO. On the other hand they also provide that the relevant parties shall indemnify the stock investors if they breach their commitments made in connection with the IPO. For instance, the Opinions obligate the issuer and its controlling shareholders, actual controllers, directors, supervisors, officers, etc. to indemnify the stock investors against losses which are incurred or suffered from the stock dealings by the reason of or as a result of any Misconduct under the issuer’s prospectus. Other agencies such as the sponsors and accounting firms are also required to make similar public commitments.
The Opinions provides that the issuer’s controlling shareholders, directors and officers who hold the issuer’s shares shall make the following public commitments under the IPO filing documentations: (i) if they sell out their shares within 2 years after the expiration of lock-up period, the selling price shall not be lower than the IPO price and (ii) their lock-up period will be automatically extended to the following six months if the issuer’s closing price for 20 trading days on a continuous basis is lower than the IPO price within six months following the IPO date, or the closing price for the end of the sixth month following the IPO date is lower than the IPO price. The issuer shall disclose under its IPO filing documentations the trading intentions of such shareholders holding 5% or more shares before the IPO.
The Opinions further provide that the issuer and its controlling shareholders, directors and officers shall put forward under the IPO filing documentations a plan to stabilize the issuer’s stock price in the event that the stock price is lower than the net assets value per share within three years following the IPO, and such plan shall include the triggers for launching the plan, and the specific measures may be carried out, which measures may include repurchase by the issuer, and purchase by the controlling shareholders, directors and officers. The issuer and its controlling shareholders shall make commitments under the IPO filing documentations that if the issuer’s Misconduct is essential for making judgment on whether the issuer is qualified to complete the IPO, the issuer shall repurchase all shares issued upon the IPO and the controlling shareholders shall buy back such shares sold by them upon the IPO.
The spokesman of CRCS indicated that the agencies’ credibility and practice history will be posted for the public.
To sum up, though the supporting regulations and rules are a work in progress, it may be expected that the Opinions will substantially advance the reforms on China’s A stock market and the governmental agencies will dramatically increase the size of the stock market in a more market-oriented manner, and achieving the better health of the IPO market.
(This article was originally written in Chinese, and the English version was translated by Mr. Wu Wang, a Beijing-based senior associate with Global Law Office.)
Mr. Tao Zhang is a Beijing-based partner with Global Law Office who specializes in IPO, M&A, corporate finance, FDI and NP. (E-mail: zhangtao@glo.com.cn)
