Initial Public Offerings Law Review Third Edition Editor David J Goldschmidt lawreviews the Initial Public Offerings Law Review Third Edition © 2019 Law Business Research LtdInitial Public Offerings Law Review Third Edition Editor David J Goldschmidt lawreviews Reproduced with permission from Law Business Research Ltd This article was first published in April 2019 For further information please contact Nick.Barettethelawreviews.co.uk © 2019 Law Business Research LtdPUBLISHER Tom Barnes SENIOR BUSINESS DEVELOPMENT MANAGER Nick Barette BUSINESS DEVELOPMENT MANAGER Joel Woods SENIOR ACCOUNT MANAGERS Pere Aspinall, Jack Bagnall ACCOUNT MANAGERS Sophie Emberson, Katie Hodgetts PRODUCT MARKETING EXECUTIVE Rebecca Mogridge RESEARCH LEAD Kieran Hansen EDITORIAL COORDINATOR Gavin Jordan HEAD OF PRODUCTION Adam Myers PRODUCTION EDITOR Helen Smith SUBEDITOR Janina Godowska CHIEF EXECUTIVE OFFICER Paul Howarth Published in the United Kingdom by Law Business Research Ltd, London 87 Lancaster Road, London, W11 1QQ, UK © 2019 Law Business Research Ltd TheLawReviews.co.uk No photocopying: copyright licences do not apply. The information provided in this publication is general and may not apply in a specific situation, nor does it necessarily represent the views of authors firms or their clients. Legal advice should always be sought before taking any legal action based on the information provided. The publishers accept no responsibility for any acts or omissions contained herein. Although the information provided is accurate as at March 2019, be advised that this is a developing area. Enquiries concerning reproduction should be sent to Law Business Research, at the address above. Enquiries concerning editorial content should be directed to the Publisher tom.barneslbresearch ISBN 978-1-83862-014-1 Printed in Great Britain by Encompass Print Solutions, Derbyshire Tel: 0844 2480 112 © 2019 Law Business Research Ltdi ACKNOWLEDGEMENTS A however, 2018 marked a year of continued resurgence for many IPO markets. The number of 2018 IPOs and total proceeds raised were led by the Asia-Pacific exchanges, which accounted for almost 50 per cent of deals in terms of both number and deal volume. China alone was responsible for 307 IPOs valued at US$56.7 billion. Many other regions also experienced strong IPO markets in 2018. Despite the temperamental nature of global economics, and the potential repercussions of various ongoing and expected geopolitical events, there is continued cautious optimism for 2019 in terms of both global deal count and proceeds. The global IPO pipeline includes many well-known companies across a range of industries, and it is anticipated that these companies will seek to list on a variety of stock exchanges around the world. Every exchange operates with its own set of rules and requirements for conducting an IPO. Country-specific regulatory landscapes are often dramatically different among jurisdictions as well. Whether a company is looking to list in its home country or is exploring listing outside of its own jurisdiction, it is important that the company and its management are aware from the outset of the legal requirements as well as potential pitfalls that may impact the offering. Moreover, once a company is public, there are ongoing jurisdiction-specific disclosure and other requirements with which it must comply. This third edition of The Initial Public Offerings Law Review introduces the intricacies of taking a company public in these jurisdictions, and serves as a guide for issuers and their directors and management. David J Goldschmidt Skadden, Arps, Slate, Meagher & Flom LLP New York March 2019 © 2019 Law Business Research Ltd24 Chapter 3 CHINA Chen Yang and Zhi Bin 1 I INTRODUCTION There are two primary exchanges in China, the Shanghai Stock Exchange (SHSE) and the Shenzhen Stock Exchange (SZSE). The SHSE consists of the Main Board and the forthcoming Technology Innovation Board (detailed draft rules (the Draft Rules) were released on 30 January 2019), whereas the SZSE consists of the Main Board, the Small and Medium Enterprises Board (the SME Board) and ChiNext (a board consisting mainly of high-technology companies). Shares traded on the SHSE and SZSE that are settled in Chinese yuan are A-shares, whereas shares settled in foreign currency are B-shares. In practice, there are few (if any) B-share initial public offerings (IPOs) in China, as the regulatory framework for B-share IPOs is incomplete. This chapter focuses on A-share listings. For the purposes of this chapter, China excludes Hong Kong, Macau and Taiwan. According to the 2017 Annual Report of the China Securities Regulatory Commission (CSRC), at the end of 2017, 1,872 companies were listed on the Main Board of the SHSE and the SZSE, 903 companies were listed on the SME Board and 710 companies were listed on ChiNext. The total market capitalisation of these listed companies was 56.71 trillion yuan, which was 68.56 per cent of Chinas total 2017 GDP . The primary regulator of Chinas capital markets is the CSRC. The SHSE and SZSE are responsible for administering the CSRCs rules, and are empowered by the CSRC to enact rules under the CSRCs supervision. IPO listings in China are currently subject to regulatory approval by the CSRC. Therefore, the approval system in China differs from the registration-based system in Hong Kong, the United States and other capital markets, though the proposed new Technology Innovation Board will purportedly have a registration-based system (see below). The CSRC determines whether a prospective issuer provided accurate and adequate disclosure in accordance with listing requirements. Prior to 2017, applicants faced long waiting periods (sometimes two to three years or even more) owing to administrative backlog and repeated requests for information. However, since 2017, the waiting periods have shortened to approximately nine months. 1 Chen Yang and Zhi Bin are partners at Han Kun Law Offices. © 2019 Law Business Research LtdChina 25 II GOVERNING RULES i Main stock exchanges As discussed in Section I, the SHSE consists of the Main Board and the forthcoming Technology Innovation Board, whereas the SZSE consists of the Main Board, the SME Board and ChiNext. Main Board (SHSE and SZSE) The Main Board of the SHSE primarily attracts established blue-chip companies such as state-owned enterprises. In recent years, however, the Main Board of the SHSE attracted private companies from industries other than traditional state-owned blue-chip companies. SME Board The SME Board targets small and medium-sized enterprises with shares in circulation of under 100 million. The listing requirements for the SME Board and the Main Board are nearly identical. ChiNext ChiNext was established on 30 October 2009 to support small and medium-sized enterprises, especially in the high-technology sector. Although the overall listing requirements for ChiNext are lower than the ones set forth for the Main Board and the SME Board, the CSRC generally exercises greater regulatory scrutiny, such as increasing the number of members on the issuance review committee, prolonging the sponsors supervisory period and imposing more rigorous delisting rules. Presently, there are only a few Chinese companies (primarily state-owned) that are dual listed in China and an overseas exchange (usually the Hong Kong Stock Exchange). Chinese companies are not prevented from pursuing dual listings after listing on a domestic stock exchange, though this would require approval from the CSRC. Some Chinese companies choose to list on foreign exchanges in lieu of listing on a domestic exchange, such as the Hong Kong Stock Exchange, Nasdaq and the New York Stock Exchange (NYSE). Among foreign-listed Chinese companies, some choose to list overseas mainly for business reasons, such as avoiding profitability threshold requirements. Others choose to list overseas because of Chinas restrictions on foreign investment in certain industries. Particularly in the technology, media and telecommunications sectors, owing to regulatory restrictions and practice that effectively prevents controlling foreign ownership in a Chinese operating company, some issuers adopt foreign parent entities and list abroad using the variable interest entity (VIE) structure. However, joint ventures involving foreign ownership in a non-restricted sector are permitted to list on Chinas domestic exchanges. Forthcoming T echnology Innovation Board President Xi Jinping, in his speech at the first China International Import Expo on 5 November 2018, announced that the SHSE will launch the Technology Innovation Board, which will adopt, among other prospective reforms, a registration-based system. On 30 January 2019, with only two months of preparation, the CSRC and the SHSE released the Draft Rules. They introduce a registration-based system and eased listing standards to accommodate qualified technology companies. In addition, the Draft Rules contain significant detail on execution procedures, such as listing and trading rules. © 2019 Law Business Research LtdChina 26 The Draft Rules may be considered a breakthrough in Chinas capital market for the following reasons: a Removal of profit requirement: pre-profit technology industries such as information technology, high-tech manufacturing, new materials, new energy and environmental protection, along with pre-revenue bio-tech companies, may list on the Technology Innovation Board. b Unweighted voting rights: the T echnology Innovation Board permits, for the first time in the mainland capital markets, technology companies with unweighted rights to list. c Red-chip companies may list: red-chip companies (those whose parent entity is incorporated outside mainland China and whose primary business activities are in China, including VIE structure companies), may apply for a public offering of its stock in mainland China or through the issuance of Chinese depository receipts (CDRs), though listing standards are higher (see below). d Spun-off companies may list: the Technology Innovation Board permits, for the first time in mainland capital markets, spun-off technology companies to list. The above reforms bring the T echnology Innovation Board in line with offshore jurisdictions where fast-growing Chinese technology companies have opted to list in recent years, such as Hong Kong and New York. That said, the Draft Rules also contain more restricting delisting procedures whereby affected companies may be delisted without any suspension or cure period. The Draft Rules are available for public comment until the end of February. The market believes the first batch of applicants will submit applications to list on the T echnology Innovation Board in the beginning of March at the earliest. ii Overview of listing requirements Presently, all listing applications are submitted to and approved by the CSRC, though the forthcoming Technology Innovation Board will have a registration-based system. If an applicant engages in a business subject to regulatory oversight by specific agencies, the CSRC will require such agencies to issue a no-objection letter in respect of the applicant. Table 1 sets forth the main requirements for the Main Board, SME Board, ChiNext and the Technology Innovation Board. Tables 2a and 2b set forth the main requirements for red-chip companies. These companies must be qualified enterprises, whether they are listing stocks or CDRs, in addition to satisfying the requirements under the Draft Rules. Table 1 Issuers incorporated in China IPO requirements Main Board and SME Board ChiNext Technology Innovation Board (the Draft Rules) Issuer qualifications A company limited by shares that is duly incorporated and validly existing in China. Business records At least three years of continuous operations or as otherwise approved by the State Council (where a limited liability company is converted into a company limited by shares through the conversion of the entire original book value of its net assets, the term continuous operation may start from the date the limited liability company was established). At least three years of continuous operations (where a limited liability company is converted into a company limited by shares through the conversion of the entire original book value of its net assets, the term continuous operation may start from the date the limited liability company was established). © 2019 Law Business Research Ltd