CSRC News Spokesman Answers Reporters’ Questions on Release of “Interim Measures on Administration of Initial Public Offering and Listing on Growth Enterprise Board” (March 31, 2009)
News spokesman for the China Securities Regulatory Commission (CSRC) has recently answered reporters’ questions concerning the release of “Interim Measures on Administration of Initial Public Offering and Listing on Growth Enterprise Board” (hereinafter referred to as the Measures). The full text is as follows:
Q: In the current economic situation, what role does the introduction of the growth enterprise board (GEB) play in supporting the national economic development?
A: The introduction of GEB is an important measure to improve the levels and the structure of China’s capital market, and to expand the depth and breadth of the capital market. The growth enterprise board offers capital market services to a large number of start-up enterprises of independent innovation and growth, and meanwhile through the demonstration effect of the capital market, it play an important role in pulling civil investment, promoting the upgrading of the industrial structure and promoting employment by starting businesses. It is conducive for better play of the capital market’s basic function in the resources allocation, and it can strengthen the capital market’s support for the development of the national economy, in a bid to promote building of an innovation-based nation.
Q: It has been more than a year since the “Administration Measures on IPO & Listing by Listed Companies on Growth Enterprise Board (Draft Version)” was published. What did the CSRC do during the period?
A: Since the CSRC started to seek public opinions on the “Administration Measures on IPO & Listing by Listed Companies on Growth Enterprise Board (Draft Version)” (hereinafter referred to as “Draft Version”), the CSRC actively collected, summarized and classified relevant opinions, and also mustered experts, scholars and securities companies to attend the symposium on the “Draft Version”. According to the views of all parties, the CSRC has amended and improved the “Draft Version”, and also drafted and revised a package of supporting rules on the issuance, listing and trading on the GEB, which strengthened the focus on the risk control measures. For issues involved in the drafting of relevant regulations and rules, the CSRC will also actively co-ordinate and communicate with the relevant departments.
Q: Public opinions on the “Draft Version” were sought in March 2008. What do the views of all parties focus on? Compared with the “Draft Version”, what adjustment was made in the Measures formally released this time?
A: From March 21 to 31, 2008, the CSRC sought public opinions on the “Draft Version”, and it has received a total of 688 feedbacks. All walks of life were positive about the GEB, and held that the “Draft Version” is targeted and of high operability, and they also put forward some constructive comments on the “Draft Version”.
Various opinions from all walks of life are mainly concentrated in the conditions of issue, access of investors and the review mechanism for issuance on the GEB, and so on. There are divergent views on the conditions of issue. While some think that the requirement about continuous growth is too high, some regard it is not enough. Considering the positioning of the GEB and other context, the CSRC kept the continuous growth and sustained profitability requirements in the “Draft Version”. In combination with other constructive comments, the CSRC revised and improved the “Draft Version”. The revised “Interim Measures on Administration of Initial Public Offering and Listing on Growth Enterprise Board” contains a total of 6 chapters and 58 articles, after adding 2 articles, modifying 5 articles, and adjusting some words.
(1) To strengthen risk control and protect the legitimate rights and interests of investors, by reference of general practice of offering differentiated products and services to different investors in overseas mature markets, one article is added in the “Draft Version” as follows: “An admittance system adaptable to the investors’ risk bearing capacity shall be established on the growth enterprise board to fully inform investors of risks in investment.”
(2) To clarify review and regulation mechanism of the stock issue on the GEB, according to the relevant provisions in the “Securities Law”, such statement is added that “the China Securities Regulatory Commission shall, according to law, examine and approve the issuer’s application for initial public offering, and supervise the issuer’s stock issuance. Stock exchanges shall formulate business rules according to law, create an open, fair and just market environment and ensure normal operation of the growth enterprise board.”
(3) In the principle of strict requirements of corporate governance of issuers on the GEB, regulatory requirements for the issuer’s controlling shareholders and actual controllers are added in Articles 26 and 41, respectively. Article 26 goes that “the issuer and its shareholders have not issued securities publicly or in other ways without approval of legal authorities in the latest three years, or the lawbreaking still lasts although they occurred three years ago. The issuer or any of its shareholders has not publicly issued securities either directly or in any disguised form without approval in the recent three years. Or, if it did publicly issue securities either directly or in any disguised form without approval three years ago, it is not doing it at present.” Article 41 contains that “the issuer’s controlling shareholder shall give confirmation opinions on the prospectus, and sign and seal on it.”
(4) For the purpose of strengthening the market mechanism of the survival of the fittest and enhancing principles bounding delisting of companies on the GEB, provisions on delisting risk alert and requiring exchanges to work out relevant delisting rules are set out in the “Information Disclosure”, the “Regulation and Legal Liabilities” and other chapters.
Q: What type of business does the GEB primarily serve? Which conditions are needed to meet in IPO and listing on the GEB?
A: As an important part of the multi-level capital market system, the GEB mainly promotes development of self-innovation enterprises and other start-ups of growth and serves as the vital platform to implement the strategy of an innovation-oriented country and support the start-ups in the stage of growth. Specifically, the GEB is a business that should have certain basis of profitability and certain assets size, and exist for a certain period of time, and have a high growth potential. The IPO and listing on the GEB shall mainly meet the following conditions:
(1) The issuer shall possess certain profitability. Two quantitative performance indicators are designed for the GEB to meet financing needs of different enterprises. The issuer can choose any one of them. The first is that the issuer shall make profit in the recent two consecutive years, with accumulative net profit of not less than RMB10 million in the recent two years and with a continuous growth; and the second is that the issuer shall make profit in the most recent year, with the net profit of not less than RMB5 million, the business income of not less than RMB50 million in the most recent year and the growth rate of business income of not lower than 30% in the recent two years.
Article 13 of the “Securities Law” stipulates that if the company is to publicly issue new shares, it shall be of “continuous profitability”. The Measures stipulates that the issuer shall not have some situations that might affect its continuous profitability.
(2) The issuer shall be of a certain scale and be in existence for some time. According to the regulation in the Article 50 of the “Securities Law” that the total capital stock of the company applying for stock listing shall not be less than RMB30 million, the “Draft Version” requires the issuer to possess some certain capital scale, namely, its net asset at the end of the most recent period shall not be less than RMB20 million, and its capital stock after the issuance shall not be less than RMB30 million. It is good for control of the market risks to require that the issuer shall possess certain net assets and equity scale.
The “Draft Version” stipulates that the issuer shall possess continuous management record. Concretely, it requires the issuer to be a Limited Company established according to laws with more than three years consecutive business. If a limited liability company carries out stock conversion according to the original book net asset to change itself into a stock company, its consecutive business time can be calculated since establishment of the limited liability company.
(3) Major business of the issuer shall be prominent. With small scale, start-up enterprises are at the growth and development stage; over-dispersive business scope with no core business is negative to the effective risk control as well as the formation of core competitiveness. Thus, the “Draft Version” requires the issuer to concentrate limited resources to mainly manage one kind of business in accordance with national industry and environmental protection policies. Meanwhile, the raised funds are required only to be used for its major business.
(4) Be strict in the issuer’s corporate governance. According to characteristics of the companies on the GEB, corporate governance of the aforesaid companies shall be strictly required according to listed companies on the main board. The Audit Committee shall be established under the Board of Directors, and the duties of independent directors shall be intensified and the liabilities of controlling shareholders shall be defined.
The issuer shall maintain continuance and stabilization of its business, management and actual controller. It is also stipulated that major business and directors, senior managers shall not go through great change in the recent two years, with its actual controller remaining unchanged.
The issuer shall have integrated assets, independent business and personnel, finance and institutions, integrated business system and independent operation ability directly facing the market. There shall be no horizontal competition between the issuer and the controlling shareholder, the actual controller and other enterprises controlled by the issuer, neither connected transactions that are unfair or may severely affect the company’s independence.
The issuer and its shareholders have not issued securities publicly or in other ways without approval of legal authorities in the latest three years, or the lawbreaking still lasts although they occurred three years ago. The issuer or any of its shareholders has not publicly issued securities either directly or in any disguised form without approval in the recent three years. Or, if it did publicly issue securities either directly or in any disguised form without approval three years ago, it is not doing it at present.
Q: How are GEM sponsor system and public offering review arranged? What’s the difference with the main board?
A: The GEB fully embodies the market-oriented principle, further brings the function of intermediaries into play and intensifies market regulation. For example, it strengthens the due diligence and prudent recommendation of sponsors, requiring sponsors to issue special opinions on the growth of the issuer. If the issuer is an enterprise of independent innovation, the opinion should contain remarks on the issuer’s capability of independent innovation. In terms of continuous supervision, sponsors are required to urge enterprises to operate in accordance with regulations and disclose information truthfully, accurately, completely and timely, supervise issuers to continuously fulfill all their promises and write follow-up reports according to the regular announcements published by issuers. Regarding the sponsorship time limit, appropriate extension is made compared with the main board. The relevant requirements will be included in the amended “Administrative Measures on Sponsorship for Securities Issuance and Listing” and relevant administrative rules of exchanges on sponsors of the GEB.
Considering that start-up enterprises boast small size, high risks and remarkable innovation, an Offering Review Committee of the GEB is set up specially to review the issuer’s applications of public offering based on the preliminary check of relevant functional departments of the CSRC. The Public Offering Review Committee of the GEB will have appropriately more members than those of the main board, with an increased proportion of the industry expert members. The member shall not hold any concurrent position in the Public Offering Review Committee and M&A and Restructuring Auditing Committee of the main board. The relevant content will be included in the amended “Measures of CSRC Public Offering Review Committee”.
Q: After the Measures are issued, what supporting rules are there for the shares issuance and regulation on the GEB?
A: According to relevant provisions of the “Company Law”, the “Securities Law” and the Measures, the following main supporting rules on the issuance and regulation on the GEB will be issued at a proper time?
(1) the “Contents and Format of Information Disclosure by Companies Publicly Issuing Securities – Application Documents for IPO & Listing on the GEB”. In the principles of effectiveness and simplification, the criteria of GEB application document are for a more accountable system of application for the issuance, to urge the relevant parties to fulfill their duties.
(2) the “Contents and Format of Information Disclosure by Companies Publicly Issuing Securities – GEB Companies’ Prospectus”. GEB Companies’ Prospectus shall emphasize the characteristics of start-up enterprises in contents and highlight such contents as growth and independent innovation.
(3) amending the “Administrative Measures on Sponsorship for Securities Issuance and Listing”. Under the existing framework of sponsorship system, according to the characteristics of the GEB, the CSRC will strengthen sponsor’s professional liabilities in terms of due diligence and adopt continuous supervision system, and build a sponsorship system that is suitable for the issuance and listing on the GEB. Relevant contents will be defined in the amended “Administrative Measures on Sponsorship for Securities Issuance and Listing” and exchanges’ relevant administrative rules on sponsors for the GEB.
(4) amending the “Measures of CSRC Public Offering Review Committee”. In terms of public offering review, the CSRC shall fully use the current effective system of Public Offering Review Committee for reference, amend the “Measures of CSRC Public Offering Review Committee” according to the characteristics of the GEB, and make provisions on the establishment of the GEB Public Offering Review Committee and the selection of commissioners, etc.
In addition, the Shenzhen Stock Exchange will issue relevant business rules including “GEB Stock Listing Rules” and “Special Rules on Stock Trading on the GEB”.
Q: When does the CSRC accept the application material of enterprises planning to offer and list on the GEB?
A: After the Measures is issued, the CSRC and exchanges will issue rules and guidelines in succession to support the Measures. The CSRC will establish the GEB Public Offering Review Committee. The listing rules, exchange’s special rules and other rules will be promulgated at a proper time. Training of sponsors, lawyers, accountants and other intermediaries will be carried out, and GEB characteristics and related systems will be introduced to businesses and investors in various ways. Investment risks of GEB will be fully disclosed to investors. Upon completion of the aforesaid work, the CSRC will accept the application material of enterprises on IPOs according to the Measures and relevant regulations.