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CSRC Releases Opinions on Further Promoting the IPO System Reform
30-11-2013

After in-depth survey and extensive public consultation, the CSRC has formulated and released the Opinions on Further Promoting the IPO System Reform (hereinafter referred to as the “Opinions”). This is an important step in the transition of share offering from approval-based system to registration-based system.

  

Adhering to market orientation and the rule of law, the Opinions aims to highlight the information disclosure-based regulatory philosophy, increase the intensity of information disclosure, enhance transparency of review standards and announce review progress updates, with a view to achieving public supervision in the entire IPO process by increasing the transparency of the IPO process at all levels and in all respects. In the IPO review, the regulator will focus on compliance review, while corporate value and risks will be decided by investors and the market themselves. After the review, when and how the IPO will be made will be restrained and decided by the market at its sole discretion and thereby the offering price will reflect demand and supply relationship in a more realistic manner.

  

With the tenet of protecting the lawful rights and interests of small and medium-sized investors, the Opinions strive to protect the rights of small and medium-sized investors to know, participate, oversee and claim for compensation; to adjust new share allocation mechanism to better respect the subscription intent of small and medium-sized investors; and to restrict issuers from setting high prices, restrain investors from quoting high prices, and curb speculation on new shares after IPO.

  

The Opinions has further clarified the independent responsibilities of issuers, sponsors, accounting firms, law firms, asset evaluators, and securities service agencies and their personnel in the IPO process and specifies that in the event of major violations of information disclosure by issuers that have causes losses to investors, issuers and relevant intermediary agencies must compensate for the losses of investors in accordance with the law. Intermediary agencies are required to be made publicly available their credit records and business performance information.

  

The IPO system reform does not indicate any regulatory easing but underscores concurrent regulation and ex poste law enforcement in addition to the improvement of ex ante review. once clues of violation committed by such entities as issuers, major shareholders and intermediary agencies are discovered, actions such as termination of review, case filing and investigation and referral to the judicial authorities will be taken against them in order to enhance accountability, intensify penalty and effectively maintain market openness, fairness and justice.

  

It is reported that after the release of the Opinions, it will take about one month to make appropriate preparations before companies can complete relevant procedures. It is expected in January 2014, about 50 firms will be able to complete procedures and conduct IPOs.

  

 

 

Opinions of the CSRC on Further Promoting the IPO System Reform

 

November 30, 2013

 

Implementation of the requirement of “promoting the reform of registration-based system of share offering” identified in the decision of the 3rd Plenum of the 18th CPC Congress requires furthering the IPO system reform, straightening out the relationship between the government and the market in the IPO process, accelerating the transition of regulatory approach, improving information disclosure quality, enhancing market restraint and promoting the fulfillment of responsibilities by various market participants, with a view to building a favorable foundation for registration-based system of share offering. The overall principles of reform are as follows: adhering to the orientation of market-based operation and the rule of law, developing integrated strategies to address both symptoms and root causes, further straightening out operating mechanisms for such processes as offering, pricing and allocation, exercising the decisive role of the market, enhancing market regulation, maintaining market fairness and earnestly protecting the lawful rights and interests of investors and especially small and medium-sized investors.

 

  

I. Advancing the market-based IPO mechanism

  

(I) The pre-disclosure of prospectuses will be made at a further early time point in order to enhance public supervision. Once officially accepted by the CSRC, the application draft of an issuer’s prospectus will be disclosed on the CSRC’s website.

  

(II) After the pre-disclosure of an issuer’s prospectus, relevant information and financial data of the issuer cannot be modified without prior approval. In the course of review, in the event of discovery of self-contradictory information recorded in the issuer’s application documents, different statements on the same fact with substantive differences, the CSRC will suspend review and will no longer accept offering applications recommended by relevant sponsor representatives within 12 months. In the event of suspected false records, misleading statements or major omissions in the offering application documents and relevant legal documents submitted by the issuer and intermediary agencies, the case will be transferred to the enforcement department for investigation and where the case has been filed for investigation, offering applications recommended by relevant intermediary agencies will not be accepted in the meantime; where the above-mentioned suspected violations are confirmed, the issuer’s share offering applications will not be accepted within 36 months as of the date of confirmation and the intermediary agencies involved and relevant persons will be held accountable according to the law.

  

(III) Information disclosure is of central significance to share offering review

  

As the primary responsible persons of information disclosure, an issuer shall provide truthful, complete and accurate financial information and other data to its intermediary agencies in a timely manner and entirely cooperate with intermediary agencies in conducting due diligence.

  

The issuer’s sponsor agency shall strictly perform statutory responsibilities, abide by business rules and industry code of conduct, conduct prudent verification of application documents and information disclosure materials of the issuer, urge and guide the issuer to operate in a proper manner, verify professional comments issued by other intermediary agencies, make professional assessment on whether the issuer maintains sustained profitability and meets statutory criteria of offering, and ensure the truthfulness, accuracy, integrity and timeliness of information disclosure documents including the issuer’s application documents and prospectus.

  

Any accounting firm, law firm, asset evaluation agency, and other securities service institution engaged by the issuer and their personnel must strictly fulfill their statutory obligations, follow the industry’s business standards and code of practice, verify relevant business information of the issuer, and ensure the truthfulness, accuracy, integrity and timeliness of relevant professional documents issued by them.

  

The CSRC’s offering supervision department and the Public Offering Review Committee shall review the legality and compliance of issuance application documents and information disclosure content pursuant to the law, without assessment on the profitability and investment value of the issuer. Where violations in application documents and information disclosure content are discovered, relevant parties shall be investigated strictly for liability.

  

Investors shall carefully read information publicly disclosed by the issuer, independently judge the issuer’s investment value, make investment decisions on their own, and assume by themselves any risk arising from changes in the issuer’s business operations and revenue after the IPO is completed legally.

  

(IV) Within three months as of the date of acceptance of securities offering application documents, the CSRC shall make decisions of approval, review suspension, review termination or rejection under the statutory conditions and in accordance with the statutory procedures.

  

(V) When making an IPO, the issuer shall encourage its existing shareholders in possession of shares for more than three years to transfer some of their existing shares to investors in order to increase the proportion of tradable shares of the newly listed company. After transfer of existing shares, the actual controller of the company may not change. Specific plan for the transfer of existing shares shall be publicly disclosed in the company’s prospectus and offering announcement.

  

The issuer shall, based on the capital demand of any investment project into which the offering proceeds will be put, reasonably determine the quantity of new shares to be offered and where the quantity of new shares is below statutory listing criteria, may increase the quantity of public offering through transfer of existing shares. Where proceeds derived from the IPO exceed the required amount, existing shares shall be sold off in proportion to the amount of excess proceeds

  

(VI) Enterprises under IPO review may apply for offering of corporate bond in the first place. Enterprises are encouraged to make the combination of share and bond offering a source of financing.

  

(VII) The CSRC will approve the IPO application after the issuer has passed the review of the Public Offering Review Committee and completed post-review procedures and the timing of IPO shall be decided by the issuer at its sole discretion

  

(VIII) The validity period of IPO approval documents is extended to 12 months.

  

From the date on which the issuer obtains the approval documents to the time of public offering, the issuer shall promptly revise the content of information disclosure documents, supplement relevant data to the financial reports and update the pre-disclosed prospectus, with reference to the information disclosure requirements for regular reports of listed companies; in the case any major post-review event in between, the issuer shall report and provide explanations to the CSRC in a timely manner; and sponsor agencies and relevant intermediary agencies shall perform their due diligence obligations on a continuous basis. Where any major post-review event occurs to the issuer, the CSRC shall decide whether it is necessary to re-submit the case to the Public Offering Review Committee for deliberation in accordance with review procedures.

  

II. Enhancing the credibility obligations of responsible entities including issuers and their controlling shareholders

  

(I) Enhancing the market restraint on relevant responsible entities

  

1. Controlling shareholders of issuers and directors and senior management in possession of the issuers’ shares shall make the following commitments in the public offering and IPO documents: in the event of sell-off of shares in their possession within two years after the lock-up period, their sell-off price shall be no lower than the offering price; where the closing price is lower than the offering price for 20 consecutive trading days within six months after IPO or the closing price at the end of a six-month period after IPO is lower than the offering price, the lock-up period for the company’s shares will be automatically prolonged for a minimum of six months.

  

2. Issuers and their controlling shareholders, company directors and senior management shall, in the public offering and IPO documents, set forth a plan to stabilize company share price in the event that company share price stays below net asset per share within three years after IPO. The plan shall include specific conditions for the initiation of share price stabilizing measures, specific measures that are likely to be adopted and so on. Specific measures may include repurchase of company shares by issuers and an increase of the number of company shares possessed by controlling shareholders, company directors and senior management. The above-mentioned personnel shall announce a specific implementation plan prior to the initiation of share price stabilizing measures.

  

3. Issuers and their controlling shareholders shall make a public commitment in the public offering and IPO documents that: where the prospectuses of the issuers contain false records, misleading statements or major omissions that cause major and substantive impact on the assessment of whether the issuers meet statutory requirements, all new shares involved in the IPO will be repurchased by the issuers in accordance with the law and the issuers’ controlling shareholders will repurchase originally restricted shares that have already been transferred. Responsible entities including the issuers and their controlling shareholders, actual controllers, directors, supervisors and senior management shall make the following public commitment the in public offering and IPO documents: where the prospectuses of the issuers contain false records, misleading statements or major omissions that have caused losses to investors in their securities trading, compensation for the investors’ losses will be paid in accordance with the law.

  

Securities service institutions including sponsors and accounting firms shall make the following public commitment in the public offering and IPO documents: where the documents they have prepared and/or issued for the IPO of the issuers contain false records, misleading statements or major omissions that have caused losses to investors, they will compensate for such losses pursuant to the law.

  

(II) Increasing the transparency of the intent of major shareholders to maintain their shares. Issuers shall disclose, in the public offering and IPO documents, the intent of any shareholders who possess over 5% of the issuers’ shares prior to IPO to maintain or reduce their shares. In the event of sell-off by shareholders who hold more than 5% of the issuers’ shares, the issuers shall make an announcement thereof three trading days prior to such sell-off.

  

(III) Enhancing restraint on commitments of relevant responsible entities. Where relevant responsible entities including issuers and their controlling shareholders, company directors and senior management have made public commitments, restraint measures against breach of such commitments shall also be established and disclosed in the public offering and IPO documents, thereby subjecting them to public supervision. Securities exchanges shall enhance supervision and restraint on the performance of public commitments by relevant parties and take prompt regulatory measures against breach of such commitments.

  

III. Further increasing the level of market-based pricing of new shares

  

(I) Reforming the IPO’s pricing method. According to Article 34 of the Securities Law, offering prices shall be determined through independent negotiation by issuers and any securities firms engaged by them as underwriters. The issuers shall determine a pricing method through discussion with their underwriters and disclose the pricing method in the offering announcement.

  

(II) After price quotations by offline investors, issuers and lead underwriters shall first remove the portion with the highest price quotation from the total quantity of subscriptions, with the subscriptions so removed being no less than 10% of the total quantity of subscriptions, and then determine through negotiation the offering price based on the remaining price quotations and the status of subscription. The removed subscriptions are not allowed to be involved in the offline allocation.

  

In the case of a public offering of fewer than 400 million shares, there shall be no fewer than 10 but no more than 20 investors who have provided valid price quotations; for a public offering of more than 400 million shares, there shall be no fewer than 20 but no more than 40 investors who have provided valid price quotations. Where proceeds derived from offline offering of shares exceed 20 billion yuan, the number of investors who have provided valid quotations may be moderately increased up to 60. Where the number of investors who have provided valid quotations is insufficient, the offering shall be suspended.

  

Individual investors are allowed to exercise their role in the determination of offering price. Issuers and lead underwriters shall permit qualified individual investors to participate in offline pricing and offline allocation. Securities firms that qualify as underwriters shall establish in advance conditions to be met by the above-mentioned individual investors and disclose such conditions to the public.

  

(III) Enhancing information disclosure requirements in the pricing process. Issuers and lead underwriters shall prepare information disclosure documents with respect to the pricing process and results and disclose such documents to the public. Prior to online subscription, the issuers and the lead underwriters shall disclose the detailed quotations by each offline investor, including the name of investor, subscription price and corresponding subscription quantity, the medium value and weighted average value of quotations from all offline investors, the medium value and weighted average value of quotations made by publicly offered securities investment funds, the determined offering price, its corresponding P/E ratio, etc.

  

If the P/E ratio calculated at the planned offering price (or the upper limit of the offering price range) is above the average P/E ratio in the secondary market of listed companies in the same industry, the issuers and the lead underwriters shall publish a special announcement of investment risk prior to online subscription to indicate that such pricing may present the risk of causing losses to investors as a result of overvaluation, bringing such risk to the investors’ attention. The announcement shall include at least the following:

  

1. Comparing and analyzing differences between the issuers and listed companies within the same industry and the impact of such differences on the determination of offering price; asking investors to note differences between the offering price determined by the issuers and the price quotations made by offline investors.

  

2. Reminding investors to be alert about investment risk, make a prudent judgment on whether the offering price is determined in a reasonable manner, and to make rational investment decisions.

  

IV. Reforming the method of new share allocation

  

(I) Introducing the mechanism of independent allocation by lead underwriters. For offline offering of shares, lead underwriters may, for the purpose of share allocation, independently select investors from those who have provided valid quotations. Issuers shall determine the principles and methods of offline allocation through discussion with lead underwriters and disclose relevant information in the offering announcement. Underwriters shall conduct allocation according to the allocation principles made publicly available prior to such allocation.

  

(II) At least 40% of shares involved in the offline allocation shall first be allocated to social security funds operated by social security fund investment managers and publicly offered securities investment funds. Where the quantity of effective subscriptions by the above-mentioned investors is insufficient, issuers and lead underwriters may allocate shares to other investors.

  

(III) Adjusting offline allocation proportion and strengthening offline quotation restraint mechanism. Where a company’s capital stock is below 400 million yuan, the shares involved in the offline allocation shall represent no lower than 60% of the quantity of shares contained in the public offering; where a company’s capital stock exceeds 400 million yuan, the shares involved in the offline allocation shall account for no lower than 70% of the total number of shares issued in the public offering. The remaining portion will be allocated to online investors. In the event of insufficient subscription of the given offline allocation portion, the offering shall be suspended and issuers and lead underwriters shall effect a claw-back of shares from offline allocation to online allocation.

  

(IV) Adjusting the mechanism for the claw-back of shares from offline allocation to online allocation. Where the valid subscription multiple of online investors is more than 50 times but less than 100 times, a claw-back of shares from offline allocation to online allocation shall be made at a percentage of 20% of the quantity of shares involved in the public offering; where valid subscription multiple of online investors is over 100 times, the claw-back shall be effected at a percentage of 40% of shares involved in the public offering.

  

(V) Improving the online allocation method. Only those investors in possession of a certain quantity of non-restricted shares are permitted to take part in online subscription. In the online allocation, the market value of unrestricted shares held by investors and the amount of their subscription funds shall be fully taken into consideration before an identification number is assigned and the lots are cast.

  

Securities exchanges and securities depository and clearing companies shall establish detailed rules for the implementation of online allocation and standardize online allocation activities. Issuers and lead underwriters shall draft and announce a specific plan for online allocation. The plan must specify the upper limit of online subscription quantity for each investor and such upper limit shall not exceed 0.1% of shares involved in the online initial offering.

  

(VI) Enhancing information disclosure requirements in the process of share allocation. Lead underwriters and issuers shall prepare and make publicly available information disclosure documents with respect to the allocation procedures and results. The issuers and the lead underwriters shall disclose in the offering announcement the criteria for the participation of investors in the underwriter’s independent allocation and the allocation principles. After the independent allocation, the results of allocation shall be disclosed, including the name of investors who have received shares so allocated, their price quotations, subscription quantity and the amount of their subscription funds, and the lead underwriters shall explain whether the results of independent allocation meet the allocation principles made publicly available prior to such allocation. For investors who have provided valid quotations but have not taken part in subscription or whose actual quantity of subscription is significantly less than the intended quantity of subscription upon quotation, the issuers and the lead underwriters shall disclose a list of such investors in the allocation results.

  

Where issuers, lead underwriters, investors who have taken part in the offline allocation, and relevant stakeholders have reached an agreement on post-listing price stability, the issuers shall reveal such information in the offering announcement.

  

V. Increasing regulatory enforcement efforts to safeguard the principles of “openness, fairness and justice”

  

(I) After sponsors enter into any pre-listing tutoring agreements with issuers, the sponsors shall, on the websites of sponsors and the websites of securities regulatory bureaus in the places where the issuers have been registered, disclose updates on tutorial services received by the issuers. After the completion of tutoring, a summary of tutoring process, content and effectiveness shall be revealed on the above-mentioned websites.

  

(II) The quality of information disclosure shall be further improved. Oriented to the needs of investor decision-making, the content and format of information disclosure shall be improved to highlight the priorities of disclosure and enhance information disclosure requirements, among others, for the issuers’ main businesses and business model, external market environment, business performance and key risk factors, which requirements have a material impact on investor decision-making. Plain language shall be used to increase the readability of information disclosed in order to make it easy for small and medium-sized investors to read and supervise such information.

  

(III) Prior to the review of the Public Offering Review Committee, the CSRC will conduct a random inspection of the working papers and due diligence of sponsors, accounting firms and law firms and other relevant intermediaries.

  

(IV) The linkage mechanism between the department of offering regulation and the enforcement department shall be reinforced. As of the acceptance of application documents, issuers and their directors, supervisors and senior management and relevant intermediary agencies shall assume corresponding legal responsibilities for the truthfulness, accuracy and integrity of the application documents. In the event of suspected major violations discovered during the review, the case will be immediately transferred to the enforcement department for investigation.

  

(V) The process regulation, behavior regulation and ex poste accountability of IPO shall be enhanced. Issuers and underwriters shall not allocate shares to the issuers, their directors and senior management, the underwriters and affiliates of the above-mentioned persons. Issuers and underwriters shall not manipulate the price of new shares and conduct under-the-table operations or engage in other activities that violate the principles of openness, fairness and justice; shall not induce offline investors to raise quotations without allocating shares to them; and shall not transmit interests to or seek illegitimate interests from other relevant stakeholders through such means as holding shares on behalf of others and holding shares in trust through independent allocation. The Securities Association of China (SAC) shall establish self-discipline rules, standardize such activities as road show promotion, disclosure of investment value analysis reports and underwriters’ independent allocation, and strengthen industry self-discipline.

  

(VI) Securities exchanges shall further improve the mechanism for the formation of opening price on the first trading day of new shares and the mechanism for the trading of new shares at the early stage after the listing of such new shares, and establish, with the IPO offering price as the benchmark for comparison, the mechanism for suspending trading on the first trading day, with a view to enhancing restraint on the speculation of new shares.

  

(VII) After the listing of issuers, sponsors shall perform continuous supervision and guidance responsibilities strictly in accordance with the law, urge the issuers to fulfill obligations related to listed companies’ proper operations, fulfillment of commitment and information disclosure, and review information disclosure documents by the issuers and other documents submitted by the issuers to the CSRC and securities exchanges on which such issuers are listed. During the continuous supervision and guidance period, the sponsors shall disclose regular follow-up reports as required. Where major changes or events occur to the issuers, the sponsors shall disclose an ad-hoc report as required. Within 20 work days after the end of the continuous supervision and guidance period, the sponsors shall draft a supervision and guidance work report, disclose such report on any website designated by the CSRC and make arrangements regarding matters not covered in the supervision and guidance activities. Where obligations of continuous supervision and guidance are not properly fulfilled, the sponsors shall be investigated for liability in accordance with the law.

  

(VIII) Where business profit of issuers in the year when they are listed drops by over 50% compared with the previous year or issuers incur any loss in the year in which they are listed, the CSRC will no longer accept the offering applications recommended by relevant sponsors as of the date of confirmation and transfer the case to the enforcement department for investigation. However, this does not apply to the situation where issuers have provided a clear and specific hint of the above risk of falling off in performance or enjoy other statutory exemption.

  

Where listed companies are suspected of managing to get listed by fraudulent means, the CSRC will take actions to freeze the issuers’ special fund-raising accounts when the case is filed for investigation.

  

(IX) The information disclosure responsibilities of issuers and the regulatory enforcement and self-regulation efforts with respect to the sponsorship and underwriting activities of intermediary agencies shall be further increased. The information sharing and interconnection among the CSRC’s sponsorship credit supervision system, the SAC practitioner self-discipline management system and the information disclosure systems of securities exchanges shall be established and improved to make it easy for the public to participate in the supervisory activities and to enhance restraint by external reputation and credit mechanism. Where issuers and their directors, supervisors and senior management fail to fulfill their information disclosure obligations in an honest manner, have serious violations in connection with information disclosure and commit financial fraud or intermediary agencies such as sponsors, accounting firms and law firms fail to diligently fulfill their obligations, they shall be penalized strictly in accordance with the law.



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