Today, the Shanghai Stock Exchange (SSE) officially promulgated the supporting rules and guidelines for launching the Science and Technology Innovation Board (Sci-Tech Innovation Board) and piloting the Registration-based IPO System. Regarding the formulation of the rules, an SSE official answered the relevant questions.
Q1: Can you give us a general overview of the SSE’s issuance of the supporting rules?
A: On November 5, 2018, CPC General Secretary Xi Jinping announced that the Sci-Tech Innovation Board will be launched and the Registration-based IPO System will be piloted on the SSE. It is a major strategic plan made by the Party Central Committee on the basis of the current world economic and financial situations and in line with China’s overall reform and opening up, a significant institutional innovation in the capital market, and an important move to improve China's multi-level capital market system. With the guidance of the China Securities Regulatory Commission (CSRC), the SSE has gone all out to vigorously promote, research and formulate the supporting rules, which have been officially issued to the market after being approved by the CSRC, at the exchange level.
The six sets of major supporting rules issued at the same time are the “Rules of Shanghai Stock Exchange for Review of Issuance and Listing of Stocks on the Sci-Tech Innovation Board”, the “Measures of Shanghai Stock Exchange for the Administration of Listing Committee for Stocks on the Sci-Tech Innovation Board”, the “Working Rules of Shanghai Stock Exchange for the Sci-Tech Innovation Board Advisory Committee”, the “Implementation Measures of Shanghai Stock Exchange for Issuance and Underwriting of the Stocks on the Sci-Tech Innovation Board”, the “Rules of Shanghai Stock Exchange for Listing Stocks on the Sci-Tech Innovation Board”, and the “Special Provisions of Shanghai Stock Exchange on Trading of Stocks on the Sci-Tech Innovation Board”.
The rules have been formulated based on the "Implementation Opinions on Establishing the Sci-Tech Innovation Board and Piloting the Registration-based IPO System on the Shanghai Stock Exchange" (the "Implementation Opinions" for short) and the upper-level systems such as the relevant regulations of the CSRC, forming a series of rules at the exchange level for the reform of launching the Sci-Tech Innovation Board and piloting the Registration-based IPO System, providing for the main institutional arrangements in all aspects such as issuance, listing, trading, information disclosure, delisting and investor protection for the stocks on the Sci-Tech Innovation Board, and establishing the basic concepts, standards, mechanisms and procedures for the issuance and listing review under the pilot Registration-based IPO System at the SSE.
In addition to the above-mentioned major rules, the SSE has also, in accordance with the principle of “priority to urgent needs”, accelerated the formulation of relevant supporting rules and guidelines, making specific and detailed operational provisions on the relevant institutional arrangements in the basic rules. This time, four sets of supporting guidelines were also issued, including the “Guidelines of the Shanghai Stock Exchange for the Contents and Formats of the Sponsor Letter for Listing on the Sci-Tech Innovation Board”, the “Guidelines of Shanghai Stock Exchange for the Acceptance of the Application Documents for the Issuance and Listing of the Stocks on the Sci–Tech Innovation Board”, the "Guidelines of Shanghai Stock Exchange for the After-hours Fixed Price Trading of the Stocks on the Sci-Tech Innovation Board” and the “Essential Terms of the Risk Disclosure Letter of the Shanghai Stock Exchange for the Stocks on the Sci-Tech Innovation Board”. Next, the SSE will also release the Q&A on the Listing Review of the Stocks on the Sci-Tech Innovation Board, the Guidelines for Recommending Enterprises for Listing, the Guidelines for the Issuance and Underwriting Business, the Detailed Rules for the Implementation of Material Assets Restructuring, the Notice on the Investor Suitability Management and other supporting detailed rules and guidelines, so as to ensure the implementation of all the institutional arrangements for the major reform initiative as soon as possible.
Q2: The SSE publicly solicited opinions on the supporting rules earlier. Can you brief us on the solicitation of opinions and the market feedback?
A: From January 30 to February 20, 2019, the SSE publicly solicited opinions on the 6 major rules that have been released. During the period, the SSE held 10 regional symposiums to learn the opinions of market participants including exchange members, investment institutions, securities service institutions and individual investors, and conducted surveys among individual investors. More than 600 pieces of opinions were collected from various market participants through the official website, public hotline, letters and other channels.
Overall, the drafts of the six sets of business rules are well-received by the public. They are believed to have successfully met the market expectations and reflected the goals and requirements of the reform. Meanwhile, there are also specific opinions and suggestions on improving the supporting systems. Specifically, opinions on the review for issuance and listing mainly focus on the goals of the Sci-Tech Innovation Board, ways to realize the inclusiveness of issuance and listing, effective linkage between the SSE’s review procedures and the CSRC’s registration processes and how to optimize and release the specific review standards for issuance and listing, etc. The opinions on the mechanism of the issuance and underwriting mainly concentrate on how to ensure the effectiveness of the market-based pricing, the feasibility of the market-based constraint mechanism, and the necessary liquidity at the initial stage of listing, among other areas. The opinions on the continuous regulatory system mainly involve the proper shareholding reduction system, the scope of responsibilities and the safeguard mechanism of the sponsoring institutions for continuous supervision, indicators and implementation procedures of delisting, and other aspects. The opinions on the design of the trading mechanism are mainly about standards of investor suitability, whether to introduce the T+0 trading mechanism, the market-based trading balance mechanism, and other issues. The opinions on the follow-up improvement of the supporting mechanisms mainly include advancing the revision of the basic laws such as the Securities Law, the Company Law and the Criminal Law, increasing the costs of violating rules and regulations in the securities market, establishing the system of group action and centralized jurisdiction for litigation disputes involving listed companies on the Sci-Tech Innovation Board, and other matters.
Q3: Can you brief us on adjustments and improvements that have been made based on the outcome of the public consultation?
A: The SSE has earnestly studied the opinions and suggestions put forward by the market participants, and fully incorporated the reasonable and feasible ones into relevant systems and rules. Specifically, major systems that have been adjusted and optimized are as follows.
First of all, the standards for the listing of the red-chip companies have been further clarified. It is stipulated that red-chip companies that meet the requirements in the “Notice of the General Office of the State Council on Forwarding Several Opinions of the China Securities Regulatory Commission on the Pilot Program of Innovative Enterprises Issuing Stocks or Depositary Receipts Domestically (Guo Ban Fa  No. 21 Document)” may apply for listing on the Sci-Tech Innovation Board. Specifically, red chip companies that see rapid growth in its operating revenue, boast indigenous state-of-art technology, have an edge in the industry and are yet to go public may apply for listing on the Sci-Tech Innovation Board if 1) the estimated market value is no less than RMB10 billion, or 2) the market value of the company is expected to be no less than RMB5 billion and the operating income in the most recent year is not less than RMB500 million,.
Secondly, the shareholding reduction system has been further optimized. The lock-up period for shares held by core technical personnel in the Draft Rules for Listing Stocks on the Sci-Tech Innovation Board has been shortened from 3 years to 1 year, and they can reduce up to 25% of pre-IPO shares every year after the lock-up period; restrictions on the shareholding reduction for the shareholders of unprofitable companies have been improved, and a phased shareholding reduction system for the controlling shareholder, the actual controller, directors, supervisors and executives, as well as the core technical personnel has been put in place. It is also clarified that other arrangements for shareholding reduction on the Sci-Tech Innovation Board shall still be aligned with the current shareholding reduction system. At the same time, in order to establish a sounder shareholding reduction system, it is provided that certain shareholders can transfer the shares issued before the IPO through non-public channel and allotment, and the rules for specific matters shall be made by the SSE separately and put into force with the approval of the CSRC.
Thirdly, the scopes and requirements for the review of the information disclosure have been further specified. It is further emphasized in the exchange rules for listing review that in the review for issuance and listing, the focus will be on whether the issuer's information disclosure meets the requirements for authenticity, accuracy and completeness, as well as the requirements for the prospectus contents and format guidelines. At the same time, the exchange will pay attention to whether the application documents and the contents of information disclosure are sufficient, consistent, intelligible and intrinsically logical. We will step up the review inquiries, strive to get the true picture of the company through inquiries, and ensure that the access is only granted to eligible companies so as to deter fraudulent issuance and financial fraud, and urge the issuers, sponsors and securities service institutions to disclose information in an authentic, accurate and complete manner.
Fourthly, the responsibility of ongoing supervision has been better defined. Sponsor are no longer required to release investment research reports; the mandatory requirement for sponsors to issue opinions on the replacement of the accounting firm by a listed company has been cancelled; and a performance guarantee mechanism has been put in place in which listed companies are required to cooperate with sponsors in the on-going supervision.
Q4: After the supporting rules are issued, the enterprises will officially start the application for issuance and listing. Can you brief us on how to figure out whether a company to be listed is in line with the positioning of the Sci-Tech Innovation Board?
A: Providing for the positioning of the Sci-Tech Innovation Board, the “Implementation Opinions” sets the goal and direction that must be firmly grasped and followed in the development of the Board. To grasp the positioning of the Sci-Tech Innovation Board at the implementation level, it is necessary to respect the law of science and technology innovation, the law of the capital market and the law of enterprise development. Characterized by rapid update, slow cultivation and high risk, the scientific and technological innovation is especially in need of the support of the venture capital and the capital market. At the same time, as a large number of China's science and technology enterprises are in the critical period of striving to make breakthroughs, we should balance the relationships between the actual conditions and the goals as well as the current situations and the long-term prospects in mastering the positioning of the Sci-Tech Innovation Board. The Sci-Tech Innovation Board is not only a board to display science and technology enterprises, but also a board for promoting the development of the science and technology innovation enterprises; the Sci-Tech Innovation Board should not only prioritize the support for the development of the enterprises with new technologies and in emerging industries, but also give equal priority to bolstering the growth of the high-quality enterprises with new models and new types of business that are highly recognized by the market.
Based on the requirements of the “Implementation Opinions” and the actual situations of the market, the SSE will focus on the following four aspects in implementing the development of the Sci-Tech Innovation Board. First of all, regarding the systematical construction, the SSE will refine the requirements for sponsor’s verification and strengthen the professional control and self-discipline supervision mechanisms by releasing the business guidelines for recommending enterprises to be listed on the Sci-Tech Innovation Board and establishing the science and technology innovation advisory committee and the Sci-Tech Innovation Board IPO self-discipline committee. Secondly, regarding the market mechanism, the SSE will pilot the system of following investment by the sponsoring institutions’ relevant subsidiaries and establish a practice evaluation mechanism, so as to give further play to the role of the sponsoring institutions in selecting the science and technology innovation enterprises through commercial constraints and reputation constraints. Thirdly, regarding the arrangements for the review, the issuer is required to conduct a prudent assessment on whether it meets the requirements for the scope of relevant industries, carrying out production and operation by relying on the core technologies, having great potential for growth and other matters, in accordance with the positioning of the Sci-Tech Innovation Board; the sponsors are required to make professional judgments on whether the issuer is in line with the positioning of the Sci-Tech Innovation Board. The SSE will examine whether the issuer's assessment is objective and whether the sponsor's judgment is reasonable, and may consult the SSE-set science and technology innovation advisory committee about whether the issuer meets the positioning of the Sci-Tech Innovation Board. Fourthly, regarding the guidance of enterprises, the SSE will highlight key areas with other sectors also taken into account. The priority will be given to supporting the enterprises that are in line with national strategies, master key core technologies, boast outstanding capacity for scientific and technological innovation, rely mainly on core technologies for production and operation, and have a stable business model, high market recognition, a good image in the society and a great potential for growth. At the same time, the SSE will also consider the enterprises with new business types and models, so as to reflect the inclusiveness of the Sci-Tech Innovation Board.
Q5: The conditions for the issuance and listing of stocks on the Sci-Tech Innovation Board have been optimized in relevant systems, and it is also announced that the relevant standards for review will be formulated by the SSE separately. Can you brief us on the progress in setting relevant standards?
A: Under the pilot registration-based IPO system for the Sci-Tech Innovation Board, in the review for issuance and listing, the SSE will adhere to the concept of focusing on information disclosure, and urge the issuers and the intermediaries to disclose information in an authentic, accurate and complete manner. At the same time, the SSE will still conduct reviews and judgments on whether the issuer meets the basic conditions for issuance and listing and the requirements for information disclosure.
The conditions for issuance on the Sci-Tech Innovation Board have been streamlined and optimized in relevant systems, and in the four aspects of the entity’s qualification, accounting and internal control, independence and legal operation, the conditions for the initial public offering on the Board have been specified. The rules of the SSE for listing stocks on the Sci-Tech Innovation Board provide for various sets of conditions for listing on the board in total equity, equity distribution, market capitalization, financial indicators and other aspects after the issuance. According to the principle of “priority to urgent needs”, the SSE is accelerating the formulation of the standards for listing review in the Q&A on review and other forms, and the standards will be promulgated with the approval of the CSRC. The first standards will provide for as soon as possible the ways to deal with the common issues in the IPO of the science and technology innovation enterprises such as the determination of the number of the shareholders in the closed-loop operation of the employee stock ownership plan, whether the listing with options attached is allowed, and the accumulated unrecovered losses before the overall change, so as to tackle the actual problems encountered by relevant enterprises in issuance and listing of stocks and enhance the market expectations.
Q6: The investor suitability system will be implemented on the Sci-Tech Innovation Board, and some investors suggested to adjust the threshold for the investor suitability. How does the SSE respond to this?
A: In recent years, the market participants have greatly deepened their understanding of the investor suitability, and it is also the experience gained at huge expense in nearly 30 years of practice in the capital market. As the enterprises on the Sci-Tech Innovation Board are characterized by new business models, rapid technological iteration, significant performance fluctuations and high operational risk, it is necessary to implement the investor suitability system. Judging from the solicited opinions, most investors agree with the current requirements of the Sci-Tech Innovation Board for the investor suitability, and some investors consider the threshold for investors to be too high or too low.
From the data-based calculations, the suitability requirements of RMB500,000 and two-year experience in securities trading are reasonable. There are about 3 million individual investors in the existing A shares market that meet the requirements, coupled with the institutional investors, whose transactions combined account for more than 70% of the total. Overall, the arrangement has balanced the risk tolerance of investors and the market liquidity of the Sci-Tech Innovation Board.
It is important to emphasize that the purpose for the investor suitability system is not to keep the unqualified investors away from the Sci-Tech Innovation Board, instead, these unqualified investors can participate in the board through mutual funds. Next, the SSE will promote the fund companies to issue funds that mainly invested in the board. In addition, according to the regulatory authority, all the existing mutual funds that can invest in the A shares are allowed to invest in the stocks on the Sci-Tech Innovation Board, and the 6 strategic allotment funds issued earlier can also participate in the strategic allotment of the stocks on the board.
Q7. Some investors proposed that the T+0 trading mechanism should be implemented to enhance liquidity. How does the SSE respond to this?
A: In fact, the T+0 trading mechanism is not new for the A shares market. The T+0 trading mechanism was implemented in the early years of the SSE. However, due to the immature market conditions, and T+1 trading mechanism was finally adopted instead. There have always been proposals to implement the T+0 trading mechanism in the domestic market, but different opinions exist as well. After a comprehensive evaluation, and according to the principle of steady start and gradual progress, the T+0 trading mechanism was not introduced in the rules released this time.