Q1: Since accepting the first batch of applications for listing on the Sci-tech Innovation Board on March 22, the Shanghai Stock Exchange (SSE) has stepped up the review for the issuance and listing, and has issued the first round of inquiry letters. At present, some enterprises have submitted their replies to this round of inquiries. Can you provide an overview of the enterprises whose applications have been accepted and the review status?
A: On March 18, the listing and listing review system of the SSE officially accepted applications for the issuance and listing on the Sci-tech Innovation Board. On March 22, SSE decided to accept the applications of the first batch of nine companies. In the past month, the listing review center of the SSE has carefully reviewed the application documents submitted by the issuers in accordance with the basic requirements for launching the Sci-tech Innovation Board and piloting the Registration-based IPO System. As of April 23, the applications of a total of 90 companies were accepted, and the first round of inquiries were issued to 72 enterprises.
The progress in the acceptance shows that the companies applying for listing on the Sci-tech Innovation Board have the following characteristics. Firstly, the companies are concentrated in certain industries. Generally the companies belong to the high-tech and strategic emerging industries such as the new-generation information technology, the biomedicine and the high-end equipment. Specifically, there are 32 enterprises in the new-generation information technology industry, 21 in the biomedicine industry, 17 in the high-end equipment industry, and 10 in the new materials industry. Secondly, the companies represent the overall status of China's science and technology innovation enterprises at the current stage. Generally speaking, most of China's science and technology innovation enterprises are in the stage of trying to make breakthroughs and many of the them have certain capability of technological innovation and competitive advantage in the market. However, most enterprises are in the stage of following or keeping abreast of the advanced level in terms of the scientific and technological innovation, and only a small number of the them are in the leading position, especially those that have made breakthroughs in the core technologies. Among the applying companies, there are some leaders in the sub-sectors that have certain brand effects and market influence with the technical level compatible with the current status of economic and technological development in China. Thirdly, the applying enterprises are highly characterized by sci-tech innovation on the whole. A vast majority of the enterprises rely mainly on core technologies in production and operation, with their investments in research and development far more than those of the companies in other market sectors in China’s mainland. Taking the most recent fiscal year (2018) as an example, the average R&D investment of the sci-tech innovation enterprises whose applications have been accepted accounted for 11% of the total operating revenue, with the highest proportion at 56%, and their R&D personnel took up 33% of the total number of the employees. Fourthly, the companies’ growth is encouraging. The sci-tech innovation enterprises with applications accepted recorded an average growth rate of 42% in operating revenue on an annual basis in the most recent year, with 22 companies growing by more than 50% and 7 by more than 100%. In the most recent year the average net profit of the companies stood at RMB123 million, with the highest reaching RMB3.717 billion.
In order to make effective efforts in the review for the issuance and listing on the Sci-tech Innovation Board, SSE has further reinforced the listing review center for the Sci-tech Innovation Board by transferring the accounting and legal professionals experienced in IPO review and regulation on listed companies from the relevant business departments to the review task. In the initial stage of the pilot, with the aim of ensuring the quality and improving the efficiency of the review, the Issuance Department of the China Securities Regulatory Commission (CSRC) has joined hands with the SSE to establish a joint review mechanism, and selected and assigned several experienced regulation cadres to work at the SSE for the purpose of guiding and participating in the review work.
It is learnt that the relevant issuers and intermediaries are earnestly preparing for the replies after receiving the first round of inquiries. In the next stage, the SSE will attach greater importance to improving the quality of information disclosure of the applying enterprises. While continuously making effective efforts in normal acceptance of applications for issuance and listing and the first round of inquiries, the SSE will concentrate the resources on reviewing the companies’ replies to the first round of inquiries, and organize the second or more rounds of inquiries based on the quality of the replies, with the reports on the replies to be disclosed to the market. After the completion of the inquiries for the review, the review meeting will be held in strict accordance with the rules and procedures to form preliminary review opinion. The listing committee meeting on review will also be organized and convened, and the results will be submitted to the CSRC for registration, so as to ensure the steady and smooth launch of the Sci-tech Innovation Board.
Q2: As the most important information disclosure document, the prospectus provides the direct basis for investors to learn about the facts about an issuer. The market participants have higher expectations on further improving the quality of the information disclosure in the prospectus for the Sci-tech Innovation Board. Can you brief us on the basic information about prospectuses of the companies whose applications have been accepted, and what are the common issues that deserve high attention?
A: The present acceptance of the companies’ applications showed that most of the enterprises applying for listing on the Sci-tech Innovation Board could basically prepare the prospectuses in accordance with the “Standards for the Contents and Formats of Information Disclosure by Companies Publicly Offering Securities No. 41 - Prospectuses of Companies Listed on the Science and Technology Innovation Board” and other related requirements. The prepared prospectuses generally focus on reflecting the characteristics of the sci-tech innovative enterprise, disclose the information related to the attribute of sci-tech innovation, and attach importance to improving the pertinence of the discussions at the management level. At the same time, it should be noted that the quality of the prospectuses disclosed at present is uneven, and there are still some common prominent problems, resulting in a certain gap between the requirements of the reform of the pilot Registration-based IPO System and the expectation of the market participants. There are mainly five factors “yet to be improved” as follows.
Firstly, the disclosure of the matters related to sci-tech innovation is not sufficient. The matters such as the core technologies, the R&D personnel and the R&D investment are important characteristics of sci-tech innovative enterprises, which provide an important basis for the investors to learn about and judge whether the issuer has the capacity of sci-tech innovation. Compared with other boards, the Sci-tech Innovation Board should attach more importance to the disclosure of the matters related to the sci-tech innovation in the prospectuses, but at present quite a few companies have the problem of insufficient disclosure. For example, the matters that are not fully disclosed include the source of core technology, the information about the R&D team, the level of the advanced technology, the market position and competitive advantages and disadvantages at home and abroad, the iteration and substitutability of the technologies, the evolution routes and development trends of the technologies, the protection and management of intellectual property rights, the industrialized application and revenue shares of the core technologies, etc.
Secondly, the company’s disclosure of its business models is not clear enough. What an issuer needs to make clear to the investors is the important information including what business the company is doing, what products or services the company provides, how the company organizes production and sales, how the company earns incomes and profits, how much the related technologies contribute to the company’s production and operation, etc. Among the sci-tech innovative enterprises, some adopt relatively new business models and profit models, which are not familiar to the investors. However, some of the prospectuses for the Sci-tech Innovation Board failed to clearly disclose the basic facts of the issuer such as the business model, and especially the main business and major products or services. In some prospectuses, there is a lack of corresponding relationship between the production, supply and marketing model and the financial data, and the up-and downstream operations and competition in the industry are disclosed in a fragmented and blurred way.
Thirdly, the company's risks in production and operation as well as technology are not disclosed adequately. Characterized by large investment, fast iteration and high risk, the sci-tech innovative enterprises should pay special attention to the full and pertinent disclosure of risks. At present, quite a few prospectuses failed to disclose the risks adequately, mostly lacking details and only touching upon the minor issues instead of the important ones. For example, the prospectus failed to disclose the risks based on the characteristics of sci-tech innovative enterprises, and the disclosure of the risk factors lacked specificity; the prospectus failed to fully disclose the causes of the risks and the degree of the impact of the risks on the issuer, and lacked quantitative analysis based on the actual conditions of the company; there were violations in disclosing the risk factors, such as the case of incorporating issuer's competitive advantages and similar expressions which turn the risk disclosure into self-recognition.
Fourthly, the language of information disclosure is not investor-friendly enough. The standards for the prospectuses for the Sci-tech Innovation Board clearly require that the prospectus should be easy for investors to read and understand, concise and logical. On the whole, the present problem that the information disclosure of the prospectuses is not investor-friendly enough is prominent. For example, some prospectuses failed to use factual descriptive language to highlight the essence of the event, but instead, they used promotion terms for marketing, which were obviously beautifying or even exaggerating; some prospectuses disclosed plenty of industry information and other information that has little relevance to the issuer, while less disclosure of business and technology that directly related to itself , resulting in the redundancy as well as the lack of effectiveness and pertinence in information disclosure; some prospectuses used many professional terms that are difficult to understand, some failed to use charts, pictures or other more intuitive means of disclosure, and some failed to indicate the source of the information when citing the third-party data or conclusions.
Fifthly, the file formats and content arrangements are not standardized enough. For example, some prospectuses failed to disclose the criteria and basis for the importance level on the basis of the business characteristics of the company itself; in some prospectuses, the specific implementation standards for accounting policies and accounting estimates were simply copied from the accounting standards; the commitments of the entities were still piled up in reminder of major issues in a great deal, failing to achieve the goal that the investors should be reminded in brief language to pay special attention to the major issues.
Among the above-mentioned problems occurred in the prospectuses, some are caused by years of usual practices, and some are related to the hasty time for the preparation for the application for issuance and listing on the Sci-tech Innovation Board and the compilation of the prospectus. The existence of these problems shows that issuers and intermediaries are not deep enough in understanding or think much of how to implement the disclosure centered regulatory requirements in the link of issuance and listing in accordance with the reform concept of the pilot registration-based IPO system. Therefore, we remind the issuers and intermediaries again that they must formulate and modify the prospectus in strict accordance with the relevant rules for the Registration-based IPO System of the Sci-tech Innovation Board, and they should make necessary simplification, deletion, addition and reinforcement based on the problems found in the inquiries for review and the corresponding requirements. In the review, the SSE will continue to focus on information disclosure, attach great importance to the quality of information disclosure, get to the bottom of inquiries and step up the inquiry about the prospectuses with significant problems.
Q3: Review inquiry for issuance and listing is an important process and regulatory method for urging issuers and intermediaries to fulfill their obligation for information disclosure and improve the quality of information disclosure. To deal with the above-mentioned common problems, how will the issuance and listing review continue to center around information disclosure and focus on improving the information disclosure quality of the prospectuses?
A: Since the acceptance of the applications for issuance and listing, the SSE will, on the basic requirements of the reform of the registration-based IPO system on the Sci-tech Innovation Board, adhere to the information disclosure-centered approach and launch one or more rounds of inquiries on the significant problems in the prospectuses, so as to urge the issuers to make clear the issues and reveal the real conditions of the company in the process of inquiry. The first round of inquiries are conducted in the principle of making comprehensive inquiries, highlighting key points, raising reasonable doubts, and tightening responsibilities.
Firstly, comprehensive inquiries should be made. The reviewers carefully read through the prospectuses and all supporting documents and raise the questions in the first round of inquiries which cover all the contents of the prospectus, including the finance, law, industry and other areas, while also focusing on the adequate, consistent and understandable requirements for information disclosure. For all important issues related to investors' investment decisions but with a lack of clarity in the prospectus, involving business, technology, finance, governance, and the succinctness of the disclosure language, etc., the issuers should be required to make supplements and improvements and to effectively enhance the adequacy of information disclosure. On the basis of a comprehensive review, the questions for the first round of inquiries are raised. Corresponding to the comprehensive review and the quality of the prospectuses, the number of questions in the first round of inquiries is relatively large. At present, there are more than 40 questions for each company on average, and each question also contains multiple facets.
Secondly, the key points should be highlighted. The first round of inquiries focuses on comprehensiveness on the one hand and highlights the key points on the other hand. On the basis of full coverage of the inquiries, the focus is on whether the issuer meets the requirements for issuance and listing, fully discloses the information that is important for the investors’ investment decision, and makes reasonable assessments and judgments for the consistency with the orientation of the Sci-tech Innovation Board. As a result, the questions asked are more concentrated on the major issues related to the issuance and listing conditions, the issuer's core technologies, its business scopes and models, and its capacity for independent and sustainable operation, etc.
Thirdly, the reasonable doubts should be raised. The review inquiries are highly concerned with the authenticity, accuracy and completeness of the issuer's information disclosure, and maintain reasonable doubt by focusing on the adequacy and consistency of the information disclosure. Specifically, the review attaches great importance to whether the financial data have the reasonable articulation, whether the financial information and non-financial information can be mutually verified, whether the differences between the issuer and the comparable companies in the same industry are normal, etc. The inconsistencies are questioned particularly, and the issuers are required to make explanations and provide reasons and basis, so as to prevent and deter fraudulent issuance, false statements and other malicious violations.
Fourthly, the responsibilities should be tightened. The diligence of the intermediaries provides an important foundation and guarantee for the smooth implementation of the reform of the Registration-based IPO System. While calling on the issuers to fulfill the primary responsibility for information disclosure, we require the sponsoring institutions and the securities service institutions to fully verify and explain the compliance of the issuer’s production and operation, the authenticity of the financial information, the effectiveness of the internal control system and other matters. We also urge the relevant intermediaries to diligently perform their responsibilities for due diligence and prudent verification and to effectively play the role of “gatekeeper”. Recently, with regard to the problems of the relaxed inspections conducted by the sponsoring institutions, which were found in the review, the SSE summoned the relevant sponsoring institutions, pointed out the problems and called for correction. According to the laws, regulations and rules, the SSE will impose relevant regulatory measures on the intermediaries violating the business rules of the SSE. Going forward, we will work with relevant regulatory authorities to make targeted assessment of the practice quality of the sponsoring institutions and other intermediaries.
Issuers and the intermediaries such as the sponsoring institutions play an important role in improving the quality of information disclosure. After receiving the first round of inquiry letters from the SSE, they should conduct self-inspection and verification according to the requirements, respond promptly, and make corresponding amendments, improvements and update disclosures for the prospectuses, so as to effectively enhance the quality of information disclosure and ensure the authenticity, accuracy and completeness of the information disclosure.
Q4: Can you brief us on the issuers’ replies to the first round of inquiries ? And how to carry out the second round of inquiries?
A: By the afternoon of April 23, three companies have submitted their replies to the first round of inquiries, and other companies' responding to the inquiries was in progress. In general, the relevant issuers and intermediaries attach more importance to the questions raised in the inquiries. They have made comparisons and replied to the questions one by one, forming an independent document of information disclosure that could be publicly disclosed, and supplementing, deleting and correcting, and adjusting the prospectuses simultaneously; the sponsoring institutions, law firms and accounting firms also issued special reports in accordance with the requirements. We will accelerate the review of the submitted and disclosed replies, focusing on the relevance, accuracy, and adequacy. On such basis, we will start the second round of inquiries.
It is worth noting that, according to the provisions of the “Review Rules for Offering and Listing Stocks on the Sci-tech Innovation Board”, the replies to the inquiries are part of the application documents for issuance and listing, and the issuers should ensure that the replies are true, accurate and complete. The SSE will pay close attention to the quality of the replies to the inquiries, and disclose the contents of the inquiries and replies to the market in a timely manner, so as to accept the social supervision. To this end, we specially put forward the following three requirements to the parties that are preparing for the replies.
Firstly, issuers and intermediaries should respond in a targeted manner as required. The replies to the inquiries should focus on the raised questions, “shoot the arrow at the target”, improve the pertinence, avoid irrelevant answers or only touching upon minor issues instead of important ones, and prevent the approaches of “squeezing toothpaste” or “reaching the lowest standard” in information disclosure. The issuers and the sponsoring institutions should comprehensively check the prospectuses and other information disclosure documents on the basis of the replies, detect and mend loopholes, cut the redundancy, eliminate contradictions, delete market promotion terms, and enhance the adequacy, consistency and comprehensibility of information disclosure.
Secondly, the intermediaries should implement inspections effectively. The sponsors and the securities service institutions should earnestly assume the responsibility for checking the issuers’ information disclosure, implement appropriate verification approaches, scopes and procedures, make in-depth analysis of the questions raised in the inquiries, draw prudent and objective conclusions of the verification, and strictly carry out the procedures of internal inspection according to the rules, so as to improve the standardization and effectiveness of the verifications. The sponsors should provide new evidence or materials in the replies to the inquiries based on the supplementary verifications and avoid simply repeating the existing contents in the prospectus.
Thirdly, the disclosure of industry information needs to be further strengthened. The sponsors should give full play to their own capabilities of industry research, strengthen their understanding of the sci-tech innovation industry, and improve their mastery of China’s strategies and policies for sci-tech development, and the levels and trends of sci-tech development at home and abroad. According to the requirements of the inquiry letters, in the replies to the inquiries, the sponsors should make further professional analysis on the issuer's core technologies and core competitiveness, industry status and future trends, up-and downstream business relations, comparison in the same industry, risk factors, countermeasures and other matters, so as to provide more effective reference for investors’ decision-making.
If an issuer fails to answer the SSE’s questions in a targeted manner in the first round of inquiries, or the SSE finds new clues and new circumstances or calls for further inquiries for review according to relevant regulatory requirements, the SSE may continue to launch the second round of inquiries for review within 10 working days after receiving the issuer’s replies to the first round of inquiries. Different from the first round of inquiries in a comprehensive way, the second round of inquiries will be more focused. The focus will be on the important issues that the issuers and intermediaries did not make clear in the first round of inquiries. Through getting to the bottom of inquiries, the issuers will be required to further disclose the information, so as to help the review authorities make review judgments on relevant matters and facilitate the investors’ decision-making for investment with sufficient information.