SSE Releases “Self-Check Forms” for Common Issues in Application for IPO on STAR Market to Tighten Responsibilities
On February 1, the Shanghai Stock Exchange (SSE) issued and implemented the Business Guide No. 2 of Shanghai Stock Exchange for Review of Issuance and Listing on the Sci-Tech Innovation Board - Self-Check Forms for Common Issues Concerning Requirements for Information Disclosure and Verification (the “Self-Check Forms” for short). It is another specific measure taken by the SSE under the guidance of the China Securities Regulatory Commission (CSRC) to earnestly implement the “information disclosure-centered” requirement for the reform of the registration-based issuance system, adhere to the principle of “building the system, non-intervention, and zero tolerance”, and strictly check the entrance and improve the work style in review by further tightening the major responsibility of the issuers for information disclosure and the responsibility of the intermediaries for inspecting and checking on the basis of summarizing and evaluating the previous work and practices. An SSE official in charge of the relevant businesses has answered questions on related issues.
Q1: What are the background and main considerations for the formulation of the Self-Check Forms at this stage?
A: In the reform of establishing the Sci-Tech Innovation Board (STAR Market) and piloting the registration-based IPO system, in order to actually implement the information disclosure-centered requirement and effectively check the entrance for the quality of the listed companies, we should ensure the fulfillment of the “two responsibilities” in the first place, which means it is necessary to urge the issuers to take the primary responsibility for information disclosure and the intermediaries to shoulder the responsibility for checking as “gatekeepers”, as the move is also one of the basic logics and premises for the reform of the registration-based issuance system to achieve productive results.
After nearly two years of practice, the pilot program of the registration-based IPO system on the STAR Market in the reform has achieved initial results, the main institutional arrangements have stood preliminary tests, and the overall operation of the STAR Market has been relatively stable. However, judging from the process of review, there is still a lot of room for improvement compared with the intrinsic information disclosure-centered requirement for the registration-based IPO system, in terms of both the issuers’ awareness and ability of shouldering the primary responsibility for information disclosure and the intermediaries’ awareness of checking and practice quality. To this end, the SSE has comprehensively sorted out the common problems and weaknesses in the information disclosure and verification and checking for issuance and listing of stocks on the SSE STAR Market, and formulated and issued the Self-Check Forms based on the existing criteria and requirements for issuance and listing review. The main considerations are as follows:
First of all, we will further tighten the “two responsibilities”. The SSE found that though the prospectus standards and the review Q&A for the SSE STAR Market had been published, the issuers’ disclosure and the intermediaries’ due diligence and inspections and checks could still fail expectations. The quality of information disclosure by some issuers, especially in terms of the pertinence and effectiveness, was not adequate, and there is still a long way to go from “clearly explaining” the major issues that the investors need to know when making investment decisions; some sponsors and their sponsoring representatives lacked initiative, professional ability and sense of responsibility in inspecting and checking, and there is still a big gap from “clearly verifying” the important matters that the issuers should disclose. The Self-Check Forms summarize and list the information disclosure and verification requirements for common issues in the application documents, and require the issuers and intermediaries to make references in disclosure and verification, specifying relevant work requirements and contributing to effectively improving the disclosure quality of the application documents and the level of intermediaries’ practice.
Second, we will further improve the efficiency of review and effectively check the entrance for the listed companies. Regarding the common and basic issues in information disclosure and verification for the prospectus and other application documents, the SSE still needed to conduct frequent and repeated inquiries during the review. The occupation of a large number of review resources objectively hindered the reviewers from concentrating on the focal matters for review, as well as hampered the efforts of the issuers and intermediaries in continuously improving the information disclosure quality through review inquiries. At present, there are significant shortcomings in the usefulness of the prospectus and other information disclosure documents for decision-making, the adequacy of the notices on major issues and risk warnings, the objectivity of business descriptions, and the pertinence of the management’s analysis, which are closely related to the abovementioned factors. By sorting out the regular problems in the application documents and urging the issuers and intermediaries to settle such issues as much as possible before the application, the Self-Check Forms are conducive to saving the review costs and concentrating more review resources on the major compliance, financial authenticity, effectiveness of information disclosure and other aspects of issuance and listing.
Third, we will make the listing review more transparent and market participant-friendly. Since the launch of the listing review for the STAR Market, oriented toward transparent review, the SSE has continuously enhanced the transparency and openness of review criteria, procedures, processes, content, and results. The review mechanism is also open and transparent, and provides clear expectations. The measures have been recognized by all parties concerned. On the basis of the previously announced criteria and Q&A on the review, the Self-Check Forms sort out, summarize and disclose the circumstances of inadequate implementation of the review Q&A and common issues since the opening of the SSE STAR Market, and guide the issuers and especially the intermediaries in conducting self-inspections by making comparisons item by item and detecting and making up for loopholes in the common issues and basic matters, which will further improve the transparency of the listing review for the SSE STAR Market. In addition, the Self-Check Forms will facilitate the efforts of the issuers and intermediaries in getting fully prepared for the issuance and listing application in advance, reduce the number and rounds of review inquiries, and cut unnecessary costs.
Q2: Can you elaborate on the main content and implementation requirements of the Self-Check Forms?
A: Based on the announced review criteria and Q&A for the SSE STAR Market and the problems found in the practice of review, the Self-Check Forms mainly sort out, generalize and summarize the common problems and weaknesses in the information disclosure and inspections and checks by the issuers and intermediaries for the application documents, with the content mainly in the following two categories: the first category includes the issues related to the issuance and listing conditions for the SSE STAR Market, such as the horizontal competition with significant adverse effects, major violations, sustainable operation capabilities, and R&D investment. The second category includes the common issues in information disclosure and verification, such as the verification of clients and suppliers, the selection of comparable companies in the same industry and other common matters in IPO application, as well as the notices on major events, cooperative research and development and other relevant issues summarized in the practice of review for the SSE STAR Market. Regarding the abovementioned content related to the review criteria and Q&A, the business guide provides two “Self-Check Forms”. Specifically, the first form contains the self-check items for the implementation of the Q&A on the review for the STAR Market, and there are a total of 29 items; the second form consists of the self-check items for the implementation of several questions and answers about the IPO business and the common review issues, and there are a total of 48 items. In addition, in order to facilitate the implementation and use, the Self-Check Forms also clarify the specific filling requirements below the two forms, setting out the notes on filling, the requirements for disclosure and verification and the corresponding standards for reference.
As the self-check items for the review criteria and Q&A listed in the Self-Check Forms will affect the quality of information disclosure in the application documents, the issuers and relevant intermediaries should pay attention to them and perform their duties diligently. The specific requirements for implementation are as follows:
1. It is necessary to ensure that the requirements for information disclosure and verification in the Self-Check Forms are truly implemented. The sponsors should take the implementation and filling of the Self-Check Forms as an important task for their quality control and internal inspections and checks, and carefully conduct examinations and verifications. Regarding the verification requirements in the Self-Check Forms, the relevant intermediaries should make verifications item by item in the sponsor’s work report, the lawyer’s work report, and the accountant's special verification report, based on the principle of materiality, elaborate on the important issues, brief on the commonplace matters, and fill in the Self-Check Forms with the page numbers in the intermediary’s report for the relevant item-applicable matters.
2. The Self-Check Forms should be consistent with the relevant information disclosed in the prospectus. The intermediary agencies should carefully check the prospectus, the intermediary’s reports and other documents, earnestly fill in the Self-Check Forms item by item, indicate the specific sources of the self-check items, and ensure that the Self-Check Forms conform to the prospectus and the relevant intermediary’s reports and are authentic.
3. The filling and submission of the Self-Check Forms should meet the requirements and standards. The intermediaries should carefully and truthfully fill in the Self-Check Forms according to the filling standards and requirements for verification and disclosure, and the signed and sealed forms should be submitted in a timely manner. First, with regard to the requirement for signature and seal, the Self-Check Forms should be signed by the person in charge of the sponsoring business, the person in charge of internal verification, the person in charge of quality control at the investment bank, the representative of the sponsor, the signing lawyer, and the signing accountant, and stamped with the official seals of the sponsor, the law firm and the accounting firm, with the date of signing indicated; second, regarding the accountant's special verification report, the application accountant should issue a special verification report on the items for verification, which should be signed by the signing accountant, affixed with the official seal of the accounting firm and the date of signature; third, with respect to the submission time, the sponsor, accounting firm, law firm and other intermediaries may submit the forms at the same time as the submission of the application documents for issuance and listing or within 3 working days after the acceptance.
In addition, the Self-Check Forms mainly list the common issues in the application for the reference by sponsors, accounting firms, law firms and other intermediary agencies. Relevant institutions should fully perform their verification obligations based on the rules and regulations as well as the actual situations of the issuers, and on such a basis, necessary additions can be made for the items not listed in the Self-Check Forms.
Q3: In practice, how were the problems related to the disclosure and verification matters listed in the Self-Check Forms dealt with in the listing review for the SSE STAR Market?
A: Related to the quality threshold and information disclosure quality for the listed companies, the disclosure and verification items listed in the Self-Check Forms have always been the focus of review inquiries for the SSE STAR Market. Judging from the review in 2020, we mainly took relevant measures in the following three aspects to deal with the circumstances in the application documents where the information disclosure did not meet the standards or the intermediaries failed to conduct effective verifications and checks.
First, the items were included in the scope of focal review. With the focus on the applying projects with inadequate information disclosure or verification, we intensified the review inquiries and questioning, and tightened the verification and check requirements for intermediary agencies so as to effectively convey the pressure of the review. For the companies that failed to meet the positioning of the STAR Market, the issuance and listing requirements, and the quality requirements for information disclosure, the listing was terminated in accordance with laws and rules. In 2020, there were more than 40 companies that had the review terminated after review inquiries and rejection, and the elimination rate in the review for the STAR Market remained at about 17%.
Second, the on-site supervision and combined measures were strengthened. We launched the on-site supervision in a timely manner for the major flaws in the information disclosure or significant doubts in financial affairs found during the review process. In 2020, we carried out the on-site supervision at a total of 23 companies, and 20 of them withdrew their applications. The synergy of written review and on-site supervision had an obvious deterrent effect on the market.
Third, we enhanced the in-process and aftermath supervision. In 2020, to address the problems found during the process of review such as substandard information disclosure and intermediaries’ improper performance of duties, we issued 2 criticism notices, 15 decisions of regulatory warning and 56 regulatory work letters, and summoned 13 issuers and intermediaries to interviews.
Q4: Are there any considerations for the follow-up implementation of the Self-Check Forms?
A: With the Self-Check Forms released, the sponsors, law firms, accounting firms and other intermediary agencies are required to attach great importance and earnestly implement relevant requirements for information disclosure and verification. In the future, the SSE will dynamically adjust, optimize and publish the content of the Self-Check Forms based on the implementation results and the needs in the review practice.
Going forward, for the issues that have been fully verified and disclosed in the Self-Check Forms, the SSE will accordingly simplify the inquiries based on the actual situations during the review, and at the same time, further intensify the review inquiries into the matters of materiality, pertinence and effectiveness that will have an impact on the issuer’s information disclosure quality. If the relevant requirements for information disclosure and verification are not implemented, resulting in major defects in the content of the application documents for issuance and listing, which seriously affects investors’ understanding and the listing review, the SSE will terminate the issuance and listing review in accordance with the Rules for Review of Stock Issuance and Listing on the SSE STAR Market and other relevant rules. In addition, the implementation and the filling quality of the Self-Check Forms will be taken as a reference for the evaluation of the practice quality of intermediary agencies, and for the intermediaries that do not perform their duties properly, the SSE will further step up the regulatory accountability.