Q&A on Regulation of Disclosure of Information on Shareholders of Companies Applying for IPO

Q1: The China Securities Regulatory Commission (CSRC) recently issued the Guidelines for Application of Regulatory Rules – Concerning Disclosure of Information on Shareholders of Companies Applying for IPO (the “Guidelines” for short). What are the considerations for the implementation of the Guidelines in the issuance and listing review for the Sci-Tech Innovation Board (STAR Market)?

A: The Guidelines are applicable to the issuance and listing review for all boards, and the SSE will study the documents and implement them without delay. From the perspective of regulatory purposes, while strengthening the regulation of information disclosure on the to-be-listed-company shareholders, the Guidelines are an important measure to thoroughly implement the requirements at the Central Conference on Economic Work and the work deployment of “preventing the disorderly expansion of capital”, and play a significant role in guarding against the problems such as “shadow shareholders”, “violations” and “producing millionaires” as well as further improving the quality of listed companies from the source. In terms of regulatory logic, the Guidelines adhere to the three principles of respecting the fundamentals of the registration-based issuance system, drawing on international best practices and reflecting Chinese characteristics and development stages, and fully embody the requirement for integrating the actual needs and the fundamentals in the institutional development for the reform of the registration-based issuance system. With regard to the regulated factors, the Guidelines stick to the problem-oriented approach, focus on curbing the problems drawing much attention in the market such as entrusted shareholding, sudden stake-taking behavior before listing and abnormal stake-taking prices, speed up plugging up loopholes in the systems, and are highly pertinent and instructive in steadily advancing the construction of the STAR Market.

The SSE will work together with issuers and intermediaries to earnestly implement the requirements of the Guidelines in the review of the issuance and listing for the STAR Market, further optimize the market ecosystem, and ensure enduring progress in the development of the STAR Market and the reform of the registration-based issuance system.

Q2: What specific measures will the SSE take in the issuance and listing review for the STAR Market to implement the requirements of the Guidelines?

A: The SSE will, under the guidance of the CSRC, adhere to strict regulation, strengthen the regulatory coordination, and steadily advance the issuance and listing review for the STAR Market, focusing on the following tasks:

First, we will effectively regulate the applications of the newly added projects. The newly applying companies should fully implement the requirements of the Guidelines when making the application, and in accordance with laws and rules, clear up their entrusted shareholdings, disclose information on shareholders, and submit special commitments. The sponsors should conduct special inspections and issue inspection opinions on the “three types of circumstances” including entrusted shareholdings, sudden stake-taking behavior before the listing and abnormal stake-taking prices. After accepting the application, the SSE will focus on checking whether the issuer and the intermediaries have implemented relevant matters in accordance with the requirements of the Guidelines, and whether the lock-up periods for the shareholders newly joining within 12 months before the application have been extended to 36 months.

Second, we will classify existing projects and deal with them accordingly. For projects under review and those that have passed the Listing Committee review but have not yet been registered, the SSE will promptly notify relevant issuers and intermediaries that they should disclose more information about shareholders and conduct verifications. For companies that do not have problems such as entrusted shareholdings, sudden stake-taking behavior and obviously unusual stake-taking prices, or have explained or disclosed the information about the abovementioned issues in the previous review and inquiry stages, their review process will proceed normally with the special commitments submitted in accordance with the rules.

Third, we will unify the inquiry criteria. The SSE will make inquiries reasonably based on the actual situations of the companies, and the scopes of disclosure and verification for the issues in the same category will be consistent. During the review, the SSE will pay more attention to the disclosure and verification of the shareholder informations, take categorized measures based on different situations of the companies, make targeted supplementary inquiries, and focus on the disclosure and verification of the information about the natural person shareholders with obviously abnormal stake-taking prices and the institutional shareholders with multi-layer embedding.

Fourth, we will hold violators accountable. Based on the “Self-Check Form for Common Issues” and the Guidelines for On-site Supervision of Sponsorship Business for the STAR Market released earlier, the SSE will further tighten the issuers’ primary responsibility for information disclosure and the intermediaries’ responsibility for verification and checking, and strictly control the entry for the listed companies. The SSE will seriously deal with to-be-listed companies that fail to truthfully explain or disclose the information about the shareholders, and intermediaries that fail to perform their due diligence obligations; and those suspected of violating laws and regulations will be transferred to relevant authorities.

Fifth, we will strengthen regulatory coordination. The SSE will further enhance regulatory coordination and information sharing with relevant departments, so as to create regulation synergy. If the companies have questions about anti-money laundering administration, anti-corruption requirements, etc., the SSE will promptly request the CSRC to launch the procedures for solicitation of opinions. If market participants have major doubts about the actual application of the Guidelines, they may consult and report to the SSE in a timely manner.

Q3: After the Guidelines are implemented, how should issuers and relevant intermediaries effectively conduct the information disclosure and verification?

A: The issuers should be honest and trustworthy, disclose information truthfully, accurately and completely, and implement the requirements of the Guidelines in terms of regulation, commitment and disclosure: first, the issuers should strictly regulate the conduct of entrusted shareholding. The entrusted shareholdings formed in the historical evolution should be dissolved in accordance with the law before submitting the application and fully disclosed in the prospectus. Second, the issuers should make a special commitment to the shareholders’ eligibility. The issuers should clearly promise and disclose that there are no entities that are prohibited from holding shares under laws and regulations among the shareholders, there are no intermediary employees that have a stake in the issuance, and there are no circumstances where the issuers use equity for improper profit delivery. Third, the issuers should fully disclose or explain relevant information on shareholders. The basic information on the shareholders newly joining within the 12 months before the application should be fully disclosed in the prospectus; the basic information on the natural person shareholders with obviously abnormal stake-taking prices, and the natural persons resulting from the see-through identification of the shareholders with complex equity structures and obviously abnormal stake-taking transaction prices, should be explained; if there are financial products such as private investment funds among the shareholders, whether they have been put under regulation should be disclosed. Fourth, the issuers should urge relevant shareholders to implement the lock-up requirements. The shareholders newly joining within 12 months before the application should undertake that the newly-added shareholdings will not be transferred within 36 months from the date of acquisition, and the issuers shall supervise the implementation.

The sponsors, securities service institutions and other intermediaries shall be diligent and responsible, and verify the shareholder information disclosed by the issuers in accordance with the requirements of the Guidelines: first, they should conduct comprehensive and in-depth verifications and supervise the issuers’ disclosure of shareholder information, shall not issue verification opinions simply based on the commitments of relevant institutions or individuals, fully and thoroughly verify the objective evidence including but not limited to the shareholder’s stake-taking agreement, transaction consideration, source of funds, payment method, etc., and shall ensure that the documents issued are true, accurate, and complete; second, for the shareholders with abnormal stake-taking prices and the shareholders with complicated equity structures, they should verify the shareholder's basic information, stake-taking background and other information via the layer-by-layer see-through verifications, and ensure that the shareholder has no circumstances such as entrusted shareholding, illegal shareholding, or improper profit delivery.

Q4: Since the release of the Guidelines, the lock-up arrangements for the shares of the newly added shareholders and the linkage in the application of the Guidelines have attracted much attention from the market. Can you give us some details?

A: To improve the transparency of to-be-listed-company equity structures, although the companies whose applications had been accepted before the release date do not apply to the lock-up requirements in the Guidelines for the shares of the newly added shareholders, they should still disclose the shareholder information in accordance with the requirements of the Guidelines, and the sponsorship representatives should carry out supplementary verifications in strict accordance with the requirements of the Guidelines.

The Guidelines extend the threshold of time in determining the stake-taking behavior close to the listing by identifying the new shareholders generated within 12 months before the application as those with the sudden stake-taking, with the ways of obtaining shares including capital increase and share transfer. The new shareholders should implement disclosure, verification and lock-up of shares in accordance with the Guidelines. In addition, if new shareholders receive shares from controlling shareholders and actual controllers, they shall follow other provisions of the CSRC and the SSE on the lock-up requirements for the shares held by the controlling shareholders and actual controllers.