What is the technology board?
The Shanghai Stock Exchange’s new technology board aims to attract both foreign and domestic technology companies to sell shares in the PRC. Unlike similar local initiatives, the board has taken a registration rather than approval-based approach. “The IPO [initial public offering] process under the new technology board will be much faster than that of other boards, as approval from the China Securities Regulatory Commission (CSRC) is not required for listing,” said Johnny Chan, chief legal and compliance officer at China Merchant Securities.
Under the rules, the approval process will be delegated to the vetting department and listing committee of the Shanghai Stock Exchange (SSE), supported by the technology innovation advisory committee. It will accept applications from companies with weighted voting rights (WVR) and red-chip companies under the Chinese depositary receipts (CDR) system. Red-chip companies are mainland-based firms that also list outside of China.
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The threshold for a trading halt for shares admitted to trade on the proposed SSE Technology Innovation Board will increase to 20% rise or fall on any single trading day, as opposed to the current 10% for the Shanghai main board and Shenzhen exchanges.
Investors are required to have at least two years’ experience in stock market trading and at least RMB500,000 ($73,921) in trading capital.
Another requirement is that IPO sponsors purchase between two and five percent of the total shares in an IPO during the two-year lock up period. Sponsors need to buy five percent of IPOs of less than RMB1 billion. For IPOs of more than RMB5 billion, they must buy two percent. For IPOs between RMB1 billion and RMB2 billion, it’s four percent.
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In the past, technology giants like Alibaba, Xiaomi and Tencent have chosen to be list in either Hong Kong or the US, with most shares subsequently held by overseas investors. “With the setup of the new board, technology firms in the PRC now have another choice, and domestic investors in the PRC will have easier access to such investment,” said Chan.
The increased number of IPOs will bring opportunities to different types of financial institutions in China. “This can bring more business growth to domestic securities firms,” said Chan. In addition, private equity and venture capital firms can sell their investments and exit a company more easily due to a shortened and simplified IPO process.
What aspects lack clarity?
Joseph Lee, partner at Simmons & Simmons, says that in terms of disclosure, the new regime requires the sponsor to ensure the information disclosed in the application is ‘sufficient, consistent and comprehensible’. This gives regulators discretion for subjective judgment in vetting applications.
“Reliance on the supervisory board to supervise the compliance with an exercise of special voting rights may not be effective, as the holders of the special voting rights are entitled to elect members of the supervisory board,” said Lee.
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Lee thinks the rules empower the SSE to force issuers with weighed voting rights to rectify circumstances in which abuse of those rights negatively affects investors. It does so without specifying what constitutes abuse nor the consequences of failing to rectify.
Additionally, as there have not been any Chinese depository receipts (CDR) listed in the PRC to date, CDRs listing on the new board will require further clarity on procedures.
How might it impact Hong Kong listings?
Chan thinks HKEx will see the new technology board as a competitor. “There are lots of technology unicorns in the PRC planning Hong Kong IPOs in the next two years,” said Chan. The new board gives these companies an alternative route for fundraising. Any liquidity or listing criteria issues, which are as yet uncertain, will influence this.
A speedy vetting process compared to the existing regime may well draw more IPOs. “But given the performance of the Shenzhen ChiNext board and the Beijing New Third Board are rather disappointing, one cannot rule out the possibility the SSE Technology Innovation Board would also just not be able to satisfy the appetite of PRC investors,” said Lee.
Hong Kong remains attractive to potential listing firms due to its more developed and mature stock market, less interventionist approach and free flow of capital. But the Shanghai technology board is certainly trying to catch up.
When will it launch?
The board is slated to launch at the end of May 2019. Investors are allegedly already eager to put their money in. Seven fund houses specifically targeted at the tech board had already met their fundraising targets on their first day of sales at the beginning of May.
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