IPO registration: how system reviews big numbers of shareholders

Disclosure of information has been at the core of China’s shift to the current across-the-board registration-based IPO system, which replaced the more cumbersome and inefficient approval-based approach. Wherever practicable, the earlier conditions needed to gain approval for a public offering have been converted into information disclosure requirements. However, enhanced disclosure requirements do not mean the standards for reviews have loosened.

In fact, the focal points of scrutiny across various sectors have only grown more meticulous, comprehensive and standardised, according to our analysis of IPOs under examination since 2023.

In accordance with guideline No. 4 on the Application of Regulatory Rules – Offerings, and the Measures for the Administration of Registration of Initial Public Offerings of Stocks, as well as the Shanghai and Shenzhen stock exchanges’ own guidelines for the examination of share sales, this article looks at the key examination points for the “relatively large number of individual shareholders in history”.

Case study

A company has a total of 81 shareholders: 68 are individual investors and 13 are institutional ones. Individual investors have had a significant involvement in the company throughout its history. The sponsor, the issuer’s attorney and the reporting accountant examined the relatively large number of individual shareholders in the issuer’s history in accordance with the Questions and Answers on the Examination of IPOs on the ChiNext Market of the Shenzhen Stock Exchange (expired), and gave clear opinions.

The examination methods of the intermediaries were as follows:

• Reviewing the issuer’s industrial and commercial administration information and the register of members;
• Reviewing the Letter of Explanation on Shareholding Status and Related Relationships provided by 77 of the 81 shareholders with an aggregate interest of 99.9855% of the company’s shares, as well as talking to the 20 biggest individual shareholders;
• For the shareholders that provided no explanation, the timing and price range of their investments were identified by checking their transactions in the register of members and changes in the share price in the NEEQ; and
• Checking the statements issued by the issuer and its actual controller, directors, supervisors and senior managers, as well as intermediaries and their handling personnel, including the Commitment to Non-Affiliation issued by the top 10 clients and suppliers of the issuer during the issuer’s reporting period.

Conclusion of intermediaries: “The issuer has been examined for its “relatively large number of individual shareholders in history” in accordance with relevant requirements set out in the Q&A examination. We have found that the changes in the equity interests of the issuer’s relevant individual shareholders are true and valid, and have gone through necessary decision-making procedures. There is no nominee or trustee holding by the relevant individual shareholders of the issuer and no disputes or potential disputes.”

Interpretation of rules

General circumstances verification: (1) Verifying the legality and compliance of procedures for individual shareholders’ entry and/or exit. The intermediaries check whether the individual shareholders have performed the corresponding procedures in accordance with the laws and regulations by reviewing the issuer’s industrial and commercial registration information, capital increase or share transfer agreement, resolutions of the shareholders’ (general) meeting, register of members, payment receipts and taxpayer receipts.

(2) Verifying the authenticity of equity changes. Shareholders’ entries and/or exits are checked for accuracy through interviews or questionnaire surveys of the most relevant individual shareholders. The intermediaries agree on a sample ratio for this exercise based on the holdings of the issuer’s individual shareholders: more than 90% of relevant shareholders for the questionnaire; more than 70% for the interviews.

(3) Verifying nominee or trustee holders. If there are any nominees among the shareholders, the intermediaries must review the entire evolution of the holdings, the actual shareholders registered with the industrial and commercial administration and the clean-up of nominee holdings. They must also talk with the shareholders involved in nominee holdings to confirm the absence of dispute or potential dispute and give a clear opinion accordingly.

Special circumstances verification: (1) Verifying for disputes or potential disputes. The intermediaries should investigate the cause and progress of any disputes, assess whether it results in unclear equity for the issuer, determine if it poses substantive legal obstacles to the issuer’s offering and give a clear opinion accordingly.

(2) Verifying for setup of joint-stock company by targeted fundraising. The intermediaries should check the industrial and commercial registration records of the joint-stock company, then-applicable laws and regulations, the approval documents issued by the competent authorities and the compliance of the historical developments and give an opinion on whether there is any dispute or potential dispute.

(3) Verifying issuer with more than 200 shareholders. According to the exchange’s exam guidelines, if the issuer has more than 200 shareholders, intermediaries should check for lawful incorporation and existence, clear ownership and sound governance in accordance with the Regulatory Guideline No. 4 for Unlisted Public Companies – Guide to Examination of Matters Regarding the Application for Administrative Licensing by Unlisted Joint-Stock Companies With Over 200 Shareholders, examine its public offering and give a clear opinion accordingly.

There is no material change in the examination standards and requirements regarding the relatively large number of individual shareholders under the across-the-board registration-based IPO system. The regulatory authorities focus on the authenticity of equity changes of individual shareholders, the legality of the procedures performed, the existence of any nominee or trustee holding and any disputes or potential disputes.

The intermediaries will conduct an examination through shareholder interviews and document reviews to confirm procedural compliance of individual shareholders’ entry and exit, the authenticity of ownership changes and the absence of disputes or potential disputes.

If there is any dispute or potential dispute, the intermediaries are required to disclose them truthfully and confirm that they do not affect the stability of the issuer’s controlling rights or constitute a material legal obstacle to the offering. For companies with more than 200 shareholders, intermediaries should focus on verifying whether the issuer has unlawfully conducted public offerings without approval and provide clear opinions accordingly.

Xia Jialin is a senior associate and Huang Yiping is a paralegal at Zhilin Law Firm