Two years after the official launch of the Star Market, Shanghai’s board for tech and innovation stock listings is showing signs of promise, having proved itself a success on the testing field of capital market reform in China.
On 22 July 2019, the Shanghai Stock Exchange Science and Technology Innovation Board was officially established with the listing of 25 pioneer enterprises. By 21 July 2021, there were 311 companies listed on the Star Market with a total market value of RMB4.76 trillion (USD743 billion). The budding Star Market has demonstrated the following characteristics.
Focus on ‘genuine tech’ with visible cluster effect. Although the Star Market explicitly stated possessing core and key technology and extraordinary technological innovation among its entry requirements, many early applicants were “pseudo-tech” companies seeking to list under the disguise of a high-tech concept. Such companies often really focused on trade, outsourcing their high-profile core technology. Consequently, doubts surfaced regarding the Star Market’s credibility.
The situation improved with the issue of the Guidelines for the Evaluation of Science and Technology Innovation Attributes (for Trial Implementation) and the Interim Provisions of the Shanghai Stock Exchange on Application and Recommendation for Issuance and Listing of Enterprises on the Star Market. The review system of “four regular indexes with five exceptions” took shape. Six industries – next-generation IT, high-end equipment, new materials, new energy, environmental protection and bio-pharmaceuticals – emerged as the Star Market’s key areas, creating a palpable cluster effect.
“Genuine tech” is the unique differentiation of the Star Market from other boards. Since the issue of the guidelines this year, the market has seen a decline in the number of new listings, which to some extent reflects the more stringent selection criteria. As the registration reform progresses, the capital Markets Star Market must further affirm its identity in terms of function and positioning to prevent any copycat competition.
Inclusiveness and flexibility. Since abandoning the rigid profit requirement for its issuers, the Star Market has become a new financing option for high-tech companies with long R&D cycles and large investment needs, a boon for quality companies in the chip and pharmaceutical industries. For example, ASR Microelectronics, a platform chipmaker and client engaged in wireless communication and very large scale integration chip manufacturing, recorded a loss during the reporting period in the run-up to its listing due to its massive R&D investments. However, as the Star Market requires prospective issuers to select any one out of five standards to be measured against, ASR was able to secure approval and successfully broke through its financing bottleneck.
The Star Market further showcased its flexibility and inclusiveness with China Resources Microelectronics becoming the first red-chip company to issue A shares, and with Segway-Ninebot adopting a VIE + CDR structure (variable-interest equity combined with Chinese depositary receipts).
Companies wishing to list are given more options with innovations in weighted voting rights, equity incentive schemes and IPO pricing. CloudWalk Technology, one of the “AI Four Little Dragons” and a client, established a special voting mechanism that helps controlling shareholders maintain control, even with relatively low equity stakes.
Centring on information disclosure. Under the registration-based system, market pricing is heavily dependent on high-quality information disclosure, giving the initiative back to the market. With the implementation of the review inquiry and self-assessment systems, the Star Market boasts a well established IPO information disclosure system with detailed disclosure standards.
A well established set of delisting standards must be in place for future needs
The switch from a review to registration mechanism spurred a series of changes in review philosophy and disclosure requirements, which, as observed by the author, is reflected in the faster review process, more detailed inquiries and the more recent emphasis on streamlining prospectuses in order to avoid information overload. As the new registration-based system continues to solidify the notion of “centring on information disclosure”, it is imperative that the general quality of information disclosure also steps up. To optimise investors’ understanding, apart from ensuring the truthfulness, accuracy and completeness of the information, issuers must also present it in an easy to read, well structured manner, both detailed and concise in the proper places.
As investors and the capital market mature, the Star Market needs to further raise its system standards. The Action Plan for Building a High-standard Market System, issued earlier this year by the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council, shed some light on the strategic direction of the capital market, including reinforcing investor protection and enhancing regulation, as well as setting up a normalised delisting system. From the perspective of an intermediary, the author recommends optimisation in the following two respects:
- Improving the regulation of the capital market and clarifying the functional boundary of intermediaries. The author strongly agrees with the approach of affirming the role of intermediaries as “market gatekeepers”, and enhancing their supervision. Meanwhile, there should be explicit division of labour and duties between intermediaries.
For example, lawyers’ expertise on financial affairs usually cannot match that of financial experts, hence they should not bear joint and several liabilities for all financial issues.
- Further improving the delisting standards based on market practice. The Star Market is relatively young and has yet to deal with any delisting. However, a well established set of delisting standards must be in place for future needs, in case any company should try to use technicalities to hold off its delisting.
Capital market reform is a long and winding road, which can only be sustainably navigated with constant self-assessment and improvement. Hopefully the testing field will one day blossom into a land of plenty.
Zhang Ying is a salary partner at Grandway Law Offices
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