Registration-based IPO review brings new philosophy

On 17 February 2023, the main boards of the Shanghai and Shenzhen stock exchanges adopted the registration-based mechanism for reviewing IPOs, signalling completion of the reform across China’s capital market and marking a significant improvement in the effectiveness of securities regulation.

Reform highlights

The Shanghai Stock Exchange took the lead in piloting the registration system in November 2019 for its newly established Star Market. After more than four years of practice, the time is ripe for promoting the registration system across the entire capital market. Having observed the reform’s step-by-step implementation, the following characteristics stand out.

Continual optimisation of the registration review mechanism, and clear delineation of regulatory duties. The reform maintains the basic structure of review by the stock exchange and registration at the China Securities Regulatory Commission (CSRC), with each focusing on different aspects and complementing each other. It also further clarifies the division of responsibilities between the stock exchange and the CSRC.

Distinct positioning of each board. Now that the registration system reform has been completed across the main boards, there is greater clarity on the function and positioning of each board, which is expected to become a key consideration for companies in their preparation to be listed.

Tighter control over information disclosure. The registration system retains only the qualifications and compliance conditions for public offering of shares, while all substantial conditions under the approval system have been, where possible, converted to information disclosure requirements. It is no longer up to the regulators to judge a company’s investment value.

Furthermore, the standards, procedures, content, process and outcome of the registration review are entirely open to the public, leading to greater transparency and stricter balance in the operation of public power, which is now open to social supervision.

Fully integrated system of systematic rules. Under the reform, relevant systems and rules were streamlined to reduce overlapping, becoming more systematic, standardised and simplified.

Disclosure at the core

Full implementation of the registration-based system means that the administrative “public power” has now given way to market supervision. To companies, the registration review period tends to be shorter than that under the approval system, the listing standards are more explicit, and the threshold is generally more inclusive, all of which serve to improve IPO predictability.

Some of the most topical legal matters in A-share IPO review, such as horizontal competition, historical restructuring defects, and valuation adjustments among investors, are now inspected in greater detail, in lieu of the previous sweeping approach.

Various degrees of adjustments have been made concerning land and housing defects of the issuer, shareholder status, administrative penalties and other such issues, with emphasis placed on inspection and information disclosure by the issuer and intermediaries.

Since information disclosure is at the core of the registration-based system, regulators have imposed more meticulous and rigorous inspection and disclosure requirements on other legal issues such as shareholding entrustment, sudden share purchases before an application, look-through inspection of shareholders, and disclosure of shareholder information.

Overhaul of regulatory logic

With the emphasis now placed on information disclosure, a new system is called for to tip the government-market balance, handing over to the market some of government’s authority to restrict and supervise corporate conduct.

The goal of the registration reform is to improve market fairness, transparency and effectiveness by establishing a sound information disclosure system, increase the liabilities of securities service providers and strengthen investor protection. By doing so, financial risks can be curbed, information imbalance can be addressed, and the rule of law in the capital market can be further boosted, laying the foundation for sustainable development.

However, the fact that registration focuses on disclosure does not mean a loosened grip. On the contrary, the disclosure standards have tightened up to ensure investors receive true, accurate and complete information.

Other than IPO review and enquiries, the stock exchanges and regulators also employ methods such as on-site guidance, on-site inspection, complaints and whistleblowing management, and regulatory enforcement to urge issuers to make their disclosures true, accurate and complete.

In the first six months of the year, 207 IPO applications were filed across all boards, of which 175 were approved, according to Wind data. That approval rate of 84.5% was lower than the 89.4% for the whole of 2022.

In addition, 113 IPO applications were withdrawn during the first half of the year, resulting in a “true approval rate” of 56.5%, a drop from 59.9% for all of 2022.

The registration reform is an overhaul of regulatory philosophy, system and methods. To prospective listed companies, it is both a pool of opportunities and a steep mountain to climb.

Companies are advised to start planning for listing at an earlier stage, and choose a path and method to IPO that is best suited to their situation.

Equally important as improving market value and core competitiveness is to, as early as possible, develop awareness of compliance and standardised disclosure.

Conclusion

The holistic implementation of the registration-based system represents not just a new chapter in China’s capital market, but also the culmination of years of reform and exploration.

It was also a market-based revamp of the regulatory philosophy behind securities issuance, a milestone signifying the maturation of the system and framework, shifting the underlying logic and applicable rules behind A-share IPO review.

Prospective listed companies should keep a keen eye on the changes occurring in the new phase of the capital market, recognise the new issues and challenges, as well as the strictness of the review standards and the mounting importance of information disclosure. Only then can they effectively seize the opportunities most favourable to their development.

Kang Xiaoyang is a senior partner at Kangda Law Firm. He can be contacted at +86 10 5086 7666 or by e-mail at xiaoyang.kang@kangdalawyers.com