Four years have elapsed since the launch of the Star Market, in which semiconductor enterprises account for nearly 20% of the lineup, raising nearly 50% of the total proceeds in the first half of this year. Evidently, the domestic semiconductor industry has achieved impressive growth, aided as it has been by the capital markets.
However, pressure applied by Western powers such as the US is constantly being intensified. Since October 2022, the Bureau of Industry and Security of the US Department of Commerce has made a series of amendments to the Export Administration Regulations (EAR rules) designed to restrict China from acquiring advanced computing chips, and manufacturing supercomputers and advanced semiconductors. In 2023, Japan, the Netherlands and several other countries also issued new export rules for semiconductors.
With the comprehensive implementation of the market’s registration system, conditions for domestic securities offerings have been greatly optimised, but the compliance of issuers’ production and operations is subject to no less scrutiny. Although semiconductor enterprises shoulder the heavy burden of breaking through the “bottleneck”, how they can ensure compliance at the procurement, research and development, sales and other stages while facing united foreign multilateral control is a matter that prospective A-share issuers in this sector cannot ignore.
On the Star Market, enterprises such as Hygon Information and DeepGlint had been placed on the US entity list before submitting their listing applications, as were Hikvision, Dahua, Fiberhome, and several of the main clients of Motorcomm. This seems to suggest that the inclusion of a company, or its main clients, into the US entity list does not directly derail listing prospects in the domestic capital markets.
More deep-seated issues, however, relate to whether enterprises can, at present and in the foreseeable future, continue to carry on their business activities and adequately respond in a potentially continually worsening international environment.
Most semiconductor enterprises are asked at the feedback stage to fully explain and disclose the impact that foreign export control policies have on their capacity to operate as a going concern. Since the issuance of the new EAR rules, the review body would pay additional attention to the connection between the prospective issuer and the US in terms of business, technology and personnel, and require it to provide an article-by-article explanation with reference to the new EAR rules.
Generally, the review body tends to see export control as a risk factor that could affect an enterprise’s operation as a going concern. It is imperative for prospective issuers to understand the key concerns and formulate corresponding approaches.
Focus of enquiry
Semiconductor enterprises currently under review, or intending to apply for listing, can be largely divided into two categories: those already subject to export control restrictions aimed at China, such as those on the entity list; and those not yet subject to direct restrictions.
For the former, regulatory enquiries will mainly revolve around the topics of “minimising US impact” and “operation as a going concern”, which can be approached from the perspectives of actual impact, and contingency plans for the future.
In the case of Hygon Information, the company was, to various degrees, affected in terms of chip foundry services, procurement of electronic design automation (EDA), tools and IP authorisation, by being on the entity list.
In response, the company explained that the foundries could continue to provide tape-out services until the completion of existing agreements, and it would maintain co-operation with multiple foundries. For other matters, the export controls would not have material adverse impact.
Those enterprises not yet subject to direct restrictions tend to be required to illustrate why they are not affected in the short term, for example: the business does not involve advanced processes, supercomputing, AI, military or other such sectors; its directors, supervisors, senior executives and core technical or other key research and development personnel are not US nationals; it is actively pursuing localised substitution; and that it continues to strengthen development of an export control compliance system.
Sometimes, regulators require in-depth quantitative analysis in considering the status of the enterprise’s main business. For example, the regulator required a chipmaker to quantify the substantive impact of import and export restriction policies on its business, to which it replied that, during the reporting period, a total of 36 clients ceased to deal with it due to “export restriction policies”, accounting for a minimal percentage of its revenue, thus demonstrating that its business had not been materially affected.
Facing the constantly shifting landscape of export controls targeting China, the authors’ advice to domestic semiconductor enterprises is do not panic or be obstinate; rather, seek a way out under the compliance framework.
In the short term, the primary task of enterprises is to at least understand the export control regimes and rules of the US, Japan and the Netherlands, equip themselves with the capability to self-check whether supply chains are impacted, and familiarise themselves on whether current export controls will affect their ability to operate, as well as affect their research and development. Enterprises subject to restrictions, or on the entity list, may also apply for import permits.
Enterprises proposing to list should also pay attention to: protecting the anonymity of core personnel (e.g. making it impossible to access through public channels any information on their shareholding on the employee shareholding platform); controlling information disclosure (online dissemination of information on company financing, product development, strategic co-operation, etc.); improving the terms of transaction agreements and confidentiality measures; and formulating, as soon as possible, medium and long-term supplier substitution plans to solidify the bulwark that enables them to respond to risks presented by the international situation.
These are the worst of times, but also the best of times. Domestic semiconductor enterprises should seize the opportunity to realise localised substitution in hard technology and, additionally, accelerate completion of the development of an internal compliance system that meets the requirements of the frequently changing international situation.
Shen Cheng is a senior partner and Shirly Xue is a senior associate at AllBright Law Offices
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