The Shanghai Stock Exchange Science and Technology Innovation Board has been a stellar success, even in the past year, paving the way for broader changes to Mainland capital markets. With these reforms, A-shares now have clearly positioned, multi-layer boards that let market forces play the starring role, writes Sophia Luo

The pandemic-ravaged year of 2020 marked the 30th anniversary of the establishment of China’s capital markets. As China emerges from the chaos still seen in much of the world, the country’s capital markets will be put to bigger tests in 2021 – a critical year that sees the beginning of the nation’s 14th Five-Year Plan.

“In the span of two years, the Star Market has played a notable role in guiding the allocation of resources. The number of listings and amount of funds raised have been rising year by year, and listed companies continue to post strong earnings growth,” says Zhang Liguo, founding chief partner at Grandway Law Offices in Beijing.

“The Star Market has played an exemplary role in promoting the implementation of registration-based initial public offering mechanisms. Based on that, we have seen the revised Securities Law make clear that a phased registration-based IPO reform will be implemented more generally across China’s capital markets. The startup board, ChiNext on the Shenzhen Stock Exchange [SZSE], will begin accepting IPO applications under the registration-based IPO regime,” notes Zhang.


According to Liu Tao, a Shanghai-based partner at Commerce & Finance Law Offices, 281 companies had debuted on the Star Market as of 26 May, with market capitalisation totaling RMB3.79 trillion (USD592.78 billion). In less than two years, the Star Market has contributed to 7% of the total market capitalisation of the Shanghai Stock Exchange [SSE].

Zhang Zhiqiang, a Beijing-based partner at Jingtian & Gongcheng, says the Star Market has shouldered two missions since its inception. One is functioning as the test ground for registration-based IPO reform, and the other is constructing a more inclusive mechanism for the listings of companies with core technologies.

“This can be seen by the fact that as much as 90% of listed companies on the Star Market come from high-tech industries and strategic emerging industries such as IT, biomedicine, high-end equipment manufacturing and new materials,” he says.

Chen Yang, a partner at Han Kun Law Offices in Beijing, says the Star Market puts the focus on sustainable operation rather than profitability, and emphasises the company’s scientific and technological innovation attributes.

“This offers opportunities for different types of companies and firms at different stages of development – such as red-chip companies, pre-profit companies and companies with weighted voting rights – to raise funds, which helps sci-tech enterprises scale up input in research and development, as well as quicken the pace to make technological breakthroughs and convert technological achievements into real productive forces,” says Chen.

Tighter scrutiny

While the registration-based IPO process has been a success, there has been an increase in rejections or suspensions of applications, too. In the first quarter of this year, 11 IPO applications were rejected or suspended, compared with 15 for all of last year. In January, the China Securities Regulatory Commission (CSRC) issued its Provisions on the On-site Inspections on IPO Enterprises, in order to act as gatekeeper.


Betty Yap, managing partner of China practice at Paul Weiss, points out that although the Star Market operates a registration-based regime, the CSRC still has the power to return an application for registration.

“It is thus obvious that regulators tightened their scrutiny of IPO candidates earlier this year,” adds Liu at Commerce & Finance, “however, this should be seen as an adjustment following the rapid development of the Star Market and the registration-based IPO system.


“In March this year, CSRC chairman Yi Huiman put forward the nine-character policy of ‘building system, non-intervention and zero tolerance’ during his keynote speech at the CSRC Roundtable of China Development Forum 2021,” says Liu. “As we continue to pilot the registration-based system on the Star Market, making the rules more systematic, the review process more institutionalised, equity issuance more market-oriented and information disclosure more transparent, eligible, would-be listed companies can expect a more predictable listing pace.”

Yi Jiansheng, a senior partner at Jia Yuan Law Offices in Beijing, says that some companies listed on the Star Market are facing illiquidity and thin trading volumes. He expects that regulators will open access to investors to tackle this problem.

Yap, at Paul Weiss, notes that investors are subject to eligibility requirements, including that an individual investor must have participated in the trading of securities for more than 24 months, and have a daily average balance of assets in his or her funds account of no less than RMB500,000.

“There is limited access to the Star Market by foreign investors through the qualified foreign institutional investors and RMB-qualified foreign institutional investor programmes,” says Yap. “As of 1 February, Star Market-listed shares can be traded by institutional investors through the Shanghai-Hong Kong Stock Connect if they are constituent stocks of the SSE 180 Index and SSE 380 Index, or have corresponding H shares listed in Hong Kong.”

In April this year, the CSRC and the Shanghai bourse raised the threshold for Star Market IPO candidates’ technology credentials, banning the listing of financial, property and investment companies, and tightening scrutiny on financial technology and “business-mode innovation” firms.

A highlight of the revision sees a new specific requirement for a company seeking a listing on the Star Market, which states that R&D staff must account for at least 10% of its headcount.

“What differentiates the Star Market from other boards by no means lies in the implementation of the registration-based IPO mechanism, but in the exchange’s scientific and technological innovation attribute,” says Zhang Liguo, at Grandway.

Li Zhen, a Beijing-based senior partner at Guantao Law Firm, says the new requirements are the equivalent of a “negative list” mechanism, making clear which companies cannot float on the Star Market.

Yi, at Jia Yuan, says Star Market applicants should take a serious look at whether they are in line with the bourse’s updated requirements. “Enterprises should adequately assess their own scientific and technological innovation attributes, instead of branding themselves as high-tech companies to try their luck,” he says.


John Xu, a corporate partner at Linklaters’ Shanghai office, points out that the Star Market, as well as the SZSE’s ChiNext, are increasingly concerned about the qualifications of shareholders, subrogation of shareholding, as well as the cash flow between the would-be listed companies and their directors, supervisors and management.

Tan Qing, a Beijing-based partner at Tian Yuan Law Firm, advises that would-be-listed firms should make sure that they can withstand the test of a multi-angled, comprehensive review process and rigorous information disclosure.

“Companies should attach great importance to the protection of IP rights, file patents in time, register software as a copyright, protect unpatented trade secrets, and avoid infringing on the IP rights of other entities or individuals,” says Tan.

Impact of Shanghai and Hong Kong policies on where to list

By Liu Yinhong, Lu Jiangxia and Yu Zheng, Jincheng Tongda & Neal

Legal innovation and industry-driven value of SPAC listing

By Fan Xingcheng, Dentons

Hong Kong listing: setting up red-chip structures

By Grace Yan and Rong Yan, Guantao Law Firm

Six major capital market issues companies face as they grow

By Yan Kebing, Hai Run Law Firm

Dismantling a red-chip structure requires planning

By Wei Pei and Ai Yongtao, Jia Yuan Law Offices

Choosing the right exchange to IPO is a strategic move

By Yang Ke and Piao Yu, Tian Yuan Law Firm; William Ji, William Ji & Co

Exploring IPOs on ChiNext board under registration system

By Liu Yinhong, Wang Cheng and Zhang Ming, Jincheng Tongda & Neal

Strategies for privatisation of listed companies

By Jo Lit and Kristen Kwok, Walkers

Cross-border funds and their legal risks

By Ran Lu and Yuan Shiye, Han Kun Law Offices

SPACs and traditional IPOs: an offshore perspective

By Anthony McKenzie, Carey Olsen

Changing rules

However, the implementation of delisting rules may continue to be an issue of critical concern for the Star Market, as regulators attempt to expel the weak while supporting the strong.

“Delisting rules and a registration-based IPO mechanism stand as a pair of pillars for the survival of the fittest and most reasonable allocation of resources in China’s capital markets,” says Zhang Liguo. “The latter takes on the responsibility of attracting promising companies to enter the market, while the former weeds out bad apples and zombie firms,” he says. “Only with the coordination of the pair can we press ahead with the healthy and long-term development of the Star Market.”

On the last trading day of 2020, a set of revised and stricter delisting rules were introduced to A-share markets. Zhang Zhiqiang, from Jingtian & Gongcheng, notes that one major highlight of the revised rules is replacing the previously narrow delisting criteria, including net profit and operating income, with the combined broader ones of “net profit after deduction of non-recurring plus operating income”.

This specifically targets listed companies without business and operational continuity. It is aimed at previous practices where companies with main businesses that had long lost competitiveness, or had been at a standstill, managed to remain listed by earnings management measures such as years-long external inputs and asset sale.

This helps identify shell companies that rely heavily on government subsidies and fabricate or inflate earnings ad hoc, while making sure that pre-profit companies with main businesses that run well, or companies caught in an industry cycle, no longer face delisting.

Luo Han, a Beijing-based partner at Merits & Tree Law Offices, says the revised delisting rules “on the one hand help improve the pricing efficiency with every market participant playing the game, and on the other hand are conducive to accelerating the pace of weeding out bad apples”.


Li from Guantao says that previously, delisting rules had long been criticised for “raising the bar high for entry but low for exit”, so much so that there was no shortage of poorly run listed firms which, far from being stripped of their listing status, inflated the valuations of shell companies.

Li says the revised delisting rules are a sign of regulators’ determination to “raise the bar high for entry and exit of market entities”, and to “select the superior and eliminate the inferior”. Li adds that this will be more beneficial to the healthy development of capital markets.

With the revised rules well in place, Yi, at Jia Yuan, expects that delisting of companies will become the norm in China’s capital markets. “Once listed, companies should not only operate in a manner that complies with regulations, but also report positive business performance,” he says. “Getting listed does not mean that they can rest easy.”

In other positive developments, the SZSE in April officially merged its mainboard with the small and medium-sized enterprises (SME) board.

Under the principle of “two unified, four unchanged”, the merger is intended to unify business rules and supervision, but retain issuance and listing conditions, investor threshold, trading mechanism, and stock code.

The SZSE has stopped approving new IPOs on its main board since 2000. A few companies managed to debut on the mainboard via a stock-for-stock deal between 2000 and 2017, but there have been no IPOs since then, until the merger of the boards.

Some large enterprises chose to float on the SZSE via the SME board, like the China General Nuclear Power Group IPO, which raised USD1.96 billion in 2019.

“The merger is aimed at tackling the issue of the overlapping of business scope of the two boards, which is conducive to establishing a more compactly structured and clearly positioned multi-layer capital market,” says Luo.

Tan, from Tian Yuan, says that a clearly positioned multi-layered board structure has shaped up in A-share markets following the merger – mainboard, Star Market plus ChiNext and the National Equities Exchange and Quotations (the NEEQ, or New Third Board).

“The SSE and SZSE have their own mainboard tailormade for large blue-chip companies, as well as the Star Market and ChiNext, focused on fast-growing, innovative SME enterprises,” says Tan. “This leads to a largely balanced structure and lays the foundation for healthy competition between the two stock exchanges.”


Li adds that would-be-listed firms will have a clearer plan for choosing the board of the SZSE to make their debuts. The mainboard is designed for more established, mature companies that can satisfy a set of requirements for business size and profitability. After the merger, the registration-based IPO mechanism has been extended to the mainboard, and it is a matter of time for the full implementation of the system across the SZSE.

In contrast, ChiNext mainly focuses on fast-growing innovation firms, for which getting listed on the startup board can help highlight their own attributes and maximise their capital value. Yap, from Paul Weiss, says that companies listed on the SSE and SZSE are differentiated more by geography and less by business nature. The SZSE’s role in the Guangdong-Hong Kong-Macau Greater Bay Area would therefore be even more clear and vital.

A two-way street

In recent years, many Chinese companies listed overseas have embarked on a “homecoming” amid mounting geopolitical and regulatory concerns abroad, while at the same time several Chinese companies are making a beeline to get listed in US markets.

According to a report by the US-China Economic and Security Review Commission of the US Congress, as of 5 May this year as many as 248 Chinese companies were listed on major US stock exchanges – the Nasdaq, New York Stock Exchange, and NYSE American. Notably, 10% of US-listed Chinese firms have made their debuts in the first four months of this year.

Fu Siqi, executive partner of Tian Yuan Law Firm in Beijing and Hong Kong, says that in the first four months of 2021, 24 companies made debuts in the US, and at least 20 more are lining up for approval from the US Securities and Exchange Commission (SEC), compared with 38, 32 and 34 IPOs in 2018, 2019 and 2020, respectively. This is believed to be the fastest pace at which Chinese companies are listing in the US to date.

“Regulatory reform has facilitated the return of a large number of high-quality China-based companies listed overseas, with the A-share market also starting to improve the delisting mechanism, and regulators beginning to impose severe penalties on violations of the new Securities Law,” says Xu, from Linklaters.


Luo says there has been misunderstanding among some companies that believe the threshold for a US listing remains relatively low, and regard it as the fast track to capital markets. This may explain why stocks of US-traded Chinese companies have generally underperformed.

Some Chinese firms listed overseas give little regard to, and do poorly in, information disclosure and accounting quality. This has raised the alarm with US regulators, investors and the US media, leading to multi-dimensional pressures imposed on US-listed Chinese firms, with their stock prices fluctuating wildly.

Sherlyn Lau, Hong Kong-based deputy head of China corporate and finance practice at Sidley Austin, says that despite rising political, trade and regulatory tensions between the two countries, the US remains a magnet for the IPOs of Chinese companies, in particular those in technology-driven industries and new-economy companies including e-commerce, retail, life sciences and biotech, new media, entertainment, and emerging automotive.

Lau says many Chinese companies still believe that they get higher valuations when they cross-list in the US and Hong Kong. “Chinese companies currently listed in the US will continue the momentum to issue secondary shares in Hong Kong, and this market will also be the main destination for new listings by Chinese companies,” she says.


Lorna Chen, Hong Kong-based Asia regional managing partner and head of Greater China at Shearman & Sterling, says the US market remains a viable option because it is a mature market-driven system that provides access to a sophisticated investor base. The streamlined and transparent process for fundraising is also appealing to Chinese issuers, she adds.

Lee Kyungwon, Asia capital markets team leader and a partner in the capital markets practice at Shearman & Sterling in Hong Kong and New York, says that the recent surge in US IPOs by Chinese companies suggests that they are seeking to realise the benefits of a US IPO now and deal with the threat of forced delistings – if it materialises in the future – by pursuing a secondary listing back home. Renee Xiong, partner in the capital markets practice at Sidley Austin in Hong Kong, highlights the major issues that Chinese companies seeking a US listing should keep in mind, including: compliance with the audit records disclosure requirement by the SEC, which conflicts with Chinese secrecy laws; and potential delisting for failure to comply with such audit records and disclosure requirement, and related consequences.

Xiong points out that companies should consider the possibility of any compromise that may be reached between Chinese and US authorities, with respect to the disclosure requirements, in light of any development related to political and economic relations between the two nations.

She says they should also take heed of what alternative listing venues – including domestic markets and the Stock Exchange of Hong Kong – may offer, including potential compliance issues and costs, investor profiles and access to capital, and liquidity issues.

Liu Zhen, the head of China practice at Gunderson Dettmer in Beijing, believes companies seeking a US listing should pay close attention to issues including: auditability of US Generally Accepted Accounting Principles; compliance issues with the Committee on Foreign Investment in the United States (CFIUS) and US export controls; improvement of corporate governance (including introducing professional managers and independent directors); and the mechanism of the employee stock ownership plan (ESOP).

“Audit and corporate governance – including higher standards on the same level with those of US companies – can help boost the confidence of secondary market investors, which makes US-traded Chinese firms better equipped to deal with a future situation where US regulators may impose more stringent rules on Chinese listings,” says Liu Zhen. “ESOP, including employee tax compliance, is of great value to multinationals.”


Richard Chang, an of counsel in Gunderson Dettmer’s Beijing office, adds that if a company runs a business in the US, it is worth preparing ahead for any possible inquiry from the SEC – such as whether it historically had compliance issues with mandatory CFIUS filing requirements of fundraising, or whether its business could be in violation of US export compliance laws – in order to avoid any impediment to the proposed listings.

With respect to how China’s capital markets reform can take cues from parallel trends, Xiong, from Sidley Austin, stresses that transparency and quality of disclosure (or at least any perceived transparency and quality of disclosure) will be important to build up investor confidence and help attract more quality investors and issuers to participate.

She also emphasises that a more mature set of regulations and rules that offer better protection for potential investors will help attract quality investors, and thereby enhance liquidity of the markets.

Keep up with Compliance

In the post-pandemic era, where crisis and hope co-exist, the evolving capital markets regulatory environment poses new challenges to corporate legal counsel – and brings golden opportunities, too.

Danny Kan, chief counsel (overseas) and joint company secretary of Ping An Insurance (Group), says that China and Western countries have systematically expanded extraterritorial jurisdiction over the years, giving rise to new opportunities and compliance challenges.

“Corporate management and the compliance department need to think outside the box (assuming that Chinese laws and regulations only regulate transactions within the borders of China) and embrace a new mindset (that transactions can be subject to laws and regulations from multiple jurisdictions) to undertake compliance work from the perspective of cross-border compliance,” says Kan.

A case in point includes the Futures Law (Draft) published by the National People’s Congress in April this year, which includes laws and listing rules across borders and regions, taking into account the fact that many Chinese companies have pursued a listing in A-share and Hong Kong stock markets in recent years.

The Hong Kong Stock Exchange has recently sought views on proposals relating to the listing regime for overseas issuers. “The ever-changing market circumstances may possibly lead to updates to relevant laws and regulations,” says Natalie Li, a legal counsel at Ping An Insurance (Group). “Companies seeking an A-share or Hong Kong listing need to keep up with the latest regulatory changes, and plan ahead to ensure smooth sailing.”

Zhou Fei, chief risk control officer and legal director of Hong Kong-listed Fullshare Holdings, says it is necessary to keep a close eye on compliance issues, both within and outside borders. In particular, he points to China’s new Securities Law, effective from March last year, which has set the bar higher for stock issuances and information disclosures by listed companies.

Zhou stresses that what is always needed is to keep abreast of the evolving regulatory change at home and abroad, and provide training for company executives and the board of directors.

Zhang Meng, the risk and compliance director of Jinmao Capital, believes the most notable addition among the laws and regulations launched in the first half of 2021 in the field of private equity is the Several Provisions on Strengthening the Regulation of Privately Offered Investment Funds issued by the China Securities Regulatory Commission.

“The new regulation reiterates and reinforces the bottom-line behaviours and code of conduct that are mandatory for private equity funds,” says Zhang. “This will have a profound impact on the industry’s development.”

Zhang highlights the potential risks that merit close attention across the lifespan of a private equity fund. At the fundraising stage, he advises that relevant departments and personnel tighten controls on approaches that the fund is promoting, and strengthen staff training, so as not to be considered illegally sourcing capital publicly.

At the investment stage, Zhang says a lack of understanding of the industry and market circumstances that a target enterprise is involved in will bring hidden troubles and lead to a lost bet, given that the target enterprise of private equity funds is typically privately held companies with low quality of information disclosures.

At the management stage, Xu Qiang, legal manager of Jinmao Capital, says that the investees’ operational compliance, especially financial management, stands out as a key issue, and is likely to become a hidden risk to the portfolio’s safety.

Xu says fund managers need to clearly define the corporate government regime of the investee in preliminary investment agreements, and set up and assign a professional post-investment management team via the fund to participate in, supervise and take charge of decision-making and financial management of the investee.

At the exit stage, Xu says it is necessary to explore a diversified exit mechanism based on the overall business characteristic and market circumstance for which the investee is involved.