To attract more innovative businesses to the Star Market, regulators raised the threshold for issuers and introduced a negative list that restricts fintech ventures and prohibits real estate companies
Since the launch of the Science and Technology Innovation Board (Star Market), the criteria for weighing the science and technology innovation attributes of enterprises proposing to list have been the focus of attention. In March 2020, the China Securities Regulatory Commission and Shanghai Stock Exchange issued the Guidelines for the Assessment of Science and Technology Innovation Attributes (for Trial Implementation) and the Interim Provisions for the Filing by, and Recommendation of, Enterprises Making Offerings and Listing on the Star Market.
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These rolled out the “science and technology innovation attribute” assessment system, set the quantitative criteria for the science and technology innovation attributes of enterprises, enhanced the transparency of registration reviews and brought to bear the key role of gathering high-quality scientific and technological innovation enterprises onto the Star Market.
However, issues arose, such as companies having too low an R&D staff ratio, insufficient scientific and technological innovation capabilities, and low market recognition in the industry in question. Regulators decided to optimise and adjust the Star Market’s “science and technology innovation attribute” assessment system and raise its “hard science and technology” threshold. To this end, they revised the two documents, on 16 April 2021.
This upgrading of the system is chiefly seen in three aspects:
(1) Full reflection of the core role of scientific and technological talent in innovation, adding the indicator that R&D personnel are to account for more than 10% of the workforce, and revising the “3+5” science and technology innovation attribute assessment benchmarks to “4+5”. More specifically, this includes:
. Four conventional indicators that need to be satisfied:
(i) R&D outlays of at least 5% of operating income or totalling at least RMB60 million (US$9.3 million) during the past three years, and, in the case of the software industry, R&D outlays of at least 10% of operating income;
(ii) R&D personnel at least 10% of the workforce during the year in question;
(iii) having at least five invention patents that give rise to the income from the main business (not applicable to the software industry); and
(iv) operating income compound growth of at least 20% during the past three years, or at least RMB300 million during the past year (if the fifth set of listing criteria is used, the RMB300 million in operating revenue may be obviated).
. An additional five indicators of which any one needs to be satisfied:
(i) the core technology owned by the issuer being recognized as having a leading or guiding role internationally, or being of great significance to national strategy;
(ii) the issuer, as a main participant, or the issuer’s core technical personnel, as main participants, having won the National Science and Technology Progress Award, the National Natural Science Award or the National Technological Invention Award and the relevant technology being applied in its main business;
(iii) the issuer having under taken or led a major dedicated national science or technology project related to its main business and core technology;
(iv) the main product (service) arising on the basis of the issuer’s core technology being key equipment, a key product, a key part or component, a key material, etc. encouraged, supported and promoted by the state and substituting for an import; or
(v) having a total of at least 50 invention patents that have given rise to the core technology and main business revenue.
(2) Express establishment of a negative list system where enterprises in different industries and sectors are furthermore classified as supported, restricted or prohibited, in terms of assessment for Star listing.
. Supported: “Hard science and technology” enterprises in new generation information systems; high-end equipment; new materials; alternative energy; energy saving and environmental protection; and biopharmaceuticals.
. Restricted: Enterprises that involve innovation in financial technology, models, etc.
. Prohibited: Real estate enterprises and those mainly engaged in financial and investment business.
(3) There is an emphasis on the responsibilities of each participant in the innovation attribute assessment, and improvement of the pool of experts, and the system of soliciting comments, giving rise to regulatory co-operation, including:
. An issuer must accurately identify its industry and prudently and objectively assess whether it has science and technology innovation attributes; issuers are particularly warned not to “piece together indicators” (e.g., padding R&D outlays, buying patents, etc.), or exaggerate their innovation technology level or technical standards.
. Sponsors are required to do due diligence on issuers’ self-assessment, and verify the basis for determining the issuer’s science and technology innovation attributes. Sponsors must also assess the issuer’s technological advancement and other such factors in making a comprehensive determination, and not conclude that the issuer fits the Star Market based simply on the relevant quantitative indicators.
. For the Shanghai exchange, as specified in the offering review, it is to determine whether the issuer’s self-assessment is objective and the sponsor’s verification and checking are adequate based on the principle of substance over form. The exchange may, in respect of the issuer’s science and technology innovation attributes, carry out a formal consultation procedure with the Science and Technology Innovation Advisory Committee of the Star Market, render its review determination as to whether the issuer is in keeping with the positioning of the Star Market by referring to the advisory opinion, and issue its review opinion by the specified procedure.
In the short term, the upgraded assessment system raises the threshold for listing on the Star Market. In particular, the classification of industries will cause certain enterprises to turn to other capital markets. In the medium term, the im- improvement will enhance the transparency and normalisation of the review process, and fundamentally raise the quality of companies listed on the Star Market. Finally, the responsibilities of enterprises, sponsors and the exchange are clearly defined, which will improve the capital market environment on an ongoing basis.
Daniel Liu is a partner at Commerce & Finance Law Offices. He can be contacted on +86 21 6019 3260 or by email at liutao@tongshang.com
