Just two years ago, Chinese internet companies were lining up for IPOs in the U.S. market, but their favor has since shifted towards local stock markets for the accessibility and higher valuations supposedly offered on the mainland.

Appetite for U.S. listings started to cool off in the beginning of 2015, since then nearly thirty U.S.-listed tech stocks have initiated privatization plans in seek of a domestic re-listing, among them are big names including Qihoo 360, Momo, Perfect World and Shanda Games. Reports show that not a single Chinese internet or tech company filed for a U.S. listing in the first quarter of this year.

What Is New Third Board And Why Are Startups Choosing It Over Main Boards

Even for a domestic IPO, Chinese companies seeking to go public have quite a few options to choose from as for which market they want to get listed. Shanghai Stock Exchange (SHSE) and Shenzhen Stock Exchange (SZSE) are two main boards of China’s stock market, but the listing threshold is higher, for example, they require listed companies to recorded sustained profitability, a condition most internet companies can’t meet in their first few years of operation.

Under these circumstances, China’s New Third Board, officially named the National Equities Exchange and Quotations (NEEQ), is becoming the primary listing destination for Chinese internet startups to clear private equity exit gridlock.

It was a year of explosion for the national over-the-counter equity market in 2015. The number of listed companies surged from more than 800 in June 2014 to nearly 2400 in May 2015. As of the end of 2015, it was home to 5,129 companies with a combined market cap of 2.46 trillion yuan ($374 billion USD), according to state media Xinhua.

The primary reason for the boom is that it has less stringent requirement for listing, providing an alternative financing means for small and medium enterprise, especially those in the high-tech sector. Moreover, the NEEQ offers a fast path to fundraising without getting stuck in the line of more than 700 firms waiting for a main board IPO, which are piled up after the government imposed an IPO halt.

What Kind of Internet Startups Are The Best Fit For NEEQ

The NEEQ is a good listing destination for most domestic internet startups, but not all of them.

According to Wang Pengfei, CEO of NEEQ-listed company Kuaipai, startups that have closed B round are best candidates for the market because they have passed a certain development stage and proved viable against other competitors in their vertical. “It would be too early for A round startups, and financing opportunities from NEEQ will help B round starups to avoid the Series C crunch”, said Wang.

Although the NEEQ has a registration-based listing system rather than the approval-based model adopted by SHSE and SZSE, capacity for profitability is still a key element highly valued by investors. So only those with sustainable business model are better candidates for the market.

At the same time, the NEEQ is not an ideal financing destination for super companies like due to its small capital amount. Data from Bloomberg showed that the total capitalization of the SHSE and the SZSE is at about US$6 trillion, more than 15 times greater than the NEEQ.

Despite the boom, there are still unstable undercurrents in the market, like a thin trading turnover and lack of proper regulation. The regulator is bringing in more changes to improve the listing and trading mechanisms. Since early this March, the board divided its listed companies into innovation market and basic market to manage companies at different development stages.