China’s revised Securities Law allows unprofitable companies to list on stock exchanges, introduces stricter information disclosure rules, and stipulates heftier fines for rule-breakers.
Why it matters: The removal of the profitability requirement for IPOs will be a boost to fledging tech firms, often unprofitable. This change makes it easier for them to list, broadening their funding options away from just institutional investors to all investors regardless of size.
“It could be a precursor to a lot more private investment in tech firms.”
—Jonas Short, Head of Beijing Office at Everbright Sun Hung Kai
Details: The revised law passed at the National People’s Congress on Dec. 28 (in Chinese).
- Legislators scrapped the requirement of “sustained profitability” for new listings, replacing it with the lower threshold of “sustained operation.”
- “It allows VC firms to get an exit strategy which makes them much more amenable to investing in tech firms,” said Jonas Short, Head of Beijing Office at Everbright Sun Hung Kai told TechNode.
- Before the revision, regulators were the gatekeepers, but moved slow and built a huge IPO backlog. The revision devolves review and approval responsibilities to the stock exchanges themselves.
- Yicai reported that Cheng Hehong, China Securities Regulatory Commission director-general said that rolling out the registration-based IPO system wholescale will not happen overnight.
- Companies should abide by stricter information disclosure rules so that investors can make informed decisions.
- The law hiked up the upper limit of penalties for fraudulent offerings from RMB 600,000 to RMB 20 million ($2.9 million)
- It sets out steps for smaller investors to bring class-action suits.
- The revised law comes into force Mar. 1 2020.
Context: Shanghai’s Nasdaq-style tech board pioneered this emphasis on operations over profit, allowing a loss-making chipmaker to issue shares in March.
- This round of amendments to the Securities Law began in 2013 and went before the NPC in April 2015. The stock market crash in June that same year interrupted its revision.
- Peng Bing, Peking University law professor wrote that from the perspective of investor protection, the new law does not expand the definition of securities sufficiently to bring all direct financing activities within its regulatory vision.
- This version also did away with exemptions for small sums and equity-based crowdfunding featured in previous drafts, which is “bound to disappoint industry,” he said.
- Economic policymaking is prioritizing supply-side reform and preventing financial risks, named as one of three critical battles China must win.