
China reveals qualification criteria for Shanghai tech board listings
China has unveiled details of the highly anticipated new technology and innovation board, which is set to adopt a registration-based system that should allow a shorter route to liquidity for PE and VC investors.
The new Shanghai board, first proposed in November by President Xi Jinping, is Beijing’s latest attempt to encourage domestic technology companies to list at home instead of overseas. IPOs on US exchanges have historically been the preferred option, but Hong Kong has begun to attract some high-profile offerings after loosening restrictions on companies that are pre-profit and have dual-class share structures.
China Securities Regulatory Commission (CSRC) and the Shanghai Stock Exchange issued statements on January 30 saying the new board will accept pre-profit companies - as well as pre-revenue biotech firms - to list if they meet certain criteria. Overseas-listed companies with variable interest entities (VIEs) or dual-class share structures will also be allowed to list. VIEs are used to separate offshore investors from assets to which they cannot have direct exposure. Companies with either of these structures are barred from China's main boards due to protect retail investors' interests.
The new board will also differ from its domestic peers by replacing the approval-based listing system with a registration-based regime, much like Hong Kong. Listing applicants will be screened by the Shanghai Stock Exchange for six to nine months and then subjected to a 20-day review by the CSRC. At present, companies can wait years to go public in Shanghai or Shenzhen.
Other qualification criteria relate to sector and financial health. Regulators will favor applicants involved in new generation IT, high-end products manufacturing, new energy and materials, energy-saving and environmental protection, and biotech.
Profitable companies must achieve a market capitalization of at least RMB1 billion ($149.2 million) and have reported RMB50 million or more in profit over the previous two years.
Pre-profit applicants with zero revenue will be required to reach a market cap of RMB4 billion and show evidence that their major products have received domestic regulatory approval and have significant market potential, among other requirements. Backing from established PE or VC investors is one form of endorsement. Meanwhile, pharmaceutical companies must have at least one drug in phase-two clinical trials.
The hurdles are lower for businesses that have yet to turn a profit but are generating some revenue. A market cap of RMB1.5 billion is sufficient if revenue hit RMB200 million the previous year and R&D expenditure is equal to at least 15% of revenue over the past three years. Those that fail to meet the R&D threshold must have posted more revenue and achieve a higher market cap.
For companies listed in Shanghai and Shenzhen, prices can fluctuate by up to 10% per day before being suspended. There will be no threshold for the new board for the first five trading days. After that, a rise or fall of no more than 20% will be permitted.
The draft rules are currently open for public consultation until the end of February. No timeline has been announced for launching the board, but it is expected to be ready by June.
Last year, guidelines were issued for China Depository Receipts (CDRs), a system through which overseas listed technology companies could sell shares domestically. The likes of Alibaba Group and JD.com responded favorably to the proposals, but traction has since been lost. Xiaomi was expected to be the test case, but it pulled out after failing to agree on pricing terms with the regulator.
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