Recently, the China Securities Regulatory Commission (“CSRC”) issued the Measures for the Supervision and Administration of Non-listed Public Companies (Exposure Draft) (“the Regulatory Measures”), to solicit opinions from the public. Compared with issuance and regulatory system on listed companies, the Measures for the Supervision and Administration of Non-listed Public Companies has many institutional innovations, including not setting financial threshold, number of shareholders may exceed 200, not establishing organization like issuance review committee, not implementing sponsorship system, simplifying information disclosure and implementing hierarchical management, etc.
Measures have favorable effect on New Third Board and good for small and micro businesses to address difficulty in financing
The promulgation of the Regulatory Measures is the need of real economic development. ChiNext was set up to serve the SMEs and addressing the difficulty in financing of SMEs. However, the threshold of ChiNext entry is relatively high, and numerous small and micro enterprises do not meet listing requirements, thus it is difficult for these enterprises to leverage capital market for direct financing, and a large number of these enterprises need the service of capital market. On the other hand, while local over-the-counter market makes progress, slack regulation, excessive risks, and issues threatening public interests and regional financial stability also emerge. Therefore, the issuance of the Regulatory Measures is not only the precondition to prefect multilevel capital market and to introduce the New Third Board (Agency Share Transfer System) and other over-the-counter markets, but also the urgent need to ensure financial stability.
The lower access threshold and simplified approval procedures of the Regulatory Measures are good for expanding the New Third Board, and breaking restrictions on number of shareholders, which will greatly increase the number of participants of New Third Board market, and then promote the vitality of trade, enhance liquidity and increase attractiveness of the New Third Board market. Allowing unlisted companies to raise funds by means of private offering has enriched functions of the New Third Board, and confirmed that the New Third Board is not only the market for trading and investment, but also for financing. All natural person investors, legal person investors and other economic organizations who meet eligibility requirements of the investors may be the objects of private offering. Natural person investors who meet eligibility requirements may get access to the New Third Board. Hence the difficulty of financing problems of private capital can be resolved. In addition, after private offering, an unlisted company that the number of shareholders is less than 200 or accumulative financing amount of issued shares is lower than RMB10.00M within 12 months, can be exempted from applying to regulatory administration for approval, and is entitled to issue shares and file records thereafter. This is an efficient and convenient green financing channel for small and micro enterprises, and will undoubtedly further enhance the attractiveness of the New Third Board.
Securities companies to embrace wider earning mode; VC/PE to enjoy diversified exit channels
The breakthrough in the number limit of shareholders specified in the Regulatory Measures improved the liquidity of stocks of listed companies on the New Third Board market. The most obvious impact of improved trading activity on securities companies is that it increased securities companies’ income from stock market and commission. On the other hand, one of the most direct benefits of permitting financing via private placement to securities companies is proceeds from underwriting commissions. Meanwhile, financing functions will also enhance the attractiveness of the New Third Board. With the increase in the number of listed companies, the registration fee income of securities companies will increase accordingly. The Regulatory Measures laid the institutional foundations for the construction of multilevel capital market, securities companies will then be connected with such innovative businesses as private placement bond of SMEs on this basis and their earning channel will be expanded.
Following the Regulatory Measures, the OTC market will be gradually standardized, and trading volume will be increasingly active. The expansion process of the New Third Board will be further accelerated, and VC/PE firms will witness more investment opportunities; meanwhile, VC/PE exit channels will be diversified by promoting invested enterprises to trade in the OTC market, which is of great benefit to VC/PE institutions.