Introduction
On February 17, 2023, the China Securities Regulatory Commission (CSRC) promulgated the Trial Measures for the Administration of Overseas Issuance and Listing of Securities by Domestic Enterprises (the “Trial Measures”), along with its five supporting guidelines [1] (collectively, the “New Rules on Overseas IPOs” or “New Rules”). The New Rules on Overseas IPOs stipulate the duties and obligations of intermediaries, especially the securities companies, securities service providers and practitioners (collectively, the “securities companies”), in the overseas securities offerings and listings by Chinese companies, and provide for the supervision and administration by the CSRC and the competent regulators under the State Council. In addition, in response to the journalists’ questions on the New Rules, CSRC officials stated that the “administration” of filing for overseas listings will be implemented by clarifying the duties of intermediaries and strengthening regulatory oversight and coordination. This article intends to tease out the duties and obligations of securities companies under the New Rules for reference and discussion.
I. Duties and Obligations of Securities Companies
1. Prudent Examination and Verification
(1) Principles of Examination and Verification
Article 12 of the New Rules stated that “Securities companies that conduct overseas listings affairs on behalf of Chinese companies shall ensure the authenticity, accuracy and completeness of the documents prepared and submitted by them and express no opinions in such documents in any way that may distort or derogate the national laws and policies, business environment and judicial situation in accordance with the national laws, administrative regulations and relevant policies, following generally accepted business standards and ethics and by performing statutory duties in a strict manner.”
Securities companies shall fully inspect and verify the filing materials to avoid (i) contradiction, inconsistent expressions and substantial discrepancy of the same fact, in the materials; (ii) ambiguous expressions and illogical context that seriously hinder understanding; (iii) failure to fully demonstrate the satisfaction by a listing applicant of the identification standards as provided for in Article 15 of the Trial Measures; and (iv) failure to give a prompt report or statement of any material matter.
(2) Obligations of Prudential Verification and Demonstration on Listing Applicants Subject to Filing Requirements
The Supporting Guideline No. 1 states that, for a listing applicant does not fall into the circumstances prescribed in Item 1 [2] of Article 15 of the Trial Measures but submits the application for overseas listing pursuant to the relevant regulations on non-domestic (regional) listing applicants and discloses the risk factors that are mainly related to domestic activities, securities companies shall, based on the principle of substance prevailing form, comprehensively demonstrate and identify the applicability of filing requirements to the listing applicant.
As the above mentioned, where the risk factors disclosed in a listing application submitted pursuant to relevant regulations of the overseas stock exchange on which a listing applicant intends to list are mainly related to its domestic assets and business (“substance”), even if the listing applicant does not fall under the circumstances stipulated in Item (1) of Article 15 of the Trial Measures (“form”), securities companies shall still conduct comprehensive demonstration and identification in respect of the applicability of filing requirements to the listing applicant.
It should be noted that, considering the New Rules do not provide for a more detailed explanation as to the “form” and “substance”, in event of uncertainty about whether a listing applicant shall file with the CSRC, this article, out of caution and in absence of detailed implementing rules of the New Rules or more filing precedents, recommends securities companies and other intermediaries, based on comprehensive analysis and identification, take advantage of the filing consultation mechanism issued by the CSRC (see “3. Consultations with CSRC before Submission of Filing Reports” in this Chapter for details), to assist the listing applicant in consulting with the CSRC to determine whether the filing requirements are applied to the listing applicant.
(3) Obligations of Prudent Examination and Careful Verification of the Contents of Filing Reports
- Sponsor’s Undertakings Regarding the Content of a Filing Report
The New Rules stipulate that, for the filing of overseas listings, sponsors and relevant personnel shall issue a letter of undertaking stating that “We have prudently examined and carefully verified the filing report and confirm that the information in the filing report is authentic, accurate and complete without any false records, misleading statements or material omissions. We undertake to bear corresponding legal responsibilities for any violation.”
Therefore, a sponsor, the sponsor’s representatives, or the responsible person of an IPO project shall prudently examine and carefully verify the information in filing reports. Given that some information in a filing report may not be necessary to be reviewed by a sponsor as required by the overseas stock exchanges, and that the CSRC sets higher standards for the obligations and means of prudential examination than that of some overseas securities regulators, the sponsor will come under strong pressure and be of much responsibility for due diligence investigation.
- Required Contents of Filing Reports
The Supporting Guideline No.2 states that a filing report must contain the following: (a) basic information of the listing applicant: basic information, history (or changes for a non-initial filing), information about shareholders and actual controllers, information of invested companies and holding companies (or changes for a non-initial filing), capital stock (or changes for a non-initial filing), and information about its listing/quoting in other securities markets (if applicable); (b) operation and corporate governance of the listing applicant (or changes for a non-initial filing): business overview, financial position, tax payment, corporate governance, confidentiality and archive management; (c) issuance and listing plan: specific issuance plan, use of raised funds, listing plan (applicable to non- issuance of shares), split-listing plan (applicable to spin-off of Chinese listing applicants), issuance and listing progress (applicable to overseas issuance of securities following overseas issuance and listing); (d) asset transaction plan of domestic companies (if applicable); (e) application plan for “full circulation” (if applicable); and (f) commitments made for previous filings and the performance of the commitments (if applicable).
It is worth noting that the above information is the minimum requirement for a filing report, and apart from that, a securities company should also assist a listing applicant in confirming other important information relating to overseas issuance and listing and include the related important information in the filing report.
In spite of currently no specific requirements by the CSRC of the means of due diligence investigation conducted by sponsors under the New Rules, we will analyze the due diligence investigation requirements under the New Rules after the promulgation of the detailed rules for due diligence investigation by sponsors under the New Rules and based on future filing instances.
2. Prudential Supervision by Securities Companies on Domestic Listing Applicants
The New Rules state that a securities company shall perform the prudential supervision on a Chinese company that intends to go public overseas so as to prevent it from being under the following circumstances:
- The listing applicants are expressly prohibited to go public by laws, administrative regulations or other relevant national policies mainly as a result of (a) being included in the Negative List for Market Access issued by the National Development and Reform Commission and the Ministry of Commerce; (b) being determined as seriously dishonest subject as prescribed in the Guiding Opinions of the State Council on Establishing and Perfecting a System of Joint Incentive for Honest and Joint Punishment of Dishonesty and Accelerating the Development of Social Integrity Development (Guo Fa [2016] No.33); or (c) its improper industrial policies, work safety, and industry regulation.
- The proposed offering may jeopardize national security as determined by the competent regulators under the State Council. That means, due to the investment by foreign investors in Chinese companies after its going public overseas, with respect to the overseas IPOs of domestic companies under foreign investment security review, network security review or other relevant laws and regulations, securities company shall assist the domestic companies in applying for security review in accordance with the law before submitting filing applications, including foreign investment security review and network and data security review.
- The listing applicant, its controlling shareholder or actual controllers has or have committed a criminal offence in the last three years, including corruption, bribery, embezzlement or misappropriation of property, or disruption of the order of the socialist market economy. If the criminal offender is a part of the listing applicant through an acquisition following the offender’s crime, in principle, the listing applicant shall not be deemed as having been involved in the circumstances, unless the listing applicant’s main business income and net profit mainly come from the offender. The last three (3) years shall be counted from the end date of a sentence.
- The listing applicant is under investigation for suspected of committing a crime or for gross violation of laws and regulations without explicit conclusion of investigation yet. The gross violation of laws and regulations above, in principle, refers to a violation leading to heavy environmental pollution, heavy casualty, considerable losses of national economic interests and other adverse social impacts.
- The listing applicant’s controlling shareholder or shareholders who are controlled by the controlling shareholder or actual controllers is or are involved in ownership disputes over the equity held by them. Attention should be paid to whether the listing applicant’s equity held by the controlling shareholder or by shareholders controlled by the controlling shareholder or actual controllers is pledged, frozen, or involved in litigation or arbitration, causing a major ownership dispute.
In case of any of the above circumstances occurring, the securities company shall remind the listing applicant to postpone or terminate the overseas listing and make promptly report to the CSRC and the competent regulators under the State Council.
3. Consultations with CSRC before Submission of Filing Reports
(1) Channels
The securities company shall assist the listing applicant in submitting the consultation application and relevant materials through a filing management system (“Filing System”) for the listing applicant’s overseas listing and to consult with the CSRC in written form, by phone, on video calls, or by face-to-face.
For issues complex to be resolved in written form or by phone but only by face-to-face, the listing applicant, the securities company or the securities service provider may apply for video call (recommended) or on-site consultation. It will be more effective to raise several issues on a single occasion.
(2) Creating Accounts and Use in the Filing System
(3) Principles of Consultation
The securities company or the securities service provider shall give play to its professional advantages to assist the listing applicant to confirm the issues to be resolved and control the quality of the materials to ensure the consultation efficiency.
During the consultation, the listing applicant, the securities company or the securities service provider shall not provide or disclose any confidential or inside information.
The reply from the filing management department does not indicate any substantive judgment or guarantee on the issues concerning the listing applicant, and the listing applicant, the securities company or the securities service provider shall not take the reply as the basis for judging whether the issuance and listing comply with relevant laws and regulations.
(4) Contents of Consultation
- Before submitting filing materials, the securities company may assist the listing applicant in applying for consultation through the Filing System about: (a) the regulatory policies and control structure in the listing applicant’s industry, (b) the applicability of filing requirements to the listing applicant, and (c) other matters as deemed necessary to be consulted about.
- During the filing, the securities company may assist the listing applicant in resolving the following: (a) questions about the requirements of supplemental filing materials, (b) new situations or changes happening during the filing which may impact on overseas listings, and (c) other matters as deemed necessary to be consulted about.
It should be noted that the filing management department will not accept any application for consultation about any non-substantial matters or any inquiry about specific progress or internal arrangements.
(5) Timing for Consultation
- During the period (generally five working days) commencing from the date when filing materials are received to the time when the supplemental filings are requested for the first time, the filing management department does not accept any application for consultation.
- The duration of consultation in the filing process shall not be counted in the period (thirty (30) working days) for the listing applicant to supplement the filing materials, i.e. the duration of the consultation is not subject to the thirty (30) -working days for supplementation and correction.
(6) Application Materials for Consultation
The application materials for consultation shall be submitted to the Department of International Affairs of the CSRC.
The materials shall include: (i) basic information of the listing applicant, including but not limited to the stock exchange chosed, the method of listing, and the equity structure and control structure of the listing applicant, as well as the basic information, primary business, production and operation, and financial standing of the controlling shareholder and actual controllers; (ii) issues to be consultant about and preliminary judgments and opinions, which are mainly to consult about and confirm the supplemental filing raised by the filing management department and the issues, and to put forward initial opinions on such issues; (iii) other matters necessary to be stated; (iv) contact person and contact information; (v) supporting documents to prove the above information (submitted as attachment).
4. Issuing Report after Listing
(1) Specific Overseas IPO Case Report
Upon successful overseas listing, the listed issuer shall, together with the sponsor or lead underwriter, submit a report on the overseas listing (the “Post-listing Report”).
The Supporting Guideline No.3 outlines the content to be contained in a Post-listing Report as follows:
(2) Report on Change in Listed Issuer after Overseas Listing
- Change of Control
In the event of any change of control of a listed issuer after overseas listing, the listed issuer and the sponsor or the lead underwriter shall report the following to the CSRC within three (3) working days after the relevant events occur and are announced:
- Other Material Changes After Listing
In the event that, after overseas IPO, the issuer is (a) subject to investigation, punishment and other sanctions imposed by overseas securities regulatory agencies or other authorities, (b) change of listing status or listing segment, or (c) voluntary or mandatory delisting, the issuer and its sponsor or lead underwriter shall submit a report to the SCRC stating the situation and date of such within three (3) working days of the occurrence and public announcement of such a material event above.
It is mainly worth noting that, in the event of material changes of the listed issuer’s main business after the overseas listing such that the filing requirements no longer applied to the listed issuer, the listed issuer and its sponsor or lead underwriter shall submit an ad hoc report to the CSRC on the situation within three (3) working days after the occurrence of such changes.
5. Filing Obligations of Overseas Securities Companies
The New Rules state that an overseas securities company engaged for overseas listing of the Chinese listing applicant as a sponsor or lead underwriter shall perform the following filing procedures:
II. Securities Companies’ Inability to Normally Perform Their Duties
The New Rules stipulate that in case of the inability to normally perform duties caused by the events that: (i) the domestic securities service provider engaged by a listing applicant is subject to the restriction of business activities, suspension of operation for rectification, appointment of other service providers for custody and takeover, and other sanctions that are imposed by the CRSC legally and have not been lifted; (ii) the securities company engaged by the listing applicant and its signatory are subject to the curb of market access that is imposed by the CSRC legally and has not been lifted, the securities company shall report to the CSRC promptly, and the CSRC shall suspend relevant filing procedures.
Upon elimination of the aforesaid circumstances, the listing applicant may apply to the CSRC for resuming filing procedures, and the CSRC shall do so pursuant to relevant regulations.
III. Supervision on Securities Companies and Legal Liabilities
1. Regulatory Measures
CSRC and other relevant authorities of the State Council may, according to their respective functions and duties, conduct supervision and inspection or investigation on overseas IPO and listing of domestic enterprises conducted by securities companies in China, and may, depending on the seriousness of the case, order domestic enterprises which conduct overseas IPO and listing, as well as securities companies, securities service agencies and their relevant practitioners which provide relevant services to such domestic enterprises in violation of the New Rules to make corrections, conduct supervisory talks, issue warning letters or take other measures.
In addition, in the circumstances of serious violation against the new offshore listing rules or other laws and administrative regulations, the CSRC may ban the relevant personnel from the securities market. If such violation constitutes a crime, they shall be investigated for criminal liabilities in accordance with the law. It is noteworthy that, according to the New Rules provide that the signatories of the securities company are prohibited from entering into the securities market by CSRC and such measures have not been lifted, rendering them unable to normally perform their duties, other overseas IPO filing procedures in which they are the signatories may be suspended by the CSRC, which will have a significant impact on the filing and listing schedules.
2. Administrative Penalties
3. Regulatory Measures against Offshore Securities Companies’ Failure to File as Required
The New Rules state that the CSRC may notify the offshore securities regulatory authorities of offshore securities companies’ failure in filing as required through the cross-border regulatory cooperation mechanism.
With respect to the cross-border regulatory cooperation mechanism, the CSRC and the Securities and Futures Commission of Hong Kong (SFC) entered into a memorandum of understanding on regulatory cooperation (the “Regulatory Memorandum”) on February 17 to further strengthen the regulatory cooperation on domestic companies listing in Hong Kong. The Regulatory Memorandum provides for regulatory cooperation arrangements and procedures in areas such as issuance and listing, cross-border enforcement, supervision on intermediaries, and information exchange.
The above cross-border regulatory cooperation mechanism leaves its specific implementation modes to be further studied after the effectiveness of the New Rules, as the Regulatory Memorandum has not yet been published.
Conclusion
With the promulgation of the New Rules on Overseas IPOs and its supporting guidelines, the domestic regulatory authorities have gradually consolidated the duties and obligations of securities companies on overseas listings of domestic companies and, as a result, overseas securities companies are facing the pressure of dual supervision by domestic and offshore securities regulatory authorities. The regulatory requirements of the New Rules on Overseas IPOs are a test and responsibility to securities companies and play a positive role in guiding the regulated, ordered and standard services provided by the securities companies of overseas listings.
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Five supporting guidelines refer to: the Supporting Guideline for Regulatory Rules—No. 1 in Overseas Issuance and Listing (“Supporting Guideline No.1”), the Supporting Guideline for Regulatory Rules—No. 2 in Overseas Issuance and Listing: Content and Format of Filing Materials (“Supporting Guideline No.2”), the Supporting Guideline for Regulatory Rules—No. 3 in Overseas Issuance and Listing: Content of Reports (“Supporting Guideline No.3”), the Supporting Guideline for Regulatory Rules—No. 4 in Overseas Issuance and Listing: Consultation on Filing (“Supporting Guideline No.4”), and the Supporting Guideline for Regulatory Rules—No. 5 in Overseas Issuance and Listing: Filing of Offshore Securities Companies (“Supporting Guideline No.5”).
An overseas listing will be deemed domestic enterprise issuing and listing overseas indirectly if the issuer satisfies both of the following conditions: (1) more than 50% of its audited consolidated financial indicators (operating revenue, total profits, total assets or net assets) for the most recent fiscal year is accounted for by the domestic company; or (2) major business activities are conducted in the Chinese mainland or the main places of business are located in the Chinese mainland, or the majority of the senior management personnel in charge of business management are Chinese citizens or domicile in the Chinese mainland.
