China Loosens Grip on Long-Term VC Investors’ Equity Disposal
China's securities regulator issued new rules to grant preference to long-term venture capital investors on sales of their pre-initial public offering (IPO) shares of listed companies, in an effort to encourage investors to support business startups.
The new rules, which ease restrictions on venture capital shareholders to offload stocks of listed companies, aim to provide differentiated policy support to venture capital funds seeking long-term and value investments, China Securities Regulatory Commission (CSRC) spokesperson Gao Li said on Friday at a press conference.
China has tightened scrutiny of big shareholders’ equity disposal after the market meltdown in the summer of 2015, when 40% of the market’s value was wiped out in few months. But the new differentiated rules highlight CSRC’s changing stance as it embraces innovation and startups.
According to the new rules, venture capital funds which have invested in a listed company for over four years before its IPO are allowed to sell no more than 1% of the company’s total shares within one month. Investors who have invested for more than three years but less than four are allowed to sell no more than 1% of the company’s total shares in two months.
Under existing rules, investors are allowed to sell such amount of shares during a period of 90 days. For venture capital investors who have invested in the company less than three years, the restriction remains as three months.
CSRC’s Gao said the revisions aim to encourage venture capital funds to support startups through provision of appropriate regulatory support while maintaining market fairness.
Venture capital shareholders have to follow the existing rules on disclosure requirements, selling proportion limits and restrictions on buyers of such sales, CSRC said.
Under the current rules issued last May, major shareholders are barred from transferring more than 2% of a company’s equity to a third party via so-called block trades, or privately negotiated transactions involving a large amount of securities. Buyers of shares through block trades are not permitted to sell the shares again within six months, a move to prevent major shareholders from skirting the rules via a third party.
The CSRC also requires major shareholders to disclose their stake-selling plans 15 trading days in advance, and to report on the progress and results of such sales.
Gao expected the rules changes to have a minimal impact on the market because most VC investors on average hold less than 5% of the listed companies’ total shares.
The new rules will go into effect on June 2. Gao said the CSRC will next work with the Asset Management Association of China and the Shanghai and Shenzhen stock exchanges to issue detailed guidelines for implementing the new rules.
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