Caixin
Apr 17, 2019 05:21 AM
FINANCE

China Rolls Out Detailed Rule for Tech Board IPO Sponsors

nvestment banks and brokerages backing IPOs on China’s new tech board need to buy 2%-5% of the shares and hold them two years under Shanghai Stock Exchange rule. Photo: VCG
nvestment banks and brokerages backing IPOs on China’s new tech board need to buy 2%-5% of the shares and hold them two years under Shanghai Stock Exchange rule. Photo: VCG

China spelled out the details of a rule requiring that sponsors of initial public offerings (IPOs) on the new Nasdaq-style high-tech board invest their own money in the IPOs and hold the stocks for two years.

Sponsors of an IPO on the new Shanghai Science and Technology Innovation board must buy 2%-5% of the new shares they help to sell, according to a guideline published Tuesday night by the Shanghai Stock Exchange, where the new board will be launched.

Sponsors, often investment banks and brokerage firms, help guide and advise companies through the IPO process to ensure they meet regulatory obligations. In global markets, sponsors are not required to take a stake in the company, but they sometimes do so to provide additional credibility for new investors considering an IPO. Sometimes underwriters of an IPO can also assume the role of sponsors.

The rule, which confirms an earlier draft version, specifies different levels of IPO share subscriptions by sponsors.

For offerings of less than 1 billion yuan ($150 million), sponsors need to subscribe for 5% of the shares offered, but no more than 40 million yuan of shares. For offerings between 1 billion and 2 billion yuan, the subscription ratio is 4%, or no more than 60 million yuan; and for offerings between 2 billion and 5 billion yuan, 3%. For offerings of more than 5 billion yuan, the minimum subscription is 2%.

The new board will focus on companies from technology and other high-growth sectors like biotech, similarly to the Nasdaq in New York. It will also mark a major shift from China's existing boards by using a market-based registration system for new listings, aimed a shortening the current process which requires far more time and major regulatory vetting.

Sponsors should invest in the stocks through their investment subsidiaries, according to the new guideline. These subsidiaries should use their own funds, not borrowed money, to subscribe for IPO shares, the rule says.

These holdings have a two-year lockup period after the date of the IPO. The sponsors participate in the IPOs as strategic investors but also assume the responsibility for proper due diligence, so their lockup period should be longer than the 12 months required for general strategic investors but shorter than the 36 months required for the actual controlling shareholders of the issuers, the Shanghai bourse said.

When the lockup period expires, the offload will be subject to current rules on the selling of stocks by big shareholders. For sponsors who hold 5% of a company’s stake, the number of shares sold through bidding transactions within 90 days shall not exceed 1% of the company’s total shares, and selling through block trading should not exceed 2% of the total shares.

Some smaller brokerage firms may feel pressure from the investment requirement, which might lead to a rise in underwriting and sponsorship fees, normally at 5% of the total offerings, an investment banker told Caixin.

Contact editor Han Wei (weihan@caixin.com)


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