Feb 06, 2021 06:18 AM

China Attacks ‘Shadow Shareholders’ in New IPO Guidelines

China has stepped up IPO scrutiny following the abrupt suspension of Ant Group’s potentially record-breaking IPO.
China has stepped up IPO scrutiny following the abrupt suspension of Ant Group’s potentially record-breaking IPO.

Companies seeking to raise funds by selling shares in China will have to fully disclose and terminate “shadow shareholder” arrangements under guidelines issued Friday by China’s top securities regulatory commission.

As part of intensified scrutiny of initial public offerings (IPOs) in the wake of the suspension of Ant Group. Co. Ltd.’s mega flotation in November, the China Securities Regulatory Commission (CSRC) issued new guidelines on how IPO companies are to divulge shareholder information. The new rules include more-detailed requirements on disclosure of multi-layered indirect shareholders and lock-up periods in a move to combat illegal shareholding and improper transfer of benefits.

Some investors hide behind registered shareholders of pre-IPO companies through shareholding entrustments and multi-layered shareholding structures, Wu Nianwen, deputy director of the CSRC’s issuance department, said at a press conference. Such shadow shareholders might have obtained pre-listing shares at a low price through bribery and the transmission of benefits, Wu said.

Authorities have intensified their focus on IPOs since the CSRC accused Shanghai’s tech board of too quickly carrying out its review of Ant Group’s application. Sponsors of new listings on Shanghai’s tech board will face tough onsite supervision and inspection when regulators question the viability of candidates or the quality of their information disclosure, according to a notice issued Wednesday.

During a meeting of the listing committee of the Shenzhen Stock Exchange Feb. 2, a review of Shanghai Canxing Culture & Media Co. Ltd.’s IPO application was terminated as the exchange demanded that the issuer explain a multi-layered limited partnership shareholding structure.

Under the new guidelines, IPO issuers will be required to disclose shareholder information truthfully, accurately, and completely. Issuers must terminate past shareholding entrustments before submitting an IPO application. And in the

prospectus, issuers must disclose any potential disputes over shareholding entrustment agreements as well as how the agreements started, evolved and terminated, the CSRC said.

In IPO applications, issuers have to disclose whether direct and indirect shareholders include individuals who are prohibited by laws or regulations from holding shares and whether IPO intermediaries or senior executives are direct or indirect shareholders, the commission said.

If an individual shareholder’s share purchase price was abnormal, an IPO intermediary must verify basic shareholder information and the background of the share purchase. If a shareholder is a limited partnership or doesn’t have any actual business and has two or more layers of shareholding structure, the final beneficiary of the shareholding should be disclosed, according to the guidelines.

The CSRC and the stock exchange may work with supervision departments on anti-money laundering management and anti-corruption to address illegal shareholding problems.

The guidelines also require a 36-month lockup period for shares purchased by new shareholders within 12 months before an IPO application. The lockup requirement doesn’t apply to companies whose IPO applications were reviewed before Feb. 5.

The guidelines also require intermediaries like sponsor agencies and securities service agencies to verify shareholder information. The agencies should carefully look into shareholder agreements, transactions, sources of funds and payment methods, the CSRC said.

Contact editors Denise Jia ( and Bob Simison (

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