Feb 26, 2021 08:50 PM

Shenzhen Bourse Wants to Shine a Light on Shady IPO Shareholders

A Beijing-based investment banker told Caixin that while tighter regulation is good for investors, the workload of IPO sponsors has surged.
A Beijing-based investment banker told Caixin that while tighter regulation is good for investors, the workload of IPO sponsors has surged.

Companies seeking to list on Shenzhen’s Nasdaq-style market for high-growth, high-tech startups have been told to reveal more information about their shareholders, as regulators intensify efforts to stop illegal or unethical financial conduct by weeding out organizations and individuals hiding their true identities and preventing pre-IPO investors bagging illicit profits.

The Shenzhen Stock Exchange has tightened supervision of shareholder information disclosure requirements for candidates for the ChiNext board, according to a notice recently released to IPO sponsors and legal advisers and seen by Caixin. Listing prospectuses will in future be required to list entrusted shareholding agreements and the backgrounds of any new investors in the 12 months preceding the IPO application. Sponsors and legal advisers will also be obligated to verify the accuracy of shareholder information.

The new requirements follow the issuance of a guideline by the China Securities Regulatory Commission (CSRC) on Feb. 5 to improve information disclosure by IPO candidates about their shareholders. At a briefing to discuss the document, Wu Nianwen, deputy director of the CSRC’s issuance department, said some investors were hiding behind registered shareholders of pre-IPO companies through entrusted shareholdings and multi-layered shareholding structures. These “shadow shareholders” may have obtained their shares at a low price before the listing through bribery or the offer of some other benefits to the listing company or its employees, Wu said.

Regulators have intensified their focus on IPO candidates since the CSRC accused the STAR Market, the Shanghai Stock Exchange’s board for science and technology companies, of carrying out its review of fintech giant Ant Group Co. Ltd.’s listing application too quickly. The securities regulator has repeatedly stressed the importance of improving information disclosure during IPOs in order to protect investors’ interests and head off risks to the financial system. The STAR board and ChiNext board use a registration-based IPO system, which relies heavily on disclosure to help investors evaluate listed companies.

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China Attacks ‘Shadow Shareholders’ in New IPO Guidelines

A Beijing-based investment banker told Caixin that while tighter regulation is good for investors, the workload of IPO sponsors has surged. Intermediaries now have to track down the ultimate owners of shares through multiple layers of indirect shareholders, and some big investment funds have dozens of layers in their ownership structure, the banker said.

IPO review procedures have already been tightened in anticipation of the guidelines. A Feb. 2 meeting of the listing committee of the Shenzhen Stock Exchange terminated (link in Chinese) the IPO application of Shanghai Canxing Culture & Media Co. Ltd. over inadequate information disclosure and the failure to fully explain a multi-layered shareholding structure.

The Shenzhen Stock Exchange notice seen by Caixin states that an IPO application will be rejected if it fails to include a “Special Commitment” report, a requirement specified in the CSRC guidelines, and a “Special Verification Report,” and the omissions are not rectified within a specified timeframe. The two documents specifically cover shareholder information disclosure and must be signed by the listing candidate, sponsor, and legal adviser.

The document sets out four major issues regarding shareholder information disclosure and verification that IPO sponsors and legal advisers need to ensure have been fully complied with and disclosed in the prospectus –– structure of shareholdings, “surprise” share purchases, unusual pricing, and shareholder eligibility.

Intermediaries working on the IPO need to check whether shareholders of the IPO applicant have entrusted shares to other investors. If so, the prospectus must disclose the structure and terms of the entrusted shareholding agreements and any disputes that may be on the horizon.

Intermediaries will be required to check whether shareholders added in the 12 months prior to the IPO application were issued equity through new shares or the transfer of existing shares by other shareholders. The prospectus will need to disclose the reason for the transactions, the price of the shares, and whether the new shareholders have connections with intermediaries or other shareholders, directors, supervisors, or senior managers of the listing candidate.

The prospectus will also have to disclose whether any new shareholders are involved in any entrusted shareholding agreements, and intermediaries will need to verify whether they have complied with a 36-month lockup requirement for shares purchased within 12 months before an IPO application. If the price of any share purchase is unusual, intermediaries are required to check the reason for the transaction, the source of funds, the payment method, the purchase price and the reason for the price discrepancy.

Intermediaries are also required to verify and disclose whether any investors who directly or indirectly hold shares in IPO candidates are relatives of senior managers or executives at the intermediaries.

Denise Jia contributed to this report.

Contact reporter Tang Ziyi ( and editor Nerys Avery (

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