With NEEQ launching its Select tier, lawyers say companies need to meet higher standards
On Dec. 27 last year, the National Equities Exchange and Quotations (NEEQ) released the first batch of rules on comprehensively deepening NEEQ reform. The Measures for the Management of Market Tiers of the NEEQ is one of those rules. In addition to optimizing the systems for the Base tier and Innovation tier, these Measures add a new market tier, the Select tier. Seven months after the release of the Measures, the NEEQ Select tier has officially kicked off, with a total of 32 stocks approved to be launched on the first day. Although their performances have varied, there is no doubt that the launch of the Select tier has significant meaning to NEEQ.
"From a macro perspective, the Select tier is an important effort of the NEEQ in a move to better serve SMEs that are innovation-oriented, premature in business models, including tech startups; meanwhile it is a major step forward in building a multi-layered capital system that fits the Chinese market, and implementing the reform requirement of carrying out differentiated and coordinated development," says Shen Xuerang, a Hangzhou-based partner at Tian Yuan Law Firm.
From a micro perspective, Shen believes that the NEEQ Select tier clarifies the route and what to expect for enterprises and investors. "After standardizing its operations on the Base tier and accomplishing cultivation on the Innovation tier, a company may seek further development and upgrade on the Select tier, where the company may step onto a higher level by means of higher-efficiency financing and transactions. It can then seek to get listed on Shanghai or Shenzhen stock exchanges, to access even better financing channels," he explains.
With this new mechanism, NEEQ, also known as the New Third Board, now has a three-layer market structure. To advance to the Select tier, companies must meet higher standards.
The Select tier serves SMEs of a certain scale and market recognition, whereas the Base tier serves micro and small startups, and the Innovation tier serves small enterprises satisfying the relevant requirements on business volumes, according to two lawyers from the Shanghai office of Grandall Law firm, partner Zhang Lantian, and Sun Weiping.
Shen of Tian Yuan adds: "The Select tier sets up a negative list, which prohibits financial entities and quasi-financial entities, enterprises in industries with excess capacity, and enterprises in the restricted and eliminated industries specified in the Guidance Catalogue for Industrial Structure Adjustments from accessing the Select tier, but there is no explicit restriction in this regard in the Base tier and the Innovation tier,"
The higher standards are also reflected in the IPO review and preparation requirements.
"In terms of IPO review and preparation requirements, the existing listing rules and supporting systems of the Select tier are very close to the main board in terms of the requirements on corporate governance, finance, internal control, and information disclosure. Companies that intend to be listed on the Select tier need to make overall control of the core issue: 'ability to remain sustainable operation’, and continuously make sufficient information disclosure, in order to protect the legitimate rights and interests of investors," Zhang and Sun say.
Shen also points out how the Select tier is different from the other two tiers. First, a company needs to go through more procedures in order to be listed on the Select tier, compared with those of the Base and Innovation tiers.
Secondly, the Select tier is stricter in terms of requirements. "For example, the reporting period is three years plus one period, the visits and disclosures of the top ten clients and suppliers during the reporting period, and the review of horizontal competition and related-party transactions, these are the same as the IPO requirements, and other legal compliance and financial regulatory requirements are also the same as those of IPOs," Shen illustrates.
And finally, with regard to preparing enterprises for the launching on the Select tier, Shen elaborates on four sets of standards from the perspective of market value and financial conditions of the enterprises: "(1) Giving priority to profitable companies with stable and efficient profit models. This standard focuses on financial indicators of the company, while the market value thereof plays a supporting role; (2) Focusing on growth companies with clear profit models, rapid business development, and initial profitability; (3) Paying attention to R&D companies with certain R&D capabilities and achievements, which have initially achieved business incomes; and (4) Innovative enterprises with high market recognition and strong R&D and innovation capabilities; and there is no requirement on the income and profitability of such enterprises."
As a result, Shen believes that intermediary agencies should do adequate due diligence in the preliminary preparation stage, including whether the companies fall within the negative list, whether the market value and financial requirements of the companies meet the standards, and whether their financial norms and legal compliance status are consistent with IPO requirements.
LAW FIRMS INVOLVED
The Select tier is of great significance to the NEEQ and enterprises, and has received extensive attention. Law firms are actively involved in the field. Grandall has advised Ningxia Kai Tian Gas Development and Dalian Linto NC Machine on the issuance of shares on NEEQ Select, and Tian Yuan has helped Golden Times Culture Communications and Sanmen Sanyou Technologies successfully launch on the Select tier.
"Getting off to a good start is the key to a broad market prospect," Zhang says. "As a partner at Grandall Shanghai Office, I'll actively participate in various business training and exchange activities, and hope to share with my colleagues the practical experience of the first batch of NEEQ Select, and to support and assist other teams of Grandall that plan to engage in the Select tier projects."
Shen says: "With regard to the current Select tier related businesses, we'll allocate our resources in light of the reform of the ChiNext board registration system carried out by the Shenzhen Stock Exchange this year. The launch of NEEQ Select tier has created a new way to meet the financing needs of companies that cannot be listed on the SSE STAR Market or the ChiNext. We'll pay attention to the growth of those companies, guide their standardized development, and help them to successfully enter the Select tier."
The launch of the SSE STAR Market last year, the recent reform of the ChiNext registration system, and the launch the NEEQ Select tier all indicate that China's capital market reform has entered an accelerated stage. Looking forward, Zhang believes that the core development trend of the capital market reform is market orientation.
"Market-oriented development is manifested by the establishment of a multi-layer capital market to meet different needs, and gradual implementation of the registration-based system. Of course, the ultimate goal of market orientation is to be in line with international standards and promote China's capital market to serve the national strategy in all aspects. Although there can be challenges in the reform process, the general trend of market orientation and internationalization will remain unchanged," Zhang says.