China Capital Stock Listing Supervision Storm Is Strong, Securities Companies' Foreign Investment Banking Business Suddenly Fell To The Freezing Point

"At present, the overseas listing projects on hand are suspended, and no one dares to touch them until the rules are clear." For the recent regulatory changes in overseas listing of domestic enterprises, the head of the securities investment bank told the reporter of the 21st century economic report.

Ten days ago, the regulatory storm of overseas listing emerged.

On July 6, the general office of the CPC Central Committee and the general office of the State Council announced the opinions on cracking down on securities illegal activities in accordance with the law (hereinafter referred to as the opinions), which is the first time in the history of China's capital market to jointly issue a special document to crack down on securities illegal activities in the name of the central office and the State Council office. In the specific content of the opinions, "strengthening the supervision of China capital stocks" was written as a special chapter.

"This should also be the first time that the issue of China capital stock has appeared in such a high standard document with a large space, reflecting the attitude of strict supervision." Some experts from the legal circle in Beijing commented.

After the release of the opinions, on July 10, the office of cybersecurity released the measures for network security review (Draft for comments on the revised draft) (hereinafter referred to as the "review measures"), which intends to require operators with more than 1 million users' personal information to go abroad for listing, and must apply to the office of network security review for network security review.

In recent days, there have been many rumors that "the overseas listing of red chip vie structure may require the approval of China Securities Regulatory Commission", and Chinese enterprises such as keep, Himalaya and zero krypton technology have successively terminated the listing process in the United States.

The sudden change of regulatory policy has made the overseas listing of domestic enterprises become confusing.

Foreign investment banking business presses "pause key"

According to wind data, since the birth of the concept of "China general stock", a total of 546 Chinese enterprises have listed on the US stock market, and most of them have completed delisting.

In more than half a year in 2021, 37 Chinese companies have successfully listed in the United States. In contrast, only 39 Chinese stocks will be born in 2020. If there is no new regulation on overseas listing, there is every reason to believe that the number of Chinese enterprises going to the United States for listing in 2021 will greatly exceed that in 2020.

"Now, due to the change of regulatory environment, the listing environment of general stocks in the second half of the year is not optimistic, and it may be fixed at the current 37 companies." There are securities firms engaged in overseas investment banking business investment banking personnel said.

From the content of the opinions, strengthening the supervision of China capital stocks is the core of the new deal. Specifically, we will take effective measures to deal with risks and emergencies of China capital stock company, and promote the construction of relevant regulatory system. In the future, China will revise the special provisions of the State Council on overseas share offering and listing of joint stock limited companies, clarify the responsibilities of domestic industry directors and regulatory authorities, and strengthen inter departmental regulatory coordination.

"The opinions indicate that it is necessary to revise the regulations on overseas listing. Recently, there are market rumors that regulation should tighten the rules for overseas listing under the red chip vie framework. In addition, the recent Internet Security Review on relevant listed companies in the United States has resulted in the suspension of overseas listing projects. Recently, we are all relatively low-key." The head of the securities investment bank said.

In fact, in the interview process, "suspending overseas listing projects, waiting for regulatory rules to be clear" has become the common choice of domestic securities companies, joint venture securities companies and internet securities companies. As for the rumor that "the overseas listing of red chip vie structure may require the approval of China Securities Regulatory Commission", the investment banks also maintain a high degree of concern.

"At present, the news that the overseas listing of red chip vie structure needs to be approved is still at the rumor stage. We have only heard rumors, and we have not confirmed from authoritative channels that the overseas listing of vie structure needs to be reviewed. There is no movement in the law firm, but the whole circle still tends to believe it is true." Some investment bank personnel told the 21st century economic reporter that their business departments were waiting for the regulatory release of relevant rules on Friday. In addition, the investment banking department of securities companies also collected relevant public opinions for internal discussion.

As a matter of fact, as early as 1994, the State Council issued the special provisions on the overseas offering and listing of shares by joint stock limited companies, which made it clear that when domestic companies offer shares to overseas investors and list overseas, they need to report to the securities authority of the State Council for approval. However, there is no clear provision on overseas listing of overseas entities holding shares or controlling domestic business, which also makes red chip and vie structure popular.

"The red chip or vie structure itself has the function of bypassing regulation. Companies registered overseas can not be supervised by domestic institutions. In some industries that clearly can not have foreign investment, enterprises can naturally list overseas by building red chip or vie structure. This is probably the biggest concern of regulation. " In addition, due to the separation of operation right and income right between domestic and overseas enterprises through vie structure, domestic investors are unable to share the benefits brought by the growth of enterprises in China.

"Through the vie structure, the profits of domestic entities can be made to overseas companies, and then listed overseas. In addition, China capital stock has not been reported to the domestic regulatory authorities before, as well as the overall operation and after listing. " Li Youxing, a professor at Guanghua Law School of Zhejiang University, believes that it is necessary to supervise the overseas listing of red chips or vies.

Data review threshold of one million users leads China capital stocks to fall sharply

While the office of the Central Committee of the people's Republic of China and the State Council of the people's Republic of China have proposed to clarify the supervision of China capital stocks, the Opinions also put forward that the provisions on strengthening the confidentiality and file management related to the issuance of securities and listing abroad will be speedily revised, so as to compact the main responsibility of information security of overseas listed companies.

After that, on July 10, the office issued the "review measures", which stipulates that operators with more than 1 million users' personal information must apply to the office of network security review for listing abroad.

According to the analysis of Zhonglun law firm, for data processors, when they can develop to the stage of listing, they usually have a large number of users and corresponding user personal information, which is very easy to trigger the threshold of 1 million users. In terms of sensitivity, one is due to the large amount of data, and the other is that personal sensitive information and even important data may be involved in business activities, so the regulatory authorities put forward the requirements of active declaration for their listing abroad. At the same time, the criteria for determining the number of users and whether the number of overseas users should be included in the calculation also need to be further clarified.

In fact, in addition to IPO, China capital stock company can also take spac (Special Purpose Acquisition company) merger and acquisition, RTO (reverse merger / backdoor listing) and direct listing (direct listing) in the United States《 In the review measures, only in the review materials required to be submitted by enterprises, the listing related materials clearly refer to "IPO materials to be submitted".

However, HanKun law firm believes that no matter what kind of listing mode, China capital stock company needs to publicly disclose or provide information to foreign exchanges and securities regulatory agencies during the listing process, and continuously and regularly disclose relevant information after listing, and accept the supervision and investigation of foreign exchanges and securities regulatory agencies.

It is worth mentioning that the "review measures" does not specify whether China capital stock companies which have been listed abroad when the relevant rules come into effect need to apply for network security review. Whether a series of new regulations will affect the listed stocks has become a hot issue in the market.

In fact, in recent days, the stock price of China capital stock has been obviously disturbed by relevant news. On July 14 alone, 211 of the 286 China capital stocks closed down, of which antelope closed down by more than 25%, and nine stocks including magic line, Baosheng technology and Hong Kong stock exchange all fell more than 10%. In addition, according to wind statistics, in the past five trading days, 187 stocks were in the decline state, and 36 stocks had a cumulative decline of more than 10%.

HanKun law firm believes that from the content of the "review measures", the regulatory authorities have the right to conduct security review on the daily data processing activities of listed China capital stock companies, and consider their overseas listing status in the review. For the overseas listing, and the pre IPO network security review after listing, if the final failure occurs, the consequences will be more clear, that is, enterprises can not be listed, additional issuance, bond issuance. However, if the regulatory authorities review the listed companies, how to deal with the companies that fail to pass the examination remains to be clarified by laws and regulations.

New choice for listed or established enterprises in Hong Kong

"Whether it is red chip vie or data security, if we really want to check in the future, we will increase the uncertainty of overseas listing of China capital stock, and those meeting the conditions may speed up the pace of listing in Hong Kong." The above is responsible for the overseas investment banking business securities investment bank personnel analysis said.

The change of regulatory policy will pose a certain challenge to the overseas listing of China capital stock in the short term. Coupled with the uncertainty of examination and approval, the listing cycle will inevitably be prolonged. Especially for new economy enterprises, under the background of increasing the threshold of listing in the United States, China capital stocks meeting the requirements may speed up the pace of listing in Hong Kong.

"In fact, the vie structure in the past has lifted the restrictions on foreign direct holding of shares in Chinese companies to a certain extent. If the current supervision is strengthened, it may also have an impact on equity financing in the primary market." According to the investment bank.

Historically, the A-share red chip companies have a relatively high threshold for listing and a long issuance cycle. The listing of us shares has become a convenient choice for capital withdrawal.

According to the statistics of Guotai Junan, only 16 unprofitable enterprises are listed on the science and technology innovation board, with an average listing period of 184 days, and they are concentrated in the health care and information technology industry. There are only two listed companies with different voting structures, i.e. Kechuang board youkede and No.9 company, with a listing cycle of 198 and 372 days respectively. The U.S. stock listing system has the characteristics of wide listing and strict delisting. The market-oriented listing system makes the listing cycle of the company short. It only takes more than 20 days for some stocks in the early stage from the submission of the prospectus to the final listing.

It is worth mentioning that the "overseas listing" activities of enterprises are included in the scope of network security review in the review measures, but the concept of "overseas" and "domestic" which is common in the securities law and relevant laws and regulations is not used.

In response, Zhonglun law firm said that the listing in Hong Kong should belong to overseas listing rather than foreign listing. Therefore, enterprises going to Hong Kong for listing may not be within the scope of network security review. The listing of Hong Kong will inevitably involve the cross-border transmission of data, and it is also a "data processing activity" that may affect national security. Therefore, it may fall into the scope of network security review initiated by the regulatory authority in accordance with its authority.

Wang Zhengzhi, chief analyst of Guotai Junan new shares, also believes that with the tightening of information security supervision, it is more difficult for non-state-owned red chip enterprises, also known as "small red chip" enterprises in the industry, to go out to sea“ It is expected that the inclusiveness of A-share listed companies will be further improved, paving the way for the listing of red chip enterprises in key areas. In addition, under the background of tense Sino US relations and the compressed living environment of China capital stocks, Hong Kong stocks, as a market with more flexible listing conditions and higher operation efficiency, is expected to usher in the centralized return of China capital stocks. "