Why the IPO reforms don't go far enough

On November 30, 2013, the State Council promulgated the Guiding Opinions on the Launch of the Pilot Project for Preference Shares (国务院关于开展优先股试点的指导意见) and the China Securities Regulatory Commission (CSRC) promulgated the Opinions on Further Promoting the Reform of the System for Offering of New Shares (中国证监会关于进一步推进新股发行体制改革的意见) (Opinion). The two policies were accompanied by the long-awaited reopening of the Chinese initial public offering (IPO) market, which had been frozen for 14 months.

Information disclosure

 The Opinion reveals the clear intention of CSRC to move toward a registration-based system. New measures have been enacted concerning information disclosure, including the pre-disclosure of the prospectus on the CSRC's website after the regulator's acceptance of the application and the continuous disclosure obligation after the pre-disclosure. The responsibility of the issuer, the relevant investment bank sponsor and other intermediaries will start from the pre-disclosure of the prospectus. This means that if there are any inconsistencies between the first disclosure and subsequent disclosures, the application of the issuer will be suspended and the sponsor representative (保荐代表人) will be barred from applying for an IPO for 12 months. Fraudulent disclosure will lead to 36 months of suspension for the issuer plus administrative penalties to the issuer and its intermediaries.

The pre-disclosure of the prospectus itself was established a few years ago. Initially, the prospectus was disclosed only after completion of the review and amendments process by CSRC and the Public Offering Review Committee (发行审核委员会). A few years ago, the pre-disclosure timing moved to a point after the initial review and comment by CSRC and before the hearing meeting of the Public Offering Review Committee. Before the introduction of the new policy, the issuer had the opportunity to address the opinion of CSRC. The moving up of the timing of the pre-disclosure and the harsh penalties for non-compliance (administrative penalties are no less than those for the formal prospectus) combined produce probably the harshest IPO regulation in the world. It is understandable that there are rumours that many issuers and their sponsors plan to delay their applications to have more time to reconsider their disclosure in the prospectus.

A CSRC senior officer has expressed that he is fond of US style prospectuses similar to that prepared by Facebook for its high-profile IPO last year, which include disclosure of all the risk factors. The new policies will help speed up the evolution of the Chinese prospectus, which has been criticised for lacking sophistication when compared with international counterparts.