On November 5, 2018, President Jinping Xi announced that China would be setting up the Sci-Tech Innovation Board ("STAR Market") and would try out the registration system at the Shanghai Stock Exchange ("SSE") at the inaugural China International Import Expo.

At 9:30 am on July 22, 2019, STAR Market formally began trading. The first 25 companies listed on the STAR Market had an average daily rise of 140%. By June 30, 2020, the STAR Market had accepted 403 enterprises in total, 145 of which took effect upon registration, 1 of which was disapproved for registration and 32 of which had their examination terminated. The establishment of the STAR Market and the pilot registration system are important reforms of China's capital market.

As of July 22, 2020, the first batch of 25 companies in the SSE STAR Market had their first anniversary. The Capital Markets Team of Chance Bridge Partners ("Chance Bridge") reviewed and researched the focus of audit, the key points of reply and the corresponding verification methods of the legal issues of the STAR Market. Following this, Chance Bridge produced a research report "Analysis on the Main Points of Legal Issues in the Examination and Approval of STAR Market", to provide some reference and enlightenment for the Chinese enterprises who intend to enter the STAR Market and the practitioners of the capital markets.

The main contents of the report comprises of four parts:

  1. the issuer’s equity structure and basic information of the directors, supervisors, senior management personnel and core technical personnel;
  2. core technical issues;
  3. the issuer’s business issues;
  4. issues relating to corporate governance and independence.

Due to the different characteristics of each enterprise, the legal problems they face are also very different. Based on the Legal Opinions and the Legal Work Report in the IPO application documents, our research team found that the historical evolution has always been a key focus of review. However, if the applicant enterprise is a state-owned enterprise, its state-owned shareholders and the disposal of the state-owned assets will also be a major concern of the Stock Exchange.

In terms of equity incentives, according to the actual situation of equity incentives of enterprises listed on the STAR Market, the issuer generally adopts an employee stock ownership plan and stock option incentive plan for equity incentives, and the Stock Exchange pays close attention to issues such as the stability of the issuer’s equity structure, whether the employee stock ownership plan has resulted in more than 200 shareholders before the listing, and the equity holdings of the motivated objects.

For historical red-chip structures or red-chip companies intending to list in the country, the Stock Exchange almost always ask questions about red-chip structures. Whether the stockholders of the issuer are qualified or not is often the concern of the Stock Exchange, and it usually asks whether some investors can be legally regarded as the stockholders of the listed company. The Stock Exchange is also concerned about the special investment terms in the issuer's history and its liquidation.

The major concerns include:

  1. the content and implementation of the Valuation Adjustment Mechanism("VAM");
  2. whether there is any dispute or potential dispute;
  3. whether such agreement has been dissolved;
  4. whether such agreement will affect the stability of the control right of the issuer.

At the same time, the identification of the actual controller, which the Stock Exchange pays close attention to, mainly exists in the situation where the issuer's equity structure is relatively dispersed.

Regarding the authenticity, centralization and sustainability of major suppliers and major customers, the Exchange generally pays more attention to the dependence on suppliers and whether the issuer's important customers have major adverse changes in their own operations. As for whether the enterprise conforms to the positioning principle of STAR Market, the Exchange puts forward clear requirements. In terms of intellectual property rights and core technologies, the Exchange has raised clear verification requirements in terms of their sources, importance in the primary business, independence, and whether they are subject to or will be subject to disputes.

Finally, the Stock Exchange also pay general attention to the joint investment of the issuer and the affiliated parties, environmental protection, existence situation of related-party transactions, horizontal competition, labor and social insurance, identification of core technicians, qualifications of directors, supervisors, senior managers and core technicians, litigation, arbitration and administrative punishments, changes in the assets and material assets of the issuer, and investment projects with raised funds.

For more information please email contacts@chancebridge.com

About Chance Bridge Partners:

Chance Bridge Partners, founded in November 2011, is a prestigious commercial law firm of approximately 100 staff specialising in providing corporate, commercial and financial legal solutions. Chance Bridge Partners’ main area of focus is on capital markets, cross-border investment, and financing, corporate, compliance, construction and real estate, intellectual property, anti-trust, financial derivatives, and dispute resolution.

Chance Bridge Partners has a professional cross-border investment and financing team, and has established a wide range of strategic cooperative relationships with a number of domestic and foreign law firms and agencies. Adhering to international and professional development patterns, Chance Bridge Partners is committed to becoming "the most recognised prestigious law firm", providing clients with comprehensive legal services. For information contact: contacts@chancebridge.com