º¬Ðß²ÝÉçÇø

China¡¯s comprehensive registration-based IPO reform has enshrined information disclosure in new listing criteria under the approval-based system to information disclosure requirements. An analysis of IPO review cases since 2023 reveals that the key points of scrutiny, compared to the approval-based system, have become more detailed, comprehensive and standardised across all boards.

This article analyses the key points of scrutiny for ¡°introducing new shareholders before IPO application¡± by referencing the Guidelines for the Application of Regulatory Rules ¨C Offering No. 4, the Measures for the Administration of Registration of Initial Public Offering and Listing of Stocks, relevant provisions of the stock issuance and listing review guidelines of the Shanghai Stock Exchange and Shenzhen Stock Exchange, as well as annual review cases.

Case details

The issuer added 10 new shareholders in the past year and multiple external shareholders in 2022, including individual shareholders and limited partnership shareholders. The sponsor had to provide additional details on the verification of these new shareholders pursuant to the above-mentioned guideline No. 4.

The intermediary conducted verification in the following ways:

1. Obtaining questionnaires and confirmation letters of new shareholders;
2. Conducting penetration verification of new shareholders and acquiring questionnaires of ultimate individual shareholders;
3. Reviewing the capital increase and the equity transfer agreements;
4. Obtaining the issuer¡¯s statements and the shareholder¡¯s questionnaires, confirmation letters, funding records and payment receipts; and
5. Interviewing shareholders to understand the nominee shareholding, potential disputes and eligibility of shareholders.

Conclusion of verification. Pursuant to the regulatory guidelines, the intermediary conducted verification of new shareholders introduced through capital increases or equity transfers within 12 months before the issuer¡¯s application. The issuer had disclosed information about these new shareholders in the prospectus and no new shareholders were introduced through capital increases or equity expansions after the most recent fiscal year¡¯s balance sheet date. The issuer was not classified as a red-chip company and its direct shareholders had not exchanged equity in significant subsidiaries for equity in the issuer.

General verification

Targeting new shareholders introduced through capital increases or equity transfers within 12 months before the IPO application, the key points of verification are as follows:

Disclosure of new shareholders¡¯ basic information. New corporate shareholders must disclose the names, establishment dates, investment dates, investment backgrounds, pricing basis and fairness, main business activities, whether they solely invest in the issuer, actual controllers and their backgrounds, and sources of funds.

New individual shareholders must disclose their names, backgrounds, investment dates, investment details and information of enterprises they invest in or control. New partnership shareholders must disclose the basic information of corporate shareholders and the ultimate beneficial owners after penetration.

Verification of new shareholders¡¯ affiliations. Verify whether new shareholders have affiliations with issuer¡¯s other shareholders, directors, supervisors or senior management. Additionally, verify any connections with intermediaries involved in the issuance, and check for nominee shareholding instances.

Verification of new shareholders¡¯ share lock-in commitments. Review share lock-in commitments, shareholder questionnaires and interview records to ensure lock-in compliance.

For shareholders added within 12 months before the application, the new shares shall not be transferred within 36 months from the acquisition date. Existing shareholders¡¯ new shares are exempt from such lock-in.

For capital increases or equity expansions within six months before the application, the new shares shall be locked in for 36 months after the issuer¡¯s completion of industrial and commercial registration alterations. Shares acquired from either controlling shareholders or actual controllers shall be locked in for 36 months after listing and trading.

Verification of former employees of the China Securities Regulatory Commission. Review identification documents, resignation approvals, appointment documents and shareholders¡¯ commitments and statements. Conduct interviews and searches to confirm if these individuals are subject to significant media scrutiny or improper shareholding.

Verification of capital increases and equity expansions after the balance sheet date. The issuer shall conduct an additional audit prior to the application submission of new shareholders introduced through capital increases or equity expansions after the balance sheet date of the most recent fiscal year.

Special verification

Verification of shareholding conversion of red-chip companies.
Shareholders with equity in domestic enterprises that have been converted based on their shareholding in red-chip companies are generally not considered as new shareholders if they have held equity in the red-chip company for at least 12 months before the IPO application.

Verification of equity swaps involving significant subsidiaries.
Shareholders who exchange their equity in a significant subsidiary for equity in the issuer are generally not considered as new shareholders if they have held equity in the subsidiary for at least 12 months before the IPO application.

Verification of shareholders newly added after the application.
In principle, the issuance and listing review or the registration process should be terminated for new shareholders introduced after the application. If new shareholders are introduced under special circumstances, their verification and information disclosure should follow the same requirements as those for new shareholders added within 12 months before the application.

The regulatory rules have further clarified the verification standards and lock-in period requirements for sudden share purchases under the registration-based system, bringing increasingly stringent scrutiny.

For IPO applications, issuers must fully disclose new shareholders¡¯ basic information, reasons for their investment, share prices and pricing basis, their associations with the issuer¡¯s other shareholders, directors, supervisors and senior management, their associations with the intermediaries¡¯ responsible persons, senior management and operators, as well as any nominee shareholding.

Intermediaries are required to verify and disclose any relationships, nominee shareholding, status of former employees and share lock-in conditions. They must also provide clear opinions on shareholder eligibility, investment fund legality, share lock-in regulation compliance, and the presence of any nominee shareholding, trusted shareholding or illegal transfer of benefits.

Xia Jialin is a senior associate and Huang Yiping is a paralegal at Zhilin Law Firm