CSRC review: visible and invisible red lines

China Securities Regulatory Commission (CSRC) has sped up the pace of IPO review remarkably since the beginning of 2017. As of 31 August 2017, 352 IPO applicants have undergone CSRC’s review procedures, of which 47 were rejected, translating into a rejection rate of 13.35%, compared with 6.54% throughout 2016. A study on the 47 rejected applicants unveils an increasingly clear picture of underlying rules and criteria.

According to the Measures on the Administration of IPO and Listing of Shares, an issuer must have posted positive net profits in each of the three fiscal years as of the IPO and the accumulated net profit for this period shall be more than RMB30 million (US$4.5 million). Similarly, the Measures on the Administration of IPO and Listing on the Growth Enterprise Market require that in order to be eligible for an IPO, an applicant shall have made profits (of not less than RMB10 million in aggregate) for two consecutive years as of the IPO or it shall have made profits in the recent year from a business revenue of not less than RMB50 million. However, it has been rumored that the CSRC adopts much higher annual net profit thresholds, including RMB30 million (after deduction of non-recurring gains or losses [NRGL]) for an IPO on the GEM and RMB50 million (after NRGL) for an IPO on the SME board and main board.

Of the 16 applicants with annual net profits of less than RMB30 million that had submitted IPO applications to the CSRC as of 24 August 2017, only two have succeeded in obtaining CSRC approval. The other 14 applicants were either rejected or terminated from going through the review procedures. The actual rejection rate was 87.5%. Among the 24 enterprises whose applications for an IPO on the GEM were rejected in the first half of 2017, approximately 13 (i.e. 54%) have generated net profits (after NRGL) of less than RMB30 million in the recent year. During the same period, 17 enterprises applying for an IPO on the main board and the SME board were rejected, about 10 (i.e. 59%) of which have posted net profits (after NRGL) of less than RMB50 million in the recent year.

Author: Zhang Ne is a senior partner at Co-effort Law Firm