IPO approvals with ‘three types of shareholders’

The increasing number of prospective issuers with “three types of shareholders” (i.e., asset management plans, contractual funds and trust plans) that obtain initial public offering (IPO) approval from the China Securities Regulatory Commission (CSRC) has aroused investor interest. Is it a signal of less stringent regulatory review on IPO applications from prospective issuers?

Article 13 of the Measures for the Administration of IPO and Share Listing requires that “the issuer’s equity structure must be clear and there must be no major dispute over the ownership of shares held by the controlling shareholder, controlled shareholders, and shareholders controlled by the actual controller”. In practice, until very recently equity holding by “three types of shareholders” had posed a red line for IPO applicants given the fact that any shares held by these managers are being held on behalf of the beneficiary owners. That is why getting rid of “three types of shareholders” has been a rule for IPO applicants.

RECENT CASES

Central China Securities

In November 2016, the CSRC issued an IPO approval for Central China Securities (CCS). According to CCS’ prospectus, dated December 2016, a contractual fund known as Bohai Industrial Fund, the second-largest shareholder of CCS, directly held 18.86% equity in CCS. Bohai Industrial Fund was issued by Bohai Industrial Investment Fund Management (BIIFM), a fund manager that had been registered and filed, prior to implementation of the Interim Regulations on Private Investment Fund Supervision.

Jiang Fengtao is the founding partner and Zhou Rong is a capital market associate at Hengdu Law Firm