Focus on STIB regulations on equity incentives

The drafting of a legislative framework for the Science and Technology Innovation Board (STIB) comprising main rules and review procedures, which began in January this year, was completed quickly and attracted a great deal of attention from various circles.

For companies intending to go public on the STIB, and that would benefit from strong technology innovation capacity, equity incentive plans with operationality and flexibility may be significantly helpful for consolidating existing technological advantages and attracting more core talent.

Extending the scope of application of the Guidelines for the Implementation of Employee Stock Ownership Plans and Option Incentives by Pilot Innovative Enterprises from pilot innovative enterprises to include STIB issuers, the recently drafted STIB regulations also bring breakthroughs in respect of criteria. Below is a summary of the key takeaways that deserve attention.

First, during the review procedure, a more tolerant approach is taken to equity incentive plans existing prior to IPO filing. In contrast to the review procedure for A-share IPOs, which takes a prudent approach to equity incentive plans not completely implemented as of filing (usually these plans are required to be terminated or restored), the Q&A Summary of Shanghai Stock Exchange Concerning Review of Stock Offerings and Listings on the STIB explicitly states that the STIB will recognize all equity incentive plans established by potential issuers prior to IPO filing and to be implemented both before and after their IPOs, provided that the specified review and disclosure principles are met.

Second, the permitted vehicles for holding STIB issuers’ employee stock ownership plans (ESOPs) established and implemented prior to IPOs are further diversified. In the above-mentioned Q&A summary, regulators clarify that the scope of permitted holding vehicles is expanded, from companies and partnerships as previously authorized, to include asset management plans. This change provides more possibilities for optimizing shareholding costs and structures.

Third, ESOPs meeting the “closed-loop principle” are allowed to have more than 200 beneficial owners; moreover, their holding vehicles are exempt from filing procedures applicable to fund products. These regulations provide a compliance basis for highly developed STIB issuers to implement equity incentives with wide coverage.

The provision that allows exemption from filing also helps STIB issuers implementing equity incentives of this kind to effectively avoid circumstances where some potential incentive receivers have to be “rejected” because they are not qualified as investors of private equity funds.