Featuring a set of listing requirements that are more attainable for start-ups that often lack a profit track record and have a differentiated voting right structure, the STAR Market also adopts a pilot registration mechanism to streamline the listing process.
The Chinese government encourages innovation as a means to “upgrade” the quality of its economy from one that is fundamentally driven by manufacturing in past decades. Meanwhile, the rise of entrepreneurship in China has seen the emergence of many innovation start-ups that have become unicorns. According to Hurun’s Global Unicorn List 2019, as of 30 June 2019, China had the most unicorns in the world (206), overtaking the US (203) for the first time2, whereas Shanghai has a high concentration of these unicorns, with 47 as of 2019.
Backed by a strong demand for funding among technology and innovation enterprises, the STAR Market has remained resilient in the face of the Covid-19 outbreak. Between 2 February and14 April 2020, a total of 15 listings on the board raised US$3.5 billion in funds.
More inclusive listing rules
One of the main reforms associated with the STAR Market is the inclusive listing rules, which allow the listing of companies that are not yet profitable and/or with differentiated voting rights3.
Unlike the Shanghai and Shenzhen stock exchanges in China, the financial requirements of the STAR Market are less focused on assets, cash flow and net income. Companies in high-tech fields, such as new materials, biomedicine, and information technology, are the main targets.
Applicants to list must meet one of the five thresholds, with the most basic requirement of having a market value of no less than RMB1 billion. The profitability requirements are further relaxed for companies with larger market capitalization.
Aside from the more attainable financial thresholds, the needs of science and technology companies with differentiated voting rights are taken into consideration. Companies can set up option incentive and employee shareholding schemes before or after listing. Given frequent changes in the shareholding structure of technology and innovation companies, the timelines for making changes to beneficial stakeholders, senior management, and the main area of business are more accommodating.
Features that support innovation enterprises
Aside from the more inclusive rules, the STAR Market has several features that differentiate it from the other stock exchanges in China, which help alleviate the pain points faced by start-ups when listing.
The first is the implementation of a registration mechanism for listing. Before the launch of the STAR Market, it could take over a year for a company to go public in China’s highly regulated capital market. The STAR Market shortens this process by putting in place a registration mechanism. Listing candidates only need to register with the China Securities Regulatory Commission (CSRC) while the applications will be reviewed and approved by the Shanghai Stock Exchange, thus avoiding the long application backlog with the regulator.
Supporting the Exchange’s review team is the Sci-Tech Innovation Counseling Committee, comprised of experts, well-known entrepreneurs and senior investors, which provides consultation and policy advice. This reduces the number of steps that need to be taken to review the listing.
The STAR Market also puts in place more stringent delisting requirements, with an aim to attract high-quality companies and boost the confidence of investors. Companies meeting the financial delisting threshold in the first year will receive a warning, before being delisted if the threshold is met for two consecutive years.
Reflecting the inherent characteristics of technology companies, which are prone to larger investments and volatility in stock prices, the circuit-breaker on the STAR Market allows for a 20% fluctuation in stock prices. In addition, to form a reasonable stock price as soon as possible, the circuit-breaker will only come into effect after the first five trading days when new shares are listed.
Increased responsibility for auditors
To protect investors, the STAR Market enforces strict standards for information disclosure and independent audit. This puts more responsibility on auditors. More listing candidates are expected to require services from independent third parties that they can trust, in order to build investor confidence in the company.
The emerging and fast-developing nature of start-ups has given rise to a data-driven approach to due diligence. Business, operational and financial data are reviewed against third-party market data to show the full scope of the business. This data is then meticulously combed for abnormalities and any potential compliance risks.
An example of how date-driven due diligence is carried out could be demonstrated through auditing the revenue of an Internet company. In checking the advertising business revenue of an Internet company, it is necessary to understand the business model, information systems architecture, and data flow to form a targeted verification framework. Then, the data must be analyzed according to monthly active users (MAU), daily active users (DAU), trends in user behavior, monthly income change trends, and number of advertisements. Finally, any abnormal trends need to be identified and flagged. As regulations become stricter to protect the market and technology matures, data-driven analysis by auditors is becoming a major trend.
The reforms that have been trialed by the STAR Market to support innovation enterprises are set to drive the development of other similar platforms in China, such as Shenzhen’s start-up board, ChiNext. Through a set of more inclusive listing requirements and trading mechanisms that address the needs of its potential candidates, the STAR Market represents a step forward in the development of China’s capital market and the listing of high-value technology and innovation companies.