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China IPOs
MAY 2008 27
Special report
28 ASIAN-COUNSEL
panies to establish offshore holding companies and discouraging Chinese companies from being listed on foreign
stock exchanges. VC/PE financings for Chinese companies have traditionally been structured offshore, using
Cayman and other offshore holding companies as financing vehicles. State Administration of Foreign Exchange
(SAFE) Circular 75 and subsequent regulations made the
use of such offshore holding companies very difficult.
Similarly, historically, IPOs of the best Chinese companies have occurred in Hong Kong or the United States.
This paradigm has been changed by the Regulation on
Merger and Acquisition of Domestic Enterprises by Foreign Investors (the 2006 M&A Rules) which deters Chinese companies from restructuring for the purpose of
conducting offshore offerings. These regulatory barriers
make overseas listings much more difficult and the trend
is to continue to limit such listings.
A parallel development is the effort of the Chinese
Government to implement a national strategy of building
mature and multi-level capital markets. From the middle of
2005 to mid-2006, China imposed a moratorium on new
domestic IPOs during which the domestic stock markets
were restructured to convert non-tradeable shares into
tradeable shares. Since the lifting of the moratorium, Chinese domestic listing activity has exploded (over 100 new
listings) and until the recent correction, the domestic
indexes have hit all time highs.
Furthermore, recent regulations provide an incentive
for more foreign investors to structure their investment
vehicles as RMB dominated domestic private equity funds.
The improvement of the approval process for listing on
domestic stock exchanges should make it more convenient
for VC/PE firms to sell their investments. Foreign private
equity investors are now looking at Chinese domestic
IPOs as a possible exit rout. IDGVC, SAIF, and other
investors have achieved high returns on investments on the
A Share market when certain of their portfolio companies
went public on the domestic A Share market.
The imminent launch of Chinas Growth Enterprise
Market (GEM) after nearly nine years of preparation also
may create additional opportunity for domestic Chinese
companies. On March 21, 2007, the Chinas Securities
Regulatory Commission (CSRC) released Initial Public
Offering and Administration Measures on Enterprises Listing on Growth Enterprises Market (draft rules) on its website. The draft rules for the GEM stipulated the conditions,
Apart from the GEM, the launch of an over-thecounter (OTC) market and a market for trading corporate bonds are also underway. The State Council has
approved the establishment of the OTC market in Tianjin, which will also provide more access to the capital
markets for smaller private companies.
Current challenges facing Chinese stock exchanges
Although the viability of the Chinese Stock Exchanges has
dramatically increased, there are still significant challenges in
going public on a Chinese stock exchange. Foreign VC/PE
firms still see an IPO on a Chinese domestic exchange as problematic. Issuers, investors and intermediaries expect more
transparency for publicly traded companies. Foreign investors
still face problems with foreign exchange and significant tax
challenges. In addition, current Chinese law requires investors
to lock-up their shares for a significant period of time. Accordingly, the Chinese stock exchanges still do not meet the needs
of foreign investors which provide the majority of capital
for Chinese private companies.
In addition, recently the domestic Chinese stock
exchanges have suffered a major correction and values have
dropped 45-50 percent. As a result, the IPO activity has
MAY 2008 29
Special report
Overseas IPO events and offer amount by market (from 2005 to 2007)
Market
2005
2006
2007
Offer
IPO Average
Offer
IPO
Average
Offer
IPO
Average
Amt (US$M) Events (US$M) Amt (US$M) Events (US$M) Amt (US$M) Events (US$M)
HKMB
19012.72
37
513.86
41284.14
39 1058.57
31127.38
52
598.60
NYSE
395.70
1
395.70
480.55
3
160.18
4490.51
18
249.47
SGX
201.83
20
10.09
1336.79
24
55.70
1987.84
26
76.46
NASDAQ
718.84
7
102.69
527.07
6
87.85
1469.10
11
133.55
HKGEM
74.74
8
9.34
227.49
6
37.92
255.58
2
127.79
TSE
0.00
0
0.00
0.00
0
0.00
191.09
1
191.09
AIM
62.09
2
31.045
130.42
6
21.74
135.43
5
27.09
MOTHERS
0.00
0
0.00
0.00
0
0.00
41.78
1
41.78
KOSDAQ
0.00
0
0.00
0.00
0
0.00
31.52
1
31.52
SESDAQ
23.94
6
3.99
11.55
2
5.78
14.56
1
14.56
Total
20,490.32
81
252.97
43,997.99
86
511.60
39,744.79
118
336.82
Source: Zero2IPO-China VentureDatabase
30 ASIAN-COUNSEL
Illustration: Johnnie Au
nology investing. Such sophistication lessens volatility the vast majority of the shares of the publicly traded comand improves liquidity. The NYSE historically has been pany. The most common exchange used for this technique has
the leading stock exchange in the world and lists many been the Over-the-Counter-Bulletin Board (OTCBB). Once
of the worlds largest companies. It has the highest list- listed on the OTCBB, successful companies seek to build a
ing standards and its corporate governliquid market in their stocks and move
ance rules are the toughest.
to a higher quality stock exchange such
Many domestic
United States stock exchanges have
as NASDAQ. Over the past five years,
Chinese companies
worked hard to attract more Chinese
There has been a tremendous resurIPOs in the past two years. NASDAQ
gence in reverse mergers in the US as
have elected to
has Chinese-speaking staff in Shanghai
institutional investors began investing
launch
their
IPOs
on
and Beijing and is waiting for approval
in companies that become public
to open a Beijing office. In late 2007,
through reverse mergers.
domestic Chinese
the NYSE received separate approval
The SPAC is a company with no
stock exchanges. The
from Chinese regulators to open a repreassets or business that conducts an
IPO process tends to
sentative office in Beijing. Most ChiIPO. Investors are willing to purnese companies looking to raise capital
chase the shares of the SPAC based
be easier and less
in overseas stock exchanges are midupon the reputations of the founders
expensive than in the
sized and looking to grow rapidly. They
of the SPAC and its purpose. Once
often find US stock exchanges as the
the IPO is completed and funds
United States
best alternative for not only attracting
raised, the SPAC seeks to purchase
Wanli
Xu
US capital but global capital as well.
an operating business. Currently,
Whether it is because of the size and
there are a number of SPACs which
Nixon Peabody
reach of the NYSE or the expertise with
have been formed to acquire pritechnology companies possessed by
vately held companies located in
NASDAQ, US exchanges are often being selected for China. The acquisition is usually completed as a share
IPOs over other foreign alternatives.
exchange and the holders of the Chinese company end
Outside forces have also driven Chinese companies to up owning shares of the publicly traded company.
US stock exchanges. Many institutional investors prefer a
listing on the US stock exchanges. Mainland firms hope that Conclusion
listing in a market known for tough regulations and strin- The Chinese domestic stock exchanges have matured
gent oversight will give them credibility with both global greatly in the past three years. Regulatory reforms, the introand domestic customers and business partners.
duction of new products and the Chinese Governments
efforts to discourage IPOs on foreign exchanges, have all
IPO Alternatives in the US Capital Market
bolstered the Chinese stock exchanges. Overseas stock
The US stock markets have not only been successful at exchanges continue to attract Chinese companies with
attracting Chinese companies interested in IPOs, but they better liquidity and a more mature investment culture. Each
have had success in attracting Chinese companies interested of the stock exchanges discussed in this articles have advanin alternative methods of going public. Currently, there are tages and disadvantages. In this era of transition, Chinese
two major IPO alternatives available in the US. These companies should carefully evaluate the best exchange for
include the reverse takeover or reverse merger and the their IPOs and plan far in advance. Careful analysis and
special purpose acquisition company or SPAC as it is com- thoughtful planning can make the difference between a
monly referred.
hugely successful IPO and failure.
A reverse merger is a transaction in which an operating
jchapman@nixonpeabody.com
company mergers with a publicly traded corporation that
wxu@nixonpeabody.com
has no business. By means of a share exchange or merger,
www.nixonpeabody.com
the shareholders of the operating company end up owning
MAY 2008 31