The State Council issued opinions promoting high-quality development of innovation and entrepreneurship, which allowed enterprises which have potential for development but haven’t making earnings yet to go public and allowed technological enterprises to adopt the weighted voting right (WVR).
The opinions pointed out that promoting high-quality development of innovation and entrepreneurship will further strengthen entrepreneurship’s ability of boosting employment, improve vitality of technological innovation and industrial development, create high-quality supply and expand effective demand, and is of great significance for enhancing economic development.
Enterprises which are promising but haven’t making profits are allowed to go public
There are 34 policy measures in the opinions. Specifically, in terms of further perfecting financial service of innovation and entrepreneurship, it suggested broadening direct financing channels, and supporting those innovative enterprises which are promising but haven’t earnings to be listed in the new third board or regional equity markets.
The requirements on profitability of enterprises which plan to be listed in A-share market blocked some promising enterprises from going public in the market before. It is learnt that it is required in Securities Law that enterprises which have public offerings should be able to be profitable continuously. Those enterprises which intend to be listed on the Main Board should have over 30 million yuan of net profits over the past three years.
The threshold of net profits for to-be-listed enterprises is also a reason for some excellent enterprises to go public in overseas market. CIB Research pointed out that a batch of excellent enterprise had no choice but to be listed overseas due to restriction on revenues. “A great number of Internet enterprises chose to be listed in overseas markets mainly because they encountered restrictions. Baidu, JD.com and Netease suffered losses three years before they went public, failing to meet the requirement for listing in A-share market.”
Analysts told the reporter that high-tech industries represented by Internet have strict requirement on capitals. They need huge capital investment in earlier development stage, and it is difficult for them to make profits without continuous capital injection. “There are few enterprises with high technology, which are mostly owned by few powerful groups.”
It is worth noting that as early as March 2018, the State Council exempted enterprises that have new technologies, are new industries, new formats and new models, and other innovative enterprises from profit requirement when applying IPOs.
In fact, listed companies have already turned to high-tech companies in 2017. According to data from the China Securities Regulatory Commission, as of the end of 2017, there were 3,485 listed companies in the Shanghai and Shenzhen Stock exchanges. In 2017, a total of 419 companies achieved IPOs and raised 218.6 billion yuan. Among the newly listed companies, high-tech enterprises accounted for nearly 80 percent.
Tech companies can adopt dual-class share structure
The "Opinions" also pointed out that it will promote technology SMEs and venture capital enterprises to raise fund by issuing bonds, steadily expand the pilot scale of innovation and entrepreneurship bonds, and support qualified enterprises to issue special debt financing instruments. It will also standardize the development of Internet-based equity financing, and broaden the financing channels for SMEs and innovative entrepreneurs. It will promote the improvement of laws and regulation and allow technology companies to adopt the weighted voting right (WVR).
WVR, or dual-class share structure, refers to the common stock structure that contains two or more types of voting rights in the capital structure. Under the structure, growth enterprises can directly use equity to finance. Meanwhile, companies can avoid excessive dilution of equity in case the founding team may lose speaking right in the company to ensure such growth companies can develop steadily.
For example, Xiaomi, which was recently listed on the Hong Kong Stock Exchange, and Alibaba, which had planned to go listing on the Hong Kong Stock Exchange, adopt dual-class share structure. Alibaba, failed to meet the requirements, eventually could only choose go listing in the US. Xiaomi became the first stock after the e Hong Kong Stock Exchange’s WVR reform.
The above analysts said that WVR is an indispensable system for stimulating the development of tech enterprises. Enterprises have obtained financing facilities through listing, and WVR can guarantee the founding team with right to make decisions and avoid being kidnapped by funds in development process.
Translated by Vanessa Chen & Coral Zhong