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China: New Securities Law with Registration-Based IPO System Takes Effect

(Mar. 17, 2020) On March 1, 2020, the newly revised Securities Law of the People’s Republic of China (PRC or China) entered into effect. Previously on December 28, 2019, the Standing Committee of the National People’s Congress (NPCSC) had adopted a major revision of the country’s first comprehensive securities legislation—the PRC Securities Law. This Law was initially adopted by the NPCSC in 1998 and went effect on July 1, 1999. It was then revised only once, in 2005, in addition to being slightly amended in 2004, 2013, and 2014.

The current revision has been deliberated for a few years. As a result, over 100 articles were changed and two new chapters, on information disclosure and investors protection, respectively, were added to the revised Law. Significantly, the new 226-article Law will implement a registration system for all initial public offerings (IPOs), a system that has been tested on the new Science and Technology Innovation Board since the Board was launched last year under the Shanghai Stock Exchange.

Under the previous Law, IPOs in China were subject to regulatory approvals of the China Securities Regulatory Commission (CSRC). Under the revised Law, the approval system will be abolished step by step and a more market-oriented registration system will be implemented. The State Council will formulate detailed rules for the step-by-step implementation of the new system. (Art. 9.)

The conditions that companies seeking IPOs are required to meet are also revised, in particular that companies are no longer required to have the capacity for sustained profitability. Instead, the revised Law requires the capacity for sustainable operation. (Art. 12.)

Under the new registration system, applications for the issuance of securities will be registered with the CSRC or other agencies authorized by the State Council. Stock exchanges will review whether issuers comply with the issuance conditions and information disclosure requirements. (Art. 21.)

The revised Law also contains stricter rules for information disclosure and considerably heavier penalties for market violators. It provides that if new securities are publicly issued and traded in China and overseas simultaneously, any information disclosed overseas must also be disclosed domestically. (Art. 78.) The penalty for fraudulent listings under the revised Law is a fine of up to 20 million yuan (RMB) (about US$2.85 million) or the entire proceeds from the IPO. (Art. 181.) The penalty for similar violations under the previous Law was a fine of up to RMB600,000 (about US$86,000) or 5% of the proceeds. (Art. 189.) Breaching information disclosure rules is punishable by a fine of up to RMB10 million (about US$1.43 million) under the revised Law (art. 197), an increase from the maximum of RMB600,000 under the old Law (art. 193).

Haolin Wang, Law Library intern, contributed to this article.