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Venture Capital Exits and the Structure of Stock Markets in China

  • Lin LIN (a1)
Abstract
Abstract

Existing literature suggests a strong relationship between a vibrant venture capital market and an active stock market: venture capital flourishes when venture capitalists can readily exit from successful portfolio companies through IPOs, and IPOs are in turn facilitated by active and efficient stock markets. This article uses China as a case study to explore the connection between the stock market and venture capital market. Through empirical studies, this article confirms the existing literature by demonstrating a close connection between the stock market and venture capital market in China. It also refines the existing literature by finding that, for venture capital availability, laws and policies also matter in China. Strong and sustained law reforms and government policies aimed at improving the institutional structure and regulatory environment of the stock market can facilitate venture capital-backed exits, which in turn lead to an increase in new venture capital availability in China. Nonetheless, numerous IPO closures have led to freeze-ups in China’s venture capital market. Also, there remain a multiplicity of institutional impediments to the efficient operation of the stock market and the effective implementation of IPO reforms in China. These may in turn hinder the development of the Chinese venture capital industry.

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Assistant Professor, Faculty of Law, National University of Singapore (NUS). Helpful comments on earlier drafts of this article were received from Prof. Kon Sik Kim, Prof. Hans Tjio, Prof. Lan Luh Luh, Mr. Florian Gamper and Mr. Jerrold Soh. I also thank the participants in the 25th Australia Annual Corporate Law Teachers Association Conference and the 12th Asian Law and Economics Association (AsLEA) Annual Conference and the 15th Tsinghua 21st Century Commercial Law Forum. I am grateful to the interviewees from China, who generously shared their knowledge and insights with me. Interviews were conducted on an anonymous, background basis.

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1. GilsonJ, ‘Engineering a Venture Capital Market: Lessons from the American Experience’ (2003) 55 Stanford Law Review 1067 , 1068. See generally on the importance of venture capital: Marco Da Rin and others, ‘The Law and Finance of Venture Capital Financing in Europe: Findings from the RICAFE Research Project’ (2006) 7 European Business Organization Law Review 525; HaarBrigette, ‘Articles/Impressions of the First RICAFE Conference: Risk Capital and the Financing of European Innovative Firms’ (2004) 5(1) European Business Organization Law Review 201 .

2. The Treasury and Department of Industry, Innovation, Science, Research and Tertiary Education, Australian Government, ‘Review of Venture Capital and Entrepreneurial Skills’ (2012), 13, para 4.4 <www.avcal.com.au/documents/item/516> accessed 5 July 2016 (‘Australia’s venture capital sector is an important component of Australia’s innovation system’); at 17, para 4.8 (‘In terms of venture capital support, the Australian Government provides a range of equity/tax-based venture capital programs’). Examples of governmental support include the Innovation Investment Fund (equity-based) (see 17, para 4.19) and the Early Stage Venture Capital Limited Partnerships program (tax-based) (see 18, para 4.23).

3. Singapore Venture Capital & Private Equity Association (SVCA) and PricewaterhouseCoopers (PwC), ‘Private Equity: the Marker of a Successful Financial Hub’ (SVCA & PwC Baseline Survey 11 December 2011) <http://svca.org.sg/wp-content/uploads/2012/12/SVCA-PWC-Article-on-Baseline-Survey-v2-21.pdf> accessed 5 July 2016 (‘Private equity and venture capital firms … play an important role in Singapore’s financial services sector’). Examples of governmental support include the Early Stage Venture Fund, an initiative of the National Framework for Innovation and Enterprise, which assists venture capital funds to invest in Singapore-based early-stage high-tech companies, as well as the SPRING Start-up Enterprise Development Scheme and the SPRING Business Angel Scheme. See Colin Ng & Partners, ‘Venture Capital and Private Equity Initiatives in Singapore’ (CNPupdate, May 2014) <www.cnplaw.com/en/cnpupdatev2/Media/Content/Articles/2014/03/VC.pdf> accessed 5 July 2016.

4. LinLin, ‘Re-Engineering a Venture Capital Market: The Case of China’ (2015) NUS Centre for Law & Business Working Paper No. 15/04; NUS Law Working Paper No. 2015/007, <http://ssrn.com/abstract=2643311> accessed 5 July 2016 (accepted paper for the Stanford International Junior Faculty Forum 2015).

5. China in 2013 had the third largest amount of VC investment after the U.S. and Europe (not a country). See Ernst & Young, ‘Adapting and evolving: Global venture capital insights and trends 2014’ (EYGM Limited 2014), 2 <www.ey.com/Publication/vwLUAssets/Global_venture_capital_insights_and_trends_2014/$FILE/EY_Global_VC_insights_and_trends_report_2014.pdf> accessed 5 July 2016.

6. Zero2IPO Research Centre, Venture Capital Annual Report 2015 (Zero2IPO Publisher 2016).

7. See Figure 2 in this article.

8. See BlackBernard S and GilsonRonald J, ‘Does Venture Capital Require an Active Stock Market?’ (1999) 11 Journal of Applied Corporate Finance 36 ; RockEdward B, ‘Greenhorns, Yankees, and Cosmopolitans: Venture Capital, IPOs, Foreign Firms, and U.S. Markets’ (2001) 2 Theoretical Inquiries in Law 711 ; GompersPaul and LernerJosh, ‘The Venture Capital Revolution’ (2001) Journal of Economic Perspectives 145 ; MayerColin, SchoorsKoen, and YafehYishay, ‘Sources of funds and investment activities of venture capital funds: evidence from Germany, Israel, Japan and the United Kingdom’ (2005) 11 Journal of Corporate Finance 586 ; FiedlerMarc-Oliver and HellmannThomas, ‘Against All Odds: The Late but Rapid Development of the German Venture Capital Industry’ (2001) The Journal of Private Equity 39 ; JengLeslie A and WellsPhilippe C, ‘The determinants of venture capital funding: evidence across countries’ (2000) 6 Journal of Corporate Finance 241 . They analyze the determinants of venture capital from a sample of 21 countries and find that IPOs are the strongest driver of venture capital investing.

9. Black and Gilson, ‘Does Venture Capital Require an Active Stock Market?’ (n 8).

10. Rock (n 8) 713; Black and Gilson, ‘Does Venture Capital Require an Active Stock Market?’ (n 8) 2.

11. ibid.

12. BlackBernard S and GilsonRonald J, ‘Venture capital and the structure of capital markets: banks versus stock markets’ (1998) 47 Journal of Financial Economics 243 .

13. The empirical study consists of three parts. Part A is a study on a sample of fifty venture capital limited partnership agreements obtained from leading Chinese law firms and venture capital firms, i.e. Gaorong Capital, Chengwei Capital, Beijing Fangda Law Firm, Beijing Global Law Firm, Beijing Jincheng Tongda Law Firm, Chongqing Zhonghao Law Firm, Shanghai Yuantai Law Firm and Shenzhen Huashang Law Firm. Part B is the author’s interviews with practitioners, venture capitalists, counsels, and investors from twenty venture capital funds. The interviewees come from the six major Chinese cities for venture capital investments, i.e. Beijing, Shanghai, Tianjin, Shenzhen, Chongqing, and Guangzhou. Part C comprises a study of data and reports published by two leading service providers and investment institutions in China’s venture capital industry: the Zero2IPO Annual Report of the Venture Capital Market in China published by the Zero2IPO Research Centre, and the China Venture Capital Yearbook published by the China Venture Capital Research Institution.

14. NEEQ is not identical to a normal stock exchange like the SSE and the SZSE. See Part VI(A) in this article for detailed discussion.

15. It is acknowledged that a large number of venture capital-backed companies have gone overseas for listing, including IT giants such as Alibaba and Baidu. See text accompanying notes 118-119.

16. For the international version of the venture capital cycle, see generally GompersPaul Alan and LernerJoshua, The Venture Capital Cycle (MIT Press 2004).

17. See generally Lin (n 4).

18. ibid.

19. CummingDouglas J and MacIntoshJeffrey G, ‘Venture-Capital Exits in Canada and the United States’ (2003) 53 University of Toronto Law Journal 101 , 106.

20. CummingDouglas J and MacIntoshJeffrey G, ‘A Cross-Country Comparison of Full and Partial Venture Capital Exits’ (2003) 27(3) Journal of Banking and Finance 511 , 512.

21. See Cumming and MacIntosh, ‘Venture-Capital Exits in Canada and the United States’ (n 19) (The paper provides a comprehensive study of the comparative advantages and disadvantages of all forms of VC exits).

22. ibid 101.

23. ibid.

24. ibid.

25. See text to nn 36–37.

26. See Gilson (n 1).

27. Black and Gilson, ‘Venture capital and the structure of capital markets’ (n 12) 256–257.

28. ibid 257.

29. ibid 258–259.

30. ibid 259–261. Upon IPO, special control rights given to the venture capital fund would disappear, as the convertible preferred stocks held by the fund will be converted to common stock at the time of the IPO, as stipulated in the contract.

31. ibid 259–260.

32. ibid 259.

33. ibid.

34. Black and Gilson, ‘Venture capital and the structure of capital markets’ (n 12) 257; Armin Schwienbacher, ‘Innovation and Venture Capital Exits’ (2008) 118 The Economic Journal 1888.

35. Schwienbacher (n 34).

36. Black and Gilson, ‘Venture capital and the structure of capital markets’ (n 12) 261.

37. RinMarco Da, NicodanoGiovanna, and SembenelliAlessandro, ‘Public policy and the creation of active venture capital markets’ (2006) 90 Journal of Public Economics 1699 .

38. See BoniniStefano and AlkanSenem, ‘The political and legal determinants of venture capital investments around the world’ (2012) 39 Small Business Economics 997 . This study analyzes data from 16 countries around the world using new statistical methods and has found evidence confirming LLSV’s hypothesis.

39. See Gompers and Lerner (n 16) 8.

40. Communist Party of China (CPC) Central Committee, ‘The Decision to Reform the Science and Technology Systems [zhonggong zhongyang guanyu kexuejishu tizhigaige de jueding]’ CPC News (China, 13 March 1985) <http://cpc.people.com.cn/BIG5/64162/134902/8092254.html> accessed 5 July 2016.

41. For the history of the venture capital market in China, see HaitianLu, YiTan, and GongmengChen, ‘Venture Capital and the Law in China’ (2007) 37(1) Hong Kong Law Journal 229 .

42. See data from the World Federation of Exchanges (data as of end-May 2015): Sophia Yan, ‘China’s stock market is now worth over $10 trillion’ CNN Money (Hong Kong, 15 June 2015) <http://money.cnn.com/2015/06/15/investing/china-stocks-10-trillion> accessed 5 July 2016.

43. Xinhuanet, ‘The Past and Present of Venture Capital in China [zhongguo fengxian touzi de lishi ji xianzhuang]’ Xinhuanet (China, 13 May 2008) <http://news.xinhuanet.com/theory/2008-05/13/content_8156697.htm> accessed 5 July 2016.

44. PE Daily, ‘Review of Venture Capital in China 2002 [2002 nian: bentu chuangtou jinru ‘handong’ IDG kaishi zaoqi buju]’ (CVCF 15 th Anniversary Special) <http://news.pedaily.cn/zt/20151116390412.shtml> accessed 5 July 2016.

45. See Part IV of this article.

46. Full figures for 2016 are not available as of the date of this article, thus the data for the year 2015 is not reflected in this table.

47. See Table 1 in this article.

48. A share buyback by an entrepreneurial firm is permissible under the Chuangye Touzi Qiye Guanli Zhanxing Banfa (创业投资企业管理暂行办法) [Interim Measures for the Administration of Venture Capital Enterprises] (promulgated by the National Development and Reform Commission, 15 November 2005, effective 1 March 2006) Order No 39 and the Waishang Touzi Chuangye Touzi Qiye Guanli Guiding (外商投资创业投资企业管理规定) [Provisions Concerning the Administration of Foreign-funded Business-starting Investment Enterprises] (promulgated by the Ministry of Foreign Trade and Economic Cooperation, the Ministry of Science and Technology, the State Administration for Industry and Commerce, the State Administration of Taxation, and the State Administration of Foreign Exchange, 31 October 2002, effective 1 March 2003, revised on 28 October 2015).

49. See the respective Zero2IPO Annual Reports for the detailed breakdown for each year.

50. Telephone interview with Ms S, Vice President, Gaorong Capital, Beijing (29 October 2015) and Ms K, Partner, Global Law Firm, Beijing (29 October 2015).

51. Article 142 of the Companies Law of the People’s Republic of China provides the situations under which a company can buy back their own shares. Also, in practice, it is difficult for unlisted companies to obtain bank loans for share buybacks.

52. National Venture Capital Association, 2015 National Venture Capital Association Yearbook (18th edn, Thomson Reuters 2015), 75.

53. In the US, one reason for the preference of US venture capitalists for M&A-exits is the booming merger business, in contrast to the volatility of the capital markets. Recent IPOs have performed poorly, with many VC-backed companies receiving better offers from potential acquirers, including financial firms and strategic rivals, than from exits through IPOs. As a result, in the US, where the financial intermediaries are sophisticated and financial infrastructure is well developed, exits through M&A have emerged as the better way to grow earnings, especially where synergies and cost-cutting are achieved.

54. In this table, the IPO figure only refers to exits by VC-backed companies going public on the Chinese stock market. It does not include IPO exits via overseas markets.

55. For the data from 2008 to 2015.

56. For the data from 2006 to 2007.

57. This total figure includes management buyouts and share buybacks but excludes the NEEQ listings.

58. Data from Annual Research Reports On Venture Capital In China, published by Zero2IPO.

59. ‘Share transfer’ excludes management buyouts and share buybacks.

60. Data not available.

61. See National Venture Capital Association (n 52) 27, 77, and 81.

62. As the National Venture Capital Association (NVCA) Yearbook 2016 was not available at the time of this article, the figures for 2015 were obtained from the press release of the National Venture Capital Association. See National Venture Capital Association, ‘Seventy-Seven Venture-Backed Companies Went Public in 2015 – Fourth Quarter IPO Volume Up Slightly from Previous Quarter’ (National Venture Capital Association, 7 January 2016) <http://nvca.org/pressreleases/seventy-seven-venture-backed-companies-went-public-in-2015/> accessed 5 July 2016.

63. Hong Kong Stock Exchange, ‘Market Highlights’ (China Stock Markets Web, 2016) <www.hkex.com.hk/eng/csm/highlight.asp?LangCode=en> accessed 5 July 2016.

64. Shenzhen Stock Exchange, ‘Small and Medium Enterprise Board’ (Shenzhen Stock Exchange, 2015) <http://sme.szse.cn/> accessed 5 July 2016.

65. Shenzhen Stock Exchange, ‘ChiNext’ (Shenzhen Stock Exchange, 2015) <http://chinext.szse.cn> accessed 5 July 2016.

66. SZSE, ‘Small and Medium Enterprise Board’ (n 64).

67. SZSE, ‘ChiNext’ (n 65). There are various reasons for the high P/E ratios in China, including the mertis-based system of IPO and speculation by the investors.

68. SongShunlin, TanJinsong, and YiYang, ‘IPO initial returns in China: Underpicing or overvaluation?’ (2014) China Journal of Accounting Research 31 , 47.

69. ibid.

70. Shangshi Gongsi Shougou Guanli Banfa (上市公司收购管理办法) [Measures for the Administration of Takeover of Listed Companies] (promulgated by the China Securities Regulatory Commission, 31 July 2016, effective 1 September 2016, amended 23 October 2014) art 4.

71. See Feishangshi Gongsi Shougou Guanli Banfa (非上市公司收购管理办法) [Measures for the Administration of Takeover of Non-listed Public Companies] (promulgated by the China Securities Regulatory Commission, 5 May 2014, effective 23 July 2014) art 4.

72. Telephone interview with Mr Y, Senior Associate, Zhonglun Law Firm, Shenzhen (28 February 2016).

73. Shangwubu Guanyu Touzizhe Binggou Jingnei Qiye de Guiding (商务部关于投资者并购境内企业的规定) [Provisions on Foreign Investors’ Merger and Acquisition of Domestic Enterprises] (promulgated by the Ministry of Commerce, 22 June 2009, effective 22 June 2009).

74. ibid art 10.

75. Zheng Xiaobo, ‘When the Chinese M&A Wave Arrival is Uncertain [zhongguo binggou langchao heshidaolai buqueding]’ Securities Times [Zhengquan Shibao] (China, 27 May 2013) <http://epaper.stcn.com/paper/zqsb/html/2013-05/27/content_473491.htm> accessed 14 July 2016.

76. Zhongguo Yinjianhui Guanyu Yinfa Shangye Yinhang Binggou Daikuan Fengxianguanli Zhiyin de Tongzhi (中国银监会关于印发〈〈商业银行并购贷款风险管理指引〉〉的通知) [Notice of the China Banking Regulatory Commission on Issuing the Guidelines on the Risk Management of M&A Loans of Commercial Banks] (promulgated by the China Banking Regulatory Commission, 6 December 2008, effective on 6 December 2008).

77. Zhongguo Yinjuanhui Guanyu Yinfa Shangye Yinhang Binggou Daikuan Fengxiangguanli Zhiyin De Tongzhi (中国银监会关于印发〈〈商业银行并购贷款风险管理指引〉〉的通知) [Notice of the China Banking Regulatory Commission on Issuing the Guidelines on the Risk Management for M&A Loans of Commercial Banks] (promulgated by China Banking Regulatory Commission, 10 February 2015, effective 10 February 2015), No 5.

78. Notable changes include: (1) extending the guidelines to policy banks, PRC branches of foreign banks, or finance companies of business groups, (2) extending the term of the loan to not exceed 7 years, (3) increasing the cap of the loan, such that it now cannot account for more than 60% of the acquisition value, and (4) relaxing the security requirements for M&A loans. See King & Wood Mallesons, ‘CBRC amends guidelines for risk management of M&A loans granted by commercial banks’ (King & Wood Mallesons, 24 March 2015) <www.kwm.com/en/knowledge/insights/cbrc-amends-mergers-and-acquisitions-loans-guidelines-20150324> accessed 5 July 2016.

79. CBRC 2015 Notice (n 76) art 22.

80. ibid art 21.

81. Telephone interview with Mr S, Partner, Yuantai Law Firm, Shanghai (22 December 2015).

82. Cumming and MacIntosh, ‘Venture-Capital Exits in Canada and the United States’ (n 19) 106–107.

83. ibid.

84. Telephone interview with Ms K, Partner, Global Law Firm, Beijing (22 December 2015).

85. See eg Ted Chan and others, ‘The 2012 BCG 50 Chinese Global Challengers: End of Easy Growth’ (bcg.perspectives, 11 September 2012) <https://www.bcgperspectives.com/content/articles/globalization_2012_chinese_global_challengers_end_of_easy_growth/?chapter=4> accessed 5 July 2016 (that ‘few Chinese companies have developed a mastery of the M&A and postmerger integration processes … for many Chinese executives, dealmaking and deal integration are still foreign concepts. Their deals frequently fall short of their original goals. … they [Chinese companies] suffer from a lack of experience. Many Western companies have spent 30 or more years developing capabilities in evaluating, executing, and integrating deals.’)

86. See eg PricewaterhouseCoopers, ‘PwC Foreign Banks in China 2013 Report’ (PricewaterhouseCoopers China 2014), 28 <www.pwccn.com/webmedia/doc/635253186547653351_fbic_2013.pdf> accessed 5 July 2016 (‘Nearly all foreign banks struggle to find and retain sufficient talent to support the continued growth of their mainland operation. Most foreign banks in China said their staff were overwhelmingly Chinese, but given the limited number of years of reform, the existing domestic talent supply is still limited’).

87. In a 2010 survey done by KPMG on Chinese companies, ‘fifty-six percent of survey respondents cited failure to identify important financial, operational and management issues in due diligence as a key reason for the failure of a deal and this is one particular area where the experience of external advisors can help.’ See KPMG, ‘World class aspirations: The perceptions and the reality of China outbound investment’ (KPMG 2010), 12 <http://www.kpmg.de/docs/china-outbound-investment-201010.pdf> accessed 5 July 2016.

88. Zero2IPO Research Centre, ‘China Equity Investment Market Year-in-Review 2014 [qingke zhongguo guquan touzi shichang 2014 nian quannian huigu]’ (Zero2IPO Research Centre 2015), 42 <http://research.pedaily.cn/researchreport/2015/20150209378364.shtml> accessed 5 July 2016.

89. See Josh Noble, ‘Why are China’s stock markets so volatile?’ CNBC (2 July 2015) <www.cnbc.com/2015/07/02/why-are-chinas-stock-markets-so-volatile.html> accessed 5 July 2016.

90. See Deloitte, ‘More experienced buyers, Higher return expectations: 2014 Greater China outbound M&A spotlight’ (Deloitte 2014), 31 <www2.deloitte.com/content/dam/Deloitte/xe/Documents/About-Deloitte/me_csg_2014-china-outbound.pdf> accessed 5 July 2016. Note though that this Deloitte study was conducted in relation to outbound M&A. (‘Respondents are more optimistic about the market dynamics in the coming year compared with those in the 2013 survey’; ‘Large M&A transactions will probably happen more frequently. Chinese M&A investors expect mid- and large-sized M&A transactions (US$150 million-US$500 million) will happen more frequently in the coming year. The expectations of small-sized M&A transactions (US$5 million-US$50 million) dropped significantly in the 2014 survey, showing Chinese investors were developing an appetite for larger transactions, especially for targets with higher valuations or with a leading position in their particular industry.’)

91. ibid.

92. Guowuyuan Guanyu Jinyibu Youhua Qiye Jianbing Chongzu Shichanghuanjing de Yijian (国务院关于进一步优化企业兼并重组市场环境的意见) [Opinion on Further Optimizing the Market Environment for the Merger and Restructuring of Enterprises] (promulgated by the State Council, 2014, 24 March 2014, effective 24 March 2014).

93. Shangshi Gongsi Zhongda Zichan Chongzu Guanli Banfa (上市公司重大资产重组管理办法) [Administrative Measures for the Material Asset Reorganization of Listed Companies] (promulgated by the China Securities Regulatory Commission, 2008, amended in 2011 and 2014, effective 23 November 2014).

94. Shangye Yinhangfa (商业银行法) [Law of the People’s Republic of China on Commercial Banks] (promulgated by the 13th Meeting of the 8th Standing Committee of the National People’s Congress, 10 May 1995, amended 27 December 2003 by the 6th Meeting of the 10th Standing Committee of the National People’s Congress, 29 August 2015, effective 1 July 1995).

95. Source: Annual Research Reports On Venture Capital In China, published by Zero2IPO. Figures representing the number of ‘VC-backed IPOs’ (represented by the bar diagram) and the amount of ‘New capital committed to VC funds” (represented by the line graph) can also be found in Table 1 in Part III(A), under the second column (‘Methods of Exit: IPO’) and last column (‘Amount of New Capital Committed to VC Funds’) respectively.

96. Fu Bilian, ‘China’s VC/PE markets hit record high in 2010 [2010 zhongguo VC/PE shichang lüchuang xingao]’ International Finance News [Guoji Jinrong Bao] (Shanghai, 9 December 2010) <http://paper.people.com.cn/gjjrb/html/2010-12/09/content_693810.htm> accessed 26 July 2016.

97. Robert Cookson, ‘China foreign listings dogged by scandal’ Financial Times (Hong Kong, 5 June 2011) <www.ft.com/cms/s/0/9b70a976-8f8a-11e0-954d-00144feab49a.html> accessed 5 July 2016.

98. PE Data, ‘Research Report of Chinese Listed Companies in the Third Quarter of 2015 [2015 nian disanjidu zhongguo qiye shangshi yanjiubaogao]’ (PE Data Report, 25 November 2015) <www.pedata.cn/report/1448429811704012.html> accessed 5 July 2016.

99. ibid.

100. These companies were approved for listing by the CSRC before the suspension of new listings in July 2015. See Zero2IPO Research Centre, ‘Zero2IPO Figures: Only 22 medium-sized listings in 2015 Q3, New Third Board hotly expands to a thousand listings [Qingke Shuju: 2015 Q3 jin 22 jia zhongqi shangshi, xinsanban huobao yue qianjia guapai jin H1 zonghe]’ (PE Daily, 10 October 2015) <http://research.pedaily.cn/201510/20151010389097.shtml> accessed 5 July 2016 (Data as of 10 October 2015).

101. Zero2IPO Research Centre, ‘Zero2IPO Annual Report: VC investments in 2015 dips after rushing to a peak, market makes history but the unicorns are not finding things easy [Qingke Nianbao: 2015 nian VC touzi chonggaohou zhoujiang, shichangchuanglishi dan dujiaoshou rizi buhaoguo]’ (PE Daily, 12 January 2016) <http://research.pedaily.cn/201601/20160112392433> accessed 5 July 2016.

102. Note though that this is very preliminary statistical evidence. A more complex model which accounts for the time effect and developments of the venture capital market and stock market, such as the introduction of the NEEQ in 2010 was not done as there were insufficient (only 9) observations at the time of this paper to justify such a complex model. See also Black and Gilson, ‘Venture capital and the structure of capital markets’ (n 12) for a similar regression model built on US stock market and VC data.

103. Source: Annual Research Reports on Venture Capital In China, published by Zero2IPO.

104. Gilson (n 1) 1093.

105. Lin (n 4).

106. ibid 53.

107. ibid 46, 48, and 50.

108. See Appendix 2. For instance, the launch and reform of the national-level NEEQ in 2014 and the initiation of the IPO reform in 2015 have increased the confidence of the venture capital market despite the crash of the stock market in the later part of 2015.

109. Some of the problems on stock markets identified in this article have indeed persisted for a long time. See Wang Jiangyu, Company Law in China: Regulation of Business Organizations in a Socialist Market Economy (Edward Elgar 2014), 32-44, as well as Victor Yeo, ‘China’s Equity Markets: A Legal and Regulatory Perspective of Foreign Participation’ (1995) 7 Asian Business Law Review 20, 26-9, for earlier critiques of the Chinese stock market.

110. Telephone Interview with Ms S, Vice President, Gaorong Capital, Beijing (29 October 2015); Mr G, Vice President, Chengwei Capital, Shanghai (11 November 2015).

111. For more on the merits-based system, see Robin Hui Huang, ‘The Regulation of Securities Offerings in China: Reconsidering the Merit Review Element in Light of the Global Financial Crisis’ (2011) 41 Hong Kong Law Journal 261.

112. Zhengquanfa (证券法) [Securities Law of the People’s Republic of China] (promulgated by the 6th Meeting of the 9th Standing Committee of the National People’s Congress, 29 December 1998, revised on 27 October 2005 by the 18th Meeting of the 10th Standing Committee of the National People’s Congress, effective 27 October 2005 amended in 2005 and 2013), art 13.

113. See Appendix 1 for detailed requirements.

114. A recent survey also found that a major reason for the CSRC to object listings is the ‘sustainable profitability’: Tang Xin and Wei Jun, ‘IPO Module and Lessons from the US, Hong Kong, and Mainland China [gupiaogongkaifaxing zhuceshenhemoshi jiqijiejian: meiguo, xianggang, yu dalu]’ (Tsinghua 21st Century Commercial Law Forum Conference Proceeding, Beijing, 31 October 2015) 17.

115. Shanghai Stock Exchange, ‘IPO Guide [qiye gaizhi shangshi shiwu]’ (SSE Publications 2012), 23 <http://www.sse.com.cn/services/sselisting/publication/doc/c/4002534.pdf> accessed 5 July 2016.

116. KPMG, ‘New York Stock Exchange IPO Guide’ (KPMG Publications 2010), 34 <www.kpmg.com/US/en/IssuesAndInsights/ArticlesPublications/Documents/kpmg-ipo-guide-july-2010.pdf> accessed 5 July 2016.

117. NASDAQ, ‘Initial Listing Guide’ (NASFAQ Listing Centre January 2016), 3 <https://listingcenter.nasdaq.com/assets/initialguide.pdf> accessed 26 July 2016.

118. See Table 3 in this article for the data for 2007-2014.

119. Wu Xinchun and Xing Mei, ‘Recognition of the Dual Class Structure in China [chengren shuangceng guquan shiying xinxing gongsi zhili shijian]’ (2015) 50 Shanghai Stock Exchange Research Report <http://www.sse.com.cn/aboutus/research/research/c/3986627.pdf> accessed 5 July 2016, 2.

120. CSRC, ‘The Evolution of China’s Share Pricing and Placement Regime [woguo xingu dingjia he peishou zhidu yanjin]’ (CSRC Publications 3 July 2013) <www.csrc.gov.cn/pub/newsite/ztzl/xgfxtzgg/xgfxbjcl/201307/t20130703_230248.html> accessed 5 July 2016.

121. Guanyu Jinyibu Shenhua Xingu Faxing Tizhigaige de Zhidao Yijian (关于进一步深化新股发行体制改革的指导意见) [Guiding Opinion on Further Reforming the Issue System of New Shares] (promulgated by the China Securities Regulatory Commission, 28 April 2012, effective 28 April 2012), art 3(2).

122. ibid art 3.

123. See the United States Securities Act of 1933 (27 May 1933, ch 39, title I, Sec 1 48 Stat 74) r 144(d).

124. Shanghai Zhengquan Jiaoyisuo Gupiao Shangshi Guize (上海证券交易所股票上市规则) [Listing Rules of the Shanghai Stock Exchange] (promulgated by the Shanghai Stock Exchange, 17 October 2014, effective 16 November 2014), 2013) rr 5.1.4, 5.1.5.

125. The listing of COSHIP Ltd Co. on the SME Board in 2006 was the first VC-backed exit on China’s SME Board. See Shenzhen Capital Group Co Ltd, ‘COSHIP, The result of venture capital’ [tongzhou dianzi: chuangtou peiyu de fengshuo zhiguo] <http://www.szvc.com.cn/mgdetail.aspx?id=4134> accessed 5 July 2016.

126. Lao Jiadi, ‘Why Don’t We Like the SME Board? [zhongxiaoban weihe bu zhaoren xiai]’ (2014) 23 China Economic Weekly <http://www.ceweekly.cn/2014/0616/84785.shtml> accessed 14 July 2016.

127. See Appendix 1, text accompanying note 230.

128. ibid.

129. ibid.

130. See Zuo Yonggang, ‘Five Year’s ChiNext: VC/PE is the Biggest Winner [chuangyeban wunian, VC/PE cheng zuida yingjia]’ Securities Daily [zhengquan ribao] (China, 23 October 2014) <http://finance.people.com.cn/stock/n/2014/1023/c67815-25891706.html> accessed 5 July 2016.

131. See Appendix 1, text accompanying n 225.

132. Shouci Gongkaifaxing Gupiao bing zai Chuangyeban Shangshi Guanli Zanxing Banfa (首次公开发行股票并在创业板上市管理暂行办法) [Interim Administrative Measures for Initial Public Offerings and Listing on the Secondary Board] (promulgated by the China Securities Regulatory Commission, 31 March 2009, effective 1 May 2009), art 11.

133. CSRC, ‘The development of companies registered in Shanghai and listed on the ChiNext venture capital [2015 niandu shanghai xiaqu chuangyeban shangshigongsi fazhan qingkuang jianxi]’ (China Securities Regulatory Commission, 29 January 2016) <www.csrc.gov.cn/pub/shanghai/gzdt/201601/t20160129_290496.htm> accessed 5 July 2016.

134. Douglas C Ashton, ‘Revisiting Dual-Class Stock’ (1994) 69(4) St John’s Law Review 863, 866; Frank H Easterbrook and Daniel R Fischel, ‘Voting in Corporate Law’ (1983) 26 Journal of Law and Economics 395.

135. The ‘one share, one vote’ principle is specified under Article 126 of the Companies Law of the People’s Republic of China. In Chinese academia, there are arguments that while non-listed limited liability companies are theoretically not prevented from issuing dual-class shares, in practice, these companies are unable to issue dual-class shares.

136. Gao Fei and Zhou Linbin, ‘Dual-class Stock Structure and Investor Protection’ (Tsinghua 21st Century Commercial Law Conference Proceeding, Beijing, 31 October 2015) 22.

137. Edmond Lococo and Yuling Yang, ‘China’s Silicon Valley Sparking 49 Technology Startups a Day’ Bloomberg Technology (China, 11 March 2015) <www.bloomberg.com/news/articles/2015-03-11/china-s-silicon-valley-sparking-49-technology-startups-a-day> accessed 5 July 2016, quoting Wan Gang, the Minister of Science and Technology in China, at a briefing for the National People’s Congress in Beijing: see ‘Science and Technology Minister Wan Gang answers reporters’ questions [keji buzhang wangang da jizhewen]’ China.com.cn [zhongguowang] (China, 11 March 2015) <www.china.com.cn/zhibo/zhuanti/2015lianghui/2015-03/11/content_34996059.htm> accessed 5 July 2016.

138. While the dual-class share structure is beneficial to entrepreneurial management, numerous problems could also arise, such as the potential risk of corporate abuse by the management. Since listed companies in China typically have a concentrated shareholding structure, a dual-class structure may exacerbate a major corporate governance issue, i.e. the conflict between the controlling shareholder and the minority shareholders. The adoption of dual-class stock in China is controversial and complicated, and will be discussed in another paper by this author.

139. The NEEQ is administered by a special-purpose company that was registered in 2012 and has been operating since 16 January 2013.

140. Guowuyuan Guanyu Quanguo Zhongxiaoqiye Gufen Zhuanrang Xitong Youguan Wenti de Jueding (国务院关于全国中小企业股份转让系统有关问题的决定) [Decision of the State Council on Issues Relating to the National Equities Exchange and Quotations] (promulgated by the State Council, 13 December 2013, effective 13 December 2013), No 49.

141. See Appendix 1, text accompanying nn 224–226.

142. ibid.

143. National Equities Exchange and Quotations, ‘The History of National Equities Exchange and Quotations’ [quanguo zhongxiao qiye gufen zhuanrang xitong de lishi yange] (National Equities Exchange and Quotations 2013) <http://www.neeq.com.cn/qa/20000543.html> accessed 15 August 2016.

144. ibid.

145. See text accompanying nn 153-155.

146. Zero2IPO Research Centre, ‘China’s Equity Investment Markets in 2015: A Full Year Recap and Outlook [qingke niandu juxian: 100 ye PPT jiedu 2015 nian zhongguo guquan touzi shichang fazhan]’ (PE Daily, 19 January 2016) <www.pedata.cn/free/1440998436829778.html> accessed 5 July 2016. Note that NEEQ listings should be distinguished from traditional IPOs in that companies listed on the NEEQ may only offer shares via private placement and may not raise funds from the general public (see explanation above).

147. See Appendix 1.

148. ibid.

149. See Quanguo Zhongxiaoqiye Gufen Zhuanrang Xitong Youxianzerengongsi Guanli Zanxing Banfa (全国中小企业股份转让系统有限责任公司管理暂行办法) [Interim Measures for the Administration of National Equities Exchange and Quotations Co Ltd] (promulgated by the China Securities Regulatory Commission, 31 Jan 2013, effective 31 Jan 2013).

150. ‘IPO Guide’ (n 114).

151. Yisanban, ‘How Long Does It Take to Get List on the New Third Board [xinsanban shangshi shijian yao duojiu?]’ (Yisanban.com 23 May 2016) <http://www.yisanban.com/70.html> accessed 14 August 2016.

152. Preference shares are only permitted in a few eligible companies in China. See Youxiangu Shidian Guanli Banfa (优先股试点管理办法) [Administrative Measures on the Pilot Scheme for Preference Shares] (promulgated by the China Securities Regulatory Commission, 21 March 2014, effective 21 March 2014), No 97, which indicated the formal launch of the Chinese preference shares scheme for specific companies.

153. That is why companies listed on the NEEQ are also termed as ‘quoted companies’ (guapai gongsi).

154. Market-makers are employed by many leading stock markets such as the NASDAQ and the London Stock Exchange.

155. GoldsteinMichael A and NellingEdward F, ‘Market Making and Trading in Nasdaq Stocks’ (1999) 34(1) The Financial Review 27 , 34.

156. Zero2IPO Research Centre, ‘Latest Data on New Third Board 2015 [qingkeshuju: 2015 nian xinsanban zuiquan shujujiedu, yuji niandi guapai gongsi zongshu da 4000 jia]’ (PE Daily, 15 June 2015) <http://research.pedaily.cn/201506/20150615384172.shtml> accessed 5 July 2016.

157. ibid.

158. ‘Homepage of the New Third Board’ (National Equities Exchange and Quotations) <www.neeq.com.cn> accessed 5 July 2016.

159. ibid.

160. Zero2IPO Research Centre, ‘Statistical Analysis of the New Third Board in 2015’ (PE Daily, 19 June 2016) <http://en.pedaily.cn/Item.aspx?id=220359> accessed 5 July 2016; and NEEQ Market Data (n 156).

161. NEEQ Market Data (n 156)

162. ibid.

163. RMB 253.6547606 billion as of 31 December 2015. See ‘Shanghai Stock Exchange Market Data’ (Shanghai Stock Exchange, 5 July 2016) <http://www.sse.com.cn/market/overview/> accessed 5 July 2016.

164. See Appendix 1, text accompanying nn 235–237.

165. ibid.

166. Liu Yonggang, ‘New Third Board Cannot be Taken as China’s NASDAQ [xinsanban buneng bizuo zhongguoban nasidake]’ Sina Finance [xinlang caijing] (Beijing, 28 July 2015) <http://finance.sina.com.cn/stock/xsbpl/20150728/003822804007.shtml> accessed 5 July 2016.

167. A consultation paper on multi-tier reform of the NEEQ was issued on 20 November 2015. The trial measures on multi-tier reform of the NEEQ were issued on 27 May 2016, available at NEEQ homepage: <http://www.neeq.com.cn/uploads/1/file/public/201605/20160527185900_u8n3865s2c.pdf> accessed 15 August 2016.

168. The trial measures on multi-tier reform of the NEEQ are available at NEEQ homepage: <http://www.neeq.com.cn/uploads/1/file/public/201605/20160527185900_u8n3865s2c.pdf> accessed 15 August 2016.

169. ibid.

170. See Eastmoney, ‘New Third Board Liquidity Continues to ‘Bleed’, ‘Market Makers’ Jointly Call for Reform [xinsanban liudongxing chixu ‘shixue’, ‘zhuoshichang’ lianhe huyu gaige]’ (Eastmoney Wealth Net, 30 July 2015) <http://stock.eastmoney.com/news/1614,20150730532440929.html> accessed 5 July 2016.

171. ibid.

172. Interview with Ms K, Partner, Global Law Firm, Beijing (29 October 2015).

173. ‘Information of Listed Companies’ (National Equities Exchange and Quotations, 2012) <http://www.neeq.com.cn/rule/Business_rules.html#class_b> accessed 5 July 2016.

174. Jia Hongyu, ‘Is the New Third Board a Blue Ocean or Refuse Dump? [xinsanban shi ‘lanhai’ haishi ‘lajichang’?]’ China Broadcast Net [zhongguo guangbo wang](China, 28 July 2015) <http://finance.china.com.cn/stock/xsb/sc/20150728/3256287.shtml> accessed 5 July 2016.

175. Dan Huifang, ‘The Listing Cost of Shell Companies on NEEQ is 2 million RMB while the Sale Price is 20 million RMB [guapai chengben 200 wan maike jiaojia 2000 wan]’ Changjiang Business News [changjiang shangbao] (Changjiang, 7 March 2016) <www.changjiangtimes.com/2016/03/527845.html> accessed 5 July 2016.

176. Eg Shenzhen Stock Exchange Trading Rules, r 3.3.15; Shanghai Stock Exchange Trading Rules, ch 2 r 14.

177. Wang Yinping, ‘New Third Board – A New Opportunity for China’s Capital Market [xinsanban, dangdai zhongguo ziben shichang de baofu jihui]’ Huaxia Business [Huaxia Licai] (China, 12 June 2015).

178. Benjamin L Liebman and Curtis J Milhaupt, ‘Reputational Sanctions in China’s Securities Markets’ (2008) 108 Columbia Law Review 929, 931, and 939. (That Chinese main boards have long been blamed as underdeveloped and less functional because of weak investor protection, weak enforcement, inefficient pricing, accounting fraud, market manipulation, and poor disclosure.)

179. ibid 931-935. Since the two stock exchanges were established in 1990, the Chinese stock market has developed alongside economic reform and served specific political missions, such as the privatization of state-owned enterprises (SOE) and the stimulation of investment sentiment amongst the public.

180. For more information on the evolution of IPO in China, see Huang Hui (n 110).

181. On 25 April 1993, the State Council of the People’s Republic of China issued the Gupiao Faxing yu Jiaoyiguanli Zanxing Tiaoli (股票发行与交易管理暂行条例) [Provisional Regulations on the Administration of Share Issuance and Trading] (promulgated by the China Securities Regulatory Commission, 22 April 1993, effective 22 April 1993), signaling the official establishment of the administrative approval system.

182. People’s Governments of the province, autonomous regions, municipality directly under the Central Government or municipality listed separately under the State plan (collectively referred to as the ‘local governments’).

183. CSRC, ‘The Evolution of the Approval System of Securities Issuance in China [woguo gupiao faxing shenhe zhidu de yanjinlicheng]’ (China Securities Regulatory Commission, 3 July 2013) <www.csrc.gov.cn/pub/newsite/ztzl/xgfxtzgg/xgfxbjcl/201307/t20130703_230251.html> accessed 5 July 2016.

184. In 1996, the State Council Securities Committee (SCSC) published the Guanyu 1996 nian Quanguo Zhengquan Qihuo Gongzuoanpai Yijian de Tongzhi (国务院证券委员会关于1996年全国证券期货工作安排意见的通知) [Opinions on Work Arrangements for the National Securities and Futures Market in 1996] (promulgated by the State Council, 2 September 1996, effective 2 September 1996).

185. CSRC, ‘Evolution of Approval System’ (n 182).

186. In 1999, the CSRC issued the Guanyu Jinyibu Wanshan Gupiao Faxing Fangshi De Tongzhi (关于进一步完善股票发行方式的通知) [Circular on the Improvement of the Share Issuance Work] (promulgated by the China Securities Regulatory Commission, 28 July 1999, effective 28 July 1999), No 94, which implemented an additional administrative procedure to examine pre-selection materials for enterprises applying for an IPO. The CSRC would take over the role of pre-selecting enterprises recommended by local governments or departments in charge of central enterprises. This procedure in turn changed the simple old practice of local recommendations under the two-level administrative review system, and ushered in an examination mechanism prior to any formal selection.

187. On 17 March 2001, the CSRC announced the abolition of the administrative approval system for stock issuance and the official implementation of the channel system, which was characteristic of the qualification approval system for stock issuances. On 29 March 2001, the Securities Association of China offered detailed explanations for the ‘Channel System’.

188. ibid.

189. ibid.

190. ibid.

191. CSRC, ‘Evolution of Approval System’ (n 183). Further, in the Zhengjianhui Guanyu Jinyibu Tuijian Xinguifaxing Tizhigaige de Yijian (证监会关于进一步推荐新股发行体制改革的意见) [Opinion on Further Promoting the IPO System Reform] (promulgated by the China Securities Regulatory Commission, 30 November 2013, effective 30 November 2013), the CSRC announced that, under the registration-based IPO system, it would focus on the compliance review of the new listing candidates without assessing the profitability of the IPO companies. The timing of new share issuances and the question of how to issue shares will be determined by the market, in the hope that the valuations of new share offerings will better reflect market demand and supply.

192. Du Qingqing, ‘The Framework of the Registration System is Confirmed [zhucezhi hexinneirong shoudu gongkai: xizezhidingyijibenchengxing, quxiaofashenwei]’ First Financial Daily (China, 29 June 2015) <http://www.yicai.com/news/4638100.html> accessed 14 August 2016.

193. ibid.

194. ibid.

195. ibid.

196. ibid.

197. ibid.

198. The State Council of the People’s Republic of China, Press Release, ‘China to push IPO registration reform gradually: CSRC’ Xinhuanet (China, 12 March 2016) <http://english.gov.cn/news/top_news/2016/03/12/content_281475306104406.htm> accessed 5 July 2016.

199. See text accompanying nn 63–65.

200. Zhou Ming, ‘The Investment Stage for PE and VC was Extended’ [PE yu VC touzi shuangshuang houyi] China Securities Journal (China, 17 March 2008) <http://tech.qq.com/a/20080317/000116.htm> accessed 14 August 2016.

201. Basic Listing Requirements for Equities’ (HKEX, 19 May 2016) <www.hkex.com.hk/eng/listing/listreq_pro/listreq/equities.htm> accessed 5 July 2016.

202. Cumming and MacIntosh, ‘Venture-Capital Exits in Canada and the United States’ (n 19) 115.

203. ibid.

204. ibid.

205. Chao Chen, Haina Shi, and Haoping Xu, ‘Underwriter Reputation, Issuer Ownership, and Pre-IPO Earnings Management: Evidence from China’ (2013) 42(3) Financial Management 647.

206. ‘2015 Report of Individual Investors [shenjiaosuo 2015 nian geren touzizhe zhuangkuang diaocha baogao fabu]’ (SZSE Main, 18 March 2016) <www.szse.cn/main/aboutus/bsyw/39759023.shtml> accessed 5 July 2016.

207. ibid.

208. ‘Five Year Anniversary of ChiNext – Composition of Investors and Investment Behaviour Report’, cited in Liu Wei, ‘ChiNext’ [chuangyeban geren touzizhe hujun yingli 5.5 wan, jiegou rengyou buzu] Shanghai Securities News [shanghai zhengquanbao] (China, 30 October 2014) <http://finance.people.com.cn/stock/n/2014/1030/c67815-25936954.html> accessed 5 July 2016.

209. Song (n 67) 47.

210. Esther Teo, ‘China’s Stock Market Casino and the Real Economy; Straits Times (Beijing, 13 January 2016) <http://www.straitstimes.com/opinion/chinas-stock-market-casino-and-the-real-economy> accessed 17 April 2016. Also see HowsonNicholas C and HannaVikramaditya S, ‘The Development of Modern Corporate Governance in China and India’ in Muthucumaraswamy Sornarajah and Jiangyu Wang (eds), China, India, and the International Economic Order (Cambridge University Press 20108), 543 (noting that China’s stock market has been unfavourably compared to a ‘casino’).

211. Institutional investors such as the NSSF and insurance companies were prohibited from making equity investments due to past policy constraints. While relaxations have been made in recent years to allow institutional investors to make equity investments, many are subject to restrictions on investment ratios. For example, public pension funds are allowed to make investment in stocks, equity funds, and bond funds up to 30% of their investible assets only under art 37(3) of the Guowuyuan guanyu Yinfa Jiben Yanglao Baoxianjijin Touzi Guanlibanfa de Tongzhi (国务院关于印发基本养老保险基金投资管理办法的通知) [Guideline on the Investment for the Pension Fund] (promulgated by the State Council, 17 August 2015, effective 17 August 2015), No 48.

212. Wang Shu, ‘How Does CSRC Reform Solve the Problem of IPO Corruption? [zhengjie jianzhenghui ruhe zhenggai ‘fashenfubai’]’ The Beijing News (Beijing, 26 April 2016) <www.bjnews.com.cn/news/2016/04/26/401393.html> accessed 5 July 2016.

213. The Chinese Communist Party’s Central Commission for Discipline Inspection has been conducting investigations on CSRC officials for violations of discipline. Three officials from CSRC who were in charge of the approval of IPOs were investigated since 2015, including the Vice Chairman Yao Gang. See ibid.

214. See also Appendix 2 for a detailed list and explanation of key legal developments.

215. Feishangshigongsi Jiandu Guanli Banfa (非上市公司监督管理办法) [Measures for the Supervision and Administration of Unlisted Public Companies] (promulgated by the China Securities Regulatory Commission, 28 Sept 2012, effective 1 Jan 2013, amended 2013), art 2.

216. Interim Administrative Measures for Initial Public Offerings and Listing on the Secondary Board (n 131) art 11(1).

217. Securities Law (n 111) art 12.

218. Guowuyuan Guayu Quanguo Zhongxiaoqiye Gufenzhuanrangxitong Youguan Wenti De Jueding (国务院关于全国中小企业股份转让系统有关问题的决定) [Decision III, Decision of the State Council on Issues concerning the National Equities Exchange and Quotations] (promulgated by the State Council, 13 December 2013, effective 13 December 2013).

219. Chuangyeban Gupiao Shangshi Guize (创业板股票上市规则) [Rules Governing the Listing of Stocks on ChiNext] (promulgated by the Shenzhen Stock Exchange, 2014, effective 25 December 2014), r 5.1.1.

220. Art 10 of the Securities Law (n 111) states: ‘Issuing securities to more than 200 specific persons in aggregate or to unspecified objects will be deemed to be a public offering’.

221. Quanguo Zhongxiao Qiye Gufen Zhuanrang Xitong Yewu Guize (全国中小企业股份转让系统业务规则) [National Equities Exchange and Quotations Share Transfer Business Rules] (promulgated by National Equities Exchange and Quotations Share Transfer System, 8 Feb 2013, effective 8 Feb 2013), art 2.1.

222. Art 11(1) of the Chuangyeban Shouci Gongkai Faxing Gupiao Bing Shangshi Guanli Banfa (创业板首次公开发行股票并上市管理办法) [Administrative Measures for Initial Public Offering and Listing on ChiNext] (promulgated by the Shenzhen stock exchange, 1 May 2009, effective 1 May 2009).

223. Art 9 of the Shouci Gongkai Faxing Gupiao Bing Shangshi Guanli Banfa (首次公开发行股票并上市管理办法) [Administrative Measures for Initial Public Offering and Listing of Shares] (promulgated by the China Securities Regulatory Commission, 17 May 2006, effective 17 May 2006).

224. NEEQ Share Transfer Business Rules (n 220).

225. 2006 Administrative Measures (n 222) art 11(2).

226. 2009 Administrative Measures (n 221) art 33(1).

227. ibid. art 33(2).

228. 2009 Administrative Measures (n 221) art 11(3).

229. 2006 Administrative Measures(n 222) arts 33(4)–(5).

230. 2009 Administrative Measures (n 221), art 11(4).

231. Art 30 of the Gupiaofaxing Yu Jiaoyi Guanli Zhanxing Tiaoli (股票发行与交易管理暂行条例) [Interim Provisions on the Management of the Issuing and Trading of Stocks] (promulgated by the State Council, 22 April 1993, effective 22 April 1993), No 112

232. NEEQ Share Transfer Business Rules (n 220) art 2.1.

233. Art 36 of the Zhengquan Faxing Shangshi Baojian Yewu Guanli Banfa (证券发行上市保荐业务管理办法) [Administrative Measures for the Recommendation Business of the Issuance and Listing of Securities] (promulgated by the China Securities Regulatory Commission, 17 Oct 2008, effective 1 Dec 2008).

234. ibid.

235. Art 3 of the Quanguo Zhongxiao Qiye Gufen Zhuanrang Xitong Touzizhe Shidangxing Guanli Xize (全国中小企业股份转让系统投资者适当性管理细则) [Detailed Rules of the National Equities Exchange and Quotations System on Management of Investor Fitness] (promulgated by National Equities Exchange and Quotations System, 17 October 2008, effective 1 December 2008).

236. The 3 million requirement was increased to 5 million.

237. NEEQ 2013 Detailed Rules (n 234) art 5.

238. Art 10 of the Shouci Gongkai Faxing Gupiao bing zai Chuangyeban Shangshi Guanlibanfa (首次公开发行股票并在创业板上市管理办法) [Administrative Measures for Initial Public Offering and Listing on ChiNext] (promulgated by the Shanghai Stock Exchange, 1 May 2009, amended 11 February 2014, effective 11 February 2014) read with the Shenzhen Zhengquanjiaoyisuo Chuangyeban Shichang Touzizhe Shidangxing Guanlishishibanfa (深圳证券交易所创业板市场投资者适当性管理实施办法)[Implementation Measures for Assessing Investor Suitability for ChiNext on the Shenzhen Stock Exchange] (promulgated by the Shenzhen Stock Exchange, 1 July 2009) No 17.

239. There are no express qualifications regarding setting up a securities trading account, but investors will not be considered professional investors unless they satisfy certain requirements specified in art 10 of the Zhengquan Gongsi Touzizhe Shidangxing Zhidu Zhiyin (证券公司投资者适当性制度指引) [Guidelines for Investor Fitness for Securities Investment] (promulgated by the China Securities Regulatory Commission, 31 December 2012, effective 31 December 2012).

240. This table is not intended to be an exhaustive survey of all the legislation or polices issued since the launch of the Shanghai Stock Exchange and Shenzhen Stock Exchange in 1990. It only seeks to highlight the most important legal developments in relation to the development of the stock market and its implication for the venture capital market in China.

241. Shangshi Gongsi Zhengquan Faxing Guanlibanfa (上市公司证券发行管理办法) [Administrative Measures for the Securities Issuance of Publicly-Listed Companies] (promulgated by the China Securities Regulatory Commission, 6 May 2006, effective 8 May 2006) No 30.

242. Shouci Gongkai Faxing Gupiao bing Shangshi Guanlibanfa (首次公开发行股票并上市管理办法) [Measures for the Administration of Initial Public Offering and Listing of Stocks] (promulgated by the China Securities Regulatory Commission, 17 May 2006, revised, effective 1 January 2016) No 32.

243. Zhengquan Faxing Yu Chengxiao Guanli Banfa (证券发行与承销管理办法) [Measures for the Administration of Securities Issuance and Underwriting] (promulgated by the China Securities Regulatory Commission, 17 September 2006, amended 13 December 2013, effective 13 December 2013) No 97.

244. Shangshigongsi Guquan Jili Guanli Banfa (上市公司股权激励管理办法) [Notice of the China Securities Regulatory Commission on Promulgating the Measures for the Administration of Equity Incentive Plans of Listed Companies (For Trial Implementation)] (promulgated by the China Securities Regulatory Commission, 31 December 2005, effective 1 January 2006), No 151

245. Shangwubu Guanyu Waiguo Touzizhe Binggou Jingnei Qiye De Guiding (商务部关于外国投资者并购境内企业的规定) [Decision of the Ministry of Commerce on Amending the Provisions on the Merger or Acquisition of Domestic Enterprises by Foreign Investors] (promulgated by the Ministry of Commerce, 22 June 2009, effective 22 June 2009), No 6.

246. Guowuyuan Guanyu Kaizhan Youxiangu Shidian De Zhidao Yijian (国务院关于开展优先股试点的指导意见) [The Guiding Opinions of the State Council on Launching the Pilot Program of Preferred Shares] (promulgated by the State Council, 30 November 2013, effective 30 November 2013), No 46.

247. Feishangshi Gongzhong Gongsi Jiandu Guanli Banfa (非上市公众公司监督管理办法) [Measures for the Supervision and Administration of Unlisted Public Companies] (promulgated by the China Securities Regulatory Commission, 28 September 2012, effective 1 January 2013), No 85.

248. Quanguo Zhongxiao Qiye Gufen Zhuanrang Xitong Gupiao Zhuanrang Fangshi Queding Ji Biangeng Zhiyin (全国中小企业股份转让系统股票转让发行确定及变更指引) [Guidelines of the National Equities Exchange and Quotations Co Ltd for the Confirmation and Modification of Stock Transfer Methods] (promulgated by the National Equities Exchange and Quotations System, 2014, effective 4 July 2014), No 62.

* Assistant Professor, Faculty of Law, National University of Singapore (NUS). Helpful comments on earlier drafts of this article were received from Prof. Kon Sik Kim, Prof. Hans Tjio, Prof. Lan Luh Luh, Mr. Florian Gamper and Mr. Jerrold Soh. I also thank the participants in the 25th Australia Annual Corporate Law Teachers Association Conference and the 12th Asian Law and Economics Association (AsLEA) Annual Conference and the 15th Tsinghua 21st Century Commercial Law Forum. I am grateful to the interviewees from China, who generously shared their knowledge and insights with me. Interviews were conducted on an anonymous, background basis.

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