Key Points:

  • Issuing conditions for IPO on Growth Enterprise Market (GEM) outlined
  • Lock-up requirements applicable to stocks held by different types of shareholders  

As part of a longstanding effort to develop China’s multilayer capital market, on March 31, 2009 the China Securities Regulatory Commission (“CSRC”) published the Interim Measures for Initial Public Offerings and Listing of Stocks on the Growth Enterprise Market (“GEM IPO Measures”), which took effect on May 1, 2009. On May 8, Shenzhen Stock Exchange (“SZSE”) posted a draft Stock Listing Rules of Growth Enterprise Market ("Draft GEM Listing Rules") on its website to solicit public comment. The GEM IPO Measures, in combination with the Draft GEM Listing Rules, are intended to lay down the regulatory framework for GEM, which could be formally launched as early as August 2009.

GEM IPO Conditions

Under the GEM IPO Measures, issuers that apply for initial public offering of shares must fulfill the following criteria:  

1. They must be a company limited by shares that has been in continuous operation for three years or more;  

2. They must have been profitable:  

a) for the most recent consecutive two years, with an aggregate net profit in the most recent two years of no less than RMB10 million and with profit growth; or  

b) in the most recent year, with a net profit of no less than RMB5 million, a business income in the most recent year of no less than RMB50 million and a growth rate of business income in the most recent two years of no less than 30%. (The basis for calculating net profit will be the lower of the figures before and after deducting nonrecurring gains and losses);  

3. Their net assets at the end of the most recent reporting period must not be less than RMB20 million, and they must not have any losses not made up; and  

4. Their total share capital after the offering must be no less than RMB 30 million (Article 10).  

GEM Underwriting Rules

The GEM will attach greater importance to the role of the sponsors. The sponsor of the issuer’s offering of shares and their listing on the GEM should conduct a due diligence investigation, make an informed judgment of the issuer’s growth potential and issue an opinion as to that potential. If the issuer is an enterprise that provides proprietary innovations, it must specify in its dedicated opinion the issuer’s capability for proprietary innovation (Article 32).

The sponsorship period (during which the sponsor must oversee and propel the issuer’s compliance with and fulfillment of various pre-IPO commitments) after an issuer’s IPO on GEM runs through the remaining months of the year of its IPO plus three years thereafter – one year longer than that required for listing on the main board. In the meantime, however, in recognition of the fact that fluctuations in performance are common to growth enterprises, the CSRC will not impose the same sanction on the sponsor as is applicable to a main board IPO if the issuer reports a 50% slump of its year-on-year profit during the sponsorship period.  

GEM’s Stock Lock-Up Requirement

According to the Draft GEM Listing Rules, the shares held by the controlling shareholder or actual controlling party can be sold only three years after the IPO of the issuing company (Article 5.16).

The shares that are held by other shareholders who acquired those shares within 6 months before the IPO application cannot be sold for the first 12 months after the IPO of the issuing company and only 50% of the total can be sold by these shareholders during the period between the 13th and 24th months (Article 5.17).  

Meanwhile, other existing shares are generally subject to a one-year lock-up period after the IPO, according to PRC Company Law.

In addition, the Draft GEM Listing Rules include provisions covering information disclosure, trading suspension, delisting conditions and procedures, and internal control rules for various aspects of corporate governance that the listed company must maintain. The Draft GEM Listing Rules can be found at the SZSE website.