In late October of 2008, the China Securities Regulatory Commission (CSRC) issued the Measures on the Administration of the Sponsorship Business for Securities Issuances and Listings, which came into effect on December 1, 2008.

Consistent with the Securities Law of the PRC, the Measures require that an issuer hire a qualified institution to be its sponsor in its initial public offering (IPO) and listing, or its issuance of additional stocks or convertible corporate bonds after it has been listed. Without the CSRC’s approval, no entity or individual may engage in the sponsorship business. In addition, according to the Measures, sponsors must appoint qualified representatives to supervise the specific tasks involved in the sponsorship process. Under relevant laws and regulations, qualified representatives are individuals with adequate experience in investment banking who have passed the rigorous examination required for certification as a sponsor’s representative.

The Measures replaced the Interim Measures on the Sponsorship System for Securities Issuances and Listings (CSRC Order No. 18, 2003) (Interim Measures) and the Measures for the Advisory Business for Initial Public Offerings of Stocks (Zheng Jian Fa [2001] No.15). The new regulation constitutes an extensive revision of the Interim Measures.

The Measures allow the CSRC to exercise closer supervision over sponsors, raise the thresholds for their qualification, and require sponsors to retain their independence from the issuers, as well as maintain complete corporate governance and internal control systems.

Compared with the Interim Measures, the Measures set stricter requirements for a sponsor’s qualification. The sponsor must have a registered capital of no less than RMB 100 million; a net capital of no less than RMB 50 million; at least four qualified representatives; and a team of no less than 35 qualified securities professionals, at least 20 of whom must have experience in sponsorship-related businesses in the last three years. Among other requirements, a sponsor must also have a sound corporate governance structure, an internal control system, a risk management system, business procedures, and a good track record with no material violations of the law in the last three years. The Measures also elaborate on the specific items that a sponsor and its representatives must file with the CSRC. For instance, a sponsor must submit an annual report of its practice to the CSRC each April.

The Measures provide that an issuer may hire two sponsors to jointly sponsor its securities issuance if the size of the issuance reaches a certain level. The sponsor of an issuance may act as the sole lead manager of the issuance, or may assume the role of lead manager together with another securities company that is qualified to be a sponsor. When hired by an issuer, the sponsor must enter into a sponsorship agreement with the issuer, and file the agreement within five days with the local branch of the CSRC. The sponsor must provide training on relevant legal and market issues to the directors, supervisors, key management members, shareholders with more than 5 percent equity interest, and actual controllers of the issuer. The Measures require that such training be reviewed and accepted by the local branch of the CSRC where the issuer is located.

Among the documents that a sponsor is required to submit to the CSRC for public offering or listing is the Sponsor’s Certificate for Issuance or the Sponsor’s Certificate for Listing. The key statements a sponsor must include in its certificate, among other things, are item-by-item descriptions of the lawfulness and fitness of the issuance or listing, disclosures of any connections between the sponsor and the issuer, and the sponsor’s guarantee that the issuer’s application documents and information disclosures contain no false statements, misleading representations or substantial omissions. After submitting the application documents, the sponsor remains responsible for supervising the issuer’s compliance with the laws and regulations relating to corporate governance, as well as its connected transactions, management of funds, investments, and guaranties to others.

The Measures set forth a new provision that requires sponsors to establish a working draft of each project. In addition, the sponsors’ representatives must keep a due diligence log for each project, which must be filed as a component of the working draft.

In cases where the sponsor and its affiliated parties cumulatively hold more than 7 percent of the equity interest of the issuer, or where the issuer holds or controls more than 7 percent of the equity interest of the sponsor, the sponsor must bring in an independent sponsor to act as the primary sponsor. Unlike the Interim Measures, the Measures allow for a sponsorship to be established when the sponsor’s executives possess interests in the issuer or hold positions in the issuer, or when the sponsor has provided guaranties or financing to the issuer.

The Measures increase the rights that a sponsor may exercise over the issuer during the advising period. In addition to the right to information and disclosure, the sponsor and its representatives now may access relevant files of the issuer, attend meetings of the issuer’s shareholders, directors or supervisors, preview disclosure documents to be submitted to the CSRC and the securities exchange, and employ certain intermediary parties to help carry out specific requests made to the issuer by relevant government agencies. The issuer is required to inform the sponsor of any changes in the amount of the public offering or issuance, its investment projects, the occurrence of connected transactions and guaranties, disclosures or reports submitted to the CSRC and the securities exchange, and major violations of the law. The Measures provide that the CSRC may conduct on-site visits to sponsors, in which case the sponsors must cooperate.

Under PRC law, all public offerings of securities must be approved by the CSRC. Additionally, the CSRC is responsible for formulating the qualification requirements for sponsors as well as relevant regulations.