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UPDATED: January 3, 2014 NO. 1 JANUARY 2, 2014
Funding SMEs
Expansion of the new third board and easier access to market capital will ease financing woes
By Lan Xinzhen

UNCERTAINTY: A trader in Hangzhou, capital of Zhejiang Province, watches the board to check on his investments (LONG WEI)

In December 2013, almost all of the securities companies in China received an emergency notification from the National Equities Exchange and Quotations (NEEQ), which encouraged securities companies to be ready for the listing of qualified companies after the NEEQ was expanded. All qualified joint-stock companies across the country can apply to the NEEQ, the so-called "new third board," for trading. The document says innovation-based, and growing micro-, small and medium-sized enterprises are particularly encouraged to participate.

The State Council issued a statement on December 14, allowing all domestic micro-, small and medium-sized enterprises to be listed on the NEEQ. Previously, only small and medium-sized enterprises (SMEs) from four hi-tech industrial parks in Beijing, Tianjin, Shanghai and Wuhan could be traded on the board.

In the United States and other developed countries, there are sound over-the-counter (OTC) systems for unlisted joint-stock companies, but in China, the new third board is just starting to take shape.

Seven year wait

According to the State Council's arrangement, qualified domestic enterprises can transfer their shares via the NEEQ and conduct equity financing, debt financing and reorganization. Companies registered in China but listed abroad can issue preferred shares via the NEEQ. Companies listed on the third board can apply for initial public offerings (IPOs) on the Shanghai and Shenzhen stock exchanges if they meet the requirements.

When China's securities market was established in 1992, the corporate-owned shares of listed companies were prohibited from trading on the A-share market. The country then set up the Securities Trading Automated Quotations System (STAQ) and the National Exchange and Trading System (NET) for the trading of corporate-owned shares. But due to a conflict with the Securities Law of 1999, the two systems had to be closed.

In 2001, the Securities Association of China, in coordination with some securities companies, set up the Agency Share Transfer System, also called the third board, to solve the problem of stock transfer after the STAQ and NET were abolished.

Only a few stocks were traded on the third board market and most of them were of low quality, so it was difficult for them to apply for trading on the main board in Shanghai and Shenzhen. The third board market remained sluggish for years.

To change the situation and offer financing opportunities for more growing hi-tech companies through stock listing, the China Securities Regulatory Commission (CSRC) in 2006 set up a new share transfer system at Beijing's Zhongguancun Science Park, which is called the new third board.

Compared with the old third board, the new third board is noticeably different in its trading rules and has made breakthroughs in many aspects.

On August 3, 2012, the CSRC decided to expand the pilot program, adding three science parks in Shanghai, Tianjin and Wuhan to the list.

According to the figures from the NEEQ, at present there are 351 companies traded on the new third board market, less than 2 percent of the total number of enterprises in the four science parks.

The State Council statement expands the new third board to the whole country. Considering that most of the listed companies on the third board market are micro-, small and medium-sized enterprises, the State Council stipulates that institutional investors will be the major investors on the new third board, because they have better capacity for taking risks and are in a better position to meet eligibility standards. Since the issuance and the transfer of stocks usually involve a small amount of capital, risks in this market are much lower than on the main board. According to the State Council statement, companies with no more than 200 shareholders are exempted from approval by the CSRC when applying for third board listings. Moreover, these companies do not need to be approved by the CSRC even if the number of their shareholders exceeds 200 after stock transfer.

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