On 17 February 2023, the China Securities Regulatory Commission (CSRC) announced the new regulations for the filing-based administration of overseas securities offering and listing by domestic companies, which are set to take effect on 31 March 2023. The new measures comprised six documents, including the "Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies" (境内企业境外发行证券和上市管理试行办法) (the Trial Measures) and five supporting guidelines. The Trial Measures regulate the system, filing management and other related rules in respect of direct or indirect overseas issuance of securities by PRC enterprises and PRC enterprises with overseas parent entities and/or variable interest entity structures, which are referred to as "domestic enterprise(s)" in this article. We set out below some of the key changes and implications to Hong Kong market participants.

Unified filing-based management for overseas listing

The Trial Measures will unify the CSRC procedures in relation to both H shares listings and red chip listings. Currently, there are two ways for PRC enterprises to list on The Stock Exchange of Hong Kong Limited (HKEx), with a summary of the procedures below:

• H shares listing: In a typical H shares listing, the applicant applies to the CSRC prior to submitting its listing application (A1 application) to the HKEx, and the CSRC will issue an acknowledgement of receipt, commonly referred to as the Initial Pass (小路条). The CSRC shall then issue its approval, commonly referred to as the Final Pass (大路条), after the applicant submits its A1 application and prior to the listing hearing.
• Red chip listing: No approval is required by the CSRC for red chip listing.

The Trial Measures introduced a filing system where a domestic enterprise seeking to list on the HKEx, whether via H shares or red chip structure, shall file a filing report, a legal opinion and other relevant materials (if applicable) with the CSRC within three working days after its A1 application. The CSRC will, upon satisfaction of the submitted documents, within 20 working days after receiving the filing documents, conclude the filing procedure and publish the filing results on its website. Domestic enterprises that require a national security review must complete the relevant review before their A1 application and CSRC filing. Domestic enterprises that are in the technology, media and telecommunications industry may require a cybersecurity review, but it is unclear whether they need to file a consent or endorsement before their A1 application or CSRC filing.

In effect, the CSRC will be responsible for reviewing all domestics companies that intend to list their shares in Hong Kong, including both H shares and red chip companies under their scope of review.

Negative list on overseas listing

The Trial Measures established a list outlining the circumstances where a domestic enterprise is prohibited from offering and listing securities overseas. The negative list sets out the following circumstances:

• Explicit prohibition by national laws, administrative regulations and relevant state rules: For instance, the list issued by the National Development and Reform Commission sets out the industries in which offshore investment to domestic companies is prohibited and restricted; entities that were identified as dishonest under the "Guiding Opinions of the State Council on establishing and improving incentive system and dishonesty punishment system to accelerate social integrity system" (国务院关于建立完善守信联合激励和失信联合惩戒制度加快推进社会诚信建设的指导意见 (国发[2016]33号)), and other national laws, administrative regulations and relevant state regulations. This is in line with HKEx’s approach where a company seeking listing must conform with the laws of the place in which it is incorporated.
• Endangering national security: The issuance and listing of securities in an overseas market that may endanger national security as determined by competent authorities under the State Council is prohibited. While there is no equivalent explicit requirement promulgated by the HKEx, it is important to note that HKEx-listed companies can be punished in Hong Kong if convicted under the Law of the People's Republic of China on Safeguarding National Security in the Hong Kong Special Administrative Region.
• A subject of a criminal offence: A domestic enterprise, its controlling shareholders or its actual controller has committed a criminal offence such as corruption, bribery, embezzlement, misappropriation of property, or has undermined the order of the socialist market economy during the preceding three years. This is in line with HKEx’s approach in assessing an applicant’s suitability for listing, such that questionable integrity and non-compliance of a director (such as tax evasion or bribery) or, in the case of a culpable controlling shareholder that is able to exert substantial influence over the applicant, will likely render the applicant being unsuitable for listing. However, the HKEx will make the assessment on a case-by-case basis and it is not a "hard" ban on listing.
• A subject of investigation: A domestic enterprise that is under investigation for suspicion of criminal offences or major violations of laws and regulations is prohibited from overseas listing (for example, major environmental pollution, substantial fatal injuries of employees, material loss of national economic interests or other violations of laws and regulations that have a negative impact on society). This is in line with HKEx’s approach to assessing an applicant’s suitability for listing, such that the applicant’s non-compliances during the track record period may affect its suitability. In practice, it can be dealt with by disclosure of the details of non-compliances or investigation, legal impediment and potential maximum penalty of the non-compliances or investigation, with the support of a legal opinion. Legal proceedings and other material disputes that are current or resolved, or material disputes that are threatened, would not prohibit the applicant from listing, but it is ideal to resolve the legal proceedings and material disputes prior to submission of its A1 application. The HKEx will make the assessment on a case-by-case basis.
• Material ownership disputes over the shares: Material ownership disputes over the shares held by the controlling shareholder or by other shareholders that are controlled by the controlling shareholder and/or actual controller would restrict the domestic enterprise from overseas listing. Shares that were pledged, frozen, or subject to litigation or arbitration may result in material ownership disputes and are therefore likely to fall under this category and may be prohibited from overseas listing. Under the Listing Rules, there is no blanket ban on listing applicants with ownership disputes over their shares. Nonetheless, any such dispute may have an adverse effect on a number of issues, such as: (i) fulfilling the ownership continuity requirement under the Listing Rules; and (ii) obtaining a clean opinion regarding the ownership of the listing applicant, which is usually required for due diligence purposes. In addition, pledged shares for purposes of securing financial assistance to the listing applicant must also be unpledged at the time of listing.

Note: A domestic enterprise that is prohibited from offering and listing securities overseas, which nevertheless lists overseas or fails to comply with CSRC filing requirements as required, may be subject to substantial penalties, and such liability may extend to the domestic enterprise’s controlling shareholder, actual controller, sponsors and other service agents.

Regulation of sponsors/overall coordinators

• First filing: An overseas securities firm appointed as the domestic enterprise’s sponsor or lead underwriter shall file the "Overseas Securities Company Filing Form" (境外证券公司备案表) with the CSRC within 10 working days from the date of signing the engagement agreement. In Hong Kong, under the Listing Rules, a sponsor and sponsor/overall coordinator(s) must be appointed at least two months from their A1 application. All overall coordinators must be appointed no later than two weeks following the date of the submission (or re-filing) of the A1 application.
• Changes to filing details: An overseas securities firm shall update the CSRC with any changes to the details on the "Overseas Securities Company Filing Form" within 10 working days from the date of the change (for example, changes to the responsible person, registered capital, contact details, penalties against the overseas securities firm by overseas regulatory authorities relating to the domestic enterprise etc). In Hong Kong, notification to the HKEx is only required in the following circumstances: (i) resignation by or termination of the sponsor during the process of its A1 application. The applicant must notify the HKEx with reasons and details of the replacement sponsor (in the case of a sole independent sponsor) along with the resubmission of the A1 application, listing fees and declaration and undertaking by the new sponsor; and (ii) revocation, suspension, variation or restriction of the licence or registration of a sponsor, whereby the sponsor must immediately inform each of the issuers for which it acts.
• Annual report: An overseas securities firm shall submit an annual report of the domestic enterprise for the preceding financial year before 31 January of each year. There is no such obligation on the overall coordinator to submit an annual report. It is the listed issuer’s obligation to submit its annual report, in respect of each financial year of the listed issuer, not later than four months after the date upon which the financial year ended (three months for GEM issuers).
• Sponsor’s undertaking: The sponsor shall undertake that it has carefully reviewed and verified the filing report and confirmed that its content is true, accurate and complete, and that there are no false or misleading representations or major omissions, and that it assumes corresponding legal responsibilities. The degree of the undertaking provided by the sponsor is much greater under the Trial Measures as opposed to existing requirements in Hong Kong. Under the Listing Rules, a sponsor is required to submit a declaration (Appendix 19 to the Listing Rules) to confirm, among other things, that it has made reasonable due diligence inquiries and has reasonable grounds to believe that (i) the applicant complies with the Listing Rules, and (ii) the listing document is true, accurate, complete and not misleading in any material respects.

The implementation of the Trial Measures will enhance the requirements and scrutiny for a PRC domestic enterprise intending to list its shares in an offshore market, including in Hong Kong. We noted above that some of these requirements will exceed what is currently required under the Listing Rules and Hong Kong law, and will afford the CSRC a higher degree of involvement in offshore listings, which can be encouraging news to certain market participants.

A Capital Markets team legal assistant, Valerie Chan, is one of the authors.