The fifth set of listing standards for the Sci-Tech Innovation Board should be accompanied by supporting measures.

Ask AI · How to Protect Investors’ Interests When Listing Loss-Making Companies on the STAR Market?

Last week, the Shanghai Stock Exchange scheduled a hearing for an IPO company that applied for listing on the STAR Market under the fifth set of standards. This is also an important manifestation of the A-share market’s increased institutional inclusiveness—supporting the development of new quality productive forces.

In fact, the STAR Market’s fifth set of listing standards has long drawn significant attention. After all, companies listed under the fifth set of standards are, in reality, loss-making companies listed with losses—and in some cases, the amounts of losses are even quite large. Therefore, for investors, the risks of investing in companies listed under the STAR Market’s fifth set of standards are far greater than the risks of investing in companies listed under other standards. Hence, while the A-share market supports relevant companies to list under the fifth set of standards, it also needs to ensure strong investor protection—meaning it must introduce corresponding supporting measures to safeguard listings under the fifth set of standards.

After all, today’s A-share market is no longer one that focuses only on financing. In recent years, leadership has repeatedly emphasized the importance of balancing investment and financing, and this year’s “Two Sessions” also clearly stated in the Government Work Report that it will “improve the investor protection system,” and it placed “improving the investor protection system” before “increasing the proportion of direct financing and equity financing.” This shows that doing a good job of investor protection and improving the investor protection system is extremely important for the A-share market today.

Especially this year, the Growth Enterprise Market (ChiNext) system is facing reform—strengthening its inclusiveness and adaptability, and even transplanting some of the STAR Market’s systems to ChiNext. Based on the market’s general understanding, efforts to arrange listings for loss-making companies on ChiNext will be intensified. For that reason, while relevant departments are reforming the ChiNext system, they also need to do a good job of investor protection and further improve the investor protection system.

As for the STAR Market’s fifth set of listing standards, at least the following measures are required to be implemented in the form of institutional rules in terms of improving investor protection.

First, listing for loss-making companies must have a clear profit outlook. In principle, the company must turn a profit within three years after listing. This is because, according to the STAR Market listing rules, for companies listed under the fifth set of standards, the rules related to delisting will apply starting from the 4th full accounting year from the date of listing. If a company continues to incur losses without end, it is very likely that the company will be delisted. Therefore, R&D-oriented listed companies listed under the fifth set of standards must formulate a clear profit outlook.

Second, for companies listed under the STAR Market’s fifth set of standards, if they fail to achieve their profit targets within the specified period, the listed company should compensate investors. Because new stock offerings in the A-share market are priced with high premiums, this portion of the premium is recorded in the company’s capital reserve. Therefore, once a listed company fails to achieve its profit targets within the stipulated timeframe, it may use this capital reserve to increase the number of shares for public investors. For each year the profit target is delayed, it will transfer to public investors no less than 1 share for every 10 shares.

Third, for companies listed under the STAR Market’s fifth set of standards, the shares held by shareholders prior to the initial public offering may not be sold or transferred while the company has not achieved profitability. Based on the lock-up periods currently set by relevant companies, the lock-up period is basically 12 months or 36 months. This lock-up arrangement corresponds to profitable companies and does not apply to loss-making companies listed with losses. If the original shareholders of a loss-making company cash out all their shares before the company has achieved profitability, that effectively transfers both investment risk and the risk of the company’s development to public investors—this is not conducive to protecting public investors’ interests. Therefore, for companies listed with losses, the original shareholders are prohibited from reducing their holdings until the company has achieved profitability.

Fourth, for companies listed under the STAR Market’s fifth set of standards, if the company is delisted due to losses, then compensation must be provided to investors for their losses. If the company does not have the capacity to pay, then regulatory authorities should establish a policy-based compensation fund to compensate investors. After all, delisting of companies listed under the STAR Market’s fifth set of standards is a form of systemic risk, and it is also a form of policy risk. Therefore, if such loss-making companies are delisted due to continued losses, they must compensate investors, and this is also the best institutional protection for investors.

Author’s statement: Personal views are provided for reference only.