Standardizing IPO: It Is Expected To Have Limited Impact On The Market For The Arrangement Of The Issuer As "Bookmaker"

Recently, the reporter of 21st century economic report has made exclusive confirmation from the insiders that the current regulatory authorities have further standardized the "gambling agreement".

According to the relevant notice, in the IPO projects under review in each sector, the arrangement of gambling agreements in respect of which the issuer was once the "gambling obligor" is required to be irrevocably terminated, and the relevant shareholders shall confirm that the arrangement is invalid from the beginning.

In addition, the latest audit report of the issuer must cover the signing date of the invalid confirmation document from the beginning, otherwise, the IPO hearing of the next stage will not be carried forward for the time being.

However, the "shareholders' gambling behavior" between the actual controller or the major shareholder and the investor is not included.

In the view of market participants, the regulatory move is intended to further regulate the information disclosure requirements of IPO companies involving gambling arrangements.

"This regulatory requirement is actually a matter of accounting treatment, not a legal issue. If it is only invalid before reporting, the bookmaking agreements that are effective at other times in the reporting period need to be dealt with according to the accounting standards, but most companies do not do so, so they acquiesce that they are invalid from the beginning. Therefore, the requirements are put forward during the audit to confirm the whole gambling Association The proposal is invalid from the beginning, and can not be used by default, "Wang Jiyue, a former senior investment banker, told the 21st century economic reporter.

Further standardizing the arrangement of "gambling agreement"

As a common arrangement for unlisted enterprises in equity financing, "gambling agreement" is the supplementary terms set and agreement when investors increase capital (or transfer) to protect their own interests, including agreed equity repurchase, cash compensation clauses, etc.

However, due to the triggering of gambling terms, the issuer's capital status, financial status, stability of control rights, normal production and operation will be greatly uncertain or even adversely affected, and this kind of agreement to a certain extent gives the corresponding shareholders more privileges than other shareholders.

In fact, the regulatory authorities have made clear regulations and requirements on "gambling" in the IPO project audit earlier, and most of the companies to be listed will clean up the gambling agreements according to the regulatory requirements before reporting.

According to the "answers to several questions about initial business" issued by the CSRC, if an investment institution has agreed on similar arrangements such as a gambling agreement when investing in an issuer, it is required in principle that the issuer shall clean up before the declaration, but those meeting the following requirements may not be cleared up: first, the issuer does not act as a party to the gambling agreement; Second, there is no agreement that may lead to the change of corporate control right; Third, gambling agreements are not linked to market value; Fourth, there is no serious impact on the sustainable operation ability of the issuer or other situations that seriously affect the rights and interests of investors.

In addition, the issuer should also disclose the specific content of the gambling agreement and the possible impact on the issuer in the prospectus, and prompt the risk.

According to the above requirements, most companies with gambling agreements will terminate / suspend / terminate the gambling agreements that affect the company's control right before IPO. The treatment methods include that the existing gambling agreements meet the conditions of CSRC not to clean up, the provisions of the gambling agreement have been fulfilled before listing, signing the "effectiveness recovery clause" and signing the termination agreement.

This time, the regulatory authorities require that if the issuer has its own arrangement as an obligator of gambling, it must make an irreversible termination, and the relevant shareholders must confirm that the arrangement is "invalid from the beginning", or for the sake of regulating the information disclosure of the gambling agreement.

Generally speaking, when "the issuer is a party to a gambling agreement", the setting of gambling terms usually includes: repurchase shares when triggering, cash compensation when triggering, and giving special rights when triggering (such as: priority of capital increase, most preferential treatment, additional directors, etc.).

In the view of the insiders, there is a contractual obligation for the issuer to exchange financial assets or financial liabilities with other parties under potential adverse conditions, which does not conform to the recognition of equity instruments, so it should be recognized as financial liabilities.

But in practice, the three-year period will be listed as the accounting period of the project in the IPO audit report. Therefore, industry insiders believe that there are certain explanations for the confirmation of financial liabilities in the last period of the reporting period if gambling terms involve the confirmation of financial liabilities.

The partner of a large domestic accounting firm said: "At present, most enterprises have PE and VC investment before they apply for IPO. Most of these investments have protection mechanisms, such as resale mechanism. We can see from the accounting standards that this is actually debt, not equity. Although regulatory requirements before listing will make companies cancel this part of obligation, before cancellation, many companies still list it as equity, which is not correct."

IPO projects under review will be affected

At present, with the regulation further standardizing the arrangement of gambling agreements, it will have a certain impact on the current IPO companies. But market participants generally believe that the impact will not be too big.

Wang Jiyue pointed out: "at the time of reporting, many enterprises have already asked to cancel all the bookmaking of issuers themselves. A large number of gambling is gambling with major shareholders rather than with issuers. Only a small number of them need to be standardized."

A Director Secretary of an IPO planning enterprise in East China also told reporters: "in the past, issuers didn't deal with gambling when they participated in gambling, and they acquiesced that they would not strictly implement it. At present, it is necessary to do some hedging, otherwise it will cause great obstacles to listing; after strict regulation by the regulatory authorities, risks may arise for some investment companies."

The Secretary further pointed out that: "For example, when an institution invests in an enterprise, some of the controlling shareholders are individuals, and they only enjoy part of the equity value. If the controlling shareholder is involved in gambling, his bearing capacity may be restricted by various conditions. If the company is taken as the gambling subject, the pressure will be less, and even some gambling conditions will require the management to participate."

In addition, some enterprises will attach certain conditions to "clean up" gambling agreements.

For example, in June 2019, the listed company and shareholders signed the termination agreement of the supplementary agreement to the capital increase agreement with the shareholders at the meeting in June 2019. All parties agreed to lift the repurchase clause, transfer restriction, priority capital increase right and the most preferential treatment in the gambling agreement, but the unlisted recovery clause in the gambling agreement was not terminated.

According to the wind data collected by 21st century economic report, as of September 15, there were 1336 A-share IPO companies under normal examination. Among them, 105, 96, 624 and 511 enterprises in Shanghai stock market, Shenzhen stock market, growth enterprise market and science and technology innovation board respectively. Many of them had gambling arrangements in the past, but most of them did not involve IPO companies.

However, some market participants believe that, according to the regulatory arrangement, some IPO projects with gambling arrangements need to wait for the latest financial documents to be supplemented before recommending follow-up audit matters after signing the termination documents, which means that the audit progress will be delayed.

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