New Third Board is a national “over-the-counter” market regulated by the China Securities Regulatory Commission (CSRC) which allows the national small and medium-sized enterprises (SMEs) to raise capital via share transfers to investors. There are generally three mechanisms for off-market transfer, namely market making, by agreement and bidding. This platform provides an alternative financing channel to small enterprises especially those who are still awaiting to meet the initial public offering (IPO) requirement.
The entry requirement on the New Third Board is very relax and the following are the main conditions:
- The company has been lawfully established and existence for at least two years;
- The company must have well defined business direction and the ability to continue as an ongoing business;
- The company must have a sounded corporate governance mechanism and carry out its operations in a lawful and regulated manner.
Development of New Third Board market
Since 2012, companies listed on New Third Board has grown tremendously and it has become increasingly popular for SMEs to raise funds through this platform. It has been seen as an easier financing method with low costs for start-up firms or companies with liquidity issue who are unqualified to be listed on major exchanges.
Challenges on New Third Board market
The New Third Board has attracted tremendous interest of small-cap companies such as start-ups because of its less stringent qualification requirements and lower costs to get traded on this platform. In addition, CSRC has previously suspended all initial public offerings in the two main markets and forcing companies to raise capital on the third board which is not covered by the IPO ban.
It is not surprising to see that the current market making and mutual agreement mechanism adopted in the New Third Board market has contributed in enlarging the trading volume as it becomes easier to close a deal. As a less regulated market, the public investors are seeing more investment opportunities in these ‘concept’ stocks and the amount of speculative trading on New Third Board market has inevitably increased.
Volatility is also one of the problem facing by the third board stocks as there is no cap imposed on the daily trading limits and hence it is not unusual for some stocks to swing 300 to 400 per cent a day. The volatility has discouraged long term investors in the third board and potentially constrained the business development of the SMEs.
Fund raising alternatives
Until the third board will be able to maintain a fair and regulated market, the current share transfer mechanism might not be seen as an ideal way for Chinese SMEs to raise funds. Financing always plays a significant role in supporting small business development and it is crucial for enterprises to adopt a suitable solution according to its development plan
Below are three common financing tools available in the market for the enterprises to raise funds:
1. Foreign Loan with domestic security “Nei Bao Wai Dai” (内保外赁)
An onshore entity or individual providing security or guarantees to an offshore creditor to secure the obligations of an offshore principal debtor.
2. Finance lease
According to the specific requirements of the lessee for the lease object and the selection of the supplier, lessor finance the purchase of the lease object and lease to lessee, the lessee pay rent to the lessor by installments. The ownership of the lease object belongs to the lessor, the lessee only has the right to use the lease object.
3. Intellectual property mortgage financing
This is a financing activity in which the intellectual property rights holders obtain funds from banks or other financial institutions by taking their property rights in the intellectual property as subject matter of pledge. The property rights are subject to evaluation and pricing before their holders can get the funds and the rights holders are bound to repay the principal and interest of the funds on time.
Conclusion
Despite financing through New Third Board has been popular among Chinese enterprises, its loosen regulation and stock price volatility issue might not be a good way to support the new third board for start-ups. There are various financing methods which are more promising and stable, enterprises are encouraged to seek advice from professionals to assess your business situation on a case by case basis. Hong Kong, as the world’s equity funding leader, is the ideal gateway for Chinese enterprises who currently plan to “going out”.
If you would like to acquire more information about corporate financing, please contact us for advisory services.
