China tells IPO bankers to ‘like’ Facebook
EQUITIES Regulator praises banned website’s risk disclosure as example for local IPOs
China’s internet censors may have a dim view of Facebook, but that has not stopped it from being a model of sorts for the country’s securities regulator.
At a regular training seminar last week, the China Securities and Regulatory Commission urged IPO bankers to learn from the risk disclosures in Facebook’s listing prospectus.
The remarks underline China’s determination to transform its existing IPO system – where regulators decide if a company is fit to come to market – into a more disclosure-based model that trusts investors to judge the risks and rewards of buying into a float.
The CSRC is working hard to restore confidence in the IPO market after a string of volatile new listings led fund managers, including Societe Generale’s Chinese joint venture, to shun new listings.
As role models go, however, Facebook cannot be a more unlikely candidate. The social network is still banned in China, and the vague “use of proceeds” statement in its prospectus means it is unlikely to win listing approval if it was a Chinese company.
“Don’t you find it funny? The regulators are urging us to learn from a website that we can’t even visit,” said a banker.
After a regular two-day training session for IPO sponsors in Beijing on April 23–24, Facebook’s listing prospectus has become a must-have accessory in China’s investment banking circles. At least three senior CSRC officials praised the quality of Facebook’s prospectus in their speeches during the seminar.
“The CSRC reckons Facebook’s information and risk disclosures are exceptionally full and tailor-made, which is exactly what they want domestic IPOs to do in the future,” said a banker who attended the session.
CSRC officials were specific in their praise. Facebook’s weighty prospectus devotes 22 pages to 49 risk factors, accounting for about 15% of the total page count. It details the risks related to its business and industry, as well as the risks to investors buying its shares.
The regulator, which has been trying to instil more confidence in the local IPO market, is also said to be deeply impressed with the comprehensive and forward-looking information disclosures in the prospectus. That is something investors in China rarely see.
On the contrary, issuers and sponsors in China tend to ignore or even hide key risk factors in a bid to secure IPO approvals.
“Under the current rules, no one dares to disclose fully risk factors as regulators will definitely reject the IPO application if they find it too risky,” said a banker.
Besides urging complete risk disclosure, the CSRC is encouraging sponsors to include more forward-looking information. While that is a standard feature of global IPOs, Chinese bankers are reluctant to include such clauses for fear of legal troubles if they prove incorrect.
Facebook couldn’t list in China
Bankers also point out that, under the current IPO approval system in China, Facebook will struggle to get clearance.
“If Facebook wanted to list in China, the CSRC may not even accept its IPO application, based on what it has written in its prospectus,” said another banker.
For instance, he said, Facebook’s stated use of proceeds was rather vague. “We intend to use the net proceeds to us from our initial public offering for working capital and other general corporate purposes; however, we do not currently have any specific uses of the net proceeds planned,” the prospectus states. “Additionally, we may use a portion of the proceeds to us for acquisitions of complementary businesses, technologies, or other assets. However, we have no commitments with respect to any such acquisitions or investments at this time.”
The Chinese regulator was unlikely to allow a company with such an ambiguous plan to list, the banker said. “Chinese domestic issuers never dare to write like this, as the regulators will only accept IPO applications with a feasible plan for the funds raised,” he added.