Venture capital market

China move to allow VC investors quicker exit route post IPO aimed at nurturing tech unicorns

China’s securities watchdog will give preferential treatment for venture funds’ stock divestment, allowing them to exit their investments within two months of the expiry of a lock-up period

PUBLISHED : Wednesday, 07 March, 2018, 7:47am
UPDATED : Wednesday, 07 March, 2018, 7:47am

New rules announced by China’s securities regulator to enable venture capital investors to step up exit of their investments underlines the central government’s move to groom more technology start-ups into unicorns and eventually get them listed on the mainland’s stock markets, say analysts.

The China Securities Regulatory Commission (CSRC) announced last Friday that preferential treatment will be given to venture capital funds to dispose of their equity, allowing them to exit their investments post IPO within 30 and 60 days after the expiry of a lock-up period.

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The rules come into effect from June 2 this year.

“Venture capital funds have become an important accelerator, incubator for early-stage small- and medium enterprises and advanced technology companies,” the CSRC said in a statement explaining the new rules. “Giving them policy support in their [divestment] will facilitate more capital [to be directed towards] SMEs and advanced technology start-ups.”

The rules are designed to incentivise venture capital investors that specialise in early-stage start-ups – defined as companies that have less than five years of operations – with quicker exit through the stock market. This is distinct to venture capital funds because other types of shareholders in listed companies are subject to a different set of divestment period, which is regulated at 90 days for major shareholders.

Ringo Choi, Asia-Pacific IPO leader at EY, said the CSRC’s rules underscores the central government’s drive to nurture more private companies that can be primed into unicorns – enterprises valued at over US$1 billion.

“If venture capital investors could exit from their investments quicker, they could also make more timely exits that could potentially result in better returns on their capital deployed,” said Choi.

Ian Chu, partner at Nio Capital, the venture capital investment arm of China’s leading electric vehicle maker Nio, said the new rules could encourage more venture fund managers to raise funds specifically for early-stage start-up investing with longer holding period.

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The latest rules “is positive to financial sponsors in realising earlier exits from their investments; and give venture capital investors higher motivation to invest in early-stage ventures,” said Zhu.

The new rules, however, are only applicable to a venture capital fund’s equity ownership that is acquired before the IPO.

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The differential treatment is targeted specifically at venture capital investors whose capital has been invested in a start-up for at least three years, counting from the time the company submits an IPO application, which would enable them to divest their equity ownership within a two-month period. Such divestment is still subject to a cap of shares equal to less than 1 per cent of the total issued outstanding shares of the newly listed company.

And if the venture capital investor has invested for a period of four years or more, the divestment period will be cut shorter to one-month.

The development comes amid Premier Li Keqiang’s call for more support to facilitate listings by high quality, innovative private enterprises on Chinese bourses. China has pledged to accelerate its efforts to surpass the US in areas such as artificial intelligence and robotics by wooing venture capital investments.