China, the world’s biggest IPO market, has recently opened an additional securities exchange to complement Shenzhen’s main exchange and the Shanghai stock exchange. The new exchange, the ChiNext/GEM (Growth Enterprises Market), is based in Shenzhen and is comprised of biotech, clean tech, high-tech and other small companies in the nascent stage of development. The ChiNext is modeled on the U.S.-based NASDAQ market. ChiNext was initially composed of 28 small-cap and private companies focused on leading technological innovations. All the companies initially listed experienced significant increases in share prices.

The ChiNext Exchange is evidence of China’s continuing efforts to encourage domestic growth and to help Chinese start-up companies in a financial system that has long favored big, state- owned companies. The size of share offerings on ChiNext is small compared with the multibillion dollar IPOs that are common on the Shanghai exchange and Shenzhen’s main stock market. Currently, hundreds of Chinese companies are awaiting their turn to list on ChiNext. However, these companies must first meet the listing requirements.

The listing standards for IPO’s and ChiNext entry are set out in The Securities Law of the People’s Republic of China (P.R.C.) and The Company Law of the P.R.C. and include the following:

First, the company shall be a limited company legally registered in China (there shall not be less than 2 but not more than 200 promoters, of whom half or more shall have a domicile within the territory of China) and must have been operating continuously for three years or more.

Second, the company should be able to show cumulative, continuous profits of 10 million Yuan or more in the two years proceeding the year of application.

Third, the net asset value of the company should be 20 million Yuan or more and it should have no loss to cover in the latest period.

Fourth, the total value of the capital stock after the offering should be at least 30 million Yuan.

In addition to the ChiNext, China intends to open opportunities for foreign companies and to allow them to list on Shanghai stock exchange in 2010. This change is part of the plan to turn Shanghai into a global financial center and to increase foreign investor participation in the mainland market. The goal is to allow qualified foreign companies to issue Series A shares (quoted in Yuan, and are only available to foreign investors through a qualified program, similar to the concept of ADRs in the United States). The first foreign companies that can be listed are known as “Red Chip” companies: companies that are based in Mainland China, incorporated outside of China, and listed on the Hong Kong Stock Exchange. Some multinational banks such as HSBC, Hang Seng Bank and Bank of East Asia have already expressed interest in listing on the new exchange. However, the regulations regarding listing overseas companies are still being drafted and there remain a number of concerns for foreign companies related to the continuing development of the Chinese legal system, lack of transparency, lack of experienced personnel in the financial system, and non – convertibility of currency.

The opening of the stock market to foreign companies will enable Chinese investors to invest in foreign companies. China’s economy continues to grow at a rapid pace. The new market will provide an outlet for the nation’s accumulated wealth. This represents a massive opportunity for foreign and Israeli companies seeking fund raising opportunities, most obviously for those companies who already maintain a presence in China but also for companies who view China as key to their future development.

Wang Zhengyang Adv., is a Senior Partner and office director at ZAG/JUNZEJUN , Shanghai Office.

Tehila Levi-Lati Adv., is legal Counsel at ZAG/JUNZEJUN, Shanghai Office.