"A chip needs at least 24 months from research and development (R&D) to mass production," Gao said. "Investment surpasses profits during this process, making it hard to ensure the balance of payments and obtain credit."

It is commonplace for small and medium-sized tech companies—featuring huge investment, high risks and long investment cycles—to have a hard time engaging investors, especially in the early stages. As a result, the shortage of funds blocks their path to innovation and development opportunities.

President Xi Jinping proposed a solution to this problem at the first China International Import Expo in November 2018. A new science and technology innovation board would be launched at the Shanghai Stock Exchange (SSE), which would be a boon for sci-tech startups like Gao's.

The launch of the new board has entered a "sprint" stage, and the technical system is expected to be ready by the end of May, the SSE said on March 5. It also announced plans to conduct a debut test at the end of March.

As an important part of the preparation process, the China Securities Regulatory Commission (CSRC), China's top securities regulator, has released a set of regulations on the new board, which took effect on March 1 on a trial basis.

Yi Huiman, Chairman of the CSRC, said at a press conference on February 27 that the main purpose of establishing the new sci-tech board is to enhance the inclusiveness of the capital market toward the real economy and to better serve enterprises with core competitiveness, bright prospects and good reputations.

It is of great significance for promoting technological innovation, high-quality development of the economy and market-oriented reform of the capital market, he said.

The sci-tech board will focus on companies in hi-tech and strategically emerging sectors such as new-generation information technology, advanced equipment, new materials and energy, and biomedicine, according to the CSRC.

China International Capital Corp., an investment bank, expects that about 150 firms will be listed on the new board this year, raising 50 billion yuan ($7.46 billion) to 100 billion yuan ($14.92 billion).

Lower thresholds

Currently, unprofitable companies are barred from raising funds on China's two main stock bourses in Shanghai and Shenzhen. The profit requirement is one of the biggest obstacles technology enterprises face in their efforts to go public.

The new board has five criteria for sci-tech enterprises of various sizes and at different stages to file initial public offering (IPO) applications. Those who show high growth potential but are yet to report financial gains will also be able to list their shares on the board with the easing of requirements.

According to its regulations, the sci-tech board marks three breakthroughs compared with China's primary A-share market. Pre-revenue companies, companies with weighted voting rights structures, as well as red-chip enterprises which operate in China but are registered and listed overseas, and companies using the variable interest entities structures will be allowed to have their shares traded on it. Overseas-listed Chinese tech companies can re-list on the board through the issuance of Chinese depository receipts.

"The sci-tech board aims to provide a fresh and specific way for small but prospective hi-tech startups to go public, which is an institutional innovation," Han Fuling, Director of the Applied Financing Department, School of Finance, Central University of Finance and Economics, told Beijing Review, "It echoes the strategy to rejuvenate the nation through science and technology."

Gao said the new board's more inclusive and adaptable listing requirements will facilitate fundraising and address tech startups' difficulties in direct financing, allowing them to invest more capital and efforts in R&D. In addition, after listing on the board, enterprises can integrate resources to achieve more technological innovations.

IPO reform

The new board will experiment with a registration-based IPO system, which differs from the current approval-based system where the CSRC plays a major role in assessing applicants' earning potential, evaluating their value and determining whether they can be listed.

Under the new mechanism, however, the CSRC relinquishes its responsibilities, giving way for the SSE to review the IPO applications and conduct a careful screening of the candidate companies' earnings and operations. In addition, listed companies and their sponsors will be responsible for ensuring the veracity and comprehensiveness of the information disclosed.

In addition, a company's valuation will not be determined by the regulator but by the market as the board will incorporate innovative mechanisms in stock issuance, listing, information disclosure, trading and delisting.

The new rules are very attractive to tech startups since they offer preferential listing requirements and overcome problems in the approval-based system such as a long approval time and abuse of regulatory power, making it possible for the SSE to compete with bourses in Hong Kong and New York.

Fang Xinghai, Vice Chairman of the CSRC, said at the February 27 press conference that compared to the approval-based system, the registration-based system eases the requirements for listing, implements a stricter information disclosure system and emphasizes more the functions of the market, responsibilities of intermediary institutions and sound supporting measures.

Under the registration-based IPO system, the stock issuance and listing review will further strengthen the regulation of information disclosure and attach more importance to its quality, so as to effectively protect the rights and interests of investors, the SSE said in a news release.

"Establishing the board and a registration-based IPO system will be a key breakthrough for the SSE to give play to market functions, bolster areas of weakness in institutions and enhance inclusiveness," said the SSE, adding that the efforts are essential for optimizing the multi-tiered capital market system and enhancing the capital market's capability to serve the real economy.

It is crucial for China to build a sound system for stock issuance and listing based on information disclosure, and make the board and the registration-based IPO system a test field for further reform that will accumulate replicable and transferable experience, Yi said.

Investment protection

However, the innovative rules and the flexible trading system of the new board are not risk-free since ineligible companies may submit fraudulent information to get listed. In addition, daily trading limits on the new board will allow stocks to rise or fall by 20 percent per day, which exposes investors to greater risks of loss as individual investors are vulnerable in the face of extreme price movements.

In response, the CSRC has set a threshold for participants in the sci-tech board. Individual investors will need to have an asset of at least 500,000 yuan ($74,600) and at least two years of equity trading experience to get access to the new board, it stipulated.

There are 3 million individual investors in the A-share market, who account for 70 percent of the trading. The threshold of investment takes into consideration the risk tolerance of investors and the need to ensure liquidity, according to the SSE.

In addition, the sci-tech board has established stringent delisting regulations, defining criteria in terms of trading volume, stock price, number of shareholders, market value and financial indicators.

The SSE recently adjusted its departmental structure and established three new departments—an IPO review center, a regulatory department and a corporate training office for the upcoming board.

Investigations into candidate companies, the building of risk control systems and investor education are under way in an intensive and orderly manner, according to the SSE.

In order to maintain the healthy and sustainable development of China's capital market, Yi said it is necessary to abide by market laws, strengthen oversight and protect the legal rights and interests of investors, stimulate strategic and innovative thinking, and forestall and defuse major financial risks.

Copyedited by Rebeca Toledo

Comments to zhangshsh@bjreview.com