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approval from the CSRC to list on the Shanghai Stock Exchange merely a month after it published a prospectus outlining its plans to raise RMB$27.3 billion (US$4 billion). The warning raised was about that the FII IPO deal came amid a Chinese push to attract Taiwanese capital and talents and some other Taiwanese firms would be lured by the accelerated approval as a consequence. The competent authority in Taiwan, which is FSC, responded promptly that the real effect on the Taiwan stock markets need to be observed and assessed in a practical way. However, worries about competing with Mainland China were triggered and had imposed negative impacts on the public confidence toward the domestic capital market.
The other big threat lies in the newly-announced policy of HKEx aiming at high valued biotechnology start-ups. On April 23th 2018, the HKEx released its new listing rules for bio-tech companies with market capitalization over HK$ 1.5 billion but are yet not reported in profits. The new listing rules ambitiously target at the qualified large bio-technology companies in spite of bio-technology has never been a mainstream sector of HKEx. But for Taipei Exchange, on the opposite, the bio-technology industry is as important sector as semiconductor industry. The bio-technology industry accounts for 11.54% and 16.3%, of all listed companies in terms of trading value and market capitalization, respectively. Given the importance of bio-technology industry, Taipei Exchange should take the Hong Kong new listing rules seriously to avoid negative impacts on the development of Taiwanese bio-technology industry.
5.Recommended Solutions
The declining IPO number and IPO proceeds in recent years shows the IPO activities performance in Taiwan was pale in comparison with other markets. No one would consider the challenges facing Taipei Exchange as a short-term issue. This situation reflected the loss
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of momentum to the stock market of Taiwan which would be harmful to the economic growth and industrial development. Even worse, it would possibly make the Taiwanese stock market marginalized in the global capital market. The competent authority should be cautious to this trend and take tactic measures in turning challenges into opportunities.
What matters is how to strengthen the function of the capital market in Taiwan, especially in facilitating the capital flow efficiency, creating a friendly fund-raising environment, and speeding up the industrial transformation. It is urgently important for the policy makers and regulators to discuss through the problems and find solutions. The inter-departmental mechanism should be enhanced and therefore the attention could be drawn to the key elements. Competent authorities, such as Financial Supervision Commission, Ministry of Economic Affairs, Ministry of Finance, Central Bank, and National Development Council are all responsible for the capital market development. Taipei exchange, being a platform focusing on bridging the small-and-medium companies and the public capital, should play a role to collect all suggestions to the market and facilitate the communication within the competent authorities.
Besides the governmental authority work, the following suggestions are actions that Taipei Exchange should take in specific.
5.1 Enhance cooperation with other exchanges
Under the current structure, Taiwan Stock Exchange and Taipei Exchange are operated separately and both are under the supervision of FSC. The cooperation between both is necessary since the domestic market scale is not big enough to allow full competition.
Clearly different market positioning and missionary roles of the two stock exchanges in Taiwan is a better strategy. As mentioned above, Taipei Exchange is an exchange aiming at
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smaller enterprises and it has established multi-layer markets of Main Board, Emerging Stock Board, and GISA board for innovative startups. Taiwan Stock Exchange has established the Main Board for larger companies and conglomerates. The threshold of paid-in capital for listing in Taipei Exchange is at least at NT$50,000,000, while Taiwan Stock Exchange is NT$ 600,000,000. The target markets and missionary goals are different between two stock exchanges until Taiwan Stock Exchange probably will lower its listing requirements of company scales as a solution to its IPO declining problem. If in that case, the overlap of resources devoted by two exchanges in luring new listings and the conflicts of interest would be greater, which is not favorable to the whole market. Therefore, it is recommended to keep different market positioning and allow each exchange build up the features and strengths of their own. As a result, Taipei Exchange can contribute more resources in fostering the GISA board for incubating more growth start-ups in the future. In short, the collaboration of Taipei Exchange and Taiwan Stock Exchange will maximize the benefits to the whole market and create the win-win situation to both.
The international cooperation with global markets is also crucial to the IPO markets. Taipei Exchange has signed the Memorandum of Understanding (MoU) with 24 stock exchanges so far. Based on the international relationship, Taipei Exchange should enhance the interaction for further cooperation with foreign exchanges in the aspects of introducing new products, new trading models, and stock connect or concurrent listings. Taipei Exchange can also learn from other exchanges about the experiences to attract new listings. For example, KOSDAQ, the Alternative market in Korea, had the same challenges in IPO market since 2016. It was ambitious to lure foreign listings to become a reginal hub for tech start-ups and had set the goal of attracting 10 new foreign firms listing. The activities KOSDAQ took included finding the differentiation with other markets, easing the listing rules for foreign tech start-ups, taking top 10 listed companies or newly listed groups on a roadshow abroad,
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introducing new derivative products based on its index to meet foreign investors’ hedging needs, and aiming at lowering the portion of retail investors from 90% to 60% or so. In the western, NYSE also had made a lot of efforts in luring new tech listings in competition with NASDAQ, HKEx and London Stock Exchange. It had offered many promotional programs to the potential companies, especially the tech start-ups located in Silicon Valley, by the ways of newspaper advertisements, billboard, marketing campaigns and face-to-face pitching and meeting. It has also marketed itself to NASDAQ-listed companies and encourage them to switch to the NYSE. NYSE was reported that it had doubled the size of its Silicon Valley department or team in order to facilitate the tech IPOs.
Taipei Exchange already has a handful of experiences of encouraging new IPOs. While the global competition raising, it should speed up the path and learn the lessons from the stock exchanges worldwide in order to maintaining the global competitiveness.
5.2 Strengthen the IPO ecosystem
The IPO ecosystem means the structural system with cross-industry cooperation and services involving in the IPO activities. The engaged parties in the IPO ecosystem are financial intermediaries including the securities firms, CPA firms, law firms, private equities and venture capital firms. As to their function, the securities firms take roles as a recommender, an advisor, an underwriter, and a market maker (or liquidity provider). The CPA firms also engage deeply in their customer companies' IPO procedures early from the pre-IPO planning to post-IPO financial auditing. The roles of both securities firms and CPA firms are important because they keep searching and approaching many potential companies.
The intermediaries closely interact with the potential companies to see if they are willing and eligible to go public. For Taipei Exchange, stronger partnership with the intermediaries is essential in luring new listings. What Taipei Exchange could do is providing more
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incentives for the intermediaries so that they would involve more in recommending companies to apply for listing on Taipei Exchange. As the recommendation of OECD proposed in a report in 2016, ensuring the existence of an SME IPO ecosystem does support SMEs in the IPO and post-IPO environment11. Enhancing the good partnership within the IPO ecosystem can help Taipei Exchange in the development of its multi-layer market and incubate more promising companies grown in the capital market.
The private equity and venture capital firms (PE/VC) can be important partners to Taipei Exchange as well. They are early investors of the companies with high growth potential.
Typically, PE/VC provides financing to a startup company in the interest of generating a spectacular return through an eventual "exit". Venture capital exit often takes place when the invested company sells shares to the public for the first time in an IPO or complete a merger and acquisition (also known as a "trade sale"). Taipei Exchange could approach PE/VE in Taiwan, or in Asia region, to work together to help the VC-backed companies become listed.
For Taipei Exchange, a strong ecosystem and networking can make the IPOs accomplished in an efficient way by precisely allocating resources, shortening the timeline of IPO procedures, and reducing the communication costs.
5.3 Find incentives of private companies and motivate them to go public
In Taiwan, there are about 420,000 enterprises with paid-in capital between NT$1,000,000 and NT$10,000,000 and 120,000 enterprises with paid-in capital between NT$10,000,000 and NT$50,000,000 on December 31, 2017. Most of such domestic SMEs are remain private. For the private companies, they need motivation to go public. The World Federation of Exchanges has jointly published a report with the Milken Institute on exchanged-based financing of Small and Medium Enterprises in July 2017. This report aims to give
11 OECD report "Opportunities and limitations of public equity markets for SMEs", February 3, 2016.
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exchanges practical views when it comes to creating and assessing SME initiatives. What to notice in this survey is that among unlisted firms, the reasons for not listing varied, ranging from concerns about the cost of listing, meeting regulatory requirements, losing control of the company, to not knowing enough about listing to make a decision. Indeed, 60% of surveyed firms responded, “raising capital at lower cost” was an important reason for listing.
From a financing perspective, the cost of equity capital can be lower than other financing tools because of the access to a wider potential investor base. Beyond the financial reasons, SMEs list their shares in order to position the firm for growth and to enhance brand reputation.
The report concludes that more stock exchanges are performing the very important function of providing SMEs with access to cost-effective financing. It comes with two pieces of suggestions for the exchanges that could make listing more accessible. One is containing costs to listing; and the other is improving firms’ understanding and ability to meet the listing requirements. These findings are particularly meaningful for Taipei Exchange whose mission is to help the SMEs access to equity capital. As mentioned above, the costs of listing on Taipei Exchange are much lower than those of other Asian exchanges. Therefore, Taipei Exchange can pay more attention on the latter suggestion of WFE report, to improve firms' understanding of listing and help them to meet the listing requirements.
Taipei Exchange has to educate these private companies about why IPO matters and help them identify their problems, or the pain points. For example, the succession problem is getting an issue for many family-owned private companies. According to the survey published by PwC’s in 2014, there were approximately only 5% of Taiwanese private companies ready for succession to the next generation. The latest survey published in 2017 by Global Views Magazine warned that nearly 27.3% of private enterprises were lack of workable succession planning. To solve the succession problem, the private companies have
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to reconsider going public. Taipei Exchange should take active measures to encourage the private companies with succession-concerns to enter into the capital market.
To make most of the potential private companies get full understanding of listing in Taipei Exchange, it should keep providing targeted education programs or promoting seminars collaborating with the intermediaries and maintain a contact window for IPO candidates when they need advises.
5.4 Deregulation of IPO regulation and on-going listing requirements
Nowadays, some listing regulations of Taipei Exchange and listing requirements for foreign listing are out of date. Updating and loosening of regulations is necessary for Taipei Exchange to maintain the competitiveness in the global environment. Taipei Exchange, as a promoter of the economy, stands in the heart of the market because it retains better understanding of the industrial need. It is also a regulation maker. Aligning the trend of global stock market, Taipei Exchange should end "one-size-fit-all" market regulatory regime and create a comprehensive market for the future development.12 Take the listing requirements for example, the original listing requirements of Taipei Exchange is practically-friendly to most of the companies, as the description in "Overview of listing on Taipei Exchange" for details. For the general companies, they are required to meet the minimum requirements of profits and company scales. As for "Technology-based Companies", they are free from requirements of profitability and existence duration.
Nowadays, over 1,200 SMEs have successfully listed on the Main Board via the original listing requirements, with nearly 80 Technology-based Companies included. Facing the changing business environment, Taipei Exchange has just announced the new alternative listing requirements on March 31st 2018. It allows nonprofitable emerging and growth
12 Please refer to the OECD report "Opportunities and limitations of public equity markets for SMEs", February 3, 2016.
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companies to apply for listing. The new listing requirements emphasize much on the operational scales and continuous revenue creation ability of the applicant companies, instead of the profitability. Under the new alternative listing requirements, companies in deficits are eligible to apply for listing as long as their annual revenues for the recent fiscal year amount to NT$2 billion, better than the year before, and the book value remains no less than NT$600 million and 2/3 of the paid-in capital, plus the net cash flow in operation activities is positive in the most recent year. Therefore, the companies which are planning to list on Taipei Exchange can choose to either meet the original requirements or the new one, depending on their business scale and financial performance.
However, some people argued that new listing requirements set a much higher criterion of revenues, implying a set of inaccessible requirements and discouraging new listings. Three months have passed since the new listing requirements being released, none of the companies has applied for listing under the new requirements. Taipei Exchange would better make an accommodation to the criteria to precisely meet the industrial needs. Otherwise, the new listing requirements could not be a big help.
What New York Stock Exchange (NYSE) did is a good example for Taipei Exchange.
Although NYSE has 200-year-old brand as a leading stock exchange in the world, NASDAQ used to be the main competitor of NYSE for many years. NASDAQ captured most of the notable tech IPOs of the past few decades. In 2011, however, NYSE surpassed NASDAQ in terms of tech companies share. This achievement can be attributed to NYSE beginning a strategic plan to pursue tech start-ups in 2008. NYSE decided to make a new effort to reach out tech start-ups while the financial crisis was disrupting the market and growth of bigger companies. It realized that many tech start-ups could not meet its original listing requirements. Therefore, NYSE had created a set of start-up-friendly alternative listing requirements in 2008, with lowered market capitalization and stock equity
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requirements, and there’s no income statement tests. These accommodating listing standards had indeed helped NYSE to successfully win many big tech start-ups in competition with NASDAQ, such as DreamWorks Animation SKG, Line Corp., Snapchat Inc., Spotify Technology SA and Alibaba Group. Lowering listing standards works because it fixed the gap where NYSE had ignored and left NASDAQ with a huge advantage for many years.
Relaxing listing requirements is a positively workable way to attract more emerging growth companies to list. From the perspective of a stock exchange, it is also important to strengthen the image as an innovative exchange with visions and insights to the industry and market.
HKEx is another recent case. HKEx is the first exchange in Asia that adopted the dual-class shares in order to allow some family firms to preserve the control in the founding firms.
Merely five days after its announcement, the Chinese unicorn company and one of the biggest smart phone makers, Xiaomi Corp., filed to HKEx for a megadeal of IPO. There are more emerging companies being expected to apply for HKEx Main Board listing. Therefore, on the purpose of broadening the gate of the capital market, Taipei Exchange should pay more attention to find the potential industries with cutting-edge technologies and new business modeling, such as Fintech start-ups, sharing economy industry, new energy industry or new e-commerce industry. With full understanding of the specialty of these emerging industries, Taipei Exchange can set up the more friendly listing requirements and ongoing requirements fitting to the target industries in preparation for new IPOs.
Another suggestion of de-regulation is regarding mergers and acquisitions (M&A). The regulators used to set the barriers for listed companies dealing with mergers and acquisitions.
In the past, listed companies were only allowed to merge or acquire another company which met the profitability criteria required by the Listing Rules. To relax the restricts, in October 2016, Taipei Exchange amended the related rules. Thereafter, the listed companies are
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allowed to merge or acquire another Main Board listed company and free of the profitability criteria checking upon the merged or acquired companies. The “Main Board listed companies” here refers to domestic companies that are listed on Taiwan Stock Exchange or Taipei Exchange or the foreign companies that are listed on the Main Board of an overseas securities market approved by the competent authority13. However, if a company listed on Taipei Exchange wants to merge another unlisted company, the merged company could only be free of the profitability criteria when the net worth of the surviving company after M&A is higher than the net worth of the original listed company, both in the most recent financial year and on the most recent pro forma financial report; or when an evaluation opinion from Industrial Development Bureau is obtained concluding that the merger will effectively increase the synergy. Regulations for mergers and acquisitions in Taiwan still have some restricts. In recent years, the number of listed companies being merged and then delisted is increasing and more than the number of the cases that currently listed companies acquiring others. Since more M&A have been taking place through the capital market, indicating that M&A is an ongoing trend for listed companies seeking out expansion opportunities, de-regulation and re-shape the regulatory regime is needed in order to create a friendly
allowed to merge or acquire another Main Board listed company and free of the profitability criteria checking upon the merged or acquired companies. The “Main Board listed companies” here refers to domestic companies that are listed on Taiwan Stock Exchange or Taipei Exchange or the foreign companies that are listed on the Main Board of an overseas securities market approved by the competent authority13. However, if a company listed on Taipei Exchange wants to merge another unlisted company, the merged company could only be free of the profitability criteria when the net worth of the surviving company after M&A is higher than the net worth of the original listed company, both in the most recent financial year and on the most recent pro forma financial report; or when an evaluation opinion from Industrial Development Bureau is obtained concluding that the merger will effectively increase the synergy. Regulations for mergers and acquisitions in Taiwan still have some restricts. In recent years, the number of listed companies being merged and then delisted is increasing and more than the number of the cases that currently listed companies acquiring others. Since more M&A have been taking place through the capital market, indicating that M&A is an ongoing trend for listed companies seeking out expansion opportunities, de-regulation and re-shape the regulatory regime is needed in order to create a friendly