股票第一上市2017 – 第1版

出版社連結：Global Legal Insights

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Initial Public Offering 2017, 1st Edition

Author 1: Derek T.C. Sun

Author 2: Chia-heng Seetoo

Introduction

There are two securities exchanges in Taiwan. Taiwan Stock Exchange Corporation (“TWSE”) is the main board of listing and trading stocks of established public companies with larger market capitalisation and scale of operation. Taipei Exchange (“TPEX”, formerly known as GreTai Securities Market) is a secondary board of listing and trading securities of public companies with smaller market capitalisation and higher growth potential, and also administers the Emerging Stock Market, an over-the-counter stock trading platform for smaller public companies prior to IPO listing on TPEX or TWSE.

Before 1990, any company seeking IPO listing must receive prior approval of the Securities & Futures Commission of the Ministry of Finance (“SFC”), a predecessor of the Financial Supervisory Commission (“FSC”, the central unitary financial regulatory authority in Taiwan established in 2004). Since then, SFC/FSC gradually deferred to the listing review process of TWSE and TPEX.

In 2008, FSC modified its regulations to permit foreign companies seeking IPO in Taiwan, in order to attract Taiwanese merchants doing business in China and Southeast Asia, to raise capital in Taiwan instead of Hong Kong or Singapore. In late 2012, TWSE and TPEX abolished the New Taiwan Dollar-denominated par value requirement, which would allow companies incorporated in jurisdictions other than the Cayman Islands to apply for IPO in Taiwan. Auto Server Co., Ltd. became the first Japanese company that completed its IPO in TPEX in January 2014. As of April 9, 2017, there are 61 foreign companies listed in TWSE, 33 in TPEX, and 12 registered in the Emerging Stock Market of TPEX.[i]

Comparing with other stock exchanges in neighbouring jurisdictions, the Taiwanese capital market (including TWSE and TPEX) has the following characteristics, making it an attractive venue for IPO:[ii]

1. higher annual P/E ratio than Hong Kong and Singapore and on par with Korea and Shanghai;
2. higher annual yield (4% for 2016);
3. special focus on high-tech and manufacturing sectors, thanks to a robust local community of supply chain and sophisticated investors;
4. lower threshold for market capitalisation and business scale;
5. regulator’s continuing efforts to improve the corporate governance of public companies; and
6. relatively low cost of raising capital through IPO and secondary offerings.

Since 2008, TWSE and TPEX have been encouraging domestic, small and medium-sized enterprises (“SMEs”) in several key sectors (such as electronic components, biotech & pharmaceutical, cultural creative business) and foreign companies whose major operations are located in Hong Kong, Singapore, Malaysia, Japan and China to seek IPO listing in Taiwan. Such endeavours have been moderately successful. FSC, as the chief regulator, wants to ensure that all foreign companies and domestic SMEs are capable of complying with the same set of strict internal control and corporate governance rules and regulations; some are quite unique to Taiwan’s capital market ecosystem. The prospective foreign issuer should evaluate whether its top management and legal compliance personnel can become familiar with the regulatory environment, a critical factor to the success of IPO listing in Taiwan.

The chart below[iii] shows the number of IPO listing deals in TWSE and TPEX for 2014, 2015 and 2016:

	Number of TPEX IPO – foreign issuer	Number of TPEX IPO – domestic issuer	Number of TWSE IPO – foreign issuer	Number of TWSE IPO – domestic issuer	Number of total IPO deals	Total size of IPO (NT$billion)
2014	7	26	5	11	50	31.37
2015	6	28	9	11	54	37.63
2016	5	31	7	13	56	24.70

The total number of IPO listings for each of the past three years has been steady, but there was a considerable drop in the size of total IPO deals in 2016. This can be attributed to the increased number of SMEs in the electronics, biotech, e-commerce and hospitality sectors, raising fewer funds due to their smaller capitalisation. In the coming year, the focus will be multi-jurisdictional competition for Taiwanese-founded companies operating in China and emerging Southeast Asian economies such as Thailand and Indonesia, as the successful IPO of Ganso Co., Ltd. (stock code 603886: Shanghai, a Taiwanese-founded bakery chain) on Shanghai Stock Exchange will certainly set a precedent for prospective issuers to consider.

The IPO process: Steps, timing and parties and market practice

Domestic companies limited by shares incorporated under Taiwan laws, and foreign companies incorporated in other jurisdictions, have different sets of IPO process. We will first discuss the IPO process for domestic companies and then note the differences for foreign companies.

IPO for domestic companies

The first step is to engage at least two FSC-licensed recommending securities firms (the “Recommending Firms”), which will advise the domestic company throughout the entire IPO process and act as the lead underwriters in the IPO financing.

The Recommending Firms will work closely with the management and the major shareholders of the domestic company to devise a preliminary IPO schedule and working plan, which includes adjusting the pre-IPO shareholding structure, identifying the scope of business suitable for the IPO application, reporting to TPEX that the domestic company is currently under the Recommending Firm’s counselling for Emerging Stock Market registration (a prerequisite for domestic companies conducting IPO in Taiwan), and assisting the domestic company to establish internal control and auditing procedures that comply with FSC regulations. Twelve months are often needed to get the domestic company ready for the next stage, which is filing for public registration with FSC and application for registration on the Emerging Stock Market administered by TPEX.

Under Article 42 of the Securities and Exchange Act of Taiwan (the “Act”) and Article 66 of the Regulations Governing the Offering and Issuance of Securities by Securities Issuers (“Domestic Issuer Offering Regulations”) promulgated by FSC pursuant to Article 22 of the Act, any domestic company that has not previously filed registration of public offering securities (“public registration”) with FSC must do so before applying for listing with TWSE or TPEX; however, usually no actual offering of new securities will be conducted in connection with the public registration.

Key documents in the registration filing deck includes the prospectus, copies of corporation registration documents, an examination checklist to be completed by the domestic company’s auditing certified public accountant (CPA), and an examination report regarding the effectiveness of the domestic company’s internal control system issued by the CPA within three months prior to the public registration filing date. The public registration then becomes effective if FSC does not raise any inquiry within 12 business days after the public registration application is filed. The domestic company becomes a public company under the Act upon the public registration being effective.

The Recommending Firms, having entered into a counselling agreement with the domestic company, would file at least one monthly counselling report to TPEX, so that the domestic company is eligible for registration on the Emerging Stock Market after the public registration becomes effective.

TPEX does not prescribe any scale, capitalisation or profitability requirements for registering on the Emerging Stock Market. Key documents required for Emerging Stock Market registration include the prospectus prepared in accordance with FSC regulations, recommendation letters from two Recommending Firms, copies of the engagement letter with an FSC-licensed shareholders’ service agent, and the registration agreement with the Taiwan Depositary & Clearing Corporation (“TDCC”) to use TDCC’s book-entry system for recording transfers of shares. Upon the registration on the Emerging Stock Market, major shareholders of the domestic company will sell at least 3% of the total issued and outstanding shares to the Recommending Firms, so that the Recommending Firms can begin trading the registered shares on the Emerging Stock Market.

Registration on the Emerging Stock Market for at least six months is a prerequisite for domestic companies seeking IPO on TWSE or TPEX. After the domestic company has been registered on the Emerging Stock Market for six months and met the capitalisation, scale and profitability threshold for either TPEX or TWSE,[iv] it may file for the IPO listing application.

TPEX and TWSE have similar sets of required documents for IPO application. Key documents include:

1. audited financial statements for the recent two fiscal years and the current period;
2. financial forecast for the current quarter and the next quarter;
3. examination report of internal control system issued by the auditing CPA;
4. evaluation report issued by the Recommending Firms, which covers a broad array of business activities, financial performance, legal issues and IPO pricing;
5. legal checklist issued by the prospective issuer’s legal counsel;
6. draft prospectus prepared in accordance with FSC regulations and TPEX/TWSE rules; and
7. corporate governance-related documents such as the board of directors’ self-evaluation report, directors’ completion of continuing education in corporate governance, list of insiders and key personnel.

During the review period, TWSE / TPEX will provide written inquiries and demand written responses. When TWSE / TPEX examiners are satisfied with the written responses, a review meeting will be arranged for the domestic company to present its case before the IPO review panel consisting of TWSE / TPEX officials and outside industry experts.

After the board of directors of TWSE / TPEX approves the IPO listing application, the domestic company will then file an expedited registration with FSC for the IPO offering, where such expedited registration will become effective after seven business days.[v]

Overall, a domestic company that has not previously registered its securities for public offering in Taiwan generally should expect at least 24 months from the kick-off meeting to the IPO listing ceremony – 12 months for preparation of the public registration, six months for Emerging Stock Market, and another six months for the IPO review and the underwriting process.

IPO for foreign companies

FSC issues the Regulations Governing the Offering and Issuance of Securities by Foreign Issuers (the “Foreign Issuer Regulation”) also pursuant to Article 22 of the Act. The Foreign Issuer Regulation was amended in December 2008 to permit foreign companies to apply for IPO listing in Taiwan. Integrated Memory Logic Limited, a Cayman Islands exempted company, became the first foreign company conducting IPO and listing on TWSE on May 18, 2010.

There are several key differences for the IPO process of a foreign company:

• First, a foreign company seeking IPO or registration on the Emerging Stock Market should amend its articles of association in accordance with the “Foreign Issuer Shareholders Protection Checklist” of TWSE / TPEX to the extent permitted under the laws of its incorporating jurisdiction, which is a long list of mandatory provisions in the Company Act and securities regulations of Taiwan.
• Second, if a foreign company is the first one from its incorporating jurisdiction seeking IPO in Taiwan, then it is also required to prepare an application for exempting from certain securities regulations under the Act (“Foreign Issuer Exemption Application”), in which the foreign company’s counsel must identify all mandatory provisions in the laws of the incorporating jurisdiction which would trump the corporate governance regulations under the Act and apply for exemption.
• Third, registration on the Emerging Stock Market for trading is optional – a foreign company is only required to have a minimum of a six-month counselling engagement with the Recommending Firms to become eligible for IPO listing.
• Finally, if a foreign company decides to file for IPO listing directly, the timing of its first public registration filing with FSC is after receiving the listing approval from TWSE / TPEX.[vi]

Parties commonly involved in the IPO process

In the IPO process, the lead Recommending Firm, the issuer’s auditing CPA and legal counsel all play key roles in advising the issuer.

The Recommending Firm is responsible for reviewing the issuer’s current business and shareholding structure, and working with the issuer’s auditing CPA to advise on the establishment of a sound governance structure, bookkeeping practices and internal control system which are consistent with the securities regulations and listing rules promulgated by FSC, TWSE and/or TPEX. The Recommending Firms also serve as TWSE / TPEX’s main point of contact throughout the IPO process. For foreign companies, the Recommending Firms are also required to provide continuing counselling on compliance with Taiwanese securities law for three years.

The auditing CPA is mainly responsible for auditing the issuer’s financial statements in accordance with the International Financial Reporting Standard as adopted by FSC (“T-IFRS”),[vii] assisting the prospective issuer to establish good bookkeeping and internal control systems; and issuing the examination report regarding the effectiveness of the prospective issuer’s internal control system.[viii]

The issuer’s legal counsel is mainly responsible for conducting a comprehensive due diligence on the prospective issuer’s legal and business affairs; issuing the legal checklists required in the IPO listing application deck and the subsequent registration with FSC; and reviewing the draft prospectus prepared by the issuer. The foreign company’s Taiwan counsel is also responsible for coordinating foreign legal counsel located in the incorporating and operating jurisdictions for due diligence, preparing the Shareholders Protection Checklist and amending the issuer’s articles of association, and the Foreign Issuer Exemption Application, if required.

When counselling a foreign issuer, the Recommending Firm is also required to engage its own legal counsel to conduct due diligence and to issue a legal opinion on specific legal matters in support of the Recommending Firm’s evaluation report.[ix]

Idiosyncratic features of the IPO Process in Taiwan

In Taiwan, a public company shall comply with additional corporate governance, public disclosure, anti-manipulation and internal control rules under the Act and various securities regulations promulgated by FSC. The Recommending Firm’s continuous counselling and the Emerging Stock Market registration prerequisite are designed to serve the regulatory purpose of providing enough time for prospective issuers to learn and get accustomed to additional compliance requirements under the Act.

Except for certain “focus” industries,[x] TWSE and TPEX expect a prospective issuer to demonstrate a track record of profitability,[xi] although TWSE and TPEX have different focuses in their respective IPO reviewing process. TPEX is more inclined to ascertain the internal control and governance procedures, because prospective issuers are usually smaller. TWSE is more concerned about the business model and the long-term profitability of the prospective issuer.

Finally, TWSE / TPEX expect foreign companies seeking IPO listing in Taiwan to act and behave like domestic issuers, and strictly follow all corporate governance regulations applicable to domestic issuers. Therefore, the Shareholders Protection Checklist and the Foreign Issuer Exemption Application were designed to facilitate and enforce such policy expectation, and relatively little room of autonomy is given to foreign issuers to implement their own internal rules.

Regulatory architecture: Overview of the regulators and key regulations

FSC was established in 2004 as the single regulatory authority of the financial services industry of Taiwan. FSC is responsible for the development, supervision, management and examination of domestic financial markets and the financial services industry. In the area of capital markets, FSC issues regulations governing IPOs, secondary offerings, securities registration, disclosure requirements, corporate governance of public companies, securities firms’ codes of conduct, review of securities offering registrations, and examination of the financial status and business operations of public companies.

TWSE was incorporated in 1961 by government-owned financial institutions, local entrepreneurs and investment vehicles controlled by the then-reigning Chinese Nationalist Party (KMT). TWSE is the leading venue of IPO listing in Taiwan.

TPEX is a non-profit incorporated foundation jointly established by TWSE and the Taiwan Securities Association (the trade association of the licensed securities firms in Taiwan) in 1994 as a securities dealer automatic quotation system of over-the-counter securities issued by smaller public companies in technology sectors. TPEX also administers the Emerging Stock Market, the “real” over-the-counter trading securities market place for public reporting companies not yet listed on TWSE or TPEX through a formal IPO. TPEX is also the major corporate bond trading platform, and the equity crowdfunding intermediary.[xii]

TWSE’s major responsibilities include: (a) reviewing and approving the formal IPO listing application submitted by a prospective issuer meeting the listing criteria; (b) examination of the audited annual and quarterly financial statements of all listing companies; (c) verification of information publicly disclosed by the listing companies; (d) promotion of better practices of corporate governance jointly with TPEX and other non-profit associations under FSC’s guidance; (e) surveillance of the market trading activities and detection of suspicious activities of manipulation or insider trading; (f) clearing and settlement of securities traded in TWSE; (g) monitoring of securities firms; and (h) establishment and maintenance of information disclosure platforms for securities investors.[xiii] As a separate listing venue, TPEX has a similar set of responsibilities regarding IPO reviews, supervision of TPEX-listed companies, and surveillance of trading activities taking place in securities markets administered by TPEX.

Key IPO rules and regulations in Taiwan

The Domestic Issuer Regulation prescribes the procedures and documents needed for domestic companies to file for first public registration and registration for public offering of new securities locally in Taiwan. Foreign companies (primary IPO listing and secondary listing through offering of Taiwan Depositary Receipts) are separately governed by the Foreign Issuer Regulation. TWSE’s Rules Governing Review of Securities Listings is the major set of IPO review rules for TWSE, while TPEX has three sets of rules governing the registration for trading on the Emerging Stock Market, domestic and foreign issuer IPO listing review. TWSE / TPEX may reject an issuer’s IPO listing application if TWSE / TPEX finds that such issuer’s finance and business cannot be independently separated from other entities, or if the key manager or directors have serious misconducts identified in the respective listing rules.[xiv]

The major legal documents are the legal checklists, the prospectus and, in the case of foreign companies, the Shareholders Protection Checklist and the Foreign Issuer Exemption Application (if needed). The legal checklist is similar to a due diligence questionnaire covering all major aspects of the issuer’s legal affairs. In practice, the issuer’s counsel would identify its findings in the legal checklist and opine whether such findings would have material adverse effects on the IPO listing.

The foreign company’s Taiwan counsel will identify whether the provisions enumerated in the Shareholders Protection Checklist have been included in the company’s articles of association, subject to foreign counsel’s comments. The Foreign Issuer Exemption Application is an extensive checklist of all provisions and relevant regulations under the Act, intended for the foreign issuer whose incorporating jurisdiction previously had no company applying for IPO listing in Taiwan, and the completion of which requires foreign counsel’s significant contributions.

The prospectus is drafted by the issuer and then reviewed by the Recommending Firms, the legal counsel and the auditing CPA, per local market practice. FSC publishes a standard form of the underwriting agreement between the Recommending Firms and the issuer, therefore the legal counsel is usually not involved in the underwriting agreement negotiation process.

Under the current regulations, when an issuer receives all required IPO listing approvals, its Recommending Firms will form an underwriting syndicate and invite additional securities firms to participate. The syndicate will underwrite the IPO on a firm commitment basis. The issuer may only offer new common shares equal to at least 10% of the total issued shares[xv]. Major shareholders of the issuer may provide up to 15% of the total issued shares to the underwriting syndicate for overallotment subscriptions by investors.[xvi]

There are three ways for the underwriting syndicate to distribute the IPO shares to the investors: (1) bookbuilding process, in which the lead Recommending Firm will first determine a price range and contact prospective institutional and sophisticated investors, which shall not be the issuer’s affiliates or insiders, and then negotiate the offering price with the issuer; (2) public subscription and allotment, in which investors will apply for subscriptions of new IPO shares with the underwriting syndicate and a random computerised draw is administered if the total number of shares applied for exceeds that of new shares offered; and (3) auction, in which the Recommending Firm will first negotiate the minimum price with the issuer, and TWSE / TPEX will then administer the auction process. Under the current regulations, either a combination of auction and public subscription, or of bookbuilding process and public subscription, will be used for IPO round offering.[xvii]

The Act requires the issuer to deliver a prospectus to prospective investors in connection with an IPO.[xviii] FSC’s regulation about the prospectus contains a list of mandatory disclosure items for all securities issued by a public company, which include:

• history of the issuer, risk factors, pending material litigations of the issuer and its directors, officers or major shareholders;
• internal organisation and brief biography of directors and officers;
• directors’ and officers’ compensations;
• capital formation and shareholding structure;
• summary of profitability in the past two full years;
• outstanding securities and employee stock options;
• description of the issuer’s business, overall market, employment and environmental protection matters;
• real estate and equipment;
• equity investment in other companies;
• material contracts;
• use of proceeds and their feasibility; and
• financial information, including short-form financial summary for the past five years, and management’s qualitative analysis of the five-year results and the Recommending Firm’s IPO evaluation report, among other things.

TWSE and TPEX have internal listing rules supplementing FSC’s prospectus regulation, which would require the issuer to further explain its business if the issuer is in a certain industry for which the TWSE / TPEX listing profitability requirements are lessened.[xix] Additional disclosures may appear in the issuer’s final IPO prospectus based on TWSE / TPEX’s feedback during the listing review.

Issuers in certain industries may be exempted from the profitability requirements subject to additional business requirements established by TWSE / TPEX; for example, a prospective issuer in technology or cultural creative industries, upon certification of the relevant government ministries, may be qualified for IPO listing application without the profitability requirement.[xx]

Influence of supranational regulatory regimes

Taiwan joined the International Organization of Securities Commissions in 1987 and became a formal signatory to the Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (“IOSCO-MMOU”) on March 15, 2011.[xxi] As of 2016, Taiwan participates in three IOSCO committees: the Committee on Issuer Accounting, Auditing and Disclosure; the Committee on Credit Rating Agencies; and the Committee on Retail Investors. FSC regularly participates in seminars and telephone conferences organised by these committees and develops research and policy recommendations with other member states.

Recent developments in market practice

Starting from January 1, 2016, TWSE / TPEX handles the auction of IPO shares and the Recommending Firms are required to use American auction rules and no longer allowed to use a book building process if the size of the IPO exceeds NT$400 million (approx. US$13.3 million) per Taiwan Securities Association’s revised self-governing rules in late 2015.[xxii] The reason for such change is to eliminate the excessive gains derived from the difference between the IPO price and the post-listing price surge that were often enjoyed by institutional investors or nominees having good connections with the Recommending Firms. Because domestic issuers are required to be registered on the Emerging Stock Market before the official IPO and the reasonable price would have been reflected by the trading price, the new changes in the underwriting practices are expected to eliminate such excessive gains.

Public company responsibilities

Paragraph 1 of Article 157-1 of the Act prohibits insiders of a public company from trading listed securities of that public company after actually learning any information which will have a material impact on the price of the securities of that company (material non-public information, “MNPI”), after the information becomes precise prior to the public disclosure of such information or within 18 hours after its public disclosure. FSC has issued a regulation[xxiii] (the “FSC MNPI Regulation”) about the definition of MNPI and how MNPI shall be disclosed – such MNPI includes, among other things, mergers & acquisitions, and matters having a negative material impact on the continuing existence or operation of a public company, such as bankruptcy or reorganisation, failure to timely publish the financial reports, irregular transactions, labour strikes or environmental pollution that may threaten the operation of the company.

TWSE and TPEX also have their respective rules governing the disclosure of material information by listing companies.[xxiv] The TWSE and TPEX information disclosure rules are nearly identical and considerably broadened the enumerated items of “material information” that should be disclosed by a listing company beyond the FSC MNPI Regulation. For example, a listing company’s receipt of its internal control system evaluation opinion issued by the auditing CPA is an enumerated disclosure item under the TWSE / TPEX disclosure rules, but not specifically required by the FSC MNPI Regulation.

Certain items of financial information are required to be disclosed monthly, quarterly or annually under the respective rules governing periodic disclosure of companies listed on TWSE or TPEX. Monthly disclosure items include: unaudited monthly revenue and income; financial derivative trades; lending and guarantees; shareholding status of corporate insiders; and related parties transactions. Quarterly disclosure items include: quarterly financial statements; status of China and overseas investments; status of use of proceeds from recent securities offerings; status of affiliates and subsidiaries; and list of top 10 customers. Annual disclosure items include: audited financial statements; material changes in financial ratios and their analysis; number of employees and employment benefits; issuance and exercise of employee stock options; directors’ & officers’ compensation; and certification of the effectiveness of internal control systems.[xxv]

Corporate governance standards

Article 23 of the Company Act of Taiwan requires a responsible person (officers, directors, independent directors and statutory supervisors) to have a duty of loyalty and a duty to exercise due care of a “good administrator” when conducting business operation of the company he serves. A public company in Taiwan is required to have at least two independent directors who shall meet certain regulatory qualifications.[xxvi] FSC, TWSE and TPEX encourage listing companies to establish an audit committee formed by three independent directors to replace statutory supervisors, which would exercise certain supervisory functions, such as evaluating the effectiveness of the internal control system, reviewing material corporate transactions and financial statements, the right to audit the company’s operation, or to call an extraordinary meeting of shareholders when the board is unable to call such meeting.[xxvii]

FSC promulgates various regulations governing the operation of listed companies. These regulations cover matters such as: the internal control system; acquisition and disposition of corporate assets; lending and guarantees; procedures of the board of directors and of meetings of shareholders; fairness of related party transactions, among other things. In order to promote good corporate governance of listing companies, TWSE and TPEX proposed the Corporate Governance Best Practice Principles for TWSE/TPEX Listed Companies, non-mandatory guidelines about all aspects of corporate governance.[xxviii] The Best Practice Principles put considerable focus on investor relations, firewall and conflicts of interest with affiliates and corporate insiders, and the business acumen and integrity of the board of directors.

Potential risks, liabilities and pitfalls

Potential risks that should be addressed during the due diligence process

Shareholders holding 10% or more of total issued shares of the issuer are “corporate insiders” for the purposes of insider trading rules in Taiwan and are subject to various periodic reporting requirement; certain key persons and the major shareholders will be subject to post-IPO lockup requirements. In the context of a foreign company’s IPO, if more than 30% of the total issued shares are owned directly or beneficially by investors from People’s Republic of China, a special permit from FSC is required. Therefore, the issuer’s composition of the owners, which is sometimes overlooked, should be ascertained during the due diligence.

Also, processes of pre-IPO corporate restructure and related parties transactions will be intensively investigated by the TWSE or TPEX IPO review panel. The issuer should be ready to explain the necessity and the fairness of such restructure and related party transactions, for the purpose of demonstrating to TWSE or TPEX that corporate insiders did not reap improper gains from such transactions.

Potential liabilities arising during the IPO process

There may be up to a two-year time gap between being a domestic public company and the IPO listing due to the unique listing process in Taiwan, and a foreign company usually needs a similar period from kick-off to the IPO listing; many things may delay the IPO listing. For example, failure to maintain the profitability requirements, unfamiliarity with the reporting and disclosure obligations, or corporate insiders’ inadvertent violation of the “Short-Swing Profit Rule” under Article 157 of the Act, as explained below, may cause TWSE or TPEX to doubt the issuer’s suitability to continuously comply with the legal obligations associated with a listed company.

The prospectus is the major information source for investors to make a decision; the Act provides both civil and criminal liabilities for the company and relevant parties if the prospectus contains false information or omits material information. Under Article 32 of the Act, the issuing company, its responsible persons, underwriters, and employees and external professionals, including CPA and lawyers placing their names on the prospectus, will be held jointly and severally liable for damages to purchasers of securities if the prospectus contains false information or omits material information attributable to those persons.

Under the Act, false content or omission of material information would lead to imprisonment for one to seven years.[xxix] If such false information or omission results in actual losses, it may even constitute securities fraud under Article 20 and Article 171 of the Act, which will result in imprisonment for three to ten years. In practice, the prosecutor or the court normally finds that false information or omission in a prospectus would cause danger of loss to buyers and simply apply the charge of securities fraud, which would imply a longer sentence of imprisonment.

Apart from the liabilities from false information or omission in prospectus, improper conduct during the book building process may also trigger investigations and liabilities.

Underwriting rules of the Taiwan Securities Association provide three methods of securities sale for underwriters in the IPO process: book building bid, auction, and public subscription and allotment; no corporate insider may participate in the book building process.[xxx] Due to the significant gains in the stock price immediately after the company becomes listed, in the past, those who were forbidden to participate in a book building bid could still purchase via nominee accounts. However, such practice may cause the criminal charges of insider trading and securities fraud provided in the Act. Taiwan Securities Association’s new self-governing rules about mandatory auction during the IPO underwriting process was an attempt to eliminate such opportunities for improper gains.[xxxi]

Common pitfalls after becoming a public company that may increase liability risk

The “insiders” of the company, including the directors, supervisors, managers and other persons specified by certain laws and regulations, would be subject to three major types of regulations for trading the shares of a public company: (1) the duty to report; (2) prohibition of short-swing; and (3) prohibition of insider trading.

The directors, supervisors, managers, and 10%-or-more major shareholders have duties to report before and after trading the shares under Article 22-2 and Article 25 of the Act.

Article 157 of the Act provides the company’s right to demand its insiders to disgorge profits from short-swing within six months (“Short-Swing Profit Rule”). If the company does not exercise the right to demand disgorgement of short-swing profit, shareholders are entitled to request directors or supervisors to do so within 30 days, or exercise the right on behalf of the company after the 30-day period. The directors and supervisors shall be jointly and severally liable for damages suffered by the company as a result of their failure to exercise the right of disgorgement; it may also cause criminal liabilities of breach of trust under the Act.

The insider trading rule under Article 157-1 of the Act provides that upon actually knowing of any information that will have a material impact on the price of the securities of the company, after the information becomes precise, and prior to the public disclosure of such information or within 18 hours after its public disclosure, insiders shall not purchase or sell shares or any other equity-type security of the public company; violation of which would lead to the most severe civil and criminal liabilities under the Act after the company becomes a public company.

The definition of insider covers all persons who learn the information from those having an occupational relationship with the company and those tippees who learn the information from tippers. The violation may be punishable by imprisonment of no less than three years and no more than ten years, and if the illegal profit exceeds NT$ 100 million, the violation may be punishable by imprisonment of no less than seven years. The civil liabilities include punitive damages up to three times the actual losses suffered by other investors.

[i] Based on the search on Market Observation Post System maintained by TWSE, the official information disclosure website for Taiwanese public companies; the English version is available at http://emops.twse.com.tw/server-java/t58query (last visited April 9, 2017).

[ii] Based on monthly and annual statistics compiled and published by the Securities & Futures Bureau, Financial Supervisory Commission, available at http://www.sfb.gov.tw/ch/home.jsp?id=622&parentpath=0,4,109&mcustomize=important_view.jsp&dataserno=201702150001(last visited April 9, 2017).

[iii] Data source: Securities & Futures Bureau, TWSE and TPEX websites.

[iv] The TWSE listing criteria includes NT$600 million paid-in capital; the net income before tax for the most recent two fiscal years represents 6% or greater of the share capital; or The net income before tax for the most recent five years represents 3% or greater of the share capital, see Article 4 of the Taiwan Stock Exchange Corporation Rules Governing Review of Securities Listings (the English full text is available at http://eng.selaw.com.tw/LawArticle.aspx?LawID=FL007326&ModifyDate=1060106&og=0201,0202,0203,0204&lt=&md=1&k1=Review%20of%20Securities%20Listing&k2=&k3=&c1=and&c2=and, last visited April 18, 2017). The TPEX listing criteria includes NT$50 million paid-in capital; the net income before tax for the most recent fiscal year represents 4% or greater of the share capital; or the net income before tax for the most recent two years represents 3% or greater of the share capital, see Article 3 of the Taipei Exchange Rules Governing the Review of Securities for Trading on the TPEX (the English full text is available at http://eng.selaw.com.tw/LawArticle.aspx?LawID=FL007383&ModifyDate=1050519&og=0201,0202,0204&lt=&md=1&k1=Securities%20for%20Trading&k2=&k3=&c1=and&c2=and, last visited April 18, 2017).
[v] See Article 13 of the Domestic Issuer Offering Regulations by Securities Issuers, full text available at http://eng.selaw.com.tw/LawArticle.aspx?LawID=FL007033&ModifyDate=1041112 (last visited April 18, 2017).
[vi] See Article 58 of the Foreign Issuer Regulation, full text available at http://eng.selaw.com.tw/LawArticle.aspx?LawID=FL007043&ModifyDate=1041112 (last visited April 18, 2017)

[vii] See Article 14, Section 2 of the Securities and Exchange Act; Article 3, Section 2 of the Regulations Governing the Preparation of Financial Reports by Securities Issuers, English full text available at http://eng.selaw.com.tw/LawArticle.aspx?LawID=FL007203&ModifyDate=1051219&og=0201,0202,0203,0204&lt=&md=1&k1=financial%20report&k2=&k3=&c1=and&c2=and; FSC Letter Ruling dated July 18, 2016 (Jin-Guan-Jheng-Shen-Zih No. 1050026834).

[viii] TWSE and TPEX may reject the listing application if the company has failed to implement effective written accounting system, internal control system, or internal audit system, see Article 9, Section 1, Taiwan Stock Exchange Corporation Rules Governing Review of Securities Listings and Article 10, Section 1 of the Taipei Exchange Rules Governing the Review of Securities for Trading on the TPEX.

[ix] See Article 7 Section 1, Clause 2 of Taiwan Stock Exchange Corporation Procedures for Review of Securities Listings and Article 7 Section 1, Clause 2 of the Taipei Exchange Rules Governing the Review of Securities for Trading on the TPEX.

[x] For example, if the company has been reorganised as a “technology-based enterprise” or “cultural creative enterprise” by a written assessment and opinion issued by relevant government ministries, it may be exempted from providing the track record of profitability (although the applicant company is still required to provide a latest financial report to prove that it has reached certain amount of net worth), see Article 5 of the Taiwan Stock Exchange Corporation Rules Governing Review of Securities Listings and Article 3 Section 4 of the Taipei Exchange Rules Governing the Review of Securities for Trading on the TPEX.

[xi] See Article 5 and Article 20, Section 1, Clause 3 of the Taiwan Stock Exchange Corporation Rules Governing Review of Securities Listingsand Article 3, Section 1, Clause 2 of the Taipei Exchange Rules Governing the Review of Securities for Trading on the TPEX.

[xii] See Taipei Exchange, Introduction, available at http://www.tpex.org.tw/web/about/introduction/message.php?l=en-us (last visited March 30, 2017).

[xiii] See Introduction to TWSE, Service, available at http://www.twse.com.tw/en/about/company/service.php (last visited March 30, 2017).

[xiv] See Article 9 Section 1, Article 18 and Article 19 of the Taiwan Stock Exchange Corporation Rules Governing Review of Securities Listingsand Article 10 and Article 15 Section 7 of the Taipei Exchange Rules Governing the Review of Securities for Trading on the TPEX.

[xv] On the post offering basis unless otherwise indicated, see e.g. Article 28-10 of the Taiwan Stock Exchange Corporation Rules Governing Review of Securities Listings; Article 17-1 of the Supplementary Provisions to the Taiwan Stock Exchange Corporation Rules for Review of Securities Listings, English full text available at http://eng.selaw.com.tw/LawArticle.aspx?LawID=FL007330&ModifyDate=1060214 (last visited April 18, 2017).

[xvi] See Article 4-1 Section 5 of the Taiwan Securities Association Rules Governing Underwriting and Resale of Securities by Securities Firms, English full text available at http://eng.selaw.com.tw/LawArticle.aspx?LawID=FL007541&ModifyDate=1050412 (last visited April 18, 2017) and Article 2 Section 1 of the Taiwan Securities Association Directions Governing the Underwriting Procedures to be Followed by Underwriters in Conducting an Initial Listing on a Stock Exchange or Over-the-Counter Market, English full text available at http://eng.selaw.com.tw/LawArticle.aspx?LawID=FL033201&ModifyDate=0940511 (last visited April 18, 2017).

[xvii] See Article 5, Article 22-2 and Article 43-1 of the Taiwan Securities Association Rules Governing Underwriting and Resale of Securities by Securities Firms.

[xviii] Article 30 of the Securities and Exchange Act, English full text available at http://eng.selaw.com.tw/LawArticle.aspx?LawID=FL007009&ModifyDate=1051207 (last visited April 18, 2017).

[xix] See supra Note 10.

[xx] See Article 5 of the Taiwan Stock Exchange Corporation Rules Governing Review of Securities Listings.

[xxi] Represented by FSC under the name “Chinese Taipei” due to Taiwan’s unique status in international politics, see Signatories to Appendix A and Appendix B List, available at https://www.iosco.org/about/?subSection=mmou&subSection1=signatories (last visited April 17, 2017).

[xxii] See Letter issued by Taiwan Securities Association dated December 31, 2015 (Jhong-Jheng-Shang-Diang-ZihNo.10400086452).

[xxiii] Regulations Governing the Scope of Material Information and the Means of its Public Disclosure Under Article 157-1, Paragraphs 5 and 6 of the Securities and Exchange Act, the English full text is available at http://eng.selaw.com.tw/LawArticle.aspx?LawID=FL039378&ModifyDate=0991222 (last visited April 17, 2017).

[xxiv] Taiwan Stock Exchange Corporation Procedures for Verification and Disclosure of Material Information of Companies with Listed Securities, the English full text is available at http://eng.selaw.com.tw/LawArticle.aspx?LawID=FL007111&ModifyDate=1060113 (last visited April 17, 2017); Taipei Exchange Procedures for Verification and Disclosure of Material Information of Companies with TPEX Listed Securities, the English full text is available at http://eng.selaw.com.tw/LawArticle.aspx?LawID=FL007378&ModifyDate=1051223 (last visited April 17, 2017).

[xxv] See e.g., Article 3 of the Taiwan Stock Exchange Corporation Rules Governing Information Filing by Companies with TWSE Listed Securities and Offshore Fund Institutions with TWSE Listed Offshore Exchange-Traded Funds, the English full text is available at http://eng.selaw.com.tw/LawArticle.aspx?LawID=FL007250&ModifyDate=1050125 (last visited April 17, 2017).

[xxvi] See Article 14-2 Section 1 of the Securities and Exchange Act (“not less than two in number and not less than one-fifth of the total number of directors. . .”); see also Articles 2 and 3 of the Regulations Governing Appointment of Independent Directors and Compliance Matters for Public Companies (five-year professional business, not convicted of serious crimes, not corporate insiders of such public company), English full text available at http://eng.selaw.com.tw/LawArticle.aspx?LawID=FL038791&ModifyDate=1040827 (last visited April 17, 2017).

[xxvii] See Article 14-4 of the Securities and Exchange Act; see also Articles 218, 219 and 220 of the Company Act of Taiwan, the English full text is available at http://eng.selaw.com.tw/LawArticle.aspx?LawID=FL011292&ModifyDate=1040701 (last visited April 17, 2017).

[xxviii] The English full text is available at http://eng.selaw.com.tw/LawArticle.aspx?LawID=FL020553&ModifyDate=1050930 (last visited April 17, 2017).

[xxix] Paragraph 1, Section 1; Section 3 of Article 174 of the Act.

[xxx] See supra note 17.

[xxxi] See supra note 22.