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Taiwan Stock Exchange Corporation Assessment and Auditing Procedures for Securities Underwriter Handling Initial Listing Applications  CH

Amended Date： 2023.04.24 
Categories： Primary Market > Review
Article Content Content Search Article No. Search Legal Basis Amended Article Legislative History Chinese

Title： Taiwan Stock Exchange Corporation Assessment and Auditing Procedures for Securities Underwriter Handling Initial Listing Applications(2017.12.11)
Date：
1     These Procedures are established in accordance with Article 3 of the TWSE Procedures for Review of Securities Listings to provide a standardized evaluation practice for securities underwriters providing consultations on the initial listing applications and strengthen the effect of consultation prior to listing of securities.
2     These Procedures provide general regulations. Securities underwriters may, depending on the actual needs on a case-by-case basis, include additional items for review in the assessment and auditing procedure, to implement their function of providing consultations.
    For purposes of these Procedures, financial reports shall mean the consolidated financial reports prepared in accordance with the regulations governing the preparation of financial reports applicable to each industry sector as promulgated by the competent authority, or individual financial reports in case where the issuing company does not have a subsidiary.
    When assessing an initial listing application by a foreign issuer, the securities underwriter shall refer to its consolidated financial information.
    Documents and statements collected pursuant to these Procedures shall be serially numbered and cross referenced for ease of reference. Upon completion of the audit, all the information and relevant attachments shall be compiled in book form and filed as working papers, and the Statement on Auditing Standards No. 45 "Audit Working Paper Standards" " shall apply mutatis mutandis to the preparation of working papers.
    Supervisors of the company receiving consulting services, consulting details and advice provided by the consultant during the consulting period shall be listed and described in the working papers of the consulting services.
    The working papers are the basis on which the securities underwriter prepares the assessment report. The TWSE shall conduct random inspections according to the applicable working paper random inspection policy.
3     General review of the assessment report
  1. Description of the total number of shares underwritten
  2. The securities underwriter shall specifically describe the basis and method of how the offer price is determined jointly by the underwriter and the issuing company, including at least the following details:
    1. method, principle and calculation for determining the offer price, and comparison against the applicable internationally accepted market approach, costing method and income approach;
    2. comparison of financial positions, profitability and P/E ratios of the issuing company against its peer companies that are listed companies;
    3. where the financial expert's opinion or appraiser's appraisal report has been referred to in the determination of the offer price, the contents and conclusions of the expert's opinion and appraisal report shall be explained;
    4. average stock price and trading volume of the securities of the issuing company listed on the emerging stock market in the most recent month;
    5. assessment opinion on the fairness of the offer price jointly determined by the securities underwriter and the issuing company.
  3. Risk factors of underwriting:
    4. List and describe the risks associated with this underwriting (e.g., excessive changes in stock prices, price stabilization strategies, relevant costs of this underwriting and fee rate of the underwriting services, dilution of profits due to capital-based growth caused by underwriting of new shares).
  4. Conclusion:
    1. Based on its own assessment results and experts' opinion (of which the underwriter shall make its own assessment to determine whether or not it may be used as the basis for assessing the overall risks of the issuing company; more assessment efforts shall be made if necessary), the underwriter shall in the conclusion of its assessment describe the operating risks, financial risks and potential risks, among others, as investment risk disclosure for investors;
    2. When concluding its assessment of the risks associated with the initial listing application by the foreign issuer, the underwriter shall perform field research to ascertain the operation of the foreign issuer or its subordinate companies, or consult experts for opinions or collect and analyze relevant information to ascertain the macro economy, changes in political and economic environments, foreign exchange control, taxes and relevant legal requirements in the jurisdiction where the issuer was incorporated and countries where it has its main operation activities, and whether or not a final and conclusive civil judgment issued by a R.O.C. court will be recognized there and other risks, and describe the adequacy of the response measures adopted by the foreign issuer;
    3. whether or not listing of shares of the issuing company should be recommended shall be based on the outcome of the underwriter's overall assessment of the issuing company.
4     Industrial circumstances and operational risks:
  1. Operational risks of the sector in which the issuing company runs its business:
    1. collect reports and information on the relevant industry to ascertain the current circumstances of the industry sector the issuing company belongs to;
    2. interview the operating officers of the issuing company and use the information about the internal finance and business operation of the issuing company and information about the industry collected from external sources to ascertain the cyclical demand specific to the industry or substitution products and their impact, and analyze the major factors impacting the profitability of the industry sector the issuing company belongs to, and the niche for the issuing company in various influencing factors;
    3. collect and analyze information about the businesses at the upstream, middle stream and downstream of the industry sector the issuing company belongs to.
  2. Operational risks of the issuing company:
    1. Business activities:
      1. collect local and foreign reports and information about the relevant industry to ascertain the possible changes in supply and demand in the market, and use the information to analyze favorable and unfavorable factors that may affect the future development of the issuing company and the measures in response, to evaluate its ability to respond to changes in economic cycles;
      2. collect information about the market share of its major competitors to evaluate the competitive niche of the issuing company;
    2. Technological research and development and patents:
      1. the underwriter may obtain technological experts' assessment opinions as supporting evidence;
      2. obtain information about the history, organization, staff, education and work experiences, research accomplishments and future projects of the R&D department of the issuing company to ascertain major sources of technologies, how and how much compensations or royalties for technology are paid, and in which direction the R&D work will develop, and analyze information such as number of staff of the R&D department, the average seniority, employee turnover, and attrition rate for the current term and the most recent three fiscal years, to evaluate the operational risks of departure of the R&D staff to the issuing company;
      3. obtain major technological cooperation contracts and evaluate the operational risks of the contracts to the issuing company based on the terms and conditions thereof;
      4. for an applicant in technology-based enterprise, cultural and creative enterprise or information software enterprise, obtain information about the competitive advantage, life cycles, sustainability of the current major products and R&D projects for new products, and levels and resources of production and development technologies, to evaluate market positioning, demands and internal control and security measures for research and development;
      5. for an applicant in technology-based enterprise, cultural and creative enterprise or information software enterprise, obtain information about the background and experiences of the company's directors participating in operation and decision making, shareholders holding five percent or more of the total number of outstanding shares of the applicant company shares who have participated in business decision-making, shareholders contributing capital with patents or professional skills, and officers controlling manufacturing technologies and technical development, their shareholding ratios, share transfers by them within the most recent three fiscal years and the year of application, time actually spent on operation and how they are actually involved in operation, in order to evaluate the operational risks of the issuing company if these personnel discontinue their participation in the operation.
    3. Analysis of human resources:
      4. Obtain information about the total number of employees, number of former, laid off or retired employees, direct and indirect labor number, average age and average years of service, to evaluate changes in the attrition rate and the operational risks to the issuing company.
    4. Cost analysis of major products:
      1. obtain information about the costs of raw material, labor and manufacturing for the current term and most recent three fiscal years, and analyze the operational risks of changes in the percentage of individual cost elements to the issuing company;
      2. for applicant satisfying the requirements under Article 16 of the Rules Governing Review of Securities Listings, obtain updates on current prices of the local (neighboring) area, information about peer companies, and the price ratio of land and building available from the government authority (such as ratio of assessed present value and declared present value, or ratio of building construction price and land price, etc.), to evaluate if the allocation ratio of the issuing company and landowner is reasonable in case of a sale of building under a joint construction project, distribution of building under a joint construction project, or distribution of profit under a joint construction project;
    5. Exchange rate changes:
      6. Obtain information about the ratio of exchange gains or losses to operating profits and the ratio of domestic and export sales and domestic and overseas purchases for the current term and most recent three fiscal years, to analyze the operational risks of exchange rate changes to the issuing company and its risk aversion measures.
5     Business circumstances:
  1. Summary of business:
    1. obtain information about the top 10 clients or clients whose business amount accounts for 5% or more of the annual net operating revenue in the most current term and the most recent three fiscal years and their sales contracts, check on a random basis the relevant evidence to verify the absence of major discrepancies in the sales price and trading conditions with the clients, and verify through written certification or on-site observation to ascertain these clients' operation status, their relationship with the issuing company, trading purposes and the necessity of the transactions, to evaluate if there is any inflated profit;
    2. for the top 10 clients or clients whose business amount accounts for 5% or more of the annual net operating revenue in the most current term and the most recent three fiscal years, verify and analyze if there are any irregularities in significant additions or reductions of the issuing company's sales amount with them, and evaluate if there are sales concentration risks;
    3. interview the sales managers of the issuing company to ascertain the issuing company's sales policy;
    4. obtain information about the top 10 suppliers or suppliers whose purchase amount accounts for 5% or more of the annual net purchase amount in the most current term and the most recent three fiscal years and their supply contracts, check on a random basis the relevant evidence to verify the absence of major discrepancies in the purchase price and trading conditions of raw materials purchased from the suppliers, and verify through written certification or on-site observation to ascertain these supplier' operation status, their relationship with the issuing company, trading purposes and the necessity of the transactions, to evaluate if there is any false sales invoice;
    5. for the top 10 suppliers or suppliers whose purchase amount accounts for 5% or more of the annual purchase amount in the most current term and the most recent three fiscal years, verify and analyze if there are any irregularities in significant additions or reductions of the issuing company's purchase amount with them, and evaluate if there are risks of centralized purchasing;
    6. obtain information about the annual purchase quantity and unit price of the main raw materials of the issuing company's major products for the most current term and the most recent three fiscal years and collect general market information for comparison to see if there are any significant irregularities;
    7. obtain copies of the issuing company's long-term supply contracts in the most current term and the most recent three fiscal years, and information about supply shortage or interruptions, to evaluate if the supply contracts contain any major qualifying clauses and if there are risks in concentration of sources of supply;
    8. obtain the issuing company's consolidated and individual financial reports for the most current term and most recent three fiscal years to analyze the fairness of changes in accounts receivable, and describe the policy for provision of allowance for losses in the parent company and subsidiaries and the evaluation of adequacy of allowance, and also possibility of recovery of accounts receivable, and compare with peer companies in the same sector of business.
  2. Summary of inventory:
    3. Obtain the issuing company's consolidated and individual financial reports for the most current term and the most recent three fiscal years, to analyze the fairness of changes in net balance of inventory, describe the policy of the parent company and subsidiaries for allowance for inventory valuation and obsolescence loss and the evaluation of adequacy of allowance, and compare with peer companies in the same sector of business.
  3. Summary of business performance in the most current term and most recent three fiscal years
    1. based on the issuing company's internal information and reports and information about the industry collected, analyze if there are any irregular changes in the business performance for the most current term and most recent three fiscal years, and evaluate if there are any circumstances where listing of its shares is advised against;
    2. analyze changes in the operating revenue, operating costs and gross operation profits by product line or by department for the most current term and most recent three fiscal years;
    3. for changes in business revenue or gross profit that are more than twenty percent (20%) in the most current term and most recent three fiscal years, cost-volume-profit analysis should be performed to analyze if these changes are reasonable.
  4. In case of a merger of another company for less than a full fiscal year, evaluate factors such as purpose, effects and fairness of the merger transaction.
6     Financial circumstances:
  1. Prepare an analysis of the issuing company's financial ratios for the most current term and most recent three financial years, compare changes against at least three listed companies and unlisted companies in the same industry sector, and explain why these companies are chosen for the comparison. For an applicant for listing of shares as a technology-based enterprise or cultural and creative enterprise, obtain information about the equity belonging to the owner of the parent company for the most recent financial year and as in the current financial statement, and ascertain the details of the issuing company's business plan for the upcoming year, to evaluate the possibility that the equity belonging to the owner of the parent company in the upcoming year continues to exceed two-thirds of its paid-in capital. For issuers of shares with no par value or with a par value per share that is not NT$10, the underwriter shall evaluate the possibility that the equity belonging to the owner of the parent company in the upcoming year drops below two-thirds of the sum of stock capital and capital reserve - share premium.
  2. Review the financial reports certified by a CPA and obtain the issuing company's statements or attorney letters to ascertain if there are any major litigations or financial difficulties in the current term and most recent three fiscal years; also obtain the endorsements and guarantees, major undertakings and lending to others, trading of derivatives and major assets transactions of the issuing company and all its subsidiaries (including transactions between parent company and subsidiaries) for the current term and the most recent three fiscal years, to evaluate their impact on the financial position of the issuing company.
  3. Obtain information about the issuing company's plant expansion plans as of the current term of the application year, evaluate its funding sources, expected benefits, and feasibility, and ascertain the progress of work.
  4. Reinvested enterprises and major investment projects:
    1. general information about enterprise reinvested by the issuing company and any of its subsidiaries (including transactions between parent company and subsidiaries):
      1. obtain the financial statements of the reinvested enterprises and relevant information to ascertain their major business activities and general operation;
      2. obtain minutes of meetings of the board of directors of the issuing company to ascertain its purpose of investment, years of investment, original investment amounts, number of shares and its shareholding ratio in the invested companies;
      3. review the issuing company's financial reports and account books to ascertain how share of profits and losses of its subsidiaries, affiliate and joint ventures is recognized by using the equity method;
      4. review information such as financial reports and account books for the current term and the most recent three fiscal years to evaluate if there is any violation of Article 13 of the Company Act;
      5. where the issuing company in the fiscal year in which it applies for listing satisfies, or its subsidiaries in the preceding fiscal year satisfied, any of the criteria of important subsidiaries as in Article 2-1, Paragraph 2 of the Regulations Governing Auditing and Attestation of Financial Statements by Certified Public Accountants, the underwriter shall send its staff to provide on-site counseling services and evaluate how its internal control measures are implemented;
        1. In regard to important subsidiaries meeting the above criteria, the underwriter shall additionally perform the following evaluation and examination procedures respecting the implementation of their internal control systems:
        2. Ascertain the organization, production, business and other operations of these important subsidiaries; obtain introductions and operating procedures about the cycles of collection of sales payments, cycles of payments for procurement, cycles of production and warehousing, and cycles of research and development; and perform on-site random inspections on information about the above cycles to ascertain if they are being operated in a reasonable way according to the written accounting system and evaluate if there are any major defects and if the cycles are effectively implemented.
        3. Ascertain the operating procedures for procurement by these important subsidiaries of real properties, plants and factories, equipment, and real estate for investment purposes, perform on-site random inspections on the relevant procurement information, and evaluate if there are any major defects.
        4. Visit the important subsidiaries to inspect their maintenance of inventories and properties, and obtain catalogues of the inventories, real properties, plants and factories, equipment, and real estate for investment purposes of these companies, to conduct random inspections on the real properties, plants and factories, equipment, real estate for investment purposes, and inventories.
    2. Major investment projects:
      1. review information about the purposes, starting time and expected completion dates of the investment projects in the minutes of meetings of the board of directors, and obtain information about the operation of the investment projects;
      2. funding sources of the investments: in case of loans, the underwriter shall evaluate the impact on the future operation of the issuing company; in case of own funds, the underwriter shall calculate the lost interest income or returns on reinvestment;
      3. collect supply-and-demand information about the markets of the products of the enterprises in the investment projects to ascertain if the projected market supply and demand is reasonable, and based on the projected operation plan calculate the returns on investment and period of recovery of costs;
      4. obtain the financial reports of the invested companies or operation reports of the projects to ascertain their operation and financial positions;
      5. ascertain the estimated investment benefits based on business or technology experts' evaluation opinions.
  5. If a public enterprise applies for listing of shares and the financial reports it submitted has not been certified by a CPA, the underwriter shall obtain and ascertain the CPA's comments on the difference in applying the Generally Accepted Accounting Principles against certification by an auditing agency, and its impact on the financial reports.
  6. The underwriter shall evaluate the fairness of the regulations governing issue of employee subscription warrants and equity securities by the applicant that is a foreign company according to the laws and regulations of the jurisdiction where it was incorporated, and the impact on the shareholders' equity.
7     Evaluate if the issuing company has conscientiously performed self-assessment based on the various specific indexes in its corporate governance self-assessment report, and if said report adequately reflects its corporate governance.
8     The underwriter shall request lawyers to issue documents such as legal opinion on legal compliance in the most current three years by a domestic issuer and its incumbent directors, general manager, shareholders holding 10% or more shares and real responsible person and on the impact on the operation of the local issuer, and whether the action plans are comprehensive and adequate:
  1. Whether the issuing company violates applicable laws and regulations:
    1. the major laws and regulations of the central competent authority for the sector of industry the issuing company belongs to and those affecting the sector of industry;
    2. evaluate if the issuing company has acted pursuant to the laws and regulations governing disclosure of information of listed companies when disclosing the information; and
    3. other laws and regulations;
  2. Whether the directors, general manager, shareholders holding 10% or more of the total number of outstanding shares of the issuing company, real responsible person and other relevant personnel violate applicable laws and regulations and therefore breach good faith or compromise performance of duty;
  3. Whether any copyright, patents, trademark rights or any other intellectual property rights are infringed;
  4. major litigation, non-litigation or administrative disputes pending in court; and
  5. major labor disputes or environmental pollution events.
    When assessing a primary listing application of a foreign issuer, the underwriter shall request lawyers to issue legal opinions on the following with regard to the foreign issuer, incumbent directors, general manager, shareholders holding 10% or more of the total number of outstanding shares of the foreign issuer and real responsible person in the most current three years, and shall further evaluate the impact on the operation of the foreign issuer and action plans based on the lawyers' opinions:
  1. Whether the foreign issuer violates applicable laws and regulations:
    1. seriously violates the applicable labor safety and health laws and regulations of the jurisdiction where the issuer was incorporated or of the country where the issuer has its major presence, to the extent that the issuer has been ordered to suspend part or all of its operation;
    2. seriously violates the pollution control and prevention regulations of the jurisdiction where the issuer was incorporated or of the country where the issuer has its major presence;
    3. major labor disputes; and
    4. other laws and regulations.
  2. Protection of shareholders' equity:
    1. whether the restrictions on where a shareholders' meeting is convened, on the voting system or exercise of other shareholders' rights imposed by the law of the jurisdiction where the issuer was incorporated may influence the exercise of the shareholders' equity of the foreign issuer. If yes, describe the measures for protection of the exercise of shareholders' rights within the Republic of China; and
    2. whether the articles of incorporation or the memorandum of association include specific provisions on protection of the exercise of shareholders' equity;
  3. Whether the issuer has entered into any contract that imposes major restrictions on its operation or that is apparently unreasonable; and
  4. Same as Subparagraphs (B) to (D) of the preceding paragraph.
    When evaluating impacts on the operation of the issuing company described in Subparagraphs (A) to (E) of the first paragraph and Subparagraphs (A) to (D) of the second paragraph, the underwriter shall not adduce opinions provided by the regular legal adviser to the issuing company or the lawyer appointed by the issuing company to complete the "Legal Matter Checklist for Share Listing Applied for by Issuer". The lawyers to be contacted may not be the same as the regular legal adviser to the issuing company or the lawyer or CPA appointed by the issuing company to complete the "Legal Matter Checklist for Share Listing Applied for by Issuer" and may not work for the firm that maintains a substantial cooperation relationship with such adviser, lawyer or CPA, so as to ensure independence of the lawyers' opinions.
9     When performing evaluations according to the provisions under Article 9, Paragraph 1 of the Rules Governing Review of Securities Listings, the underwriter shall conduct random checks on relevant evidence and documents, except for Subparagraphs 1, 3 and 8 which require opinion provided by lawyer, and Subparagraph 6 which requires opinion provided by CPA, to evaluate if the domestic issuer has failed to comply with the requirements.
    When performing evaluations according to the provisions under the subparagraphs of Article 28-8 of the Rules Governing Review of Securities Listings, the underwriter shall conduct random checks on relevant evidence and documents, except for Subparagraphs 1 to 4 which require opinion provided by lawyer, to find out if the foreign issuer applying for initial listing or its subordinate companies have failed to comply with the requirements.
    For evaluations of lawyers under the first two paragraphs, the lawyers to be contacted may not be the same as the regular legal adviser to the issuing company or the lawyer or CPA appointed by the issuing company to complete the "Legal Matter Checklist for Share Listing Applied for by Issuer" and may not work for the firm that maintains a substantial cooperation relationship with such adviser, lawyer or CPA, so as to ensure independence of the lawyers' opinions.
    When evaluating if directors and supervisors may independently perform their duties under Article 9, Paragraph 1, Subparagraph 9 and Article 28-4, Paragraph 3 of the Rules Governing Review of Securities Listings, the underwriter shall conduct an advanced evaluation on the independence of the independent directors. It shall further obtain the lists of directors and supervisors and minutes of meetings of the board of directors for the year of application and the most recent three years, and perform on-site observation to see if the formation is healthy, if the meetings convened are working effectively, if the important decisions or changes are well considered before they are made, if the procedures for submitting a proposal are reasonable, and describe its evaluation and results in a "securities underwriter evaluation report on initial listing."
    When evaluating the establishment of the compensation committee under Article 9, Paragraph 1, Subparagraph 9 and Article 28-4, Paragraph 4 of the Rules Governing Review of Securities Listings, the underwriter shall obtain the organizational regulations of the compensation committee created by the issuing company, ascertain the professional qualifications of its members and obtain the meeting minutes of the committee, to assess if its formation is regular and compliant with requirements, if the members of the committee are independent, if the meetings convened are working effectively, if the proposals submitted are reasonable, and the discussions of the above proposals at the meetings of the board of directors, and describe its evaluation and results in a " securities underwriter evaluation report on initial listing."
10     Evaluation pertaining to the supplementary provisions governing listing applications by companies in a specific sector of business or form of organization:
  1. Listing application by business group
    1. Verify the members of its business group according to Article 6 of the Supplementary Provisions to the Rules for Review of Securities Listings.
    2. Obtain the financial reports of the business group for the most recent two fiscal years, details about its major business activities or major commodities and marketing channels thereof, and information about purchase amounts and business incomes of the issuing company and its business group for the year of application and the most recent two fiscal years, and evaluate the domestic issuer according to Article 18 of the Rules Governing Review of Securities Listings, or evaluate the foreign issuer to see if there is any circumstance where listing of shares is advised against according to Article 28-5 of the same Rules.
    3. For listing applications by a subsidiary that maintains a relationship with its parent company, obtain information including the consolidated financial reports of the parent company and all its subsidiaries, and evaluate the local issuer according to Article 19 of the Rules Governing Review of Securities Listings, or evaluate the foreign issuer to see if there is any circumstance where listing of shares is advised against according to Article 28-6 of the same Rules.
  2. In case of a listing application by a company satisfying the requirements under Article 16 of the Rules Governing Review of Securities Listings:
    3. Obtain a photocopy of the certification of registration (or amendment registration) of the company after its incorporation, transcript of the land register obtained by the time the application for listing is made, case specific analysis of the gross profit margin of the issuing company and construction company for the most recent two fiscal years issued by CPA, and reports on fairness of the procedure for contracting of work, contract price and payment method issued by experts, percentage of leased assets to all assets available for leasing, policy-making documents and lease agreements etc., and perform evaluations on all items described in Articles 16 and 17 of the Rules Governing Review of Securities Listings to ensure the absence of circumstances where listing of shares is advised against.
11     If the applicant for listing of shares is an investment holding company or financial holding company, the underwriter shall perform evaluations of individual companies subordinate to the holding company according to Articles 4, 5, 6, 7, 8 and 9.
11-1     If the applicant for initial listing is an offshore subsidiary of a local TWSE/GTSM-listed company, the underwriter shall take necessary evaluation and audit procedures and perform detailed evaluations on the following:
  1. Evaluate the legality of the policy-making procedure of the local TWSE/GTSM-listed company, whether the listing of shares may have a major adverse impact on its operation and financial position, and the proposed action plans; and
  2. In case of shareholding dispersal by the local TWSE/GTSM-listed company for the purpose of reducing the shareholding of the offshore subsidiary, whether the parties the shares are dispersed to and method of price determination violate any applicable requirements or are apparently unreasonable to the extent the shareholders' equity of the local TWSE/GTSM-listed company may be compromised.
12     Other matters to be evaluated:
    For companies not covered in these auditing procedures due to the characteristics of their specific sector of industry, the underwriter may add matters to the auditing procedure and describe the circumstances and relevant impact.
13     Ascertain any material subsequent events occurring to the issuing company from the date of completion of the underwriter's assessment report until the day before the effective date of the share listing contract, and provide updated descriptions and evaluations. The underwriter shall also ascertain if there is any material subsequent event before the date of publication of the prospectus used for share listing, and provide the updated descriptions and evaluations.
14     These Procedures shall take effect after having been submitted to and approved by the competent authority and publicly announced. Subsequent amendments thereto shall be effected in the same manner.