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Amendments

Title：

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

Amended Date： 2024.08.09 (Articles 6 amended,English version coming soon)
Current English version amended on 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(2021.03.31)
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 or applications by Taiwan Innovation Board listed companies, Taiwan Innovation Board primary listed companies for relisting as TWSE listed companies or TWSE primary listed companies, and strengthen the effect of consultation prior to listing of securities.
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;
      3. in the case of an application for the listing of securities in accordance with Article 4, paragraph 2 or 3, or Article 28-1, paragraph 5 or 6 of the Rules Governing Review of Securities Listings, evaluate the adequacy of disclosure of the issuing company's operation model, ability to react to operational risks and feasibility of the future development plan;
      4. In the case of an application for listing of stocks on the Taiwan Innovation Board, evaluate, based on the features of innovation and operational models of the issuing company, the possible risks to arise out of any changes to the material technologies, products, policies, and operational models, together with the countermeasures taken. In the event of an enterprise in the biotechnology and medicine industry, evaluate the clinical trial progress of the core products 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 (or the current term and the most recent two fiscal years in the case of an application for listing of stocks on the Taiwan Innovation Board), 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 a technology-based enterprise, cultural and creative enterpriseor information software enterprise applying for listing of stocks on the TWSE or Taiwan Innovation Board, 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 a technology-based enterprise, cultural and creative enterprise or information software enterprise applying for listing of stocks on the TWSE or Taiwan Innovation Board, 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 (or the most recent two fiscal years in the case of an application for listing of stocks on the Taiwan Innovation Board) 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:
      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(or the current term and the most recent two fiscal years in the case of an application for listing of stocks on the Taiwan Innovation Board), 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:
      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(or the current term and the most recent two fiscal years in the case of an application for listing of stocks on the Taiwan Innovation Board), 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 (the evaluation shall cover the current term and most recent two fiscal years in the event of an application for listing of stocks on the Taiwan Innovation Board):
    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 (the evaluation shall cover the current term and most recent two fiscal years in the event of an application for listing of stocks on the Taiwan Innovation Board):
    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 (or the current term and the most recent two fiscal years in the case of an application for listing of stocks on the Taiwan Innovation Board)
    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 fiscal years (or the current term and the most recent two fiscal years in the case of an application for listing of stocks on the Taiwan Innovation Board), 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 in accordance with Article 4, paragraph 2 or 3, or Article 28-1, paragraph 5 or 6 of the Rules Governing Review of Securities Listings or 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 fiscal 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.
    In the event of an applicant for listing of stocks on the Taiwan Innovation Board, obtain a forecast of cash receipts and disbursements for the month of such application and each of the 12 months after the scheduled listing, and evaluate whether the applicant complies with Article 29, paragraph 1, subparagraph 3 of the Rules Governing Review of Securities Listings.
  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 (or the current term and the most recent two fiscal years in the case of an application for listing of stocks on the Taiwan Innovation Board); 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 (or the current term and the most recent two fiscal years in the case of an application for listing of stocks on the Taiwan Innovation Board), to evaluate their impact on the financial position of the issuing company.
    The underwriter shall perform the following assessment and auditing procedures for the above major asset transactions:
    1. Obtain a summary statement of major asset transactions for the current term and most recent three fiscal years (or the current term and the most recent two fiscal years in the case of an application for listing of stocks on the Taiwan Innovation Board), and check if any counterparty in such transactions is a related party and whether there are any major restrictive clauses.
    2. Obtain materials relating to the above major asset transactions, such as purchase contracts, records of actual receipts and disbursements, internal decision-making procedures etc., to ascertain whether the transactions violate relevant laws and regulations and involve irregularities.
    3. Perform necessary procedures to verify the authenticity and completeness of the above materials
  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 (or the current term and the most recent two fiscal years in the case of an application for listing of stocks on the Taiwan Innovation Board) 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 satisfies, any of the criteria of major subsidiaries as in Article 2-1, Paragraph 2 of the Regulations Governing Auditing and Attestation of Financial Statements by Certified Public Accountants or Article 5 of the Regulations for Auditing and Attestation of Financial Statements of Financial Institutions by Appointed 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 issuing company 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.
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.
    When performing evaluations in accordance with any of the subparagraphs of Article 31, Paragraph 1 of the Rules Governing Review of Securities Listings except Subparagraphs 1, 3, and 7, where a lawyer opinion is required or Subparagraph 5, where a CPA opinion is required, the underwriter shall conduct random checks on relevant evidence and documents to find out if the issuing company applying for listing of stocks on the Taiwan Innovation Board has failed to comply with the requirements.
    For evaluations of lawyers under paragraphs 1 to 3, 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 may independently perform their duties under Article 9, Paragraph 1, Subparagraph 9, Article 28-4, Paragraph 3, and Article 31, Paragraph 1, Subparagraph 8 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 (or the year of application and the most recent two fiscal years in the case of an application for listing of stocks on the Taiwan Innovation Board), 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’s assessment report."
    When evaluating the establishment of the compensation committee under Article 9, Paragraph 1, Subparagraph 9, Article 28-4, Paragraph 4, and Article 31, Paragraph 1, Subparagraph 8 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’s assessment report."
    When evaluating the circumstances in Article 9, Paragraph 1, Subparagraph 11, Item 2, Article 28-8, Paragraph 7, Item 2, and Article 31, Paragraph 1, Subparagraph 10, Item 2 of the Rules Governing Review of Securities Listings, the underwriter shall obtain the following information and describe its evaluation and results in a “securities underwriter's assessment report:”
  1. With regard to the reduction of shareholding in the issuing company over the last three years, inspect the minutes of meetings of the audit committee, board of directors or shareholders of the TWSE/TPEx-listed company for the cause, expected reduction ratio, stock assignees or specific persons negotiated with, price and impact on the equity of the shareholders of the TWSE/TPEx-listed company; in the absence of an audit committee, examine whether consent of two-thirds or more of the directors has been procured.
  2. Where over the last three years the TWSE/TPEx-listed company has reduced its shareholding in the issuing company on account of a forfeiture of its subscription rights to shares issued by the issuing company for cash capital increase, inspect the minutes of meetings of the audit committee, special committee of board of directors of the issuing company on each such reduction for the assessment opinion by an independent expert on the fairness of the price of the new shares issued for each cash capital increase and reasonableness of the pricing and specific persons negotiated with etc. in each capital increase. The stock release procedures obtained of the issuing company that have been approved by the board of directors shall include specific person negotiated with and pricing basis etc. and information. Whether such procedures have been effectively implemented shall be assessed. Whether the composition, qualification, method of review, and other matters pertaining to the special committee are governed mutatis mutandis by the Regulations Governing the Establishment and Related Matters of Special Committees of Public Companies for Merger/Consolidation and Acquisition and, in the absence of an audit committee or special committee, whether consent of two-thirds or more of the directors has been procured, shall also be assessed.
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, the foreign issuer according to Article 28-5, or the issuing company applying for listing of stocks on the TWSE or Taiwan Innovation Board according to Article 32, of the same Rules, to see if there is any circumstance where listing of shares is advised against.
    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 the foreign issuer according to Article 28-6 or the issuing company applying for listing of stocks on the TWSE or Taiwan Innovation Board according to Article 33, of the same Rules, to see if there is any circumstance where listing of shares is advised against.
  2. In case of a listing application by a company satisfying the requirements under Article 16 of the Rules Governing Review of Securities Listings:
    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.