1. Preface
When a company issues new shares, in accordance with Paragraph 1, Article 267 of the Company Act of the Republic of China, the company shall retain 10% to 15% of the total number of new shares for purchase by company employees, and in accordance with Paragraph 3 of the same article, the company shall make a public announcement and notify the existing shareholders to subscribe, with preemptive right, in proportion to their original shareholdings. Therefore, investors who are employees and existing shareholders of the company have the right to subscribe to new shares.
In the past, if investors with the aforementioned qualifications had funding needs, they might borrow from banks or apply for subscription financing from securities finance companies. However, although it is for the purpose of securities business money lending from securities firms, investors could not borrow money with newly subscribed but not yet issued stocks as collateral, and could only use securities or other commodities or foreign currencies they already held as collateral. This is because when securities firms provided financing in the past, customers had to transfer at the same time the securities or other commodities or foreign currencies they held to the securities firm’s designated loan collateral account as collateral.
To expand the business scope of securities firms, improve the efficiency of investors’ utilization of funds, and meet their needs for participating in the subscription to new shares, the competent authority amended the “Regulations Governing Borrowing or Lending Money in Connection with Securities Business by Securities Firms” on August 19, 2024, and allowed employees and existing shareholders to borrow funds from securities firms to subscribe to IPO/ SPO new shares of listed companies (also known as subscription loans). The key points of the amendment include adding subscription loans as a type of securities business money lending, adding stock types that cannot be accepted as collateral, amending the matters to be recorded in the loan contract, and specifying that related operations shall be drafted by the Taiwan Stock Exchange (TWSE) in joint consultation with the Taipei Exchange (TPEx) and the Taiwan Depository and Clearing Corporation (TDCC).Therefore, the TSWE announced on September 5, 2024 the amendment to the “Operating Rules for Securities Business Money Lending by Securities Firms” (hereinafter referred to as the “Regulations”) to include subscription loans in the scope of financing, and specify relevant operating procedures.
2. Introduction to the System
(1) Definition of Subscription Loan
A subscription loan refers to the use of new shares from an IPO/ SPO on the TWSE/TPEx as collateral by a customer with the status of the public company’s employee or existing shareholder for a loan from a securities firm for the share subscription. The amount of the loan is the remaining balance after deducting the self-provided funds that the customer should pay from the amount of subscription for shares, and shall not be combined or offset with other loan amounts. The financing period shall not exceed 30 days, so it is also known as a 30-day financing.
(2) Application for a Subscription Loan
A customer who wishes to apply for a subscription loan should submit an application within the period of two to four business days before the payment deadline. After submitting the application, the self-provided funds for the subscription loan should be transferred to the customer’s sub-account under the securities firm’s designated settlement account one business day before the payment deadline, and the securities firm will then pay the share subscription funds to the issuing company’s designated account on behalf of the customer.
However, if the new shares issued by the issuer have a lock-in period restriction for its employees or restricted rights for its employees, or if its employees choose to apply Article 19-1 of the Statute for Industrial Innovation to defer the income tax of the shares, then such shares shall not be used as collateral.
(3) Calculation Standards and Collateral Management
For securities subscribed through subscription loans, the financing calculation standards for the collateral is 60% of the subscription price. However, for securities that are not eligible for margin purchase and short sales, the calculation standard is 40% of the subscription price.
The collateral maintenance ratio and collateral market value calculation for subscription loans are the same as the current 6-month financing, that is, the collateral maintenance ratio shall not be less than 130%; however, when calculating the collateral market value, if the new shares subscribed to by the customer are IPO new shares, as there is no market price, the subscription price shall be used for calculation.
(4) Situations Where Securities Firms Deny Subscription Loans
Article 14-2 of the Regulations stipulates that securities firms should deny subscription loans in the following situations: 1. Customers who fail to pay their self-provided funds before the deadline.2. An extension of the issuer’s fundraising period has been approved for by the competent authority.3. The issuer changes the subscription amount per share.4. The specific person makes the payment for new shares more than three business days after the subscription deadline. The aforementioned regulations are mainly for the situations where the securities firm encounters a customer who fails to pay the self-provided funds before the deadline, resulting in the firm’s inability to pay the full subscription price or exercise the customer’s new share subscription rights on his/her behalf, and therefore should deny the loan. In addition, if the competent authority approves an extension of the issuer’s fundraising period, or if there is a change in the subscription amount per share during the fundraising process, the subscriber may withdraw the subscription from the issuer. If the specific person makes the payment late, it may result in an insufficient margin maintenance ratio; besides this, if the customer fails to make up the payment before the deadline set by the securities firm, the securities firm will have no collateral for the subscription loan to dispose of. Therefore, considering that the reasons above will all add to the business risks of securities firms, it is explicitly stated in the Regulations that securities firms should deny subscription loans accordingly.
(5) Procedures for Establishing a Subscription Loans
Subscription loans are secured by new shares subscribed to by customers but not yet acquired. All securities acquired from the subscription should be used as collateral and transferred from the customers’ custody accounts at the TDCC to the securities firm’s designated loan collateral account at the TDCC via book-entry. For customers who subscribe to new shares for more than one trading unit with odd-lot shares, securities firms should provide loan funds in multiples of the trading unit. After the new shares subscribed by the customers are transferred to the securities firm’s designated loan collateral account, the securities firm should return the odd-lot shares to the customers; this is because the odd-lot shares are subscribed to by customers themselves and do not belong to the securities firm’s debt collateral. In addition, the securities firm should still calculate the margin maintenance ratio before obtaining the collateral.
(6) Procedures for Invalid Subscription Loan
When securities firms handle subscription loans, if the issuance of new shares through cash is not established or the issuance is revoked or abolished by the competent authority, the issuer shall refund the subscription funds to the customer’s sub-account under the securities firm’s designated settlement account. If the issuer fails to return the payment amount to the customer’s sub-account under the securities firm’s designated settlement account, the securities firm shall notify the customer to repay the securities firm’s loan and interest within the next business day.
(7) Application for Conversion and Repayment
Subscription loans may be converted into the 6-month financing stipulated in Paragraph 1, Article 16 of the Regulations before the expiration of the financing period. If the customer sells the securities used as collateral before the financing period expires, he/she should first repay the loan amount.
3. Benefits After Opening Up and Prospects
The handling of subscription loans involves investors, TWSE and TPEx listed companies and securities firms. This new business will bring positive benefits to the three parties and also help the development of the capital market.
For investors, opening up subscription loans will expand their investment opportunities. If investors have a need to reduce their self-provided funds or increase the scale of subscription, using subscription loans for financing can help improve their financial flexibility, strengthen their participation in new share subscription, and allow the new shares subscribed to be used as collateral to borrow from securities firms, without the need to use currently held securities or other commodities or foreign currencies as collateral, which can effectively improve the convenience of financing. For employees, participating in new share subscription may obtain shares of the company they work for, share the company’s future operating results, and help motivate their work performance; for existing shareholders, participating in new share subscription may maintain the proportion of their equity shares and ensure their rights to participate in the company’s decision-making.
For TWSE and TPEx listed companies, opening up subscription loans reduces the investment threshold for the employees and existing shareholders, increases their willingness to subscribe, and is conducive to a smooth fundraising process. In addition, promoting employees to hold company shares will encourage their loyalty and be beneficial for talent retention, thereby enhancing the value of the company.
For securities firms, the opening up of subscription loans is the first time that securities firms are allowed to extend stock loans with customers’ shares not yet acquired as collateral, thereby expanding their scope of financing. In addition, by providing a mechanism for customers to apply for converting subscription loans into 6-month loans, securities firms can guide customers’ funding needs to long-term business. Therefore, it is beneficial for the enhancement of the capacity and revenue of securities firms in handling securities business money lending.
Opening up subscription loans can break through regulatory restrictions and improve market mechanisms to effectively solve the problem of insufficient financing channels in the past, and create a win-win effect for investors, TWSE and TPEx listed companies, and securities firms.