STAR Market – China’s new thermometer for IP monetization

“STAR” is the abbreviation of “Sci-Tech innovAtion boaRd.”  STAR Market, as China’s counterpart to NASDAQ, has become a new board in the Shanghai Stock Exchange (SSE) since 13 June 2019.  In its continued effort to increase the size and depth of its financial market, China launched the STAR Market with the aim of addressing the needs of the innovative industries.  

According to SSE, the mission of the STAR Market is to:

- Enhance the capability to serve technology innovation and promote high-quality development of China's economy;
- Support the establishment of Shanghai International Financial Center and Innovation Center of Science and Technology, and promote the joint development of the two centers; and
- Promote a market-oriented reform of the capital market and improve a multi-tier capital market.

Undoubtedly, the establishment of STAR Market carries positive implications for IP monetization.  The listing rules of STAR Market support innovative companies which have impressive IPs but not enough revenues to obtain financing in the traditional capital markets.  In other words, the STAR Market provides an additional and more structured option to early-stage investors seeking to monetize their IPs in China. 

To this end, certain listing rules set out specific disclosure requirements for the underlying IPs of companies seeking to list in the STAR Market.  In addition, these rules request a detailed elaboration on how the IPs are essential to the potential growth of the companies.  The scope of these most significant disclosure rules covers, among other things, a company’s:

1. Key technology staff members;
2. Competitive advantages in connection with its underlying IPs; and 

3. Key intangible assets and their composition, with classification into the respective IP categories, such as a patent, a trademark, a copyright, or trade secret, etc.

Because of its special focus and purpose, the STAR Market has become an indispensable sector of China’s innovation regime.  As such, for deal makers pursuing opportunities in IP monetization in China, it can serve as a valuable window to observe the development and dynamics among various driving forces.  The STAR Market is offering information otherwise unavailable or used to be difficult to collect in China.

Observers now may investigate the market’s trade volumes, total number and composition of the listed companies, and their financial performance to get a sense of the innovation activities in China.  For example, in December 2019, among the 64 companies listed in the STAR Market, 14 companies belong to the health industry, amounting to 21% of the listing pool; and 10 out of these 14 listed companies (71%) are in the medical device industry.  This profile provides a bird’s-eye view to deal makers seeking for “hot zones” to monetize their IPs.

Observers may also investigate the trading regulations, rules, or administrative orders, as enacted by SSE for the Star Market, to understand the current regulatory intent.  The SSE adopts a new regulatory regime in response to the contemporary issues.  The regulatory intent, therefore, is like a mirror that reflects the goals or challenges at different stages of the development in the innovative industries in China. Such regulatory move particularly provides insights in the IP areas.  For example, the relevant listing rules cover in length the connection between companies’ IP portfolio and their competitiveness in the market.  The listing rules scrutinize this aspect in response to a common but misleading practice where Chinese companies often claim themselves to be “innovative companies” based on a sizable patent portfolio which, however, does not have any genuine value.

In short, IP monetization deals in China benefit from the growth of the STAR Market.  Like a thermometer in the hand of an ordinary observer, it provides a quick impression on the innovative activities in China; while in the hand of a professional deal maker, it provides rich and detailed information at fingertips to identify risks and opportunities for IP monetization deals.