The Standing Committee of the Sixth Shenzhen Municipal People’s Congress, a local-level legislature arm of the Communist Party, passed regulations on August 26 allowing tech companies registered in the city to implement dual-class shares on the Shenzhen Stock Exchange,

reported.

Dual-class shares are designed to give some shareholders more voting power than others. This structure works by providing more voting rights to B shares, which have several times the votes of each A share.

These unequal voting shares are primarily created to satisfy company owners who don’t want to give up control to investors but, at the same time, want to gain financing from the public equity market.

B shares are not publicly traded in most cases, and company founders and their families are most commonly the controlling groups in dual-class companies.

China’s “company law” specifies that companies implement a “one share, one right” system. However, in the start-up phase, most tech companies have founding shareholders with intangible assets, such as technology, but relatively little starting capital. As a result, the shareholding ratio of founders shrinks with multiple equity financings, with a risk of losing control of the company.

This situation is one of the reasons why China’s big technology companies like JD.com (NASDAQ: JD) chose to list overseas, such as in the New York Stock Exchange and NASDAQ, where they can hold dual-class shares.

The draft of the Shenzhen Stock Market regulation, which allows dual-class shares, was first submitted to the Municipal People’s Congress Standing Committee for deliberation on  April 28, following changes in the Hong Kong and Shanghai Stock Exchange markets.

In 2018, Chinese bourses revised rules that would allow Hong Kong-listed dual-class shares to be included in the Stock Connect—a cross-boundary investment channel that connects the Shanghai Stock Exchange and the Hong Kong Stock Exchange and allows international and mainland Chinese investors to trade securities in each other’s markets.

After the inclusion, Xiaomi (HKEX: 1810) and Meituan-Dianping (HKEX: 3690), both went to IPO in the Hong Kong Stock Exchange.

Last year, with the launch of the STAR market of the Shanghai Stock Exchange, companies who use dual-class shares, such as the Shanghai-based cloud service provider, UCloud, were able to get a listing in Shanghai.

Allowing dual-share structures is part of a batch of regulatory changes on the Shenzhen Stock Market. The move followed just days after the ChiNext startup board on the Shenzhen Stock Market welcomed its first batch of companies subject to a new, Nasdaq-style initial public offering process.

These new regulations may encourage Chinese companies to choose domestic stock markets to be listed.

According to Wayne Shiong, partner of China Growth Capital and a veteran VC expert, “registration process improvement and multi-class share system would allow a more dynamic market to boost the Chinese technology economy.” He further told KrASIA that 2020 is an amazing year for Chinese capital markets as it finally moves fast towards an international protocol that Chinese entrepreneurs have yearned for decades.

“I’d expect a huge jump in market size and an even faster recycle of good companies. Chinese entrepreneurs are now actively turning to Shanghai STAR and Shenzhen ChiNext to access capital,” concluded Shiong.