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Introduction: While the Shanghai Stock Exchange continues to maintain a phased slowdown in the pace of IPO review since the second half of 2023 due to the "counter-cyclical adjustment mechanism of the primary and secondary markets", since mid-April 2024, under the heavy pressure of the implementation of the new "Nine National Policies" and its supporting new policies, the supervision and guidance of proposed IPO projects has continued to increase.

This article was exclusively published by Koukou Finance (ID: koukouipo)

Author: Yao Yi@Beijing

Editor: Zhai Rui@Beijing

The Shanghai Stock Exchange has recently disclosed and warned against the "illegal" behavior of many companies planning to IPO on the Science and Technology Innovation Board who have embellished relevant scientific and technological innovation attribute evaluation indicators in the hope of "hiding the truth" and achieving A-share listing.

Following the anonymous announcement by the Shanghai Stock Exchange two months ago in the previous issuance and listing review dynamics (No. 3, 2024) that two companies planning to be listed on the Science and Technology Innovation Board were found to have doubts in the rationality of the identification of R&D personnel, the effectiveness of the R&D project management mechanism, and the accuracy of R&D working hours statistics (see the relevant report of Kekou Finance "Unbelievable! Nurses, tour guides, and customer service have become R&D personnel of high-tech enterprises. The Shanghai Stock Exchange discloses the latest regulatory case: More than a year after the review, the mystery of Anxin Electronics' IPO withdrawal of materials and termination of listing will be revealed?"), recently, with the official issuance of the Shanghai Stock Exchange's latest listing review dynamics (No. 4, 2024), another company planning to be listed on the Science and Technology Innovation Board that was suspected of "falsification" in the evaluation indicators of scientific and technological innovation attributes was reported to the industry by the regulatory authorities as a typical example of "on-site supervision and on-site inspection".

According to the latest "Shanghai Stock Exchange Issuance and Listing Review Dynamics (2024 Issue 4)" (hereinafter referred to as the "Latest Review Dynamics") released by the Shanghai Stock Exchange, in the past May and June 2024, although the acceptance and review of IPOs have gradually resumed, the progress is still slow. During this period, the Shanghai Stock Exchange only accepted the initial public offering application of one company, held two listing committee meetings, and reviewed and approved the listing applications of two science and technology innovation board companies. In terms of registration, for two whole months, only one main board company and two science and technology innovation board companies in the Shanghai Stock Exchange had their IPO applications approved by the China Securities Regulatory Commission and took effect.

While the Shanghai Stock Exchange continues to maintain a phased slowdown in the pace of IPO review since the second half of 2023 due to the "counter-cyclical adjustment mechanism of the primary and secondary markets", since mid-April 2024, under the heavy pressure of the implementation of the new "Nine National Policies" and its supporting new policies, the supervision and guidance of proposed IPO projects has continued to increase.

"Compared with the period before the implementation of the New Nine Articles and supporting measures, the Shanghai Stock Exchange has significantly increased the penalties for problematic companies after May 2024," an insider close to the regulatory authorities told Kekou Finance.

A set of data disclosed in "The Latest Audit Trends" is sufficient to confirm what the above-mentioned insider said.

"From May to June 2024, the Exchange took 9 disciplinary actions against issuers for information disclosure issues and intermediary agency practice quality issues in 7 IPO application projects and 2 refinancing application projects, including non-acceptance of application documents within a certain period of time, public identification of unqualified candidates and 2 public condemnations, and 7 notifications of criticism; 18 regulatory measures, including 12 regulatory warnings and 6 verbal warnings. It involves 7 issuers and 11 relevant responsible persons, 8 sponsors, 5 accounting firms, 2 law firms and 34 relevant signatories," the Shanghai Stock Exchange revealed in the "Latest Audit Dynamics".

According to Kekou Finance, from March to April 2024, the Shanghai Stock Exchange only took disciplinary sanctions twice and regulatory measures nine times regarding information disclosure issues of issuers of three IPO application projects and professional quality issues of intermediary institutions, involving three issuers and six relevant responsible persons, four sponsors, two accounting firms, one law firm and 14 relevant signatories.

Similarly, in accordance with the Shanghai Stock Exchange's practice of disclosing updates on listing review activities, a warning case of initial public offering review that was discovered after on-site supervision was also anonymously announced in the "Latest Review Updates".

As mentioned above, this IPO project suspected of "passing the gate with problems" and announced by the Shanghai Stock Exchange as the latest regulatory example is a company that plans to apply for listing on the Science and Technology Innovation Board. The violation involved is precisely the "falsification" of the evaluation indicators of scientific and technological innovation attributes.

According to the "Latest Audit Updates", the Shanghai Stock Exchange recently conducted on-site supervision of the underwriting business of an issuer D that plans to apply for an IPO on the Science and Technology Innovation Board.

The reason why the Shanghai Stock Exchange decided to initiate problem-oriented on-site supervision of the underwriting business of D's initial public offering application was that during the review of issuer D, it was found that the proportion of R&D personnel to the total number of employees in the year and the proportion of R&D investment to operating income in its scientific and technological innovation attribute evaluation indicators were both below the limit. There were also abnormalities in the identification of R&D personnel and the investment in R&D materials.

For example, at the end of the most recent year of the IPO reporting period, the number of R&D personnel of Company D was only about 10 more than the required number. D's R&D investment is mainly composed of R&D personnel salaries and R&D material expenses. The R&D personnel are mainly full-time personnel in the R&D center. However, the Shanghai Stock Exchange found that during the IPO reporting period, its R&D personnel increased significantly, and the professional background of some personnel did not match the R&D positions. In addition, D's R&D materials are mainly turnover materials, but its turnover frequency is significantly higher than that of the same industry.

Finally, the Shanghai Stock Exchange stated that after on-site supervision focusing on the conditions for issuance and listing and information disclosure requirements, it was found that the relevant sponsor institution had not fully verified the relevant information of the issuer D's scientific and technological innovation attribute evaluation indicators. After the on-site supervision, the sponsor institution also took the initiative to apply to withdraw D's listing application.

Even though the Shanghai Stock Exchange did not reveal the true identity of the above-mentioned company that passed the Science and Technology Innovation Board IPO with problems in its "Latest Review Updates", and only referred to it by the letter D, Kekou Finance still confirmed from multiple channels that the protagonist of this company, which is recently regarded by the regulatory authorities as a typical IPO regulatory warning case, is Dalian Kolide Semiconductor Materials Co., Ltd. (hereinafter referred to as "Kolide").

Public information shows that on June 15, 2023, Collide submitted an application for listing on the Science and Technology Innovation Board to the Shanghai Stock Exchange under the sponsorship of Haitong Securities and was accepted.

As a professional high-purity semiconductor material supplier in China, Collider described its main business in the IPO prospectus (submission) submitted to the Shanghai Stock Exchange as follows: It is mainly engaged in the research and development, production and sales of electronic special gases and semiconductor precursor materials. It is one of the few domestic electronic special gas manufacturers whose self-produced products can cover key manufacturing process links such as deposition, etching, doping, ion implantation, and cleaning. It also stated that the company's founding team all came from the local area. After more than 30 years of technical accumulation, the founding team has a deep understanding of the industry and guides the company's technology research and development and industrialization path.

According to Collide's original listing plan, it had intended to raise 877 million yuan by issuing no more than 25 million shares to invest in three major projects, namely "construction of high-purity electronic gas and semiconductor precursor production line construction", "construction of semiconductor key material R&D center" and "industrialization of high-purity electronic gases and precursors for semiconductors" and to supplement working capital.

The first set of listing standards for the Science and Technology Innovation Board chosen by Kolide for this IPO are "the estimated market value is not less than RMB 1 billion, the net profit in the last two years has been positive and the cumulative net profit is not less than RMB 50 million, or the estimated market value is not less than RMB 1 billion, the net profit in the most recent year is positive and the operating income is not less than RMB 100 million."

From the perspective of the attributes of the Science and Technology Innovation Board, Kelide also claims to fully meet the relevant requirements. For example, the company's R&D investment from 2020 to 2022 is 38.5712 million yuan, accounting for 6.35% of operating income, meeting the requirement of "R&D investment accounts for more than 5% of operating income in the past three years"; as of December 31, 2022, the company has 44 R&D personnel, accounting for 12.83% of the total number of employees in the current period, meeting the condition of "R&D personnel account for ≥10% of the total number of employees in the year". In addition, it has as many as 19 invention patents applied to its main business, far exceeding the patent recognition of companies that intend to list on the Science and Technology Innovation Board.

However, just after Collide completed the first round of inquiries from the Shanghai Stock Exchange on its IPO in mid-October 2023, the progress of its listing review almost came to a standstill. Until February 20, 2024, four months after the review was suspended, Collide suddenly gave up the further promotion of its IPO by voluntarily withdrawing its application materials, thus putting a regrettable end to its attempt to enter the Science and Technology Innovation Board.

1) On-site supervision reveals the risk of “falsification” of scientific and technological innovation evaluation indicators

In the "Latest Audit Updates", the Shanghai Stock Exchange disclosed that after on-site supervision of Company D's IPO sponsorship business, it was found that Company D had two major "flaws" in its application for listing.

First, the regulators believed that Company D lacked sufficient basis and rationality in the accuracy of identifying R&D personnel and aggregating R&D remuneration.

In the IPO filing submitted to the Shanghai Stock Exchange, Company D stated that during the reporting period, there was no situation in which new R&D personnel were added through job transfers, and that no full-time R&D personnel were engaged in non-R&D activities. The main basis for the identification of full-time R&D personnel and the collection of R&D remuneration was the R&D working hour ledger.

However, the Shanghai Stock Exchange's on-site supervision revealed that the issuer D had more than 20 full-time R&D personnel who also participated in the production process during the reporting period, such as entering and approving production documents, which was inconsistent with the disclosure in its application documents and D's R&D work time records.

In addition, during its IPO review period, D also re-signed labor contracts with more than ten full-time R&D personnel, adjusting their job positions from non-R&D positions such as production technicians in the original contracts to R&D positions. At the end of the most recent year of the IPO reporting period, D also changed the departments to which the above-mentioned ten full-time R&D personnel belonged from production workshops to R&D centers in its company's OA system.

In addition, D also adjusted part of the wages and social security of more than ten full-time R&D personnel that were originally included in the production costs to R&D expenses before the IPO filing.

Secondly, through on-site supervision, the Shanghai Stock Exchange found that there were many doubts about the authenticity of D Company's R&D materials and the accuracy of its accounting.

According to D's reply to the relevant audit inquiry of the Shanghai Stock Exchange, the scope of its book R&D materials is the material collection with the outbound type of "R&D material collection" in the ERP system. R&D circulating materials are mainly used for installation in relevant devices and equipment and subsequent replacement. There is little difference in specifications and models between the circulating materials used in R&D and production.

However, during the on-site supervision of D, the Shanghai Stock Exchange found that there were obvious differences between the R&D material collection data of its ERP system and the original paper documents.

Some of the materials collected as R&D expenses in D Company's ERP system are shown on the corresponding paper receipts as being used for production.

Upon verification by the Shanghai Stock Exchange, the paper material requisition documents retained by the R&D department of Company D were all signed and approved by the receiving department and relevant warehouse personnel, but they were not matched one by one with the ERP system data, and the relevant material requisition amounts were significantly different from the ERP system data.

The Shanghai Stock Exchange also found significant discrepancies between the quantity of materials received for R&D and its actual needs.

For example, if Company D uses a large quantity and high value of a circulating material for its research and development, the ratio between it and the supporting main materials should be 1:1. However, Company D used a large amount of circulating materials for its research and development activities, but the book records showed that it did not use the supporting main materials.

In addition to the difficulty in matching with actual demand, the matching between the quantity of R&D materials received by Company D and the quantity of scrapped materials is also questionable.

After D Company's R&D experimental equipment is built, it is necessary to promptly replace circulating materials with performance problems. The unit value of the circulating materials is high and the replacement is frequent. Therefore, after the project is completed, D Company generally dismantles the circulating materials, scraps them after regular unified approval, and stores them in the same warehouse as production waste.

Previously, the sponsor of Company D's IPO stated that after verification, it was confirmed that there was no significant difference between the quantities of circulating materials received, in use, and scrapped in the R&D stage.

Strangely, the Shanghai Stock Exchange discovered that the signature time of the reviewers of some scrapped documents was earlier than their time of employment. Therefore, the Shanghai Stock Exchange believed that as the sponsor of D Company's IPO, it did not pay sufficient attention to the reliability of the scrapped documents and relevant basis for replacing circulating materials such as equipment inspection records, and did not fully verify the accuracy of the number of scrapped R&D materials and its matching with the number of materials received.

As early as mentioned above, Kekou Finance has revealed the true identity of Company D disclosed in the Shanghai Stock Exchange's "Latest Audit Updates", which is Collide, which was delisted more than four months ago.

On May 8, 2024, due to various violations that occurred during the IPO application process, the Shanghai Stock Exchange decided to impose a penalty of criticism on Colide.

In its disciplinary decision against Kolide, the Shanghai Stock Exchange stated that during the process of Kolide's IPO application, on-site supervision revealed two major crimes: "inaccurate disclosure of information related to scientific and technological innovation attribute indicators" and "failure to fully explain the accuracy of cost accounting."

According to the IPO filing documents previously submitted by Colide to the Shanghai Stock Exchange, as of the end of the last year of the reporting period, the number of its R&D personnel was 44, accounting for 12.83% of the total number of employees that year. During the IPO reporting period, there was no situation where new R&D personnel were added through job transfers, and there was no situation where full-time R&D personnel were engaged in non-R&D activities.

According to on-site supervision by the Shanghai Stock Exchange, it was found that the subsidiary of Kolide had re-signed labor contracts with 13 employees after it submitted its IPO application, stipulating that the jobs were R&D-related positions, but the previous labor contracts of the above-mentioned personnel stipulated that the jobs were non-R&D positions such as production technicians and safety and environmental engineers. At the end of 2022, Kolide adjusted the department to which 15 employees belonged from the non-R&D department to the R&D center. During the IPO reporting period of the past three years, Kolide had 33 so-called full-time R&D personnel who were actually engaged in non-R&D work at the same time. However, the main basis for the identification of R&D personnel and salary calculation showed that these personnel were engaged in R&D activities full-time. The salaries of the 33 full-time R&D personnel involved in non-R&D activities were not apportioned according to working hours, but were all included in the R&D expenses, involving an amount of 8.0536 million yuan.

Regarding the matching of R&D material requisition data on the ERP system with the original paper documents, after comparing the paper document material requisition details retained by the R&D department of Kolide with the system data one by one, the Shanghai Stock Exchange found that the amount was less than the system material requisition amount in the corresponding period, involving a difference of 1.8596 million yuan; at the same time, some R&D material requisitions did not retain or use paper documents, and the system material requisition amount in the corresponding period was 4.8480 million yuan.

During the IPO reporting period, Kolide also used 2,399 steel cylinders and valves for research and development, involving an amount of 3.8803 million yuan. There is a certain match between the usage of valves and steel cylinders, but the number of steel cylinders used for research and development during the IPO reporting period of Kolide was zero.

"The number of R&D personnel and the amount of R&D investment are important indicators stipulated in the "Shanghai Stock Exchange Science and Technology Innovation Board Enterprise Issuance and Listing Application and Recommendation Interim Provisions"," the Shanghai Stock Exchange stated in its criticism of Kolide that Kolide, as the first person responsible for information disclosure, failed to accurately disclose important information related to the scientific and technological innovation attribute indicators, such as the number of R&D personnel and the amount of R&D investment. After deducting the relevant data, it no longer met the conditions of the scientific and technological innovation attribute indicators, and "failed to ensure the authenticity, accuracy and completeness of the issuance and listing application documents and information disclosure."

2) Sponsor institutions are held accountable and are required to conduct a comprehensive self-examination of sponsored projects

In addition to the fact that Kolide was severely held accountable by the Shanghai Stock Exchange for "faking" its listing by embellishing important judgment indicators in its IPO, Haitong Securities, the sponsor of Kolide's IPO, was also punished by the Shanghai Stock Exchange on May 8, 2024.

According to a regulatory self-discipline decision issued by the Shanghai Stock Exchange on the same day aimed at Haitong Securities, it was determined that Haitong Securities had "failed to perform its duties in the sponsorship verification work" and "there were weak links in the internal quality control of the sponsorship business" in the process of sponsoring the IPO of Kolide. In view of the relevant illegal facts and circumstances, it was decided to criticize Haitong Securities.

This is also the first time since the implementation of the registration system that the Shanghai Stock Exchange has criticized and punished a securities firm for due diligence issues in its IPO project underwriting business.

What is different from previous penalties is that due to the repeated violations of Haitong Securities' underwriting business since 2024, the Shanghai Stock Exchange continued to require Haitong Securities to "learn from this and seriously hold internal accountability in light of relevant issues." At the same time, it also clearly stated that it requires Haitong Securities to "conduct a comprehensive review and self-inspection of the issuance and listing underwriting projects, and take practical measures to ensure that rectification is in place." After submitting a written self-inspection and rectification report signed by the principal person in charge, the person in charge of underwriting business, the person in charge of quality control, and the person in charge of internal review, and stamped with the company's official seal to the Shanghai Stock Exchange, the Shanghai Stock Exchange also bluntly stated that it would "inspect Haitong Securities' self-inspection and rectification situation."

It explicitly requires securities firms to conduct a comprehensive review and self-inspection of issuance and listing underwriting projects, and to check the rectification of self-inspection. This is extremely rare in the self-regulatory measures issued by regulatory authorities to securities firms in the past.

According to Kkk Finance, since the implementation of the registration system, after the IPO review authority was delegated to the exchange, Essence Securities, Galaxy Securities, China Merchants Securities and Haitong Securities have been criticized by the exchange for violations in their sponsorship business. The regulatory measures for the first three were all issued by the Shenzhen Stock Exchange. However, only Haitong Securities was required to "conduct a comprehensive review and self-examination of the issuance and listing sponsorship projects."

In the following months, Haitong Securities indeed paid a heavy price for the self-regulatory penalty caused by the issue of due diligence in sponsoring Kolide’s IPO, which required it to “conduct a comprehensive self-examination of the sponsored projects” (see the relevant report of Kekou Finance for details: “The intermediary brokerage firm unilaterally withdrew its sponsorship, and the reason why Xinhu Futures’ main board IPO failed: the Shanghai Stock Exchange’s accountability order was effective, and a wave of Haitong Securities’ listing sponsorship projects were terminated!”).

According to statistics from Kekou Finance, as of June 6, 2024, less than a month after the Shanghai Stock Exchange issued a related notice of criticism and punishment measures on May 8, 2024 and required Haitong Securities to conduct a comprehensive self-examination of its underwriting projects, seven companies sponsored by Haitong Securities that were planning to go public on the Shanghai Stock Exchange announced the termination of their review, including some companies that had already passed the review of the Shanghai Stock Exchange Listing Committee.

In the same period, the Shanghai Stock Exchange proactively terminated IPOs for 28 companies. In other words, within one month after Haitong Securities was punished for sponsoring the IPO of Collider, one out of every four companies whose listing review was terminated was sponsored by Haitong Securities. As a result, Haitong Securities was the brokerage firm that withdrew the most IPO sponsorship projects from the Shanghai Stock Exchange during the same period.

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