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With the release of a document from the State Council, the A-share market's charging and reward ecosystem, which has long been oriented towards listing results, is about to face a radical change.

The Ministry of Justice recently announced that in order to standardize service behaviors related to public issuance of stocks, improve the quality of listed companies, and protect the legitimate rights and interests of investors, the Ministry of Justice, together with the Ministry of Finance and the China Securities Regulatory Commission, has drafted the "Regulations of the State Council on Regulating the Services Provided by Intermediary Institutions for Public Issuance of Stocks by Companies (Draft for Comments)" (hereinafter referred to as the "Opinions") and is now soliciting public opinions. The deadline for comments is September 15.

The Opinion clearly states that securities companies' sponsorship services and accounting firms' audit services may not use the results of public stock offerings and listings as a condition for charging fees, and law firms may not violate the relevant regulations of the judicial administration and other departments on lawyer service fees. It also stipulates that local people's governments may not give rewards based on listing results.

The reporter of China Business News learned that some intermediaries, in the process of providing services for companies' public stock issuance, have linked their fees to the results of the company's stock issuance and listing, which has induced financial fraud, fraudulent issuance and other problems. The issuance of the above-mentioned document aims to regulate the market order, guide and cultivate independent, objective, fair and standardized intermediaries, and play a good role as "gatekeepers".

Intermediary fees cannot be conditional on listing results

The Opinion contains 19 articles in total. It focuses on regulating the relevant charging issues in the services of intermediary institutions, strengthening supervision, and enhancing the independence of intermediary institutions. Under the premise of unified standards, it puts forward specific supervision requirements for different intermediary institutions in light of the characteristics of the industry. At the same time, it also stipulates specific prohibitions and punishment measures.

Independence is the "soul" of intermediaries. However, due to the industry's general charging model based on listing results, intermediaries and enterprises have shown a stronger "Party A and Party B" relationship, which can easily damage the "gatekeeper" ability of intermediaries, leading to financial fraud and even fraudulent issuance.

The "Opinion" clarifies that intermediary institutions should follow market principles, reasonably determine charging standards based on factors such as actual workload and required resource input, and agree on charging arrangements with issuers in the contract.

Among them, securities companies engaged in underwriting business can charge service fees in stages according to the progress of the work, but whether to charge or how much to charge cannot be conditional on the results of the public offering and listing of stocks.

When securities companies engage in underwriting business, they must comply with the regulations of the state and industry regulatory authorities and charge service fees based on a comprehensive assessment of project costs and other factors.

When performing audit services, accounting firms may charge service fees in stages according to the progress of the work. However, whether or not to charge fees or the amount of fees may not be made conditional on the results of the audit work or the results of the public offering and listing of stocks.

When a law firm provides services for a company's public issuance of stocks, it should charge a unified fee and must not violate relevant regulations of the judicial administration and other departments regarding lawyer service fees.

At the same time, the Opinion also provides for possible "flexible" methods. It requires that intermediaries and their practitioners shall not charge other fees beyond the contractual agreement or increase fees in disguised form by temporarily increasing prices; shall not collect fees by signing supplementary agreements or other agreements to circumvent supervision; shall not seek improper benefits by acquiring shares or obtaining listing incentives; and shall not engage in other charging or disguised charging behaviors that violate national regulations.

Local governments are prohibited from giving listing incentives

The Opinion clearly states that local governments are prohibited from giving listing incentives to issuers or intermediaries.

The "Opinion" clearly states that local people's governments at all levels shall not give rewards to issuers or intermediary institutions based on the results of public issuance and listing of stocks.

Listing incentives have always been very common across the country. Although the amounts vary from place to place, the incentives are generally large. In addition, incentives are given directly in batches based on results, according to different links such as listing guidance, application acceptance, and approval for listing.

For example, the "Several Measures (Trial) on Further Supporting the Development of Enterprises' Listing" issued by the Beijing Economic and Technological Development Zone Management Committee in January 2013 stipulates that domestic listings will receive a 4 million yuan reward for guidance and acceptance, a 4 million yuan reward for acceptance of the initial public offering application, and another 4 million yuan reward for approval and listing. A one-time reward of 6 million yuan will be given for successful overseas listings, and another 6 million yuan will be given for overseas listed companies returning to the A-share market.

The "Several Measures on Further Promoting Corporate Listing and High-Quality Development of Listed Companies" issued by Shenzhen in September 2023 stipulates that a maximum reward of 1.5 million yuan will be given to companies that intend to list domestically and complete shareholding reform and listing guidance; a maximum reward of 800,000 yuan will be given to companies that list overseas; a maximum reward of 500,000 yuan will be given to companies that are listed on the New Third Board for the first time, and a maximum reward of 300,000 yuan will be given to companies that enter the innovation layer.

On June 26 this year, the Management Committee of Chongqing Hi-Tech Zone issued the "Chongqing Hi-Tech Zone Measures to Encourage Enterprise Restructuring and Listing", which has just "upgraded" the listing support policy that was implemented three years ago.

Among them, a reward of 500,000 yuan will be given for signing an IPO agreement and a letter of engagement for domestic listing, another 1.5 million yuan will be given for inclusion in the listing guidance filing, a reward of 3 million yuan will be given for acceptance of the application by the China Securities Regulatory Commission or the exchange, and another 5 million yuan will be given for approval and listing. For overseas listings, a one-time reward of 10 million yuan will be given to the registered companies that successfully list on major overseas stock exchanges.

The "Opinion" proposes that local people's governments at all levels shall not give rewards to issuers or intermediary institutions based on the results of public issuance and listing of stocks. At the same time, it also makes it clear that "if local people's governments violate Article 10 of these Regulations and give rewards to issuers or intermediary institutions, the rewards shall be recovered, and the relevant authorities shall impose penalties on the responsible leaders and directly responsible persons in accordance with the law."

Punishment is “implemented on individuals”

The "incentive" system oriented towards listing results has a long history, and it will not be easy to cut off the chain oriented towards listing results.

To ensure the effective implementation of the policy, the Opinion clarifies the legal responsibilities and supervisory division of issuers, intermediaries, intermediary practitioners and relevant departments. When necessary, measures such as joint on-site inspections will be taken. Penalties are stipulated for illegal acts, which will be recorded in the credit files in accordance with the law and connected with other relevant laws.

Among them, the issuer needs to make good disclosures and list in detail the charging standards, amounts, payment arrangements and other information of various intermediary service contracts in the prospectus or other relevant information disclosure documents submitted when applying for public issuance of stocks in accordance with the law.

If the regulations are violated, they will be ordered to make corrections or given warnings. If the circumstances are serious or they refuse to make corrections, they will be fined between RMB 100,000 and RMB 1,000,000. The directly responsible supervisors and other directly responsible persons will be given warnings and fined between RMB 100,000 and RMB 1,000,000. If the controlling shareholder or actual controller of the issuer organizes or instructs others to engage in the above-mentioned illegal acts, or conceals relevant matters that lead to the above-mentioned circumstances, they will be fined between RMB 100,000 and RMB 1,000,000. The directly responsible supervisors and other directly responsible persons will be given warnings and fined between RMB 100,000 and RMB 1,000,000.

If an intermediary institution violates the regulations, it will be ordered to make corrections, given a warning, have its illegal gains confiscated, or even fined. If the circumstances are serious or if the institution refuses to make corrections, it will be fined between 1 and 10 times the illegal gains. If there is no illegal gains or the illegal gains are less than 100,000 yuan, it will be fined between 100,000 yuan and 1 million yuan. The directly responsible supervisor and other directly responsible persons will be given a warning and fined between 100,000 yuan and 1 million yuan.

If practitioners of intermediary institutions violate the regulations, they will face orders to correct, warnings, and confiscation of illegal gains. If the circumstances are serious or they refuse to correct, they will be fined not less than 1 times but not more than 10 times the illegal gains. If there are no illegal gains or the illegal gains are less than 100,000 yuan, they will be fined not less than 100,000 yuan but not more than 1 million yuan, and their related business will be suspended for 1 month to 1 year.

The "Opinion" proposes that when intermediary institutions provide services for companies' public issuance of stocks, they should follow the principles of honesty, diligence, independence and objectivity. At the same time, they should be equipped with practitioners who meet the corresponding qualifications and have the corresponding professional capabilities, and establish effective risk control systems such as conflict of interest review.

The securities supervision, finance, judicial administration and other departments of the State Council will strengthen supervision over the practices of intermediary institutions in accordance with the division of responsibilities and laws. If necessary, joint on-site inspections and other measures can be taken to investigate and punish illegal and irregular behaviors in accordance with the law.