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A strong crackdown on IPO "listing incentives" and targeting intermediary agencies' listing-oriented charging... With the joint regulation issued by three ministries, will the IPO market usher in huge changes?

Recently, the Ministry of Justice, together with the Ministry of Finance and the China Securities Regulatory Commission, drafted the "State Council Regulations on Regulating the Services Provided by Intermediaries for Public Stock Issuance by Companies (Draft for Comments)" (hereinafter referred to as the "Regulations"), which clearly stated that securities companies' sponsorship services and accounting firms' audit services shall not use the results of public stock issuance and listing as a charging condition, and law firms shall not violate the relevant regulations of the judicial administration and other departments on lawyer service fees. At the same time, it is stipulated that local people's governments shall not give rewards based on the results of listing.

The new rules have attracted great attention from the market. For a long time, the practice of governments in many places using "red envelopes" and "real money" to support companies' listings will be unsustainable? Should the intermediary institutions' listing-oriented charging model be changed?

"We understand that not allowing local governments to engage in competitive investment promotion to a certain extent is conducive to building a unified national market." A securities firm official told Caixin that currently there are listing incentives with varying standards in various places for companies that successfully go public if they plan to IPO. The rewards are mainly given to companies, with the amount mostly ranging from several million yuan. "Some will also be given if refinancing is successful, and some places will also reward intermediaries."

Wang Jiyue, a former senior investment banker, told reporters: "A lot of the content in the document was required before, but the level has been raised this time." He believes that the new regulations will help enhance the independence of intermediary institutions in sponsoring the listing of listed companies, reduce the motivation to help listed companies embellish profits and commit fraud, and regulate behaviors ranging from low-price competition when contracting projects to charging additional fees under various names before listing.

The reporter learned from investment banks, law firms and other parties that the above-mentioned institutions currently adopt a phased charging method for IPO and refinancing business. A securities lawyer in South China said: "Now IPO and fixed increase are linked to the results, similar to segmented charging. For example, if the total cost of a business is 1 million yuan, the company will pay at different time points after signing the contract, successful share reform, and listing approval."

"There will definitely be an impact (on the industry), but it won't be the kind that will cause the sky to fall." Wang Jiyue believes that the new rules will regulate investment banks' behavior such as temporarily raising prices before companies issue shares.

Stop local governments from “spending money” to encourage IPOs

For a long time, many places have supported companies with "real money" to go public, with the amount of rewards ranging from several million to tens of millions of yuan. However, at the current stage, with the release of new regulations, this practice may be difficult to continue.

The Regulations clearly state that local governments at all levels shall not give rewards to issuers or intermediary institutions based on the results of public stock issuance and listing. It also states that if local governments violate this regulation 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.

It is understood that listing incentives are very common across the country. Although the amounts vary from place to place, the incentives are generally large. In addition, the incentives are given directly in batches based on the results of the different links, such as listing guidance, application acceptance, and approval for listing.

In recent years, many local governments have introduced cash subsidies and related cultivation policies. According to incomplete statistics, at least more than 10 provinces, including Gansu, Guangdong, Hunan, Shaanxi, Inner Mongolia, Shandong, and Sichuan, have explicitly proposed to provide cash rewards to companies that have been listed or are planning to be listed.

For example, Qingdao Laoshan announced that it would provide subsidies of up to 15 million yuan in stages to companies that initially listed on domestic and overseas stock exchanges in Laoshan District, of which 10 million yuan would be provided in the stage before successful listing; Gansu would provide equal rewards to companies that successfully listed on the main board, science and technology innovation board, ChiNext and Beijing Stock Exchange, based on the actual listing cost expenditure, with a maximum of 10 million yuan; this year, Beijing's Chaoyang District will provide a maximum reward of 5 million yuan to companies that successfully listed at home and abroad, and a maximum reward of 2 million yuan to companies listed on the New Third Board.

Some people believe that in the past, in order to attract investment and expand listing resources, local governments have used "real money" to support local companies to go public or introduce listed companies, and provide subsidies or rewards to companies at different stages of IPO. Now, this "red envelope" trick may be ineffective.

"Some local governments will give rewards to enterprises, similar to government subsidies. The successful listing of enterprises in their jurisdiction also has a 'signboard' effect in (promoting) attracting investment to a certain extent, and it is also beneficial to taxation." A person from an intermediary agency told reporters.

A senior securities lawyer from a leading law firm told reporters that the regulation of local listing incentives is intended to avoid inducing some unqualified companies to blindly submit IPO applications, or even engage in fraud and disrupt the normal IPO order.

If the new regulations are introduced, local government IPO support policies will be stopped. How will it affect listed companies and intermediary institutions?

"It is not clear yet (the impact). Should we trace back to the past and recover the previous incentive funds? If we recover them, the impact will be quite large," said an investment banker.

However, an industry insider told reporters that the law does not have retroactive effect. In theory, rewards issued before the new regulations came into effect are not eligible for recovery.

Has the charging model of intermediary agencies changed?

Another highlight of the "Regulations" is that they focus on regulating the charging issues in the services provided by intermediary institutions, and "name and name" the intermediaries' charging model that is conditional on listing results.

Overall, the Regulations propose 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.

There are also separate regulations for the fees charged by securities firms, law firms and accounting firms.

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

When performing audit work, accounting firms may charge service fees in stages according to the progress of the work, but whether to charge or how much to charge may not be conditional on the results of the audit work or the results of the public issuance and listing of stocks; when law firms provide services for a company's public issuance of stocks, they should charge a unified fee and shall not violate relevant regulations of the judicial administration and other departments on lawyer service fees.

The regulations also state that intermediary agencies and their practitioners are not allowed to charge other fees beyond the contractual agreement or increase fees in disguised forms such as temporary price increases; they are not allowed to charge fees in a way that circumvents supervision by signing supplementary agreements or making other agreements.

The reporter learned that it is true that investment banks temporarily increase prices before companies issue shares.

"Some securities firms will snatch clients at low prices when taking on contracts, and then before issuance, they will ask for price increases and sign supplementary agreements on the grounds of market price." Wang Jiyue mentioned that for many companies, going public is often the first time and there is a lot of information asymmetry. Also, due to the long cycle and the high cost of changing intermediaries, companies have no way to deal with behaviors such as price increases.

He believes that the new regulations clearly regulate the behavior of investment banks in raising prices before corporate issuance, which will help enhance the independence of investment banking business.

"The new regulations do not restrict the total amount and charging ratio, which are still determined through market negotiations," he also mentioned.

So, will the new regulations change the current charging model of intermediaries such as investment banks and law firms?

As for the overall impact on investment banks, "there is definitely an impact, but it's not the kind that will cause the sky to fall." Wang Jiyue said that the main impact is that increasing revenue before issuance is no longer allowed, and the amount of money to be collected needs to be made clear in advance.

Some intermediary agency personnel also believe that judging from the proportion of sponsorship and underwriting fees, the regulations will not have a large impact on investment bank income. "Among the sponsorship and underwriting fees, the majority of investment bank income comes from underwriting fees, and underwriting fees are charged after a company goes public," an investment banker told reporters.

For law firms, "the fees under the new regulations are very different from our previous fee structure, because in the past, listing bonuses were the bulk of the fees, which were linked to the listing results and clarified through the signing of supplementary agreements. According to the current new regulations, this part of the income is gone, and the impact is still quite large." A person from a law firm told reporters.

A lawyer who also works on IPOs said: "The bulk of the revenue comes after the listing is successful. The previous revenue can only cover the costs. If the listing process is tortuous, it may not even cover (the costs)."

"The quotations given by intermediary agencies do not guarantee the results, and the companies planning to go public may have some opinions, but in general, there are not many IPO businesses at present," said the above-mentioned securities lawyer.

How are IPO issuance fees charged?

In addition to underwriting fees, how do investment banks currently charge IPO underwriting fees?

According to Wang Jiyue, the sponsorship fee is now collected in stages, and some will be collected when the report is submitted. However, the proportion of sponsorship fees to total revenue is relatively small, less than 10%, and even below 5% in some cases.

"Because it is impossible for a company to pay a large sum of money before it succeeds. Even if a part of it is paid in the early stage, it can only break even, or even just compensate for part of the expenses, but it cannot even break even," he said.

That is to say, for investment banks, underwriting fees are the biggest expense. The Regulations clearly state that securities companies engaged in underwriting business should 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.

"This has not yet been clearly restricted, and at present there is still a lot of room for negotiation." Wang Jiyue said that adding money on the grounds of successful listing is actually added to the underwriting fee, so the impact of this part will be relatively larger. It is an income, but it is not the bulk of the underwriting fee, and the situation of each investment bank is also different.

So, what is the impact of the regulations prohibiting listing incentives and regulating intermediary fees on companies planning to go public? In Wang Jiyue's opinion, the impact is not significant, and perhaps the overall burden can be lighter.

The IPO issuance costs of an enterprise generally include four fees: underwriting and sponsorship fees, audit and capital verification fees, legal fees and information disclosure fees, among which sponsorship and underwriting fees account for the largest share.

Looking at the issuance costs of listed companies, according to Wind data, from 2023 to August 18, 2024, among the 367 listed companies, only 5 companies had underwriting and sponsorship fees accounting for less than 50% of the issuance costs, while the underwriting and sponsorship fees of the other 362 companies accounted for between 50% and 92% of the issuance costs.Ming Yang Electric、Shaanxi Energy, Zhixiang Jintai,Aviation Materials Co., Ltd.、Huahong CompanyFor 5 companies, this proportion is over 90%.

Narrowing the scope to look only at the 54 companies listed in 2024, onlyBawei SharesFor one company, the proportion of underwriting and sponsorship fees in issuance costs was less than 50%, while for the remaining 53 companies, this proportion ranged from 52% to 87%.Xidian New Energy、Cloud Star、Chengdu Huawei、Yongxing Shares、Arrow EnergyThe underwriting and sponsorship fees of these five companies account for more than 80% of the issuance costs.

Arlo Energy's issuance fee was also the highest among listed companies in 2024, reaching 238 million yuan, of which underwriting and sponsorship fees accounted for 87%, or 207 million yuan. China Merchants Securities is the sponsor and lead underwriter of the company's IPO, and has won the highest underwriting and sponsorship fee for listed companies so far this year.

In comparison, the issuance costs of companies listed on the Beijing Stock Exchange are generally lower, and the corresponding underwriting and sponsorship fees are also lower. The issuance costs of the 10 companies listed on the Beijing Stock Exchange range from 10 million yuan to 42 million yuan, and the underwriting and sponsorship fees of 8 companies are below 20 million yuan. Among them, Bawei Co., Ltd. has the lowest underwriting and sponsorship fee of 5.0079 million yuan.

In addition, the proportion of audit and capital verification fees to issuance costs is about 10% to 20%. According to Wind data, among the 54 companies listed in 2024, 4 companies have a proportion below 10%, only 1 company has a proportion of more than 30%, and the other 40 companies have a proportion between 10% and 30%. In terms of specific amounts, the audit and capital verification fees of 35 companies are between 10 million and 19 million yuan, and the rest are in the millions.

Looking at legal expenses, among the 54 companies listed in the first half of this year, the legal expenses of 8 were between 10 million and 18 million yuan, while the legal expenses of other companies were generally in the millions of yuan level.

Information disclosure fee is the lowest of these four fees. According to Wind data, among the 47 companies that went public this year, three had information disclosure fees of less than 1 million yuan, and the remaining 44 had information disclosure fees between 2.5 million yuan and 6 million yuan.

(This article comes from China Business Network)