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Regulatory reiterationIPOIt is not allowed to "pass the gate with problems" or "withdraw once and for all", but issuers and intermediary institutions often take risks.

The China Securities Regulatory Commission recently reported on administrative law enforcement in the first half of this year, stating that for issuers suspected of major illegal and irregular activities, even if they withdraw their application for issuance and listing, they will continue to investigate them to the end, and "named" projects such as Huadao Biological's IPO that were investigated for violations of laws and regulations.

Under the comprehensive registration system, IPOs insist on "filing means taking responsibility", but with the "entry barriers" becoming increasingly strict, companies planning to go public and intermediary institutions have repeatedly "escaped at the last minute". Choice data shows that since the beginning of this year, a total of 345 companies have withdrawn their IPO applications; in terms of the withdrawal rate of investment banks, Wind shows thatCITIC Securities、CITIC Construction Investment、Haitong SecuritiesThey are the top three securities firms in terms of the number of IPO withdrawals this year, with 45, 33 and 25 companies voluntarily withdrawn respectively, and a withdrawal rejection rate of around 50%.

The "gatekeepers" cannot escape responsibility for the "failure" of issuing and listing. This year, intermediaries have been punished in the IPO withdrawal projects of Hengda Intelligent Control and Bona Precision.

In addition, the supervision of IPO rejection has been continuously strengthened, and the responsibility has been assigned to individuals. Recently, the China Securities Association (hereinafter referred to as "CSAA") has taken action to regulate the investment banking business of securities companies. It is reported that CSAA requires sponsors to submit specific sponsor rejection projects and basic information since the implementation of the registration system in various sectors of the Shanghai, Shenzhen and Beijing Stock Exchanges. At the same time, the rejection of individual sponsors is also required to be reported.

"The 'recovery-style punishment' for IPO withdrawals reflects the regulator's resolute attitude towards cracking down on major illegal and irregular activities." Tian Lihui, dean of the Institute of Financial Development at Nankai University, told Caixin that even if the issuer withdraws its application for issuance and listing, the regulator will continue to investigate until the facts are ascertained to ensure that illegal activities receive due punishment, which reflects the principle of comprehensive accountability.

Named Huadao Bio's IPO and other problematic projects

The CSRC has imposed unprecedentedly strict law enforcement measures, with the amount of fines and confiscations it has imposed in the first half of the year exceeding last year's total.

Data shows that in the first half of the year, the CSRC investigated and handled 489 securities and futures violation cases, made more than 230 penalty decisions, an increase of about 22% year-on-year, punished 509 responsible entities, an increase of about 40% year-on-year, banned 46 people from the market, an increase of about 12% year-on-year, and the total amount of fines and confiscations was more than 8.5 billion yuan, exceeding the total for the whole of last year.

Tian Lihui believes that the amount of fines and confiscations imposed by the CSRC in the first half of the year exceeded the level of the whole of last year, which shows the regulatory agency's determination and strength to strictly enforce the law. Increasing the intensity of penalties and law enforcement can increase the cost of violations of laws and regulations and gradually achieve a deterrent effect.

Fraudulent issuance and "passing the listing with problems" are the "hardest hit areas" for violations of laws and regulations in the securities field.

The CSRC named four projects that were fined in this announcement. The penalized entities were Huadao Bio, Hongxiang Shares,Chuang Medicaland Evergrande Real Estate, respectively involving IPO, refinancing, convertible bonds and bond issuance.

Being found to have engaged in fraudulent issuance, Huadao Biopharma could not escape punishment even though it had withdrawn its IPO application materials nearly two years earlier.

The administrative penalty decision disclosed by the China Securities Regulatory Commission shows that Huadao Bio has committed illegal acts of fraudulent issuance. After investigation, it was found that the financial data involved in the company's prospectus contained false records. From 2019 to 2021, it falsely sold products such as diphenyl sulfone by issuing false invoices, and at the same time forged sales proceeds, resulting in false sales revenue and profits disclosed in the prospectus.

In the end, Huadao Bio and five others including the company's chairman and then-CFO were fined, with a total fine of 11.5 million yuan.

As early as December 2021, Huadao BioGEMThe listing application was accepted by the Shenzhen Stock Exchange, with Huatai United Securities as the sponsor, and two rounds of inquiries were completed by August of the following year. After being selected for on-site supervision at the end of August 2022, Huadao Bio "withdrew the materials" the following month, at the end of September 2022.

The CSRC stated that it will adhere to the principle of "assume responsibility upon filing", severely punish fraudulent issuance, and resolutely prevent issuance and listing of products with problems from being approved.

"For issuers suspected of major illegal and irregular activities, we will continue to investigate them to the end, even if they withdraw their listing application," the CSRC said.

IPO withdrawal, intermediaries are "punished"

In recent years, with the pilot of the comprehensive registration system, strict supervision of the capital market has continued to escalate, targeting prominent problems such as "passing the gate with illness" and "withdrawal upon investigation".

Issuers that "absconded" from the IPO process and had questionable financials were repeatedly fined. Due to fraudulent issuance, Sierxin was "blacklisted" by the Shanghai Stock Exchange and its IPO application will not be accepted for five years.

In February this year, the CSRC imposed administrative penalties on Sierxin and related responsible persons due to fraudulent issuance. This also became the first fraudulent issuance case investigated by the CSRC after the issuer submitted the application materials but before obtaining registration since the implementation of the new Securities Law.

In mid-June, the Shanghai Stock Exchange issued a disciplinary decision indicating that Sirxin would be subject to a disciplinary penalty of not accepting any application documents for issuance and listing submitted by the issuer within five years.

According to the disclosure, Sierxin inflated its operating income and total profit by fabricating sales transactions and recognizing revenue in advance. In 2020, the inflated operating income totaled 15.3672 million yuan, accounting for 11.55% of the operating income of the year; the inflated total profit totaled 12.4617 million yuan, accounting for 118.48% of the total profit of the year.

As early as August 2021, SierxinScience and Technology Innovation BoardThe IPO application was accepted, and the sponsor isCICCIn September of the same year, the company entered the inquiry phase. At the end of the year, the China Securities Regulatory Commission conducted an on-site inspection and found that the company was suspected of violating laws and regulations such as inflating revenue.

The following year, in July 2022, Sierxin withdrew its application for listing. The China Securities Regulatory Commission launched an investigation and trial into its suspected fraudulent issuance.

Not only the issuers are held accountable for the IPO withdrawal, but the intermediary institutions that provide them with protection are also held accountable.

Just a month ago, the Shanghai Stock Exchange disclosed three fines on July 22, targeting Hengda Intelligent Control's Science and Technology Innovation Board IPO project. The issuer, sponsor and accounting firm were all named.

At the end of September last year, Hengda Intelligent Control’s IPO application on the Science and Technology Innovation Board was accepted, but its review was terminated by the Shanghai Stock Exchange in mid-May this year due to the withdrawal of materials.

Two months after the withdrawal of the listing application, fines followed. After investigation, Hengda Zhikong was found to have problems in the collection of salaries for R&D personnel, and the company was given a regulatory warning by the Shanghai Stock Exchange.

Intermediaries were also held accountable. CITIC Construction Investment was accused of failing to perform its duties properly, and two of its insurance agents were also warned; Lixin Accounting Firm and two of its staff were also issued regulatory measures.

IPO withdrawal supervision is upgraded

Under the comprehensive registration system, the IPO rejection rate has become a key indicator for measuring the quality of investment bank practice. However, with the IPO "entry barrier" becoming increasingly strict, companies planning to go public have repeatedly "escaped at the last minute".

Choice data shows that a total of 345 companies have withdrawn their IPO applications this year. In terms of the withdrawal rate of investment banks, CITIC Securities, CITIC Construction Investment, and Haitong Securities are the top three brokerage firms in terms of the number of IPO withdrawals, with 45, 33, and 25 companies withdrawing their applications respectively.

Minsheng Securities, CICC,Guojin SecuritiesThe number of IPOs that were voluntarily withdrawn during the year was also over 20.

Small and medium-sized securities firms have less investment banking business and a high rejection rate.Southwest Securities, Xiangcai Securities, Pacific Securities, etc. each had 1 order withdrawn, with a withdrawal rate of 100%.

Regulatory measures continue to be improved to deal with IPO "desertion" behaviors.

In March this year, the China Securities Regulatory Commission issued and implemented the "Regulations on On-site Inspections of Initial Public Offering Companies", emphasizing that "once you file, you will be responsible" and stipulating that companies that withdraw their listing applications will be "investigated to the end" during the inspection process. The withdrawal of listing applications will not affect the implementation of the inspection work, nor will it affect the handling of problems discovered during the inspection in accordance with laws and regulations.

The accountability for IPO rejection will also be implemented on the individual insurance agents. Recently, there is news that the individual insurance agents’ rejection will be made public.

It is reported that the China Securities Association requires all sponsors to submit the sponsorship withdrawal and rejection information and basic information of each sector of the three major exchanges in Shanghai, Shenzhen and Beijing. The time range for submitting projects is the registration system, and the historical information submission must be completed before August 18. At the same time, the China Securities Association is improving the negative evaluation publicity mechanism for sponsor representatives, and will increase the information on sponsor representative withdrawal and rejection projects.

Tian Lihui believes that after illegal and irregular behaviors in the securities field are verified, simultaneous punishment of issuers and intermediary institutions will help improve the integrity and standardization of the entire market.

"As the 'gatekeepers' of the capital market, intermediaries should be responsible for reviewing and supervising the companies they serve. If intermediaries fail to perform their duties, they should also be punished. This reflects the principle of comprehensive punishment," he mentioned.

"The penalties against intermediaries this year are indeed more severe than in previous years, increasing in both number and intensity." Tian Lihui also said that regulators have strengthened supervision of intermediaries, especially those that failed to fulfill their prudent review responsibilities during the IPO process.

He believes that through punishment, intermediaries will be urged to strengthen internal management and self-discipline, improve the professional level and service quality of the entire industry, strengthen supervision of intermediaries, ensure that they perform their due duties, and improve the transparency and credibility of the capital market.

(This article comes from China Business Network)