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Introduction: According to exclusive information from Kekou Finance, what was not disclosed in the Shenzhen Stock Exchange's regulatory measures document was that in August 2023, after the Shanghai Securities Regulatory Bureau organized personnel to conduct an on-site inspection of Yaomazi for nearly two months, it was found that Yaomazi not only had information disclosure loopholes in concealing related parties in its IPO filing documents, but also had weak links such as lack of effectiveness in the company's distribution revenue and other related internal controls.

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

Author: Yao Yi@Beijing

Editor: Zhai Rui@Beijing

The shoe has finally dropped.

After waiting for nearly a year, the Shenzhen Stock Exchange recently officially announced self-regulatory measures on Yaomazi Food Co., Ltd. (hereinafter referred to as "Yaomazi") and related institutions and personnel.

"On March 3, 2023, this exchange accepted your company's application for an initial public offering of shares and listing on the main board." In the regulatory letter issued by the Shenzhen Stock Exchange to Yaomazi on August 23, 2024, it was bluntly stated, "As the first person responsible for information disclosure, your company omitted disclosure of related party information in the filing documents, and failed to ensure the truthfulness, accuracy, and completeness of the application documents for issuance and listing and information disclosure." Therefore, in accordance with relevant regulations, it was decided to take regulatory measures of written warnings against it.

Due to the above-mentioned information disclosure defects, those who received written warnings along with Yaomazi also included Zhao Qi, one of its actual controllers, and a number of intermediary agencies and relevant signatories who escorted Yaomazi's IPO.

The company responsible for the sponsorship of Yaomazi's listing on the Shenzhen Stock Exchange's main board was CICC, once known as the "domestic securities aristocrat".

This is also the first written warning CICC has received for its GEM IPO underwriting business since the reform of the GEM registration system.

As early as December 30, 2023, Yaomazi had terminated the aforementioned listing review by voluntarily withdrawing its IPO application materials.

At that time, the reason given by Yaomazi for delisting was that "the company withdrew the previous application materials due to strategic planning adjustments and business development considerations." However, most industry insiders attributed the failure of Yaomazi's main board IPO to the fact that the food industry it was in did not meet the relevant definition of main board listing under the registration system.

"The implementation of the Shenzhen Stock Exchange's self-regulatory supervision and punishment has finally brought a solution to the problem that Yaomazi has been worried about for a long time. This result is a mixed blessing for Yaomazi." On August 26, 2024, an insider close to Yaomazi revealed to Kekou Finance that over the past year or so, Yaomazi and related persons have long been aware that the regulators may punish them for violations in the listing process, but there are uncertainties about the clarification of responsibilities, the definition of violations, and the methods of punishment. These uncertainties will also affect Yaomazi's subsequent capital operation deployment.

Receiving a regulatory penalty in the form of a written warning was certainly not a good thing for Yao Mazi.

Fortunately, in the end, the Shenzhen Stock Exchange's determination of Yaomazi's violation was limited to the issue of omitting disclosure of related parties. Although the violation had a wide scope and all intermediary institutions and signatories involved in the project were punished, it did not have a significant impact on Yaomazi's fundamentals.

"Yaomazi has currently restarted its A-share listing plan, and the listing destination has been changed to the Beijing Stock Exchange." The above-mentioned person familiar with the matter told Kekou Finance that the above-mentioned regulatory penalty was settled in the form of a written warning, which will not affect the compliance of Yaomazi's listing. The omission of disclosure of related parties is also relatively simple to rectify, "which essentially clears the way for Yaomazi to restart its listing."

In the above-mentioned regulatory letter issued to Yaomazi, the Shenzhen Stock Exchange revealed that the violations committed by Yaomazi during the aforementioned IPO process were "discovered during the on-site inspection by the China Securities Regulatory Commission."

The above-mentioned person familiar with the matter admitted that the CSRC instructed the Shanghai Securities Regulatory Bureau to conduct on-site inspections of Yaomazi's Shenzhen Stock Exchange main board IPO in July 2023.

According to the "Regulations on On-site Inspections of Initial Public Offering Companies" issued in January 2021, which was implemented at the time, the CSRC's on-site inspection targets were determined by two methods: random sampling and problem-oriented.

In mid-2023, the CSRC conducted four rounds of random on-site inspections of initial public offering projects, but Yaomazi was not among them. In other words, Yaomazi was subjected to an on-site inspection by the CSRC this time because of the "problem-oriented" review process.

According to exclusive information from Kekou Finance, what was not disclosed in the Shenzhen Stock Exchange's regulatory measures document was that in August 2023, after the Shanghai Securities Regulatory Bureau organized personnel to conduct an on-site inspection of Yaomazi for nearly two months, it was discovered that Yaomazi not only had information disclosure loopholes in concealing related parties in its IPO filing documents, but also had weak links such as lack of effectiveness in related internal controls such as the company's distribution revenue.

"From the punishment results, it is proved that Yao Mazi's explanation and rectification of internal control management, financial and other issues found during the on-site inspection were basically recognized by the regulatory authorities." The above-mentioned insider said that the "concealment of related parties" for which he was eventually convicted was also caused by the party's "misunderstanding" of relevant regulations.

For Yaomazi, which is in the process of restarting its listing process, if it is accused of having internal control deficiencies, the severity of the matter is obviously far greater than the omission of disclosure for an affiliated company that does not have a significant impact.

However, for Yao Mazi, who had just escaped a disaster, it is far from time to relax.

Before it could get over the shadow of the illegal penalties caused by the problems left over from the previous IPO, its plan to re-list was thwarted right from the start because it stepped on the landmine of a "problematic intermediary agency."

As it had no experience of being listed on the New Third Board before, Yao Mazi wanted to apply for listing on the Beijing Stock Exchange. Before the Beijing Stock Exchange's direct listing policy was released, it had to first be listed on the New Third Board's Innovation Layer for 12 months.

Two months ago, on June 27, 2024, Yaomazi quietly submitted the application materials for listing on the New Third Board to the Stock Transfer Center.

Just like the previous IPO application on the Shenzhen Stock Exchange's main board, Yaomazi used the entire "old" team of intermediary agencies to escort its listing on the New Third Board.

In addition to CICC continuing to be the sponsor, the accounting and auditing work for its listing on the New Third Board will still be provided by Tianzhi International Certified Public Accountants (Special General Partnership) (hereinafter referred to as "Tianzhi International").

What Yao Mazi had not expected was that not long ago, in mid-August 2024, the China Securities Regulatory Commission issued an administrative penalty decision, deciding to suspend Tianzhi International's securities services business for 6 months.

"Due to the suspension of Tianzhi International's securities service qualifications, the relevant review matters for Yaomazi's listing on the New Third Board have also been suspended by the Stock Transfer Center." The above-mentioned person familiar with the matter admitted that Yaomazi is currently also seeking new solutions in order to restart the relevant review as soon as possible.

1) Weak internal control other than related party omissions

The exchange's final definition of the violation in Yaomazi's previous application for an IPO on the Shenzhen Stock Exchange's main board was "omission of disclosure of related party information in the application documents."

According to a regulatory letter recently issued by the Shenzhen Stock Exchange to Yaomazi, the China Securities Regulatory Commission discovered through an on-site inspection that Zhao Qi, one of the actual controllers of Yaomazi, actually controls a company called Hongya County Deyuan Yaoguniang Night Snack Shop (hereinafter referred to as "Yaoguniang"). However, this affiliated company was not disclosed in the Shenzhen Stock Exchange main board listing materials previously submitted by Yaomazi.

Zhao Qi is the eldest son of Zhao Yuejun, the current chairman and legal representative of Yaomazi.

In the list of shareholders of Yaomazi, Zhao Qi currently holds a total of 12.1305% of the shares.

Yaomazi is also a typical family business. It was originally founded by Zhao Yuejun and Gong Wanfen, a couple.

After more than ten years of development, Zhao Yuejun, Gong Wanfen and their two sons, Zhao Qi and Zhao Lin, were all identified as the actual controllers of Yaomazi.

Industrial and commercial information shows that Yaoguniang was established on April 30, 2021. Before July 2023, when the China Securities Regulatory Commission conducted an on-site inspection of Yaomazi, the operator of Yaoguniang was a natural person named Peng Zhaoxiang.

The reason why the regulatory authorities were able to finally uncover the abnormalities between Zhao Qi and Miss Yao was also due to the inspection and verification of the sponsor's cash flow verification procedures.

During the previous IPO review of Yaomazi, CICC submitted to the regulatory authorities a "Special Investigation Opinion on the Distribution Model of Yaomazi Food Co., Ltd." (hereinafter referred to as the "Special Investigation Opinion").

The "Special Investigation Opinion" stated that CICC selected single income and expenditure of RMB 100,000 or more for investigation on Zhao Yuejun and Gong Wanfen, the actual controllers of Yaomazi; selected single income and expenditure of RMB 50,000 or more for investigation on the other two actual controllers, Zhao Qi and Zhao Lin, other directors, supervisors and their spouses; and selected single income and expenditure of RMB 20,000 or more for investigation on the personnel who served as cashiers during the reporting period, as well as the head of the sales department and the regional sales manager for Sichuan and Chongqing. For the above-mentioned abnormal or large items, CICC learned about their background, nature and rationality from the relevant entities and individuals, and obtained supporting evidence.

However, the CSRC's on-site inspection found that CICC's above-mentioned fund flow verification procedures were flawed, including that some transactions that met the verification standards had not been verified, the background and nature of some transactions included in the verification scope had not been indicated, some transactions had not obtained supporting evidence, and the actual circumstances of some transactions had not been verified.

It was also during the verification of the above-mentioned relevant fund flow verification procedures that the abnormal fund transactions between Zhao Qi and Peng Zhaoxiang were noticed by the regulators.

From May to June 2022, shortly after Yao Girl was established, Zhao Qi transferred 800,000 yuan to Peng Zhaoxiang in the name of personal loan.

The China Securities Regulatory Commission, upon discovering the clues about this "personal loan" that did not have any supporting certificates, immediately asked CICC to conduct an additional investigation. This investigation exposed the true relationship between Zhao Qi and Miss Yao.

A check by CICC showed that of the 800,000 yuan that Zhao Qi transferred to Peng Zhaoxiang, only 140,000 yuan was actually a loan, the other 440,000 yuan was working capital, 200,000 yuan was operating capital for the young girl, and 20,000 yuan was an advance payment.

Faced with the facts, Zhao Qicai admitted that Peng Zhaoxiang registered and established Yaoguniang in April 2021, and he was actually the actual controller of Yaoguniang. He provided the funds needed for the operation, and Peng Zhaoxiang was responsible for daily business affairs.

Even though Yao Mazi insisted that the omission to disclose the related party Hongya County Deyuan Yao Girl Night Snack Shop was mainly due to misunderstanding of the company's parties, and the corresponding related transactions did not exceed 20,000 yuan per year, the omission to disclose related party information in the filing documents did violate the relevant provisions of the "Shenzhen Stock Exchange Stock Issuance and Listing Review Rules" (hereinafter referred to as the "Listing Review Rules").

According to the first paragraph of Article 15 of the "Listing Review Rules", "the contents of the application documents for issuance and listing shall be true, accurate, complete, concise, clear and easy to understand", "from the date of submission of the application documents for issuance and listing, the issuer and its controlling shareholders, actual controllers, directors, supervisors and senior management personnel, as well as the sponsors, securities service institutions and their related personnel related to the issuance and listing of this stock shall bear the corresponding legal responsibilities". At the same time, the first paragraph of Paragraph 25 also points out: "The issuer shall be honest and trustworthy, and fully disclose the information necessary for investors to make value judgments and investment decisions in accordance with the law, accurately and truthfully reflect the company's operating capabilities, fully disclose the direct and indirect risks that are currently and foreseeably likely to have a significant adverse impact on the issuer, and ensure that the application documents for issuance and listing and information disclosure are true, accurate, complete, concise, clear and easy to understand, and shall not contain false records, misleading statements or major omissions."

"Yao Girl applied for cancellation immediately in the month when the on-site inspection found disclosure issues, and it has been almost a year now." The above-mentioned person familiar with Yao Mazi told Kekou Finance that neither Yao Mazi nor Zhao Qi himself had expected that this inconspicuous and small late-night snack shop would bring such great trouble to its listing.

In addition to the disclosure of the company's omission to disclose related parties, Kekou Finance learned from multiple channels that during the on-site inspection of Yaomazi by the China Securities Regulatory Commission, it actually found several other problems involving weak internal control in its operations.

For example, the order records of many Yaomazi dealers communicating with Yaomazi sales staff through WeChat are missing, and the original order information is difficult to verify; some dealers also reported that Yaomazi sales staff had never obtained distribution data from them.

In addition, when the inspection team of the China Securities Regulatory Commission visited Chongqing Tianhao Dijie Trading Co., Ltd. (hereinafter referred to as "Tianhao Dijie"), an important customer of Yaomazi, it retrieved its inventory data as of June 30, 2023 and found that there were differences between its inventory data and the inventory data of Tianhao Dijie recorded by Yaomazi for the same period.

What is more noteworthy is that the CSRC also found that some of Yaomazi’s sales staff had financial transactions with dealers in violation of its internal regulations.

After the regulatory authorities discovered the above-mentioned doubts, Yaomazi and its intermediary institutions immediately verified and explained the above-mentioned issues to the regulatory authorities one by one.

In the verification documents submitted by Yaomazi to the regulatory authorities, it stated that it did not require the unified retention or safekeeping of communication records of orders placed by dealers. The order information entered into the business management system is the original order of the dealer, and the relevant order information has been kept intact since the business management system was launched. According to the company's internal management system, it also did not require sales personnel to obtain the distribution data of all dealers, including detailed information of downstream customers. The company mainly grasps the sales situation of dealers through sales area and sales price control, continuous tracking and return visits of downstream customers, understanding of distribution channel inventory data, and paying attention to ordering cycles and returns and exchanges.

As for why there are inventory data records that are different from those of customers, Yao Mazi explained that "the company has low requirements for the accuracy of this data, and internal management can tolerate certain differences in the data. The inaccuracy of data statistics is mainly due to inherent characteristics such as inconsistent statistical time." "Monthly inventory data does not belong to the company's internal control nodes, and the difference between the company's statistical records and the actual inventory of dealers does not affect the effectiveness of the company's internal control."

As for the external funds between some sales staff and dealers, Yao Mazi said that it was mainly due to the sales staff collecting and paying for dealers or their downstream customers, but "the relevant matters do not involve the business between the company and the main dealers, and there is no situation of collecting payment or advance payment on behalf of the company." "The company has held many internal control meetings on sales business and introduced a strict internal control system, which details the self-inspection methods and disciplinary measures for the financial transactions between sales staff and dealers."

2) The restart of the Beijing Stock Exchange listing got off to a bad start

Yao Mazi and one of its actual controllers Zhao Qi are naturally responsible for "omitting to disclose related party information in the filing documents", but the intermediary institutions such as the sponsor, accounting firm and law firm of its previous IPO are also equally responsible.

As a result, CICC, Baker Tilly International, Jun He Law Firm of Beijing (hereinafter referred to as “Jun He Law Firm”) and relevant signing persons were all given written warnings by the Shenzhen Stock Exchange.

"If it is true as Yaomazi said that the omission to disclose related parties was due to the parties' 'misunderstanding' of the relevant regulations, then in this incident, CICC, as the sponsor of Yaomazi's IPO, should bear a greater share of the responsibility." A senior sponsor representative from a large brokerage firm in Shanghai told Kekou Finance that the "misunderstanding" of the rules by the company and the parties involved means that the intermediary agency did not do its job when providing compliance guidance and training to the company.

As we all know, before a company submits an IPO application, it needs to go through the guidance process of an intermediary agency. An important part of the guidance work is that the relevant intermediary agency needs to provide comprehensive legal and knowledge training to the directors, supervisors, senior executives and shareholders holding more than 5% of the shares and actual controllers of the guidance company, so that they can understand the laws, regulations and rules related to issuance and listing, and understand the responsibilities and obligations of listed companies in terms of standardized operations, information disclosure and issuance commitments.

"The disclosure and verification of IPO related parties have always been the focus of information disclosure review. There have been cases in the past where many companies have been punished for this. When securities firms provide compliance training to companies, they basically emphasize the disclosure standards of relevant information. Even many companies that do not constitute related relationships will disclose information as related companies in accordance with the requirement that reality prevails over form." said the above-mentioned senior sponsor representative.

However, even though CICC and other intermediary institutions failed to make Yaomazi and related parties correctly "understand" the relevant regulations on information disclosure and were punished for this, when Yaomazi restarted its listing, it still chose to cast a vote of confidence in these intermediaries.

On June 27, 2024, half a year after voluntarily terminating its listing on the Shenzhen Stock Exchange's main board, Yaomazi formally applied for listing on the New Third Board, a move that undoubtedly pointed to its listing on the Beijing Stock Exchange.

CICC has become the main board securities firm for Yaomazi's listing on the New Third Board. The project leader Qu Liang was one of the sponsors of Yaomazi's previous IPO on the Shenzhen Stock Exchange's main board. Tianzhi International and Junhe Law Firm continue to provide audit and legal services for Yaomazi's application for the New Third Board.

Less than two months after launching a new round of capital operations, Tianzhi International has become a new obstacle to Yaomazi's listing.

"Tianzhi International's securities service qualifications have been suspended by the China Securities Regulatory Commission for six months. According to past practice, almost the vast majority of listing projects will choose to replace new accounting firms in order to restart the project review and promotion as soon as possible." The above-mentioned senior sponsor representative believes that Yaomazi may not be an exception. "If we want to wait for Tianzhi International to resume its service qualifications, we will have to wait until after February next year, which will greatly delay Yaomazi's listing process on the Beijing Stock Exchange."

(over)