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introduction: in the past few years, the deterrent effect of the on-site inspection of the china securities regulatory commission on companies planning to go public is self-evident. there have been more than one record where the winning companies were eventually wiped out and none of them successfully went public. moreover, even if many companies planning to go public that were found to have "problems" voluntarily withdrew their ipo applications, they still could not escape the accountability of the regulatory authorities under the clear responsibility of "filing means taking responsibility". the situation that aode equipment's ipo is facing now is the latest portrayal of the power of the on-site inspection of the china securities regulatory commission.

this article was exclusively published by koukou finance (id: koukouipo)

author: fang zhiyue@beijing

editor: zhai rui@beijing

more than a year later, the results of the third batch of initial public offering companies’ information disclosure quality spot checks in 2023 are gradually coming out.

on the evening of september 13, 2024, the shenzhen stock exchange issued five self-regulatory letters at one go, announcing that it would take self-regulatory measures in the form of written warnings against relevant companies, institutions and responsible persons.

this series of regulatory letters all point to the same ipo project - the gem listing journey of suzhou aode high-end equipment co., ltd. (hereinafter referred to as "aode equipment").

ten days ago, the shenzhen stock exchange punished changchun zhuoyi biotechnology co., ltd. (hereinafter referred to as "zhuoyi biotechnology") and related intermediary institutions for violations in the ipo application process.

the main reason why both aode equipment and zhuoyi bio were held accountable by the regulators was the on-site inspection of information disclosure of initial public offering companies by the china securities regulatory commission.

both aode equipment and zhuoyi bio were selected by the regulatory authorities for on-site inspections in the third batch of initial public offering companies' information disclosure random inspections in 2023.

on july 7, 2023, 11 companies were unfortunately "selected" in the random inspection of information disclosure quality of the third batch of ipo companies in 2023 held by the securities association of china. according to relevant regulations, these companies that are selected by the lottery will be subject to on-site inspections of their information disclosure quality and the professional quality of intermediary institutions in the next few months by the china securities regulatory commission in accordance with the requirements of the "regulations on on-site inspections of ipo companies".

aode equipment and zhuoyi bio are two of these 11 companies.

in the past few years, the csrc's on-site inspections have been a deterrent to companies planning to go public. more than once, the csrc has created a record of all the winning companies being wiped out and none of them successfully listed. moreover, even if many companies planning to go public that were found to have "problems" voluntarily withdrew their ipo applications, they still could not escape the accountability of the regulatory authorities under the clear responsibility of "filing means taking responsibility".

the situation that aude equipment's ipo is facing now is the latest reflection of the power of the csrc's on-site inspection.

aode equipment, which specializes in the research and development, production and sales of high-precision industrial temperature control equipment and accessories, submitted its gem ipo application to the shenzhen stock exchange on june 30, 2023 and was accepted.

according to the relevant listing financing plan submitted by aode equipment to the shenzhen stock exchange, its ipo intends to issue no more than 17.383 million new shares to raise 460 million yuan to invest in three major projects including "construction of industrial temperature control equipment production base", "construction of high and low temperature pump production base" and "research and development center" and to supplement working capital.

essence securities, which was just renamed guotou securities at the end of 2023, served as the sponsor for the ipo of aode equipment and provided escort for its listing.

at the beginning of 2024, after completing the on-site inspection by the china securities regulatory commission, the shenzhen stock exchange initiated the first round of inquiries into the ipo of aude equipment.

i thought that ode equipment may have successfully passed this assessment that makes many companies planning to go public shudder.

on june 8, 2024, the ipo of aode equipment was suddenly halted by the shenzhen stock exchange with a decision to terminate its review.

prior to this, aude equipment was in a suspended review status as required because it needed to supplement the latest financial information. until its listing failed, aude equipment also failed to complete its response to the first round of inquiries issued by the shanghai stock exchange regarding its ipo.

according to the relevant information released by the shenzhen stock exchange when it suspended the ipo review of aude equipment, aude equipment and its intermediary institution for this ipo took the initiative to apply to withdraw the listing materials and gave up on continuing the review.

"the violations discovered during the on-site inspection were only part of the problems that hindered ode equipment's listing, which ultimately led to ode equipment's abandonment of its ipo plan. it was also related to the fact that its performance was difficult to meet the new listing requirements of the chinext." in mid-june 2024, a person from an intermediary agency close to ode equipment revealed this to kekou finance.

public data shows that during the ipo reporting period from 2020 to 2022, aude equipment recorded operating income of 322.5 million, 467 million and 496 million, respectively, and the corresponding net profit attributable to the parent was 26.4984 million, 49.3162 million and 55.5992 million.

for this application for listing on the gem, aode equipment selected the first set of standards stipulated in the "shenzhen stock exchange gem listing rules (revised in 2023)", namely "net profit has been positive in the last two years and the cumulative net profit is not less than 50 million yuan."

on april 30, 2024, when aode equipment was considering how to respond to the shenzhen stock exchange's first round of inquiries on its ipo, the shenzhen stock exchange revised the gem stock listing rules in order to further implement the spirit of the central financial work conference and the "several opinions of the state council on strengthening supervision, preventing risks and promoting high-quality development of the capital market" (hereinafter referred to as the "new nine articles"), and further strengthen the risk resistance and growth requirements of gem companies.

according to the revised listing rules of the shenzhen stock exchange, the first set of standards selected by aode equipment was changed to "net profit has been positive in the last two years, the cumulative net profit is not less than 100 million yuan, and the net profit in the most recent year is not less than 60 million yuan."

according to the latest listing rules revised and implemented by the shenzhen stock exchange, ode equipment, which has not yet passed the shenzhen stock exchange's review, naturally needs to follow the new ipo standards. this means that after the new gem listing rules are released, ode equipment will not even meet the basic listing requirements.

at that time, the ipo of aude equipment, which was waiting to update its 2023 financial data, actually still had a glimmer of hope. if its net profit in 2023 could meet the requirement of "not less than 60 million yuan", then it could be considered to have met the basic conditions for listing on the gem again.

although aude equipment did not officially disclose its 2023 annual report until it was delisted, the answer is obvious from its decision to delist when updating its financial data and its earlier released 2023 interim report data which was not very good.

in the first six months of 2023, aode equipment's operating income was only 210 million yuan, which was only 40% of the full-year revenue in 2022, and its non-net profit was only 20.9612 million yuan, which only achieved 1/3 of the profit scale required for listing on the gem.

as mentioned above, no matter what the reasons are for the termination of aude equipment's ipo, it cannot avoid being held accountable by regulators for violations during the listing process.

in addition to aode equipment itself, three other institutions including guotou securities, zhonghui accounting firm and beijing king & wood mallesons and their relevant signatory persons were also given self-regulatory measures by the shenzhen stock exchange due to their ipo violations.

this is also the second case since 2024 that guotou securities has been punished by regulators for failing to perform its duties in the ipo underwriting business.

on january 16, 2024, guotou securities was given a regulatory warning by the shanghai stock exchange because it "failed to promptly report and urge the disclosure of major events affecting rongsheng bio's continued operation" during the underwriting process of the ipo of shanghai rongsheng biopharma co., ltd., and during the previous on-site supervision of the professional quality of guotou securities by the regulatory authorities, it was found that its "due diligence procedures were not fully implemented and there were weak links in internal control."

1) on-site inspection reveals the “three sins” of aude equipment’s ipo

if it had not been selected for on-site inspection, it would have been difficult for anyone, including the regulators, to know how much important information and risks aude equipment had concealed or failed to fully disclose during the ipo process.

according to the penalty supervision letter issued by the shenzhen stock exchange to aude equipment recently, after an on-site inspection by the china securities regulatory commission, aude equipment's ipo was found to have at least three major violations.

the first is that aude equipment did not fully disclose the funds borrowing and lending with related parties and third parties during the reporting period.

in the ipo prospectus (submission draft) submitted by aode equipment to the shenzhen stock exchange, it also admitted that during the reporting period, the company did have irregularities in financial internal controls such as borrowing funds from related parties.

in the above-mentioned application materials, ode equipment stated that during the ipo reporting period, it only had fund borrowing with its actual controller zhou dingshan. in march and april 2020, zhou dingshan borrowed 8,600 and 34,400 yuan from ode equipment respectively, but both funds had been repaid in december 2022, and relevant interest had been accrued.

"the above-mentioned irregularities have been rectified, and the company has further improved the relevant internal control system." aode equipment stated in its ipo filing materials.

however, the csrc's on-site inspection found that the actual situation of aode equipment's fund borrowing during its ipo reporting period was far from this. it did not fully disclose the fund borrowing with related natural persons and other non-related third parties in its listing application materials.

after investigation by the regulatory authorities, it was found that aode equipment did not fully disclose the fund borrowing with its related party zhou moufen.

zhou moufen is the sister of zhou dingshan, the actual controller of aode equipment.

on january 1, 2018, aode equipment borrowed rmb 6.0702 million from zhou moufen. during the reporting period of this ipo, aode equipment only repaid part of the loan.

in 2020 and 2021, aode equipment repaid zhou moufen the remaining loan principal and interest totaling 3.1341 million yuan.

according to article 76 of "guidelines on the content and format of information disclosure by companies offering securities to the public no. 57 - prospectus" (hereinafter referred to as the "prospectus guidelines"): "the issuer shall disclose the overall situation of related-party transactions during the reporting period, and disclose related-party transactions and the impact of related-party transactions on the issuer's financial position and operating results based on the nature and frequency of transactions and the classification of related-party transactions as regular or occasional."

aode equipment failed to fully disclose the fund borrowing and lending situation with related parties during the reporting period in accordance with the above requirements.

in addition, during the reporting period of the aode equipment ipo, it also borrowed 6.1 million yuan and lent out 531,500 yuan to other non-related natural persons.

however, this information was not mentioned in the ipo prospectus (submission draft) of aude equipment.

secondly, the second major violation identified by the shenzhen stock exchange as occurring during the ipo process of aude equipment was its failure to fully disclose internal control deficiencies and irregular corporate governance.

also in the listing application materials submitted by aude equipment to the regulatory authorities, it insisted that the company had established a standardized internal governance structure, and that the shareholders' meeting, board of directors and board of supervisors all operated in accordance with the system norms; the internal control system was relatively sound and played a good management and control role in all key aspects of the company's business management.

however, the csrc found through inspection that aude equipment not only had defects in internal control in sales, inventory, and r&d, but also had irregular corporate governance, and these risks were not fully disclosed by the company.

for example, in terms of sales management, the csrc found that the sales delivery order documents in the erp system of aude equipment were supplemented later, the dates of some delivery orders were later than the delivery date, and the person who made the order and the person who reviewed it were the same person.

the internal control system for inventory management of aude equipment is also not as perfect as it claims. there has been a long-term situation of borrowing (borrowing inventory from customers or suppliers) but no borrowing management system has been established; the storage of raw materials is not in compliance with regulations, and it is impossible to accurately distinguish between warehouse materials and production line materials.

in terms of r&d management, its internal control system also has loopholes. for example, even after its prototype has passed the test and is put into mass production, it still has r&d investment.

in terms of corporate governance, aude equipment has also failed to follow the regulations in performing personnel appointment and dismissal procedures; most of the personnel appointments of non-senior management personnel are signed by the chairman, and the functions of the management and the board of directors are not separated.

"some accounting treatments are not standardized and relevant information disclosure is inaccurate" is the "third sin" identified by the china securities regulatory commission for violations in the listing process of aude equipment after an on-site inspection.

according to the penalty supervision letter issued by the shenzhen stock exchange to aode equipment, the china securities regulatory commission found after an on-site inspection of aode equipment that there were many irregularities in accounting treatment and inaccurate disclosure of relevant information:

first, the company failed to set aside and pay union funds in accordance with accounting standards, and failed to fully set aside employee education funds, resulting in inaccurate disclosure of total profits.

second, the accounting treatment of r&d expenses is not standardized, and there are situations where mold costs that cannot be distinguished as being mixed with production costs are directly included in r&d expenses.

third, the method of setting aside inventory impairment provision was inconsistent with the disclosure, and the accounting treatment was not standardized. the method of setting aside inventory impairment provision disclosed by aode equipment in its ipo filing was the lower of cost and net realizable value, but the inspection found that it actually used the age of inventory method to set aside impairment provision. at the same time, during the ipo reporting period, aode equipment did not write off the impairment provision for the inventory it received or sold, which was not in compliance with the provisions of accounting standards.

"as the first person responsible for information disclosure, your company failed to ensure the authenticity, accuracy and completeness of the application documents for issuance and listing and the information disclosed. the above-mentioned behavior violated the provisions of article 15, paragraph 1, and article 25, paragraph 1 of the "stock issuance and listing review rules" (hereinafter referred to as the "review rules") of this exchange," the shenzhen stock exchange pointed out in the above-mentioned regulatory letter.

2) hundreds of sponsor representatives were punished for violations this year

during the ipo process, aude equipment had flaws and even serious problems in fund borrowing, internal control governance and accounting treatment, and the intermediary agency responsible for protecting it is naturally to blame.

due to "failing to pay sufficient attention and conduct prudent verification of part of the issuer's fund borrowing during the reporting period", "failing to pay sufficient attention and conduct prudent verification of the issuer's internal control deficiencies and irregular corporate governance", and "failing to pay sufficient attention to the issuer's irregular accounting treatment and inaccurate information disclosure", guotou securities, the sponsor of aode equipment's ipo, and its two signing sponsor representatives, cao ke and zhou pengxiang, were also taken self-regulatory measures of written warnings by the shenzhen stock exchange.

according to kkk finance, cao ke and zhou pengxiang, who serve as the sponsors of ode equipment's ipo, have both been working in investment banks for quite a while. zhou pengxiang, in particular, has been a senior professional with more than ten years' experience in the industry.

although cao ke was only registered as a sponsor representative in 2020, he had already started working at a securities firm as early as 2016.

both of them jumped to guotou securities from soochow securities and gf securities respectively at the end of 2019.

before the failure of sponsoring the listing of aode equipment, zhou pengxiang had a record of escorting many companies to go public, while cao ke had no successful sponsorship cases.

according to statistics from kekou finance, with the regulatory authorities taking regulatory measures against cao ke, zhou pengxiang and others, since 2024, in the past eight months, the number of sponsors who have been punished by self-discipline by regulatory authorities has reached 100, a significant increase compared with the same period in 2023.

data shows that in 2023, there were approximately 88 sponsors who were issued self-discipline penalty decisions by various regulatory authorities. among them, in the eight and a half months before september 15, 2023, a total of 66 sponsors were fined for violations.

that is to say, since 2024, the scale of penalties for violations by sponsors has increased by 50% year-on-year.

among the 100 sponsors punished by the regulators in 2024, the brokerage firm with the largest number of people was cicc, with as many as 18 people, accounting for almost 1/5 of the total.

it is not surprising that cicc has become the "hardest hit area" for lack of compliance in underwriting business in 2024.

in the past few months, cicc has just created a record of being fined five times in a row by regulators for its ipo underwriting business.

it is worth mentioning that zhuoyi bio's ipo, which was selected for on-site inspection in the same batch as aode equipment's ipo and was punished by the shenzhen stock exchange 10 days ago due to the violations found, was the "masterpiece" of cicc's underwriting.

following cicc is haitong securities, which was also criticized by regulators for its underwriting business in mid-2024.

this brokerage firm, which has just announced its upcoming reorganization and merger with guotai junan, has had 14 of its sponsors included in the self-regulatory “blacklist” since 2024.

there is no need to elaborate on the challenges and difficulties that haitong securities' related businesses encountered in 2024.

i believe that anyone who knows something about the a-share brokerage industry should have heard of this (see the relevant reports of kekou finance for details, "required for comprehensive self-examination of listing projects! frequent violations in haitong securities' investment banking business have annoyed the shanghai stock exchange: the sponsorship of kolide's ipo was criticized again, and dozens of companies planning to go public may be affected", "exclusive | the csrc's first ipo on-site inspection and regulatory penalty notice in 2024 may be issued soon: haitong securities is once again involved in the vortex of investment banking practice, and two senior underwriters were punished, involving cashmere family's listing with problems", "the intermediary brokerage unilaterally withdrew the sponsorship, and the reason why xinhu futures' main board ipo failed was behind the failure: the shanghai stock exchange's accountability order was effective, and haitong securities' listing sponsorship projects were terminated in waves!").

citic securities, known as the "king of investment banks" in a-shares, is temporarily ranked third on the 2024 investment banking business "black list" with 9 sponsors punished.

"since 2024, the regulatory trend of strict ipo supervision has been self-evident. the china securities regulatory commission has always insisted on 'having fangs and thorns'. from policies to regulatory practices, it has continuously emphasized the strengthening of 'gatekeeper' responsibilities and severely punished intermediary institutions for failing to perform their duties diligently and illegally." an investment banker close to the regulatory authorities told kekou finance that as the regulatory authorities further increase the intensity and scope of on-site inspections of companies to be listed, it is believed that more intermediary brokerage institutions will take this as a warning, cultivate their internal strength, and comprehensively improve the quality of their practices.

3) on-site inspection and random inspection of enterprises with different fates

after the results of on-site ipo inspections of companies such as aode equipment and zhuoyi biotechnology were released one after another, the fate of these 11 companies that were unfortunately "selected" in the third batch of information disclosure spot checks on initial public offerings in 2023 continued to diverge further.

according to statistics from kekou finance, as of september 14, 2024, none of the 11 companies that applied for ipo between april and june 2023 have successfully listed.

the company closest to the door of a-shares is huangshan valley jie co., ltd., whose ipo application just successfully passed the review of the shenzhen stock exchange listing committee a month ago on august 9, 2024, and is awaiting registration with the china securities regulatory commission.

on the evening of september 14, 2024, just before the deadline for this article, the shenzhen stock exchange disclosed the decision to terminate the ipo review of guangdong tute precision hardware technology co., ltd. (hereinafter referred to as "tute precision").

tute precision is not only the latest case of failed listing on the shenzhen stock exchange's chinext board, but also a company that was selected for on-site inspection in the third batch of information disclosure spot checks of initial public offering companies in 2023.

the failure of tute precision's ipo also brought the number of companies in the same batch that were terminated from listing after on-site inspections to 8. in addition to aode equipment, zhuoyi bio and tute precision, which was just suspended from listing by the regulators, before mid-september 2024, including zhongding hengsheng gas equipment (wuhu) co., ltd. (see the relevant report of kekou finance for details, "with star shareholders such as sinopec and sany group, why did zhongding hengsheng voluntarily terminate its listing: the deterrent effect of ipo on-site inspections was effective and the first case in 2024 was released. guotai junan was trapped in the vicious circle of sick sponsorship again?"), zhejiang chunhui environmental protection energy co., ltd., guohong tool system (wuxi) co., ltd., henan provincial urban and rural planning design research institute co., ltd., fujian haidian operation and maintenance technology co., ltd., etc., another 5 companies have already failed in their respective capitalization breakthrough tracks.

in addition, the ipos of suzhou fengbei biotechnology co., ltd. (hereinafter referred to as "fengbei biotechnology") and hubei xingfu electronic materials co., ltd. are still in the review stage and continue to advance their pace of listing.

however, although it is still insisting on the ipo process, fengbei bio's listing prospects are not optimistic.

this company, which is sponsored by haitong securities and is planning to be listed on the main board, received the first round of review inquiry letters issued by the shanghai stock exchange as early as july 5, 2023. more than a year has passed, but its relevant response has not yet been disclosed by the exchange.

public information shows that fengbei bio is a high-tech enterprise in the field of comprehensive utilization of waste resources, mainly producing resource products from waste oils and fats. it plans to raise up to 1 billion yuan through this ipo.

(over)