The State Council of China is soliciting public feedback on draft regulations that prohibit local governments from offering incentives for company listings and allow sponsorship services to be charged in phases according to work progress.
In a recent move aimed at regulating services related to public stock offerings, enhancing the quality of listed companies, protecting investors’ legitimate rights, and promoting the healthy development of the capital market, the State Council of China has released the “Regulations on Services Provided by Intermediaries for Companies’ Public Offering of Stocks (Draft for Public Comment)” (hereinafter referred to as the “Regulations”).
The core objective of these Regulations is to strengthen financial supervision, ensure intermediaries fulfill their role as “gatekeepers,” and prevent issues like financial fraud and fraudulent issuance arising from improper fees. The draft Regulations follow a problem-oriented approach, emphasizing classified strategies and strict supervision. They primarily focus on regulating fee-related issues in intermediary services, enhancing oversight, and bolstering the independence of intermediaries.
Under a unified framework, specific regulatory requirements are proposed for different intermediary sectors based on their unique characteristics. Additionally, the Regulations aim to fill institutional gaps by clarifying prohibitive provisions and penalty measures for intermediaries, issuers, and local governments. Currently, the Regulations are in the public comment phase, allowing the public to provide feedback through various channels, including the Ministry of Justice’s official website for legal information, email, or postal mail, from August 16, 2024, to September 15, 2024.
The Regulations encompass nineteen articles, highlighting key aspects such as:
- Principles for Intermediaries: Intermediaries like securities companies, accounting firms, and law firms must adhere to principles of honesty, diligence, independence, and objectivity. They must employ qualified professionals, possess requisite expertise, and establish effective risk control mechanisms.
- Prohibition of Misconduct: Intermediaries are barred from producing or issuing documents with false records, misleading statements, or significant omissions. They cannot engage in activities that aid companies in violating legal conditions for public offerings, such as financial fraud, fraudulent issuance, or irregular information disclosure.
- Fee Determination: Intermediaries must follow market principles to reasonably determine fees based on factors like actual workload and resource allocation, with clear fee arrangements outlined in contracts with issuers.
- Staged Fees for Underwriting and Audit Services: Securities companies engaged in underwriting can charge fees in stages based on work progress, but fees cannot be contingent on the outcome of the public offering. Similarly, accounting firms conducting audits can charge in stages but cannot base fees on audit results or public offering outcomes.
- No Rewards for Public Offerings: Local governments at all levels are prohibited from rewarding issuers or intermediaries based on the outcome of public stock offerings.
- Penalties for Violations: The Regulations outline penalties for intermediaries and their staff who violate the provisions, including warnings, confiscation of illegal income, and fines. Severe or unrectified violations can lead to fines ranging from one to ten times the illegal income or, if none or less than 100,000 yuan, a fine between 100,000 and one million yuan.
- Implementation and Oversight: The Regulations will be incorporated into the securities market integrity archive, and relevant departments will enforce strict oversight. Violations by local governments in granting rewards will result in recovery of the rewards and disciplinary actions against responsible officials.
These measures are part of a broader effort by Chinese authorities to improve the quality and transparency of the capital markets, ensuring fair practices and safeguarding the interests of investors. The public comment period provides stakeholders with the opportunity to contribute to the final version of the Regulations before they are officially implemented.
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