Verification of shadow shareholders The SFC blade to the intermediary to verify the responsibility of the private equity fund

Through equity holding on behalf of other means, shadow shareholders are hidden behind the nominal shareholders of the enterprise to be listed, and there may be a series of problems such as power and money transactions

Text | Caijing reporter Liu Zonggen Zhang Xinpei

Edit | Lu Ling

Because of the huge interests involved, the surprise stock purchase before the listing has been criticized. On May 28, the China Securities Regulatory Commission (CSRC) issued the Guidelines for the Supervision of the Shareholding Behavior of Departing Employees in the CSRC System (hereinafter referred to as the "New Rules"), clarifying the improper entry of departing personnel, strengthening the verification responsibility of intermediary institutions, and setting a three-year prohibition period for departing employees at or above the deputy division level.

This is believed to reflect the SFC's determination to eliminate the persistent problems in the securities issuance market. In February this year, the China Securities Regulatory Commission (CSRC) issued guidelines for the disclosure of information by shareholders of enterprises applying for initial public offerings (hereinafter referred to as the Guidelines), focusing on restricting acts such as nominee shareholding, surprise pre-listing equity purchases and abnormal shareholding prices. The new separation rules are a supplementary policy to the Guidelines.

The China Securities Regulatory Commission said on February 5 that some investors hide behind the nominal shareholders of the enterprise to be listed through equity holding on behalf of the shareholders and indirect holdings by multi-layer nested institutional shareholders, forming shadow shareholders, buying shares before listing or obtaining shares at low prices, realizing huge benefits after listing, and there may be a series of problems behind the trading of rights and money and the transmission of benefits.

However, intermediaries have a bad tendency to be exempt from liability and simplification in their verification work. A spokesman for the CSRC said on May 28 that the CSRC urged market entities to regulate shareholders' shareholding behavior in accordance with regulations, but in the specific implementation process, some intermediaries expanded the scope of verification for the purpose of exemption from liability, and there was a phenomenon that some shareholding entities could not penetrate the verification and shareholders with a small proportion of individual shareholdings also had to be verified.

The "Caijing" reporter learned that the rules for the penetration and verification of private equity funds need to be refined. For the scope of final holders, in April this year, the Shanghai and Shenzhen Stock Exchanges issued standards for the identification of final holders of equity, clarifying that listed companies, overseas government investment funds, university endowment funds, pension funds and foreign shareholders who meet certain conditions do not need to be penetrated and verified.

<h1 class="pgc-h-arrow-right" data-track="21" > the SFC blade turned inward</h1>

On 1 June, on the first day of the implementation of the new separation rules, the CSRC issued a notice on providing information inquiry and comparison services for departing personnel in the CSRC system (hereinafter referred to as the "Notice"), as a supporting measure to verify to the sponsoring institution whether there are channels for the shareholders of the issuer to leave the CSRC system.

From the content point of view, the full name of the new separation rules is the "Guidelines for the Application of Regulatory Rules - Issuance No. 2", which is mainly divided into three parts and eleven articles, one is to clarify the improper shareholding situation; the second is to strengthen the verification responsibility of intermediary institutions; the third is to strengthen audit supervision and establish an independent review system.

The former employees of the CSRC system who use the influence of their original positions to seek investment opportunities, the transfer of benefits in the shareholding process, the purchase of shares during the prohibition period of shareholding, the entry of shares as an unqualified shareholder and the source of funds for equity participation in violations of laws and regulations will all be regarded as improper investment.

The CSRC said that in the process of implementing the Guidelines, it insisted on turning the blade inward, and simultaneously studied and formulated a package of institutional measures to prohibit the improper entry of departing personnel of the system, so as to make up for the shortcomings of the system. Strengthen the supervision and management of integrity, improve the independent review system, specially formulate and issue new rules for resignation, clarify the verification requirements for departing employees of the CSRC system to enter the shares of enterprises that intend to be publicly listed or listed on the selected layer of the New Third Board, highlight targeted supervision of departing personnel who fall within the scope of the norms, consolidate the verification responsibilities of intermediary institutions, and maintain the "three public" order in the market.

Liu Junhai, a professor at the Law School of Chinese Min University, told caijing that the csrcovers' system supervision guidelines for the shareholding behavior of departing personnel highlight targeted supervision of departing personnel, which is more targeted, and to a certain extent, it deters some departing personnel who have a fluke mentality. "Because there is a review system, the shares that should be withdrawn should be withdrawn as soon as possible."

The csrcrust system is determined to have a ten-year term. From the perspective of scope, the departing staff refers to the staff members who have left the CSRC system for less than ten years at the time of the issuer's declaration, including the staff who have left the CSRC organs, dispatch agencies, the Shanghai and Shenzhen Stock Exchanges, and the National Stock Transfer Company, the management cadres who have left the CSRC system, the non-management cadres of other management units of the CSRC system who have been seconded for a total of 12 months in the issuance department or the public company department and have left the CSRC system within three years after the end of the secondment, and the non-management cadres of other management units of the CSRC system who have left the CSRC system within three years after the end of the secondment, from the meeting organs, dispatch agencies, the Shanghai and Shenzhen Stock Exchanges, Non-management cadres who are transferred by the National Stock Transfer Company to other management units of the CSRC system who leave their posts within three years after the transfer.

In addition, the new separation rules set a shareholding prohibition period for departing personnel in the CSRC system, that is, within three years after the departure of departing personnel at the deputy division level (middle level) or above, and within two years after the departure of other departing personnel.

A person close to the CSRC told Caijing that the CSRC strictly controls the illegal behavior of the departing personnel of the system, and the departing personnel of the system cannot work in the object of supervision for three years. The 2009 CSRC Staff Code of Conduct shows that staff members may not use the convenience of their positions to seek improper benefits for themselves, their relatives and others. After the staff leaves their posts, they shall abide by the csrcover regulations of the CSRC within the prescribed period of time, and shall not serve in the objects of supervision in violation of the regulations.

The SFC is not without cases of improper shareholding. In 2017, the "Feng Xiaoshu case" east window incident occurred, which caused a sensation in the capital market. Feng Xiaoshu was the deputy director of the issuance and review supervision department of the Shenzhen Stock Exchange, and twice served as a concurrent member of the issuance and review committee of the CSRC. The "Feng Xiaoshu case" involved three listed companies, Yuyue Medical, Sanchuan Shares and Baolite, and Ping An Securities was also involved. According to the 2017 CSRC administrative penalty decision, Feng Xiaoshu illegally made a profit of 248 million yuan through pre-listing surprise shares and high-priced selling after listing. The CSRC decided to confiscate his illegal gains and impose a fine of $251 million.

At the same time, the new separation rules also clarify the exclusions. The new resignation rules do not apply to shareholders whose shares are increased by the issuer through public trading methods such as collective auction, continuous auction, market making transactions, etc., participating in the public offering of shares to unspecified qualified investors during the listing period of the national SME share transfer system, and shareholders who have acquired the issuer's shares as a result of inheritance, enforcement of court judgments or arbitral awards. Issuers who have invested in shares through listed companies or neer third board listed enterprises do not apply to the new separation rules.

The "Finance" reporter learned that in January 2021, the announcement of the audit results of the 11th meeting of the 18th Issuance and Review Committee of the Securities Regulatory Commission showed that Zhejiang Mingtai Holding Development Co., Ltd. passed the first offering. Behind Mingtai shares, former officials of the CSRC system appeared, including Ni Yifan and Xue Qingfeng of the Zhejiang Securities Regulatory Bureau.

On April 19, the China Securities Regulatory Commission (CSRC) issued a document to strengthen the supervision of the proposed listed companies invested by departing personnel in the system. The CSRC said that the personnel held a special interview before leaving the company, requiring a written commitment not to illegally enter the shares. Improve internal audit supervision and review procedures, strictly implementing institutional provisions such as recusal from official duties and reporting on interactions with regulatory targets.

According to the new separation rules, in the process of shareholder information verification, intermediary institutions will comprehensively check whether there are guidelines and norms for the entry of departing personnel into the shares, and judge whether it is an improper shareholding situation. It is an improper shareholding situation and should be cleaned up. When issuers and intermediaries submit application documents for listing (listing), they should make special explanations on the verification of the departing personnel of the CSRC system.

A person who has been active in the securities field for a long time believes that if the relevant personnel conceal it, the verification ability of some intermediaries may be challenged. "There is an information advantage in the csrc's internal investigation, and the list of departing personnel can be published, and if some of the departing personnel are not verified, it is probably a problem that the intermediary institutions are not in place."

With the CSRC launching the Departing Personnel Inquiry System, it is expected that this concern will be resolved. The notice shows that the sponsoring institution carrying out the counseling work may submit an inquiry application to the securities regulatory bureau where the issuer is located before submitting the application for counseling acceptance before the proposed public offering or the selected listed enterprise on the New Third Board submits the application for counseling acceptance. When applying for an inquiry, the sponsoring institution shall provide the issuer's shareholder information to be inquired at one time. After receiving the inquiry application, the CSRC will feedback the results to the sponsoring institution within five working days.

<h1 class="pgc-h-arrow-right" data-track="107" > intermediary verification responsibilities</h1>

At present, the registration system has been extended from the science and technology innovation board to the ChiNext board, and the registration system emphasizes information disclosure as the core, which poses new challenges to intermediary institutions. According to the Guidelines, intermediaries cannot simply rely on institutional or individual commitments to issue verification opinions, and comprehensively and thoroughly verify objective evidence including but not limited to shareholders' shareholding agreements, transaction consideration, sources of funds and payment methods.

One of the changes in the Guidelines is that the starting time for the sudden acquisition of shares has been extended from 6 months before the declaration to 12 months before the declaration, and the lock-up period is 36 months from the date of acquisition of the new shares held. In addition, the new shareholders of the issuer within 12 months before submitting the application shall fully disclose in the prospectus the basic information, reasons for the new shareholders, the price of the shares and the basis for pricing, whether the new shareholders have a relationship with other shareholders, directors, supervisors and senior management of the issuer, whether the new shareholders have a related relationship with the intermediary institutions of the offering and their responsible persons, senior management personnel and handling personnel, and whether the new shareholders have shares holding on behalf of the new shareholders.

In terms of the final holder, if the equity structure of the shareholder of the issuer is more than two layers and there is no actual business of the company or limited partnership, if the transaction price of the shareholder's shareholding is obviously abnormal, the intermediary institution shall penetrate the shareholder layer by layer to verify the final holder.

Lou Weiliang, a partner at Fangda Law Firm, told Caijing that intermediaries lack effective verification means for some verification requirements. For example, foreign shareholders and three types of shareholders currently lack third-party data for intermediary institutions to verify, and shareholders need to cooperate in providing relevant information. The existence of nominee holdings also depends mainly on the interviews and commitments of the relevant shareholders. In practice, some shareholders often refuse to provide relevant information on the grounds that they do not know the information of the upper shareholders and have confidentiality obligations, which causes practical work obstacles.

The "Caijing" reporter learned that before the introduction of the new regulations, the penetration verification of shareholders in the practice of initial listing focused on the penetration of the actual controller, the external personnel of the employee shareholding platform and the three types of shareholders, or the penetration calculated based on the number of shareholders of 200 people; after the introduction of the new regulations, because it used expressions such as "the entity that prohibits the holding of shares in laws and regulations directly or indirectly holds the shares of the issuer" and "the intermediary institution should penetrate and verify the shareholder to the final holder", combined with some window guidance at the time of the introduction of the new regulations, Intermediaries may conduct verification of each shareholder layer by layer to the final holder, which has a significant impact on the initial listing filing process.

A person from a securities company in Guangdong told the Caijing reporter that some of the verification content is too much and too detailed, and there is almost no effective means of verification. "For example, some verification needs to go through more than one layer, but some people do not cooperate and can only issue a commitment letter in the end."

"Some of the specific verification requirements of some intermediaries have gone beyond the scope of the Guidelines, which will inevitably have an impact on the workload of issuers and shareholders." The above-mentioned securities person told the "Finance" reporter.

In March this year, CSRC Chairman Yi Huiman said at the roundtable of the China Development Forum that the role of intermediaries such as sponsors and accounting firms has changed from the approval system to the registration system. A high proportion of withdrawal of declaration materials occurred in the on-site inspection of the initial listing. Many intermediaries have not really possessed the concept, organization and ability to match the registration system, and are still "wearing new shoes and walking the old way".

"Intermediaries may be expanding the scope of verification to avoid liability." Liu Junhai said. "Caijing" reporter learned that since the beginning of this year, judging from the administrative supervision measures announced by the Csrc, many securities companies have been punished, including Haitong Securities and CICC, many of which are related to investment banking business.

The "Caijing" reporter learned that under the registration system, in principle, as long as the enterprise meets the listing conditions, the Shanghai and Shenzhen Exchanges and the Securities Regulatory Commission do not make judgments on the profitability and investment value of the issuer in the review and registration of the issuance and listing of new shares, but require the issuer to disclose information in accordance with laws and regulations on the situation that it meets the conditions for the public offering of shares. According to the current review practice of the Science and Technology Innovation Board and the ChiNext Board, the time for initial listing has been shortened, and the registration system is considered to be a significant progress in the system for enterprises that meet the listing conditions.

"In practice, it is more important to emphasize the importance of full disclosure than to find ways to downplay and cover up flaws and risks." The core of registration-based information disclosure is not that the regulations clearly stipulate what kind of information should be disclosed, but that relevant parties need to make substantive judgments, and information that has a significant impact on investors' value judgments and investment decisions should be disclosed. Lou Weiliang told the "Finance" reporter.

In addition, according to the Guidelines, shareholders increased by issuers through collective auction and continuous auction transactions during the listing of the national SME share transfer system and the listing and trading on overseas stock exchanges, as well as shareholders who have acquired the issuer's shares as a result of inheritance, enforcement of court judgments or arbitral awards and enforcement of national laws and policies, or led by people's governments at the provincial level or above, may apply for exemption from the verification and share locking requirements of the new rules.

<h1 class="pgc-h-arrow-right" data-track="108" > private equity fund</h1>

At present, the penetration rate of private equity funds to listed companies is about 70%. The number of investors behind private equity funds is large and extremely hidden, and there is a situation where the final holder is difficult to penetrate or the number of shares held is very small but extremely difficult to penetrate.

"The workload has increased considerably, including having funders provide bank statements." A partner at Temasek's Xiangfeng Investment told Caijing that the bank flow of some investors may be lost, which makes it more difficult for business execution.

It is understood that at this stage, many private equity funds are supplementing materials. Lou Weiliang told Caijing that although the information disclosure guidelines clearly require that the shareholders who have penetrated the verification are limited to "companies or limited partnerships with an equity structure of more than two floors and no actual business operations, such as the shareholder's shareholding transaction price is obviously abnormal", in practice, for various reasons, it has been extended to the penetration verification of all shareholders. The number of shareholders of companies to be listed is often large and complex and even difficult to identify. The structure of private fund shareholders and foreign shareholders can also be very complex, and after penetrating to the final holder, the existence of thousands or even tens of thousands of indirect shareholders is the norm, so the workload involved is huge.

"For the verification of private equity funds, in the early stage of the promulgation of the Guidelines, in the case of increasing the number of layers of all parties, intermediaries will generally require private equity funds to provide a complete register of investors that penetrate to the final holders, and require private equity funds to issue commitment letters with qualified shareholder qualifications and no nominee holdings. In practice, there are indeed difficulties in verification, mainly because it is more difficult for private equity funds to accept the requirements of intermediary institutions to penetrate layer by layer, and there is indeed a situation that cannot be confirmed by the upper investors after layers of nesting, which ultimately leads to the inability to implement the penetration or the inability to issue a commitment letter, which increases the communication cost and burden of the enterprise to be listed. He said.

In April this year, the final criteria for the identification of the holders were finally settled. The Shanghai and Shenzhen Stock Exchange issued the "Understanding and Application of the "Ultimate Holder" in the Verification of Shareholder Information", which clarifies the scope of verification of the final holder, and listed companies, companies listed on the New Third Board, state-owned holding or management entities, collectively owned enterprises, overseas government investment funds, university endowment funds, pension funds, public welfare funds, public asset management products and foreign shareholders who meet certain conditions do not need to penetrate the verification.

A spokesman for the CSRC said on May 28 that since the implementation of the Guidelines, the CSRC has urged market entities to regulate shareholders' shareholding behavior in accordance with regulations and achieved positive results. However, recently, the CSRC has paid attention to the fact that in the specific implementation process, some intermediary institutions have expanded the scope of verification for the purpose of exemption from liability, and there are phenomena such as some shareholding entities that cannot penetrate the verification, and shareholders with a small shareholding ratio must also be verified, which increases the burden on enterprises.

"According to the current information disclosure policy, some of the final holders need to penetrate and verify, but in practice, we must communicate with the company's securities companies and listed lawyers to see if it can be replaced by a commitment letter, promising that individuals and invested enterprises do not have any capital transactions and interest transmission, etc. We also have projects to deal with the past." The aforementioned partners said.

According to data from the Asset Management Association of China, as of the end of April 2021, there were 29,820 existing private equity investment funds with an existing scale of 10.08 trillion yuan, an increase of 1.27% month-on-month; and 11,493 existing venture capital funds with an existing scale of 1.88 trillion yuan, an increase of 8.36% month-on-month.

An executive of Huasoft Capital told the Caijing reporter that the new regulations require the penetration and verification of private equity funds, and at present, no impact has been found on fundraising, and "the funding side pays less attention to such a detailed issue."

In the next step, the CSRC said that on the one hand, it will adhere to the substance over the form in the process of shareholder penetration and verification, and effectively prevent the use of listing for profit transmission, illegal and illegal enrichment. On the other hand, the principle of quantifying the importance as much as possible, for situations such as holding fewer shares and not involving illegal enrichment, intermediary institutions can normally promote the review after seeking truth from facts and issuing opinions. At the same time, it is also necessary to correct the unhealthy tendency of exemption from liability and simplification in the verification work of intermediary institutions.