Chinese online 2.8 billion yuan private placement inquiry letter received in two days, lawyers dismantle four compliance red lines for listed companies' refinancing
The private placement plan was questioned within two days, and the regulatory pace under the registration system has changed
Chinese online disclosed a targeted issuance plan of no more than 2.8 billion yuan, and just two days later, the inquiry letter from the Shenzhen Stock Exchange was placed on the table. This speed was almost unimaginable a few years ago - in the past, when listed companies raised funds again, the buffer period left from plan disclosure to exchange feedback was often calculated in weeks or even months. After the comprehensive implementation of the registration system, the review logic of the exchange for refinancing has shifted from "pre screening" to "inquiry during the process and accountability after the fact". The fast issuance of inquiry letters precisely indicates that pre screening is weakening, and the authenticity, accuracy, and completeness of information disclosure have been raised to an unprecedented height.
For listed companies, the inquiry letter itself is not a punishment, but it is a mirror: whether the investment of raised funds is reasonable, whether the previous fundraising has been used up, whether there is any disguised investment in financial investments, and whether there is premature disclosure of insider information - if these questions are not answered correctly, the review will be suspended at the slightest, and in severe cases, it will trigger the illegal disclosure liability under Article 197 of the Securities Law. As a team of lawyers who provide long-term services for the refinancing of listed companies, what we see is not a simple financial news, but a concentrated exposure of a whole set of securities compliance risks.
Purpose of raising funds: easiest to trace and most likely to be questioned
The core legal issue of private placement cannot be avoided from Article 12 of the Measures for the Administration of Securities Issuance and Registration of Listed Companies, which stipulates that the raised funds must be invested in the main business and shall not be used to hold financial investments or directly or indirectly invest in companies whose main business is buying and selling securities. 2.8 billion yuan is not a small amount, and the inquiry letter from the exchange almost inevitably asks: Where exactly did the money go? What is the basis for calculation? Is there any guarantee for capacity digestion?
In practice, many listed companies describe their fundraising projects in a vague manner during the planning stage, using phrases such as "supplementing working capital" and "project construction" as a reference, and only provide temporary materials when an inquiry letter arrives. This operation carries extremely high risks. Article 78 of the Securities Law requires that information disclosure be truthful, accurate, complete, concise, clear, and easy to understand. Ambiguous fundraising explanations themselves constitute disclosure defects. More seriously, if the fundraising project is not actually established and the calculation is obviously unreasonable, it may be deemed as "fabricating significant false content" and violating the fraudulent issuance clause of Article 181 of the Securities Law, which is not a problem that can be solved by inquiry.
In a refinancing project we represented, the company invested the raised funds in real estate through multiple layers of nesting. After being identified by the exchange, the application was requested to be withdrawn, and the sponsor and signing lawyer were issued warning letters simultaneously. The compliance review of the purpose of fundraising must penetrate to the final flow of funds, which is the basic skill of lawyers in the due diligence stage.
Previous Fundraising and Financial Investment: Areas where Inquiry Letters Repeatedly 'Uncover Old Accounts'
Another frequent issue with inquiry letters is the use of funds raised in the previous round. The regulatory logic is straightforward: if you haven't spent the previous amount of money clearly, why should you be given another one? The "Guidelines for the Application of Regulatory Rules - Issuance Category No. 7" clearly requires that if there are changes in the purpose, idleness, or unexpected benefits of the previous fundraising, special explanations must be provided.
Financial investment is also a red line. Many listed companies have large amounts of wealth management, private equity fund shares, and industrial fund contributions on their accounts, which are required to be deducted from the total amount of funds raised during the private placement review. The most controversial aspect in practice is "quasi financial" investments, such as investments formed through equity participation in small loan companies and leasing companies. Whether these investments constitute financial investments often requires lawyers to demonstrate them item by item based on shareholding ratios, business synergy, and investment purposes.
There is an easily overlooked compliance detail here: if a listed company adds financial investments during the private placement planning period, the sponsor and lawyers need to verify whether it is a "surprise investment" to avoid regulation. In due diligence, we usually recommend that clients suspend all non core investments within six months prior to declaration to avoid unnecessary explanation costs for audit manufacturing.
Insider information prevention and control and intermediary agency responsibility: the most hidden risks in private placement projects
I received an inquiry letter two days before the disclosure of the contingency plan, and the time difference itself is worth pondering. The planning cycle for private placement is long, from internal decision-making to plan disclosure, and the scope of insiders may cover directors, supervisors, senior executives, controlling shareholders, intermediary agencies, and even external consultants. Article 53 of the Securities Law prohibits insider trading, Article 80 requires timely disclosure of major events, and the planning process of private placement plans happens to be a sensitive period for insider information.
We have seen too many cases: before the announcement of private placement news, the stock price fluctuated, and the exchange demanded self-examination of the registration of insiders as soon as they inquired. If it is confirmed that someone has bought in advance, the listed company and related responsible persons may face investigation by the China Securities Regulatory Commission, which constitutes the crime of insider trading under Article 180 of the Criminal Law if the circumstances are serious. For listed companies, establishing and strictly implementing a registration system for insiders of insider information is not just a formality, but the first firewall against criminal risks.
The responsibilities of intermediary agencies are also tightening. The obligation of sponsoring institutions, law firms, and accounting firms to verify private placement documents has been substantially strengthened under the registration system. Article 163 of the Securities Law stipulates that if securities service institutions fail to fulfill their duties diligently and result in false records in documents, they shall bear joint and several liability for compensation. A signing lawyer should not only consider whether the materials are complete or not, but also whether the essence of the business is correct - whether the fundraising project is true and feasible, whether the financial data can withstand scrutiny, and whether the related party transactions are fairly disclosed, each of which may become a basis for future accountability.
Legal consequences of illegal private placement and suggestions for lawyer practice
The consequences of illegal private placements by listed companies are hierarchical. At the administrative level, exchanges can take self regulatory measures, and the China Securities Regulatory Commission can order corrections, warnings, and fines; At the civil level, investors who suffer losses due to false statements can file a claim lawsuit in accordance with Article 85 of the Securities Law and the Several Provisions of the Supreme People's Court on the Trial of Civil Compensation Cases for False Statement Infringement in the Securities Market; At the criminal level, fraudulent issuance, illegal disclosure, and insider trading may all be subject to criminal law.
Our suggestions for listed companies planning private placements are three. Firstly, fundraising projects must withstand thorough verification, and the flow of funds must be clear and traceable to avoid any form of disguised financial investment. Secondly, the use of the previous fundraising should be sorted out in advance, and any defects should be proactively explained and a rectification plan should be formulated. Do not wait for an inquiry letter to uncover the situation. Thirdly, insider information prevention and control should be carried out throughout the entire process, including insider registration, trading window period management, and confidentiality agreements with intermediary agencies, all of which cannot be omitted.
For investors, if they encounter inquiry letters after the disclosure of private placement plans, they need to calmly judge the nature of the inquiry questions: if it is a technical supplementary explanation, the impact is limited; If it involves the authenticity of the fundraising project, abnormal financial data, or insider trading clues, it is necessary to be alert to the risk of subsequent audit suspension or even investigation.
Refinancing is an important tool for listed companies to expand their main business, but if the tool is not used properly, it may harm the company itself. The Securities and Capital Markets team of Guangdong Zhiming Law Firm has long provided full process legal services for listed companies' private placements, mergers and acquisitions, and compliance with information disclosure. From contingency planning, due diligence verification to response to inquiry letters, our focus is more on putting compliance at the forefront, rather than waiting for regulators to knock on the door.
