CSRC to Ban Ex-Serving Staff from Improper Shareholding in Pre-IPO Firms

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CSRC to Ban Ex-Serving Staff from Improper Shareholding in Pre-IPO Firms

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CSRC stated on April 19 that it was formulating rules to prohibit separated employees from the authority to hold shares of a proposed IPO company through improper practices, as reported by Caixin on April 20. Relevant regulations include four measures to completely prohibit improper shareholding. The first is to define the circumstances of improper shareholding, focusing on preventing the use of previous political power to seek investment opportunities and the fraud behaviors in the equity investing process. The second is to have exit talks with staff, requiring a written commitment not to illegally buy shares of companies that have IPO plans, and study a shareholding purchase prohibition period for departure staff. The third is to formulate inspection guidelines to strengthen the targeted supervision on the improper shareholding of separated employees from CRSC during the issuance and review stage. The last is to improve the internal supervision and review procedures, and strictly implement requirements such as official avoidance and reports on interactions with monitored subjects.

The policy strengthened the supervision of IPO chaos such as sudden equity investments before IPOs, shadow shareholders, illegal proxy shareholding, and else. Through those methods, a number of ex-serving officials purchased shares at a low price before a company’s listing and sold after the lock period to gain huge profits. Take Ouyang Jiansheng as an example, the former director of the punishment committee under CSRC, who was sentenced to seven and a half years. He once invested in Stanley’s [002588:CH] and Helitai’s [002217:CH] IPOs at super low prices in the form of proxy holdings and made a profit of over RMB10m. Previously, on Feb 15, CSRC also issued the implementation guidelines for shareholder information disclosures of companies applying for IPOs. The guidance specifies that the shareholders that acquired their shares within 12 months before the firm’s IPO shall have a 36-month lock period, targeting to crackdown sudden equity investing practices before IPOs.