The China Securities Regulatory Commission issued the “Guidelines for the Due Diligence of Sponsors” and “Guidelines for the Working Papers of the Sponsorship of Securities Issuance and Listing”

Image source: Visual China

Reporter | Wang Xin

In order to further improve the quality of due diligence work of sponsors and improve the working paper system of sponsorship business, on the evening of May 27, the China Securities Regulatory Commission issued the “Guidelines for Due Diligence of Sponsors” (hereinafter referred to as “Due Diligence Guidelines”) and “Securities Issuance and Listing Sponsorship Business”. Guidelines for Working Papers (hereinafter referred to as Guidelines for Drafts), of which the Guidelines for Drafts require sponsors to add three types of drafts, including professional opinions on securities service institutions, the core stage, and the analysis and verification process.

There are three main revisions to the Due Diligence Guidelines. The first is to clarify the criteria for ensuring the recommender’s reasonable trust, and to ensure that the recommender can reasonably rely on the issuer’s application documents and securities offering documents on the basis of performing prudential verification obligations and conducting necessary investigations and reviews. There are professional opinions issued by securities service institutions.

The Due Diligence Guidelines also specify that sponsors should assess whether the relevant work of securities service institutions and participants has a sufficient and reliable basis. Whether the information is sufficient and whether the verification procedures are sufficient and appropriate shall be verified by means of inquiries, inspections, visits, correspondence, and auctions when necessary.

In addition, it is also expressly ensured that in the due diligence work, the sponsor selects and hires third parties such as auditing, asset evaluation, legal advisors, financial advisors, consultants and other third parties to provide due diligence-related services, the sponsor shall reasonably use a third-party external agency , the statutory duties shall not be outsourced, and the responsibilities that the sponsor shall undertake in accordance with the law shall not be reduced or exempted by hiring a third party.

Second, the Due Diligence Guidelines place the responsibility of sponsors “recommended” in a more important position, emphasizing the forward-looking role of sponsors in judging investment value, which is novel, abstract, complex and scarce for industry formats or issuer businesses. or some specific business models also put forward verification requirements.

Finally, the Due Diligence Guidelines supplement due diligence matters such as red chip structure, special voting rights, agreement control, and contract assets, and also increase the verification requirements for some key matters such as goodwill and government subsidies.

Working papers refer to the general term for all kinds of important materials and work records related to the sponsorship business obtained and compiled by the sponsor and its sponsor representatives in the entire process of engaging in the sponsorship business.

The revision of the Draft Guidelines mainly adds three types of draft requirements. One is to increase the relevant review materials for the professional opinions of securities service institutions. The sponsor institution shall issue professional opinions to the issuer’s application documents and securities issuance and raising documents. The content can be reasonably trusted, maintain professional suspicion, and fully understand and analyze the securities service institution’s verification thinking, verification process, and evidence obtained. Therefore, in the scope of the manuscript, the documents and materials of the securities service institution’s professional opinion process should be clearly reviewed.

The second is to increase the requirements for working papers in the kernel stage. The kernel is an important procedure for sponsors to conduct export management and terminal risk control of investment banking projects. During the stage of performing the kernel duties, corresponding working papers will be formed. This revision clearly requires the sponsor working papers. Kernel stage scripts should be collected.

The third is to increase the relevant manuscripts of the analysis and verification process. “Diligent and responsible, words must be based on evidence” are the basic requirements for sponsors to issue verification conclusions. When conducting due diligence work, sponsors must maintain professional skepticism and obtain sufficient and appropriate evidence. Combining the probative force of the evidence, the verification conclusion is issued. Therefore, the analysis and verification process of the due diligence evidence should be recorded in the working paper.

In addition, in order to urge securities companies to continuously strengthen the construction of internal control of investment banking business and improve the quality of practice, the China Securities Regulatory Commission recently issued the “Guidelines for On-site Inspection of Securities Companies’ Investment Banking Business Internal Control”. Including high rejection rate of investment banking projects, low evaluation of investment banking practice quality, large number of negative public opinions or great influence, high default rate of underwriting corporate bonds or managing asset securitization projects, and taking major regulatory measures or administrative penalties due to violations of laws and regulations in investment banking business.