[Direct answer]Before a company goes public, it conducts a criminal risk assessment to proactively identify potential hidden risks that could trigger criminal liability and avoid "applying for listing with hidden risks", which may lead to the suspension of the listing process or even the prosecution of the controlling shareholders and senior executives. The focus is on financial authenticity, related-party transactions, bribery of officials, and the responsibilities of intermediaries. For more details, please refer to the relevant rules.Financial capital and cross-border legal services involving foreign affairsThe physical examination can be combined withLegal services for corporate commercial contractsAndIntellectual property and corporate legal servicesSynchronously sort out compliance loopholes, adding an additional criminal defense line beyond the sponsor's due diligence to protect the actual controllers, senior executives, and intermediary institutions from the impact of criminal liabilities such as fraudulent issuance.

I. Legal basis and interpretation of provisions

1. Article 160 of the Criminal Law of the People's Republic of China (amended on December 26, 2020, Criminal Law Amendment (XI))

The crime of fraudulent issuance of securities stipulates that if any important facts are concealed or major false information is fabricated in the prospectus, subscription documents, and company bond issuance methods, etc., and stocks, corporate bonds, depositary receipts, etc. are issued with a large amount, serious consequences, or other serious circumstances, criminal responsibility shall be investigated and a "double punishment system" shall be implemented to punish both the unit and the directly responsible personnel. This article is the most critical criminal red line before going public, and financial fraud and inflated revenue are precisely the high-incidence inducements.

2. Article 19 of the Securities Law of the People's Republic of China (effective March 1, 2020)

The securities issuance application documents submitted by the issuer shall fully disclose the information necessary for investors to make value judgments and investment decisions, and the content shall be true, accurate, and complete. This article sets out civil and administrative responsibilities from the perspective of information disclosure and links up with criminal regulation: once there are major false statements in the disclosure documents, the registration will be rejected at the very least, and serious cases will trigger criminal investigations into fraudulent issuance. It is a disclosure compliance benchmark that must be verified item by item during the review process.

3. The interpretation of the case by the judge

In practice, common criminal risks before going public also include: the crime of bribing units (bribing relevant personnel for financing or project acquisition), disclosing or failing to disclose important information in violation of regulations, insider trading, and trading using undisclosed information, as well as the crime of providing false certification documents by intermediary personnel. The key points of the review are to "look forward": review the recognition of income, the collection of costs, the fairness of related-party transactions, the authenticity of fund flows and major contracts, identify clues that may trigger criminal investigations, and rectify them in advance. The most common pitfall is treating financial embellishment as an "industry practice" and ignoring the consequences of criminal and civil overlaps. In addition, under the registration system, the responsibilities of intermediaries have been significantly increased. Defects in due diligence by sponsors, accountants, and lawyers may trigger criminal investigations in a chain reaction. The review should also cover intermediary draft materials and conflict of interest checks, so as to proactively avoid risks before filing the application.

II. Henglue Law Firm's Practical Experience

Based on the practical observations of Beijing Henglu Law Firm in serving enterprises in financing, many enterprises only expose problems in the stage of striving for listing, and the common forms include: cross-period recognition of revenue in the reporting period, fictitiously increasing transactions through related parties, disguised transfer of benefits under the name of consulting fees, and incomplete disclosure of major litigations and guarantees. At this time, remedial measures are often taken, which often violate the due diligence red line of intermediaries. In the mildest case, the declaration will be delayed, and in the most serious case, it will trigger regulatory investigation. Professional health checks should be carried out before the sponsor enters the scene, so as to identify criminal risks and compliance gaps at the same time. For more details of related services, please refer to the following link:Beijing Henglu Law FirmAndFinancial capital and cross-border legal services involving foreign affairsAlso, you can do it onSpecialised legal servicesUnderstand comprehensive compliance support. (This paragraph is a summary of practical experience and does not cite specific case details or amounts.)

The output of the physical examination is not a disclaimer, but a "risk list and rectification roadmap": it clearly specifies which items need to be corrected and disclosed, which transactions need to be restored to their actual state, which personnel need to be interviewed and their conversations recorded, and which intermediary documents need to be reviewed. For the actual controllers, conducting a physical examination in advance can establish a defense evidence of "having conducted reasonable verification" between regulatory inquiries and criminal investigations; for intermediary agencies, it can also reduce the risk of issuing false certificates due to negligence. The earlier it is done, the greater the room for rectification and the lower the cost. (This paragraph is a summary of practical experience and does not cite specific case details or amounts.)

III. Frequently Asked Questions

Q1: What are the most common criminal risks before going public?

The main focuses are fraudulent issuance of securities, illegal disclosure of important information, bribery by units, insider trading, and intermediaries providing false certificates. Financial fraud, inflating revenue, unfair related-party transactions, and transferring benefits under the guise of expenses are the most likely triggers for criminal investigations, and comprehensive checks should be conducted before filing the reports.

Q2: What exactly does the criminal risk physical examination check for?

Verify the authenticity of income recognition and cost collection, the fairness of related-party transactions and the completeness of disclosure, the cash flow and major contracts, the historical development and equity nominee arrangements, the disclosure of major litigation guarantees, and the quality of intermediary working papers. The goal is to identify clues that may trigger criminal liability and provide a path for rectification.

Q3: Will someone go to jail for financial fraud?

Possibly. According to Article 160 of the Criminal Law, if the issuance documents conceal important facts or fabricate major false content, or if the amount is huge or the consequences are serious, it constitutes the crime of fraudulent issuance of securities. A double-penalty system is implemented, and both the unit and the directly responsible personnel may be subject to criminal punishment, not just administrative penalties.

Q4: Does the actual controller personally bear criminal responsibility?

If they are identified as directly responsible supervisors or other responsible persons in the unit's crime, the actual controllers and senior executives may be held personally liable. The physical examination is precisely to delineate the boundaries of personal responsibility, reduce the probability of being prosecuted through compliance rectification and traceability, and protect key natural persons.

Q5: When is the most suitable time to have a physical examination?

The earlier, the better. Ideally, the sponsor should start the due diligence process before the listing application is submitted. The closer the application deadline is, the less room there is for rectification, and the higher the regulatory and criminal risks will be. Conducting a pre-listing physical examination can help resolve potential issues before the application is submitted, thereby reducing the likelihood of the listing being suspended or of the sponsor being held accountable.

IV. Suggestions for Protecting Rights

  • Before the sponsor conducts due diligence, it should first conduct a criminal risk check to identify compliance gaps and then file the application.
  • The focus of the review is on income recognition, related-party transactions, and cash flow, with the aim of identifying any false reporting or evidence of illicit transfer of benefits.
  • Disclose information truthfully about major lawsuits, guarantees, and equity holding on behalf of others, etc., to avoid concealing information that may trigger liability for disclosure violations.
  • Standardize the selection and appointment of intermediaries and the management of draft documents, and reduce the associated risks of intermediary agencies providing false certificates.
  • As soon as possible, entrust a professional lawyer to issue a risk list and a rectification roadmap to protect the actual controllers and senior executives.

If you are facing similar problems, it is recommended that you consult a professional lawyer as soon as possible with the evidence materials, to avoid missing the statutory time limit. →Financial capital legal services·Beijing Henglu Law Firm