[Direct answer]It's necessary, and it's better to do it sooner rather than later. During the financing and listing stages, enterprises are prone to criminal risks: raising funds from unspecified individuals may violate Article 176 of the Criminal Law on the crime of illegally absorbing public deposits (amended on December 26, 2020); and forging issuance documents may constitute the crime of fraudulent issuance of securities under Article 160, which carries a maximum sentence of 15 years in prison. The criminal risk check should be conducted one to two years before the start of the listing process, with a comprehensive investigation into fundraising, financial and taxation, commercial bribery, intellectual property, and data compliance. Once risks are identified, they should be rectified in a timely manner. If a company applies for listing with existing risks, it may face the consequences of having its review terminated at the very least, or even having its actual controllers prosecuted at the worst. Beijing Henglue Law Firm\nFinancial Capital TeamWe can provide special compliance opinions. For more details, please refer to the following link:Beijing Henglu Law Firm.

I. Legal basis and interpretation of provisions

1. Article 176 of the Criminal Law of the People's Republic of China (amended on December 26, 2020)

The crime of illegally absorbing public deposits is the most common criminal red line in the financing sector. The common judicial interpretation of the crime's definition includes four characteristics: illegality (absorbing funds without authorization or by borrowing the guise of legitimate business operations), publicity (promoting the scheme to unspecified individuals through online channels or promotional events), inducement (promising to repay principal and interest or provide returns), and social harm (targeting unspecified members of the public). Even if the funds are actually used for production and operation, the crime may still be established as long as all four characteristics are present. If the funds are raised through "internal fund-raising" from employees, dealers, or upstream and downstream partners and then spread through multiple layers, it will still be covered by the crime. After the amendment of the Criminal Law (Eleventh Amendment), the maximum statutory penalty for this crime has been raised to imprisonment of not less than ten years, and the sentencing for particularly large-scale cases has been significantly increased.

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

The crime of fraudulent issuance of securities: Concealing important facts or fabricating major false content in issuance documents such as prospectuses, subscription notices, and company bond issuance methods, and issuing stocks or company bonds with a large amount, serious consequences, or other serious circumstances constitutes a crime. The Amendment (XI) to the Criminal Law separately criminalizes the acts organized or directed by controlling shareholders and actual controllers, and raises the maximum sentence to 15 years. Under the registration system, "filing means assuming responsibility", and financial fraud, concealment of related-party transactions, and non-disclosure of major contracts may all trigger criminal prosecution. Moreover, administrative investigations and criminal referrals often proceed in parallel.

3. Practical judicial interpretation (identification of the four criteria and declaration of responsibility upon submission of the application)

The judicial authorities refer to the "Interpretation of the Supreme People's Court on Several Issues Concerning the Specific Application of Law in the Trials of Criminal Cases Involving Illegal Fund-raising" (formulated in 2010 and amended in 2022) when handling illegal fund-raising cases. Article 1 of the Interpretation summarizes four characteristics. In practice, the use of funds and investors' losses are the key factors in sentencing. Full repayment and compensation can affect sentencing but do not change the determination of guilt. On the review side, if the exchange discovers false records through multiple rounds of inquiries and on-site inspections, it will suspend or terminate the review and may transfer the clues. In practice, the focus of the review is not "whether there are violations", but "whether the historical operations may be re-evaluated according to today's standards". The assessment conclusions determine the path of rectification and the disclosure approach.

II. Henglue Lawyer's Practical Experience

The distribution of common risk points:In terms of funding, private equity funds raise funds from non-qualified investors without registration, promise guaranteed buyback in historical financing, and extend employee stock ownership arrangements to external personnel; in terms of finance and taxation, they engage in off-book income, false invoicing, and fraudulent loan obtaining; in terms of operations, they commit commercial bribery and collusive bidding; and in terms of data and intellectual property, they illegally obtain citizens' personal information and infringe on trade secrets. Pre-listing due diligence is usually conducted by securities firms and lawyers to identify potential issues, and the value of criminal lawyers lies in further assessing "whether the conduct constitutes a crime, the severity of the consequences, and whether it can be rectified", rather than simply issuing a general compliance report.

The tendency of the case-handling authority:In stakeholder-related fund cases, investors' losses and the flow of funds receive the most attention, and the scope of prosecution often expands layer by layer along the funding chain. The distinction between corporate crimes and individual responsibilities is strict, making it difficult to separate the actual controllers and financial managers from ordinary employees, who are judged based on whether they were aware of the situation and the depth of their involvement. Reviewing authorities maintain a highly cautious attitude towards the actual controllers' criminal records and historical penalties, and any concealment of such information will lead to the termination of the review once it is discovered.

The most common pitfalls that parties involved are most likely to fall into are:Taking the physical examination as submitting a report without checking the historical fund chain; replacing legal rectification with "internal handling" after discovering problems, missing the window for administrative handling and escalating to criminal transfer; hiding litigation and punishment information to apply for listing despite having problems; handling related transactions and fund transfers in a "technical" manner, only to be exposed during subsequent inquiries. The value of compliance rectification lies in being timely, authentic, and traceable.

III. Frequently Asked Questions

Q1: What items are generally checked during a criminal risk physical examination?

It typically covers six major areas: historical and current financing activities (whether involving illegal fund-raising or loan fraud), financial and taxation issues (such as fraud, false invoicing, and tax evasion), related-party transactions and transfer of benefits, commercial bribery and bidding and tendering, intellectual property and data compliance, and executives' personal conduct (such as embezzlement and misappropriation of funds). By assessing the constituting elements of specific crimes item by item, a risk grading list and rectification suggestions are generated, which can be implemented in tandem with financial and legal due diligence to maximize efficiency.

Q2: Can the product still be put on the market if problems are found during the physical examination?

Depending on the magnitude of the risk: - Risks that can be rectified (such as completing the filing process, standardizing the fundraising procedures, paying back taxes, and returning illegal proceeds) and have been resolved and operated stably for a period during the reporting period generally do not constitute a substantial obstacle. - If the risk has already constituted a crime, it is necessary to assess the risk of prosecution and the proof of rectification. If necessary, adjust the listed entity, divest the risky business, or change the actual control arrangements. - The core principle is not to conceal the risks—the legal consequences of proactive rectification and submitting a flawed application are vastly different.

Q3: Is it safe to borrow money from employees and acquaintances during the financing process?

It may not be safe. The key to judgment lies in the number of people, the mode of transmission, and the promise of returns: even if it is limited to employees and relatives and friends, if it is spread to unspecified objects through WeChat groups and promotion meetings, and a promise of guaranteed principal and interest is made, it may still meet the four elements of the crime of illegally absorbing public deposits. The compliant approach is to verify the eligibility of investors, control the scope of transmission, avoid rigid repayment statements, manage funds in special accounts, and disclose information truthfully. When necessary, please have a lawyer review the financing plan in advance.

Q4: How to remedy the problem of inaccurate financial data?

First, professionals will assess whether the case meets the criteria of "significant misrepresentation". If the disclosure is not significant, the company can rectify its financial records, make a truthful disclosure, and provide risk disclosure before filing the application; if the case constitutes a risk of fraudulent issuance, the company should suspend the application, assess the risks of administrative penalties and criminal prosecution, and take active measures to rectify the situation, refund the funds, and preserve evidence. It is strictly prohibited to continue packaging the case with "technical processing". Under the registration system, the inquiry and on-site inspections have strong penetrating capabilities, and the scope of accountability after fraud exposure will be expanded to include signatory personnel and actual controllers.

Q5: How long does the physical examination take, and what is the approximate cost?

For small and medium-sized enterprises, the process typically takes one to three months, while those with diversified businesses, complex financing histories, or group structures may require three to six months. The fees depend on the complexity of the business and the depth of the verification, and it's more common to charge by module. Compared with the sunk costs of a failed listing and the consequences of criminal prosecution, a due diligence review is a low-cost, high-leverage pre-investment. It is advisable to arrange it simultaneously with the due diligence by intermediary agencies one to two years before launching the listing, and those involving criminal defense can refer to it for reference.Criminal defense legal services, or contact us directlyBeijing Henglu Law FirmEvaluation.

IV. Suggestions for Protecting Rights

  • Conduct a comprehensive criminal compliance check one to two years before the launch of the listing, and proceed with it simultaneously with financial and legal due diligence.
  • Review historical financing activities, including prompt rectification of unregistered operations and guaranteed return commitments, as well as the return or resubmission of relevant documents and procedures.
  • Establish a legal review mechanism for major financing decisions, and subject new proposals to criminal compliance review before their implementation.
  • The personal behavior of executives and actual controllers should be included in the scope of physical examinations to prevent personal risks from being transferred to enterprises and listed entities.
  • When encountering problems, we do not conceal them or leave any traces of fraud. Instead, we actively communicate with intermediary agencies to assess the situation before determining the pace of the declaration process.

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