On 10 November 2023 the China Securities Regulatory Commission published for public comment the Draft Revisions to the Provisions on On-Site Inspections of IPO Applicants. On-site inspection is not a new institution, but the revisions make its targets, methods, procedures and follow-up handling more specific, signalling continued tightening of filing quality and disclosure scrutiny.
For companies preparing to list, inspection is not a matter of luck. It is a question of whether the filing documents can withstand a penetrating verification.
What is inspected
The core of an on-site inspection is consistency between the filing documents and reality. It typically covers financial data, business substance, related-party transactions, internal controls, fundraising projects, shareholding structure and corporate history.
Unlike a documentary review, an on-site inspection can examine source documents, interview personnel and inspect premises and information systems. It asks not only whether the documents are well written, but whether the business is real and the controls operate.
Who is selected
Inspection targets are usually determined through a combination of sampling and issue-led selection. Being selected does not imply a problem, but once selected the company must provide complete materials and cooperate with interviews.
For intermediaries, inspection is also a test of their verification procedures. The working papers, methods and conclusions of sponsors, accountants and lawyers will be reviewed. On-site inspection is therefore not only the issuer’s affair; it tests professional practice quality.
What the revisions emphasise
The draft further clarifies inspection procedures and handling: where issues are found, the issuer and intermediaries may be required to explain, supplement or rectify; in serious cases, the review process may be affected. The value of the rules is to reduce uncertainty, so that companies know before filing which matters will be scrutinised.
For companies, the important step is not memorising provisions but working backwards from inspection logic to filing preparation: does every disclosure have supporting working papers; does every anomaly have a reasonable explanation; does every related-party transaction have a pricing basis and decision process?
Five checks before filing
First, financial and business alignment. Revenue growth, gross margin and customer concentration should be supported by contracts, orders, logistics and payments.
Second, related-party penetration. Shareholders, directors, senior managers, close relatives of the controller and affiliated companies should be fully disclosed, and undisclosed fund flows identified.
Third, a clear corporate history. Nominee holdings, defective capital contributions, restructuring and reorganisation should have complete documents and remedial measures.
Fourth, operating internal controls. Treasury, procurement and sales, seal use and related-party approval should have rules, execution and records.
Fifth, feasible fundraising projects. Land, filing, environmental assessment, capacity and market absorption should rest on verifiable evidence.
How intermediaries should cooperate
Companies should organise a mock inspection early: list questions according to inspection logic, check working papers item by item, and resolve matters that cannot be explained. The value of a mock inspection is not rehearsal but exposing gaps in the filing materials.
Companies should also define a contact mechanism: who provides documents, who handles interviews and who communicates with the regulator. Confused information flow during an inspection can create unnecessary misunderstandings.
For IPO and capital markets compliance, see our IPO and capital markets service; for shareholding and financing arrangements, see financing and equity; for ongoing support during the filing period, see annual legal counsel.
This article is based on the Draft Revisions to the Provisions on On-Site Inspections of IPO Applicants published for public comment by the CSRC on 10 November 2023. It is for reference only and does not constitute legal advice.