China Securities Regulatory Commission, Guidelines on Due Diligence Work of Sponsors

Issued: May 29 2006
Effective: as of date of issue
Applicability: The term 'due diligence' refers to the process whereby a sponsor conducts a comprehensive investigation on a company for which it intends to be the sponsor for its public offering of securities, obtains a full understanding of the operations of the issuer as well as the risks and problems it has to face, and forms solid reasons to believe that the issuer complies with the offering conditions, as provided by such laws and regulations as the Securities Law and by the China Securities Regulatory Commission, and that issuer's application documents and public offering documents are true, accurate and compete (Article 2).
For non-public offering of securities, due diligence work of sponsors may be conducted by reference to the relevant provisions of these Guidelines (Article 76).

Main contents: The Guidelines specify how due diligence shall be conducted by sponsors and include such major points as:
Part One: General Provisions
Part Two: Investigation on the Basic Particulars of Issuers
Article 9: Restructuring and Establishment
Article 10: Historical Evolution
Article 11: Capital Contributions of Promoters and Shareholders
Article 12: Material Changes in Equity Interests
Article 13: Major Reorganization
Article 14: Major Shareholders
Article 15: Staff
Article 16: Independence, for example, business independence, asset independence, staff independence, financial independence and institutional independence
Article 17: Employee Shares, etc.
Article 18: Business Credit
Part Three: Investigation on Business and Technology
Article 19: Industry and Competition
Article 20: Procurement
Article 21: Production
Article 22: Sales
Article 23: Core technical personnel, technology, research and development
Part Four: Investigation on Intra-industry Competition and Affiliated Transactions
Part Five: Investigation on Senior Management Personnel
Part Six: Investigation on Organizational Structure and Internal Controls
Article 33: Articles of Association and its Standardized Operation
Article 34: Organizational Structure and Operation of Shareholders' General Meeting, Board of Directors and Supervisory Board
Article 35: System of Independent Directors and its Implementation
Article 36: Internal Control Environment
Article 37: Business Control
Article 38: Control of Information Systems
Article 39: Accounting Management Control
Article 40: Supervision of Internal Controls
Part Seven: Finance and Accounting Investigation
Part Eight: Investigation on Business Development Objectives
Part Nine: Investigation on Use of Proceeds
Part Ten: Investigation on Risk Factors and Other Material Matters
Part Eleven: Supplementary Provisions
Related legislation: PRC Securities Law (Amended), Oct 27 2005, CLP 2006 No.1 p.31 and PRC Company Law (Amended), Oct 27 2005, CLP 2005 No.10 p.21