Why Historical Compliance Issues Are Blocking IPOs for Traditional Chinese Enterprises

At the 25th CIFIT · Phoenix Net Wutong Night Talk in Xiamen, Li Ya, Founder and Chairman of Lichen China and Chairman of Lichen Capital, made a compelling appeal to the investment community. He urged investors to provide more opportunities and confidence to high-quality traditional entrepreneurs and support their journey toward listing. Li emphasized that many traditional businesses are facing significant challenges and are in urgent need of understanding and assistance from capital markets. His central argument was clear: going public can be straightforward if enterprises address their historical compliance issues early on. Many companies struggle with IPOs not because of market conditions, but due to unresolved problems like同业竞争 (competition with related parties), 关联交易 (related-party transactions), and 资金占用 (misuse of funds). By focusing on standardized governance from the outset, the path to listing becomes much smoother. Li Ya’s call to action includes two main aspects: offering more confidence and tolerance to listing candidates rather than quick dismissal, and connecting traditional entrepreneurs with innovative resources, such as through technology empowerment, to help their businesses achieve breakthroughs. Editor: Ma Yidong PF171. – Many traditional Chinese enterprises face IPO challenges due to unaddressed compliance problems. – Li Ya emphasizes that early governance standardization can simplify the listing process. – Common issues include related-party transactions, fund misappropriation, and competitive conflicts. – Investors are urged to support these businesses with patience and innovative resources. – Technology integration is key to helping traditional sectors modernize and attract capital. The bustling city of Xiamen recently hosted influential leaders from government, business, and academia at the 25th CIFIT · Phoenix Net Wutong Night Talk. Under the theme ‘At the Crest of the Wave, Investing in the Future,’ discussions centered on global investment opportunities and industry trends. Among the speakers, Li Ya, Founder and Chairman of Lichen China and Chairman of Lichen Capital, stood out with his urgent message to the investment world. He highlighted that numerous traditional enterprises are grappling with substantial hurdles, and the capital market’s role is crucial in overcoming them. A key insight from his address was that the perceived difficulty of going public often stems from historical compliance issues rather than inherent business weaknesses. By proactively addressing these concerns, companies can transform their IPO journey from a daunting challenge into a manageable process. The Core Challenge: Historical Compliance Issues in Chinese Enterprises Many businesses in China, especially those in traditional sectors, carry baggage from their early growth stages. These historical compliance issues can become significant obstacles when seeking to list on stock exchanges. Common problems include unresolved related-party transactions, where business dealings between connected entities lack transparency; fund misappropriation, where company resources are used improperly; and同业竞争, where conflicts arise from overlapping business interests with affiliates. These issues often originate from a time when regulatory oversight was less stringent, and corporate governance standards were still evolving. For example, a family-owned manufacturing firm might have intertwined finances with other family businesses, creating complications during IPO due diligence. If not rectified early, these problems can lead to rejections from regulators or loss of investor confidence. Li Ya pointed out that addressing these matters head-on is not just about ticking boxes for regulators—it is about building a foundation of trust and sustainability. Companies that invest time in cleaning up their governance structures often find that the IPO process becomes more straightforward. This proactive approach can prevent last-minute scrambles and reduce the risk of delays or failures. Examples of Typical Compliance Hurdles – Related-party transactions: Without clear documentation and fair pricing, these can raise red flags. – Fund misappropriation: Unauthorized use of company funds for personal or other business purposes. –同业竞争: When a company’s executives or major shareholders have interests in competing businesses. Why IPO Readiness Hinges on Early Compliance Work The journey to an initial public offering is often compared to a marathon, not a sprint. Success depends heavily on preparation, and much of that preparation involves ensuring compliance with regulatory standards. Historical compliance issues, if left unaddressed, can snowball into insurmountable barriers. For instance, a company that has neglected to formalize its accounting practices or resolve ownership disputes may face intense scrutiny from regulators like the China Securities Regulatory Commission (CSRC). Li Ya’s assertion that ‘上市其实可以很简单’ (going public can be simple) underscores the importance of early action. By integrating compliance into their long-term strategy, businesses can avoid the pitfalls that derail many IPO aspirants. This includes conducting internal audits, seeking legal counsel, and implementing robust corporate governance frameworks. Moreover, investors are increasingly vigilant about compliance. In today’s market, they look for companies that not only have strong financials but also exhibit transparency and ethical practices. A clean compliance record can enhance valuation and attract more interest from institutional investors. For traditional enterprises, this is particularly critical. Many of these businesses have solid fundamentals but are held back by past oversights. By prioritizing compliance, they can unlock their full potential and gain access to the capital needed for growth and innovation. Steps to Proactive Compliance Management – Conduct regular internal audits to identify and rectify issues early. – Engage with legal and financial experts to ensure adherence to evolving regulations. – Document all business transactions meticulously to provide transparency. – Educate leadership and staff on the importance of corporate governance. Li Ya’s Dual Appeal to the Investment Community In his address, Li Ya made a two-fold appeal to investors and financial institutions. First, he urged them to offer more confidence and包容 (tolerance) to traditional enterprises seeking to go public. Instead of dismissing these businesses due to past compliance issues, investors should evaluate their potential and willingness to reform. This approach can help nurture promising companies that might otherwise be overlooked. Second, Li Ya emphasized the need to connect traditional entrepreneurs with innovative resources. Technology empowerment, for example, can transform conventional business models, making them more attractive to modern investors. By facilitating access to digital tools and expertise, investors can play a pivotal role in bridging the gap between tradition and innovation. This dual strategy not only supports individual businesses but also contributes to the broader economy. Traditional sectors form the backbone of many regional economies, and their success can drive job creation and stability. Investors who recognize this can achieve both financial returns and positive social impact. How Investors Can Make a Difference – Provide mentorship and guidance on navigating regulatory requirements. – Invest in technology upgrades that enhance operational efficiency and transparency. – Foster partnerships between traditional businesses and tech startups. – Advocate for policy changes that support the modernization of traditional industries. Case Studies: Enterprises That Overcame Compliance Hurdles Real-world examples illustrate how addressing historical compliance issues can lead to successful IPOs. Consider a well-known Chinese retailer that struggled with related-party transactions for years. By working with consultants to restructure its operations and improve documentation, the company not only resolved these issues but also enhanced its corporate governance. This transformation attracted top-tier investors and facilitated a smooth listing process. Another case involves a manufacturing firm accused of fund misappropriation. Through internal reforms and the appointment of independent directors, the company restored credibility and eventually went public with strong market reception. These stories highlight that with determination and the right support, compliance obstacles can be overcome. Li Ya’s message resonates strongly here: the root cause of IPO difficulties often lies in historical compliance issues, but they are not insurmountable. Enterprises that take proactive steps can turn their weaknesses into strengths, demonstrating resilience and adaptability to investors. Lessons from Successful Transformations – Early intervention is key; don’t wait until the IPO application process begins. – Transparency builds trust with regulators and investors alike. – Continuous improvement in governance practices pays long-term dividends. The Role of Technology in Solving Compliance Challenges In today’s digital age, technology offers powerful tools for addressing historical compliance issues. For instance, blockchain can provide immutable records of transactions, reducing the risk of fraud or disputes. Artificial intelligence can analyze vast datasets to identify anomalies or areas of non-compliance, enabling proactive corrections. Li Ya’s call for technology empowerment aligns with this potential. By integrating advanced technologies, traditional enterprises can modernize their operations and demonstrate a commitment to transparency. This not only helps resolve existing compliance problems but also prevents new ones from arising. Moreover, tech-driven solutions can make compliance management more efficient and cost-effective. Automated systems for monitoring transactions or generating reports can save time and reduce human error. For businesses with limited resources, these innovations can level the playing field and enhance their appeal to investors. Implementing Tech Solutions for Compliance – Adopt cloud-based accounting software for real-time financial monitoring. – Use AI tools to audit contracts and identify potential related-party issues. – Explore blockchain for secure and transparent record-keeping. – Train staff on digital tools to ensure widespread adoption and effectiveness. Looking Ahead: The Future of IPOs for Traditional Businesses The landscape for IPOs is evolving, with regulators placing greater emphasis on corporate governance and sustainability. For traditional enterprises, this means that addressing historical compliance issues is no longer optional—it is imperative. Those who embrace this reality will be better positioned to succeed in the capital markets. Li Ya’s insights remind us that the root cause of IPO difficulties often lies in these unresolved problems. However, with the right mindset and support, businesses can navigate these challenges. Investors, too, have a role to play by fostering an environment of patience and innovation. As we move forward, collaboration between entrepreneurs, investors, and regulators will be essential. By working together, we can create a ecosystem where traditional enterprises thrive, contribute to economic growth, and achieve their listing goals. The journey may require effort, but the rewards—for companies and the broader economy—are well worth it. In summary, Li Ya’s address at the Phoenix Net Wutong Night Talk sheds light on a critical issue facing traditional Chinese enterprises: historical compliance issues that hinder IPOs. By focusing on early governance improvements, leveraging technology, and garnering investor support, these businesses can overcome obstacles and unlock new opportunities. The call to action is clear—investors should extend more confidence and resources to traditional entrepreneurs, helping them modernize and succeed. For companies aspiring to go public, the message is equally important: address compliance concerns proactively to smooth the path to listing. Together, these steps can transform challenges into achievements, benefiting both individual enterprises and the economy as a whole.