JC Master · Listed Company Securities Compliance Column | Issues of Mismanagement of Raised Funds and Compliance Controls from the Perspective of On-site Inspections

The high-quality development of the capital market hinges on the compliance foundation of listed companies. As the registration-based system is fully implemented and regulatory frameworks are iteratively refined, securities compliance has become a central pillar for the stable operation of listed offices. Accurately aligning with regulatory guidance and fortifying compliance safeguards are critical enablers for enterprises to navigate market cycles.
 

To this end, we have established this dedicated column, focusing on the core areas of securities compliance for listed companies: summarizing the key points of new regulatory rules, deconstructing the rationale behind typical enforcement actions, dissecting the essence of court rulings, and conducting in-depth analysis of practical compliance challenges. Adopting a legal‑professional perspective, we employ clear, pragmatic language and scenario‑based analysis to interpret compliance requirements, map out risk pathways, and provide actionable guidance, helping companies strengthen their internal control systems, mitigate compliance risks, and enhance the effectiveness of their compliance management.

When compliance thrives, enterprises thrive; when compliance is stable, development is stable. We hope this column will serve as a trusted partner for listed companies—helping them anticipate regulatory trends, address compliance challenges, mitigate compliance risks, and strengthen the foundations of sustainable growth—so that together we can foster the sound and healthy development of the capital market.

2025 year “ Regulations on the Supervision of Funds Raised by Listed Companies The formal implementation of the regulation marks a significant elevation in the requirements imposed by regulatory authorities on the management, utilization, reallocation of proceeds, and disclosure quality of raised funds. In recent years, local securities regulatory bureaus have steadily intensified on-site inspections, with the area of fund‑raising consistently remaining a top priority for regulatory scrutiny. Drawing on typical regulatory cases, this paper systematically identifies and summarizes the most prominent compliance violations in the management and use of raised funds, and proposes targeted compliance‑risk‑mitigation measures, thereby providing guidance for listed companies to operate in full compliance.

I. Typical Violations of Fund-Raising Regulations Identified Through On-Site Inspections

By reviewing recent case reports of on-site inspections issued by local securities regulatory authorities and stock exchanges, it is evident that violations in the area of fundraising are highly concentrated, primarily falling into the following categories:

(1) Violations in cash management that cross the red lines of “principal protection” or “quota limits”

Cash management is one of the most common ways to utilize idle raised funds, and it is also the area most prone to regulatory violations. There are two primary types of non-compliant practices:
 

1. Purchasing non-principal-guaranteed wealth management products:

[Violation Case] Between 2023 and 2025, GKSH repeatedly purchased 179 wealth management products, 158 of which were non-principal-guaranteed. Furthermore, the company failed to adequately disclose the risk of principal loss in its special reports, ultimately resulting in a warning letter issued by the Guangdong Securities Regulatory Bureau.

2. Cash management exceeding the quota or the prescribed time limit:

[Violation Case] Between 2023 and 2024, LSHX’s purchases of wealth management products using idle raised funds were made prior to the board’s authorized review period, with the cumulative amount exceeding the approved limit. Additionally, the purchase amounts disclosed in the annual special report were inaccurate.

[Violation Case] During an on-site inspection, the Zhejiang Regulatory Bureau identified the following issues at ZYSS: After the authorization for cash management of idle raised funds expired on May 22, 2025, the funds were not redeemed; furthermore, the company continued to purchase time deposits without prior board approval, with the outstanding balance reaching a peak of RMB 49.50 million (excluding accrued interest).

(2) Misuse of funds, deviating from the principle of earmarked use.
 

Dedicated use of funds is the core principle governing the utilization of raised capital. Such funds must be strictly allocated to the designated investment projects and may not be arbitrarily reallocated, repurposed, misappropriated, or improperly used for wealth management or working‑capital replenishment. Based on recent regulatory cases, non‑compliant fund usage typically manifests in the following specific forms:
 

1. Use of raised funds exceeding the planned amount
 

[Violation Case] During an on-site inspection, KGJJ was found to have planned for new‑staff salaries totaling RMB 178.876 million under the “R&D and Testing Center Project.” However, as of the end of 2023, the company had actually recorded and disbursed RMB 447.999 million in such salaries, exceeding the planned amount by RMB 269.123 million—more than 150% over the budget.
 

2. Using the raised funds for expenditures unrelated to the fundraising projects.
 

[Violation Case] Between April and September 2024, YGGF allocated working capital under its “800 Units (Sets) per Year Chemical and Pharmaceutical Equipment Project” to pay salaries for employees in administrative departments—such as the sales and management divisions—that were not directly related to the project’s fundraising‑related investment. The total amount disbursed amounted to RMB 5.4936 million.
 

3. Misappropriation of Funds: Proceeds from fundraising are not kept separate from the entity’s own funds, and funds from different projects are commingled.

[Violation Case] In June 2020, QBGF used idle raised funds that had been temporarily allocated for working capital in May 2020 to distribute dividends, resulting in non‑compliant use of the raised funds. Furthermore, the company also experienced misappropriation of funds across different fundraising investment projects due to errors in the contracting parties.
 

4. Unauthorized alteration of the use of raised funds

[Violation Case] In October 2025, during an on-site inspection, the Zhejiang Securities Regulatory Bureau found that certain uses of funds raised by DYYY were inconsistent with those disclosed in its initial public offering prospectus, and that the company had failed to promptly comply with the required deliberation procedures.
 

(3) The decision-making process is absent, and compliance reviews have become mere formalities.
 

For material matters such as the use of raised funds to replace existing capital, cash management of idle funds, adjustments to fundraising‑related investment projects, and large‑value fund transfers, the principle of “review first, then implement” must be strictly adhered to, with the board of directors and the shareholders’ meeting reviewing the matters in sequence, followed by verification by the sponsor institution. On-site inspections have revealed that several companies have engaged in procedural reversals and procedural omissions.

[Violation Case] During an inspection, the Zhejiang Securities Regulatory Bureau found that ZHKJ had transferred substantial proceeds from fundraising out of the dedicated account for management and use, without complying with any statutory procedures, including board and shareholders’ meeting deliberations and special conofficeation by the sponsor institution.

(4) Misrepresentation in information disclosure, failure to disclose in a timely or accurate manner.
 

Listed companies are required to disclose, in a truthful, accurate, complete, and timely manner, the status of funds raised, the progress of their use, project developments, the management of any remaining balances, and all material changes thereto, thereby effectively safeguarding investors’ right to information. On-site inspections have revealed that deficiencies in the completeness, accuracy, and truthfulness of such disclosures remain particularly pronounced.
 

[Violation Case] During an on-site inspection, the Henan Securities Regulatory Bureau found that GJJG used idle raised funds for cash management, with the maximum outstanding balance exceeding the limit approved by the board of directors. The company failed to disclose this matter in its special report on raised funds, resulting in inaccurate reporting.
 

[Violation Case] During an on-site inspection, LYSW was found to have disclosed in its April 2024 special report on raised funds that the amount of temporary supplementary working capital was RMB 529 million, whereas the actual amount disbursed was RMB 594 million, resulting in a discrepancy of RMB 65 million.
 

(5) Unauthorized Misappropriation of Raised Funds: Fund Misappropriation by Related Parties and the Actual Controller, as well as Off-Balance-Sheet Circulation
 

Misappropriation of raised funds is a frequently occurring, serious regulatory violation among listed companies. Some listed offices have transferred such funds—directly or indirectly—to their controlling shareholders, actual controllers, and related parties, constituting non‑operational fund occupation and severely undermining the very foundation of the security of these funds.

[Violation Case] During on-site inspections, the Shanghai Securities Regulatory Bureau found that, from 2021 to 2024, ZRGF, in the course of implementing its IPO‑raised‑funds investment projects, improperly disbursed a portion of the raised funds. These funds were channeled through bank accounts of suppliers or intermediary financial conduits effectively controlled by the company’s controlling shareholder and chairman, thereby forming an off‑balance‑sheet fund pool for internal allocation. Some of these funds were returned to the company’s non‑raised‑funds accounts either on the same day or the following day, while the remainder flowed to entities indirectly controlled by the controlling shareholder and chairman. In addition to failing to disclose truthfully the deposit and actual use of the raised funds, the company also concealed non‑operational fund transactions with related parties.

[Violation Case] LYSW first lent RMB 600,000 to the supervisor. Upon receiving these funds, the supervisor immediately transferred them to the actual controller. After receiving the payment, the actual controller remitted RMB 400,000 to an affiliated entity of the company, while the remaining RMB 200,000 was disbursed via WeChat, Alipay, and other channels for external use.

(6) The internal control system is weak, and there are vulnerabilities in day-to-day oversight.

An inadequate internal control framework and lax enforcement of regulations are the root causes of various violations involving raised funds. In some listed companies, outdated institutional frameworks, unclear job responsibilities, and insufficient day-to-day oversight have resulted in persistent, recurring breaches.
 

[Violation Case] During ongoing on-site inspections, regulators found that, following its listing, ZTJZ has long maintained internal control deficiencies in the management of raised funds: it failed to establish a dedicated account for wealth‑management of such funds and instead transferred idle proceeds into a general account for cash‑management; certain fundraising‑related projects overspent their allocated funds; and it did not promptly fulfill the required deliberation procedures or disclosure obligations regarding the use of raised funds to replace previously self‑funded capital.

II. Compliance Risk Prevention and Rectification Measures Under On-Site Inspections

In the face of intense scrutiny from on-site inspections, listed companies can establish a systematic compliance defense by taking the following measures:

(1) Enhance the internal control system to achieve end-to-end process management. In conjunction with the latest revisions to regulatory requirements, we have refined the special‑purpose fund management system for raised capital, detailing operational guidelines across the entire process—including the opening of dedicated accounts, the placement of funds, fund transfers, project disbursements, the management of idle funds, information disclosure, and ledger recording—and clearly defining approval authorities and responsibilities for each position. We strictly enforce the segregated‑account mechanism, prohibiting any commingling of raised funds with proprietary funds and strictly forbidding the use of non‑dedicated accounts to make payments on behalf of fundraising projects. A dynamic fund ledger has been established to ensure full traceability of funds throughout the process and complete reconciliation between records and actual holdings.
 

(2) Conduct regular “self-assessments” of fundraising management. It is recommended that, on a quarterly basis, you conduct self-assessments against the common issues identified during on-site inspections, covering areas such as segregated account management, fund flow monitoring, and information disclosure. Any issues discovered should be promptly addressed and rectified to prevent their accumulation and subsequent exposure during regulatory reviews.

(3) Strengthen the “substantive accuracy” of information disclosure. In announcements related to fundraising, it is imperative to clearly specify product characteristics, ensure the accuracy of monetary figures, and provide comprehensive risk disclosures. Any omissions, false disclosures, or misreporting of data must be strictly prohibited; for example, vague terms such as “time deposits” or “wealth management products” may not be used to conceal the non‑principal‑guaranteed nature of the offering.

(4) Strengthen the statutory responsibilities of the “key few.” Listed companies are required to regularly organize training for directors, senior executives, finance personnel, and staff in internal control and securities affairs roles on the new regulations governing the management of raised funds, officely establishing the business philosophy of “dedicated use of funds, compliance first, and transparent operations.” They must reinforce the compliance responsibilities of controlling shareholders, actual controllers, and management, integrate standardized fund‑raising management into their internal performance‑evaluation systems, and eliminate subjective or opportunistic violations at the source.

(This article reflects the author’s personal views and is intended solely for informational purposes; it does not constitute legal advice or an interpretation of the law by JC Master Law Office. This disclaimer is hereby made.)

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