Times Observation: Using thunderous measures to strictly punish listed companies that ride the trend and hype concepts

Securities Times reporter Cheng Dan

Since the beginning of this year, as interest in sectors such as brain-computer interfaces and commercial aerospace has been heating up, some listed companies have latched onto concepts through channels such as interactive platforms and announcements, attempting to trigger a rise in their stock prices. Recently, multiple listed companies have received large fines for capitalizing on hot trends. The penalties not only target the companies involved, but also pursue responsibility in tandem for “key minority” stakeholders such as actual controllers and directors and senior executives.

The China Securities Regulatory Commission’s stance is clear and firm: any conduct that infringes investors’ interests under the pretext of trading concepts or riding on hot trends will be investigated strictly and dealt with quickly, with absolutely no tolerance. It is worth noting that the CSRC’s crackdown on hot-trend chasing is accelerating. In several cases, it has taken only a little over a month from filing to the implementation of penalties; the fine amounts in individual cases can reach hundreds of millions of yuan, and joint liability accountability is carried out, using swift and forceful measures to curb the chaos of concept speculation.

Although regulators have continued to maintain a high-pressure posture, the practice of chasing hot trends still persists despite prohibitions. Some “key minority” stakeholders, fully aware that it should not be done, have still carried out offenses. The core issue is that, in China’s capital markets, the costs of unlawful conduct and the benefits of unlawful conduct are still imbalanced to a certain degree, making administrative penalties difficult to form effective deterrence.

From a legal characterization standpoint, when listed companies chase hot trends, they are often identified as “misleading statements,” which falls within the scope of violations of information disclosure requirements. Criminal accountability mainly relies on Article 161 of the Criminal Law, “the crime of unlawful disclosure or failure to disclose important information.” However, because the threshold for this offense to be prosecuted is relatively stringent, in practice it is difficult to determine and cases that actually reach criminal prosecution are few. Under current provisions, accountability must meet “the amount is huge, the consequences are serious, or there are other serious circumstances.” For example, inflating assets, revenue, or profits by 30% or more over the relevant period, or failing to disclose major matters accounting for more than 50% of net assets—only then can prosecution be triggered. The benchmark sentence is imprisonment for a term of not more than five years or criminal detention. In addition, procedural obstacles such as difficulty in determining subjective intent and complexities in proving causation lead many hot-trend-chasing cases to remain at the stage of administrative penalties, with criminal procedures rarely initiated.

By contrast, in mature capital markets, behaviors such as false statements and concept speculation are incorporated into the category of securities fraud, and criminal accountability is routine. Taking the U.S. market as an example, in addition to large civil damages, responsible persons may also be sentenced to up to 25 years in prison. For instance, in the case of a biotech company’s CEO who fabricated progress in drug R&D and cashed out at high levels by riding on hot trends, he was ultimately convicted of crimes such as securities fraud and insider trading, sentenced to 30 months in prison, and ordered to forfeit all illegal proceeds. The severity of the punishment is sufficient to deter market participants from thinking they can get away with it.

Amid overwhelming financial temptation, lower illegal costs may prompt some listed companies to take risks. Only by further strengthening mechanisms for coordinating law enforcement and criminal prosecution, lowering the threshold for criminal accountability, and pressing down the responsibility of the “key minority,” can the illegal cost of hot-trend chasing be genuinely increased. This is the only way to thoroughly clear up market disorder at the root and effectively safeguard market order and the legitimate rights and interests of the vast number of small and medium investors.

(Editor: Wang Zhiqiang HF013)

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