China introduces new filing regime for overseas securities offerings and listings by domestic companies, including via VIE structure

28 March 2023

On 17 February 2023, the China Securities Regulatory Commission (“CSRC”) issued the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies (《境内企业境外发行证券和上市管理试行办法》) (“Measures”) accompanied by five supporting guidelines (collectively, “New Rules”). The New Rules establish a new filing regime that promotes consistency for the overseas offering and listing of securities involving domestic companies incorporated in China (“Overseas Offering and Listing”). Notably, the New Rules expressly include provisions relating to Overseas Offering and Listing through a variable interest entity (“VIE”) structure for the first time.

The New Rules will take effect on 31 March 2023.

This update provides an overview of the New Rules and the specific filing requirements for Overseas Offering and Listing through a VIE structure.

Overview of the New Rules

The New Rules divide Overseas Offering and Listing into the following categories:

• Direct Overseas Offering and Listing, which refers to a domestic Chinese company limited by shares to be listed overseas; and
• Indirect Overseas Offering and Listing, which refers to a company whose primary business activities are in China that is to be listed overseas in the name of an overseas-incorporated company, leveraging the equities, assets, earnings or other similar interests of the domestic company. Utilising a VIE structure has become a popular way to accomplish this since it was first used by Sina Corporation for their initial public offering in the US in 2000.

Prior to the introduction of the New Rules and its filing system, Direct Overseas Offering and Listing required approval from the CSRC before proceeding on an overseas exchange. However, there were no regulations in place at the time that required a VIE structured Indirect Overseas Offering and Listing to seek approval from the CSRC.

Key provisions of the Measures

Under the Measures, a filing of the Overseas Offering and Listing application should be submitted to the CSRC concurrently with the Overseas Offering and Listing application on the overseas exchange. For an issuer who is applying for its initial Overseas Offering and Listing on an overseas exchange, such filing should be made within three working days of its Overseas Offering and Listing documentation being filed overseas. In the event that the issuer subsequently offers securities on the same exchange after its initial Overseas Offering and Listing, the issuer should file with the CSRC within three days of completion of the subsequent offering.

Overseas Offerings and Listings will be prohibited if:

• such listing is expressly prohibited by laws, regulations and/or other relevant rules;
• relevant competent department(s) of the State Council of China has determined that the Overseas Offering and Listing may endanger national security;
• the domestic company, its controlling shareholder or its beneficial controller has committed a criminal offence of embezzlement, bribery, misappropriation or misuse of assets or disruption of the market economic order of China within the last three years;
• the domestic company is under investigation for suspected crimes or major violations and no definitive conclusion has been reached; or
• there is a major ownership dispute over the equity interests held by the controlling shareholder or a shareholder who is under the dominance of the controlling shareholder and/or the beneficial controller.

An overseas securities company who is appointed as sponsor or lead underwriter for an Overseas Offering and Listing will also be required to file such appointment with the CSRC within 10 working days of the signing of the relevant engagement agreement. The overseas securities company will also have to submit an annual report on its business activities associated with the Overseas Offering and Listing in the previous year by 31 January.

After the Overseas Offering and Listing is completed, an issuer is also required to submit specific reports to the CSRC in certain circumstances, such as change of control or delisting, within three working days from the date of announcement of the relevant matter or the date of occurrence of certain changes.

While filing requirements are technically less strict than examination and approval requirements, the Measures impose relatively severe penalties for the failure to file and other violations. For example, if a domestic company fails to submit its filing in compliance with the Measures, the CSRC may order the company to rectify its breach of the Measures and impose a fine ranging from one million RMB to 10 million RMB. Liable individuals may also face a fine ranging from 500 thousand RMB to five million RMB.

Overview of the accompanying guidelines

On the same day it issued the Measures, the CSRC also published five supporting guidelines to facilitate the enforcement of the Measures. The guidelines are summarised below:

• Guideline No. 1: This guideline elaborates on several provisions in the Measures including the circumstances where an Overseas Offering and Listing will be prohibited as set out above. The guideline also explains in detail the filing procedures, objects for which the securities are being offered, scope of filing, transactions related to domestic assets, determination of control and corporate governance.
• Guideline No. 2: This guideline sets out the detailed requirements on the preparation and filing for Overseas Offering and Listing, and also provides various lists and templates for different kinds of Overseas Offering and Listing activities.
• Guideline No. 3: This guideline sets out the content of reports that must be filed and other requirements for various circumstances where the reporting obligation is triggered.
• Guideline No. 4: This guideline sets out the expected communication practices of domestic companies for filing. Such communication includes communication between domestic companies, the securities companies serving such companies, and the CSRC before and during the filing process.
• Guideline No. 5: This guideline details the filing and reporting requirements for overseas securities companies. A blank filing form is attached to the guidelines.

Required disclosure for VIE-structured Overseas Offering and Listing

Overseas Offering and Listing through a VIE structure involves a foreign company creating a subsidiary in China where the business operates. The subsidiary, which is typically wholly owned by individuals or companies closely connected to the foreign company, establishes a contractual relationship to manage the assets or operations of the business. Through the contractual relationship, the economic benefits of the business are transferred to the foreign company without the foreign company actually owning the business. The foreign company or its parent entity may serve as the listing entity on an overseas exchange. The VIE structure is usually referred to as the “contract/agreement controlling structure” in Chinese Government documents.

In Guideline No. 2, it is stipulated that if the issuer utilises a VIE structure, the filing report to be submitted must detail the following:

• The reasons for the establishment of the VIE structure and the detailed arrangements, including the basic information of the legal subjects involved in the VIE structure, the core terms of the main contracts and the transaction arrangements;
• Potential risks that may arise from the VIE structure, including risks of control, default of relevant parties, and taxation; and
• Arrangements for risk response measures.

In addition, Guideline No. 2 also requires the issuer’s external counsel to inspect and elaborate on the following matters:

• The engagement of foreign investors in the operation and management of the issuer, such as dispatching of directors;
• Whether there are circumstances where domestic laws, administrative regulations and relevant provisions expressly prohibit the use of VIE structure to control business, licences, or qualifications; and
• Whether the domestic operating entity controlled through the VIE structure falls within the scope of the foreign investment security review as set out in relevant laws and regulations and whether such entity operates in a restricted or prohibited industry for foreign investment.