SEC Division Of Corporation Finance Issues Sample Letter To China-Based Companies – Corporate/Commercial Law


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SEC Division Of Corporation Finance Issues Sample Letter To China-Based Companies


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On December 20, 2021, the US Securities and Exchange
Commission’s Division of Corporation Finance
(“Division”) issued the Sample Letter
(“Letter”) to companies based or having the majority of
their operations in the People’s Republic of China
(“China-based Companies”). The Letter requires
China-based Companies to disclose in their public filings
“more prominent, specific and tailored” risks associated
with investing in these companies in compliance with their
disclosure obligations under the federal securities laws and to
enable investors to make informed investment decisions.

In the Letter, the Division provided a sample comment letter to
a China-based Company identifying the types of disclosures that
should be addressed, including the relevant risks and the potential
impacts on such company’s operations. These issues include, (i)
the corporate structure of the China-based Company, (ii) the
relationship between the entity conducting the offering and the
entities conducting the operating activities, (iii) the operations
conducted by subsidiaries and through contractual arrangements with
a variable interest entity (“VIE”) based in China, (iv)
potential impact if VIE structure were disallowed or the contracts
were determined to be unenforceable, (v) the potential impact of
the Holding Foreign Companies Accountable Act and related rules in
the listing and trading of its securities, (vi) permission or
approval required to be obtained from Chinese authorities to
operate its business or offer securities to foreign investors,
(vii) how cash is transferred within the organization and (viii)
the Chinese government’s significant oversight and discretion
over the conduct of the company’s business.

For SPACs, the Division requires them to also disclose (i) if
their sponsor/s or executive office/s are in China or have
significant ties with China, (ii) if contemplating to merge with a
company incorporated in China, (iii) what challenges SPAC investors
might face in enforcing their rights under the SPAC’s
controlling agreements with the VIE, (iv) any impact Chinese laws
or regulations may have on the SPAC’s ability to consummate a
business combination with an operating company in China and (v) the
cash flows associated with the business combination.

A copy of the Letter may be viewed here.

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