[co-author: James Alford]
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, (v) permission or approval required to be obtained from Chinese authorities to operate its business or offer securities to foreign investors, (vi) how cash is transferred within the organization and (vii) 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.