SEC Alert! Division of Corporation Finance issues comments to China-based companies seeking more specific & prominent disclosure about legal & operational risks associated & the potential impact on operations and investors’ interests if disallowed
Recent events have highlighted the risks associated with investing in companies that are based in or that have the majority of their operations in the People’s Republic of China (China-based companies). The Division of Corporation Finance believes that more prominent, specific, and tailored disclosure about these risks, and companies’ use of the variable interest entity (VIE) structure specifically,[2] is warranted to provide investors with the information they need to make informed investment decisions and for companies to comply with their disclosure obligations under the federal securities laws. The Division previously provided its views regarding certain disclosure considerations for China-based companies,[3] and, in July 2021, Chair Gensler issued a Statement on Investor Protection Related to Recent Developments in China.[4] Among other things, the Chair’s statement noted that the People’s Republic of China (PRC or China) has provided new guidance to, and placed restrictions on, China-based companies raising capital outside of China.
In light of these concerns, the Division is issuing comments to China-based companies seeking more specific and prominent disclosure about the legal and operational risks associated with China-based companies. The Division’s comments focus on the need for clear and prominent disclosure regarding the structure of the company, including the relationship between the entity conducting the offering and the entities conducting the operating activities, risks associated with a company’s use of the VIE structure, and the potential impact on the company’s operations and investors’ interests if such structure were disallowed or the contracts were determined to be unenforceable. The Division’s comments also focus on additional legal, regulatory, and enforcement risks that may apply to investments in China-based companies, such as the potential impact of the Holding Foreign Companies Accountable Act and related rules and any necessary PRC permissions a China-based company may need to operate its business or offer securities to foreign investors.[5]